A strong track record of policy implementation is intended to ensure that debt relief is put to effective use. Currently, 80 members of the IMF are PRGF-eligible (Table 1). While the qualification of these members for the HIPC Initiative is determined on a case-by-case basis, the enhancements to the Initiative could allow as many as 36 IMF members to qualify for assistance (Table 2).

The IMF supports the economic adjustment and reform efforts of its low-income members through the PRGF, which provides loans at an annual interest rate of ½ of 1 percent with repayment periods of 5 ½ - 10 years. The PRGF—which incorporates recommendations from past evaluations of the IMF’s concessional lending facility—is designed to make poverty-reduction programs a key element of a growth-oriented strategy.³ Programs supported by the PRGF are framed around a comprehensive, nationally-owned poverty reduction strategy, the costs of which are fully incorporated into the macroeconomic framework. In the case of HIPC-eligible members, this tightens the link between resources made available by debt relief and additional poverty reduction efforts.

Concessional lending under the current PRGF is provided by the PRGF Trust, which

• borrows resources at market-related interest rates from central banks, governments, and government institutions and lends them on a pass-through basis to PRGF-eligible borrowers;
• receives contributions used to subsidize the rate of interest on PRGF loans and;
• maintains a Reserve Account that provides security to lenders by meeting the obligations of the Trust to them in the event of non-payment by PRGF borrowers.

The resources of the Reserve Account are derived mainly from IMF gold sales initiated in the mid-1970s, and the investment income thereon. Reserve Account resources cannot be used for other purposes without the unanimous consent of all 16 lenders.⁴

In order to participate in the HIPC Initiative and continue PRGF lending the IMF requires resources to provide grants to qualified members under the HIPC Initiative and subsidy and loan resources to support concessional PRGF lending. The subsidy resources are needed to cover the difference between the market-related interest paid to providers of PRGF loan resources and the highly concessional interest rate paid by PRGF borrowers. Since the HIPC Initiative and the PRGF are so closely interrelated and the current PRGF is expected to have resources only through 2000, the Fund has sought to mobilize resources for these initiatives at the same time. These resources are administered by the IMF under the PRGF-HIPC Trust, established in February 1997.

Enhancements to the HIPC Initiative to provide deeper, broader, and quicker debt relief increased substantially the costs of the Initiative and accelerated the timeframe for obtaining the needed resources. The total cost of the enhanced HIPC framework is estimated at US$27.4 billion in 1998 net present value (NPV) terms⁵; the IMF’s share of these costs is estimated at US$2.3 billion in NPV terms.⁶

Under the enhanced HIPC Initiative framework, the IMF and the World Bank determine the qualification of a member and the amount of assistance to be provided at the decision point—the point when the member completes its first (three-year) record of good policy performance under programs supported by the IMF and the World Bank. The decision point also marks the point at which the IMF commits the amount of HIPC assistance. A qualified member may receive interim assistance of up to 60 percent of the determined amount of HIPC assistance between the decision point and the completion point—the point when the member has fulfilled all policy-related conditions for HIPC assistance. Remaining HIPC Initiative assistance committed at the decision point is delivered at the completion point.

The IMF, as Trustee of the PRGF-HIPC Trust, provides its share of assistance under the HIPC Initiative to qualified members in the form of grants, which are used to help meet debt service payments to the IMF. Between the decision point and the completion point, interim assistance is provided in annual installments in the form of grants deposited to an account of the member administered by the IMF. These resources are used to help meet debt service payments to the IMF as they fall due. The member’s account earns interest on any positive balance during the interim period. At the completion point, the IMF deposits the remaining amount of undisbursed assistance to the member’s account, as well as interest on amounts committed but not disbursed during the interim period. After the completion point is reached, the member will continue to draw on the resources of its account to help meet debt service payments to the IMF according to a schedule agreed by the IMF and the member.

The framework for the PRGF envisages operations under the current facility through 2000, to be followed by a four-year interim PRGF starting in 2001 with a commitment capacity of US$1.4 billion per year. Financing possibilities for concessional lending for the period after 2004 would need to be re-assessed closer to the time, but a substantial proportion of such financing would be provided by the IMF’s own resources accumulating in the PRGF Trust Reserve Account. These resources will become available as PRGF lenders are repaid and the security provided by the Reserve Account is no longer needed.

The subsidy needs of the interim PRGF, estimated at US$1.2 billion in NPV terms, are included in the financing requirements of the PRGF-HIPC Trust.⁷ The loan resources of US$5–6 billion for the interim PRGF will be sought from bilateral lenders, including current loan providers to the PRGF Trust.

In September 1999, agreement was reached on the main elements of a financing package that will enable the IMF to make its contribution to the costs of the HIPC Initiative and continue concessional lending for sustainable growth and poverty reduction in low-income IMF member countries. Since then, the IMF has made substantial progress in securing the needed financing. The total cost to the IMF of these initiatives is estimated at US$3.5 billion in NPV terms, with the HIPC Initiative accounting for two-thirds of the total financing requirements (Table 3). The main elements of the financing package comprise contributions by member countries and by the IMF itself.

Bilateral pledges from member countries amount to about US$1.4 billion in NPV terms and come from a wide cross-section of the IMF's membership, demonstrating the broad support for the HIPC and PRGF initiatives. Altogether, 93 member countries have pledged their support: 27 industrial countries; 57 developing countries, of which 6 are low-income countries that have had PRGF-supported programs in the past; and 9 countries in transition. To make their contributions, many members intend to use resources derived from their participation in the Second Special Contingent Account 2 (SCA-2), one of the IMF’s precautionary balances that has been liquidated.

The IMF's own contributions will amount to US$2.1 billion in NPV terms. The bulk of this, US$1.6 billion in NPV terms, will come from investment income on the profits generated from off-market transactions in gold of up to 14 million troy ounces. A substantial part of resources originating from off-market gold transactions will be placed in the Special Disbursement Account (SDA) and invested for the benefit of the HIPC Initiative.

The IMF will also contribute about US$500 million in NPV terms by foregoing compensation for the cost of administrative expenses related to PRGF operations for the financial years 1998 through 2004 with the equivalent amount transferred from the PRGF Reserve Account to the PRGF-HIPC Trust, and by transferring to the PRGF-HIPC Trust part of the interest surcharge on certain outstanding purchases under the Supplemental Reserve Facility related to activation of the New Arrangements to Borrow.

On December 8, 1999, the IMF Executive Board took the decisions needed to enable the IMF to complete its contributions to the PRGF-HIPC Trust, including approval of plans to undertake off-market gold transactions of up to 14 million ounces and to terminate the IMF’s Second Special Contingency Account (SCA-2). The off-market gold transactions are expected to be completed by early April 2000. Investment income (of up to US$1.6 billion in NPV terms) from the resources generated by these transactions will be used to provide debt relief under the HIPC Initiative. So far, the IMF’s Executive Board has authorized the transfer of nine-fourteenths of the investment income to be used for this purpose. The transfer of the remaining five-fourteenths requires a decision by the IMF’s Executive Board with an 85 percent majority. Further legislation by the United States Congress is necessary for the Executive Director of the United States to support such a decision. The decisions needed to complete the financing package are expected to be taken in the spring of 2000. Without these final steps, there will be a shortfall in resources available for debt relief under the HIPC Initiative of about US$560 million in NPV terms.

The IMF has received substantial bilateral contributions since December 8, in part facilitated by the termination of the SCA-2. This has permitted the IMF to move ahead with early cases under the enhanced HIPC Initiative. The IMF has already committed assistance under the enhanced framework to three member countries (Bolivia, Mauritania, and Uganda), including the provision of interim assistance in the case of Uganda (Table 4). It is expected that another 20 or so countries will reach decision points in 2000.

The commitment to deliver broader, deeper, and faster debt relief under the enhanced HIPC Initiative can be kept only if there are firm prospects that the required resources will be available when they need to be delivered. Without such firm prospects, commitments of HIPC assistance would be halted at an early stage of implementation of the enhanced framework. It is therefore imperative that all bilateral donors honor their funding commitments without delay and to obtain approval of the transfer of the remaining investment income on the resources generated from gold sales.

When the PRGF-HIPC Trust was established in 1997, it was envisaged that financial contributions could be earmarked for either PRGF subsidies or HIPC operations. To permit such earmarking, three separate sub-accounts have been established as illustrated in Chart 1:

• the HIPC sub-account for resources earmarked for HIPC operations;
• the PRGF sub-account for resources earmarked for interim PRGF subsidy operations; and
• the PRGF-HIPC sub-account for unearmarked resources.

Resources earmarked for the HIPC sub-account include investment income on the profits derived from off-market gold transactions and bilateral contributions from Australia, Finland, and the United States. Together these earmarked resources amount to US$1.9 billion in NPV terms, compared to total estimated HIPC costs of US$2.3 billion in NPV terms. Since expected HIPC costs exceed resources earmarked for HIPC, and the investment income on the profits derived from gold sales accrues only slowly over time, the structure of the Trust allows the HIPC sub-account to borrow resources from the PRGF-HIPC sub-account for HIPC operations.

All HIPC assistance provided by the PRGF-HIPC Trust is disbursed from the HIPC sub-account to the Initiative beneficiaries; HIPC assistance in the form of grants is transferred to the beneficiary country’s account managed by the IMF, as Trustee of the PRGF-HIPC Trust. The investment earnings on resources generated from gold sales held in the SDA will be made available to the HIPC sub-account to meet the costs of the HIPC Initiative. As the HIPC sub-account is replenished over time, it will repay the PRGF-HIPC sub-account. To preserve the value of resources for PRGF operations, the HIPC sub-account will pay interest on the use of resources of the PRGF-HIPC sub-account at a rate equal to the average return on investment of SDA resources.

Financial statements of the PRGF-HIPC Trust will be published. All transactions and each sub-account of the Trust will be separately disclosed in published financial statements. These accounts will be audited by the external audit firm selected under Section 20 of the IMF’s By-Laws, whose report, together with the financial statements, will be published in the IMF’s Annual Report.

Until February 2000, the resources of the PRGF Trust, PRGF-HIPC Trust, and SDA resources had been invested in short-term deposits with the Bank for International Settlements. To boost the return on such investments—and thus the scope for assisting the poorest countries—beginning in March 2000, the resources will be diversified into longer-term government bonds and other medium-term instruments within the prudential constraints of the investment authorities for these trusts and the SDA.