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IMFSurvey Magazine: Countries & Regions

Debt Relief Bringing Benefits to Africa

Ultrasound at a clinic in Malawi, one of the African countries that has benefited from debt relief that has freed up money for social spending. (photo: AFP/Getty)

IMF-backed initiatives

Debt Relief Bringing Benefits to Africa

By Alberto Espejo and Anna Unigovskaya
IMF Policy Development and Review Department

February 25, 2008

  • Debt relief of some $42 billion being delivered to 19 African countries
  • Projected to reduce debt stocks of recipient countries by 90 percent
  • IMF working with other countries to help them progress toward debt relief

Debt relief under two international initiatives has helped reduce significantly the debt burden of heavily indebted poor countries in Africa and freed up additional resources for poverty-reducing and social expenditures.

With armed conflicts and political instability becoming less frequent, strengthened macroeconomic fundamentals and lower debt levels following debt relief from the IMF and other international institutions have also increased the attractiveness of low-income African countries to a broader universe of investors (see related story).

Thirty-three African countries are eligible for debt relief of about $80 billion (in end-2006 net present value terms) under the two initiatives. Some $42 billion is being delivered to the 19 countries that have already reached the final stage of the process.

What are the two initiatives?

The Heavily Indebted Poor Countries Initiative (HIPC Initiative) was launched in 1996 by the IMF and the World Bank to ensure that no poor country faces a debt burden it cannot manage. The initiative aims to reduce the external debts of the most heavily indebted poor countries to levels they can manage. It entails coordinated action by the international community, including multilateral organizations, governments, and private creditors. In 1999, the initiative was modified to provide faster and broader debt relief and to strengthen the links between debt relief, poverty reduction, and social policies.

In 2005, the HIPC Initiative was supplemented by the Multilateral Debt Relief Initiative (MDRI) to help accelerate countries' progress toward the UN Millennium Development Goals (MDGs).

The MDRI grants countries 100 percent relief on eligible debts owed to three multilateral institutions—the IMF, the International Development Association of the World Bank, and the African Development Fund—if they complete the HIPC Initiative process. In 2007, the Inter-American Development Bank also decided to provide debt relief to the 5 HIPCs in the Western Hemisphere on similar terms to those under the MDRI.

"Nineteen countries have already established a good track record of policy performance and have reached the final stage of the process."

Eligibility for debt relief

Thirty-three African countries have been found to be eligible, or potentially eligible, for assistance under the HIPC Initiative and the MDRI. Nineteen countries have already established a good track record of policy performance and have reached the final stage of the process. At that point, lenders are expected to provide the full amount of debt relief they committed to at the "decision point," when countries become eligible for interim debt relief under the HIPC Initiative.

Seven countries have reached the decision point. Seven other countries have been identified as potentially eligible for HIPC Initiative assistance but have not yet reached their decision points. Liberia could reach its decision point by early 2008, as progress continues in mobilizing the bilateral contributions necessary to finance arrears clearance and debt relief.

How African countries have benefited

The international community has committed significant resources for debt relief for the heavily indebted poor countries in Africa. Debt relief under the HIPC Initiative and the MDRI is projected to reduce by more than 90 percent the debt stocks of the 26 African countries that have reached the decision point.

Debt service paid by these countries declined by about 3 percentage points of GDP between 1999 and 2006; their poverty-reducing expenditures increased by about the same magnitude.

Before the HIPC Initiative, eligible African countries were, on average, spending slightly more on debt service than on health and education combined. Now they have markedly increased their spending on health, education, and other social services, and, on average, such spending is more than 5 times the amount of debt-service payments.

Debt relief providers

Some creditors are offering more relief than others. Most multilateral creditors have delivered HIPC Initiative debt relief. The IMF, the World Bank, and the African Development Bank are providing interim relief after eligible African countries reach their decision point and the remainder (including MDRI relief) once they reach the completion point.

Almost all Paris Club creditors are delivering additional debt relief, beyond the amounts they committed to under the HIPC Initiative. About 60 percent of the non-Paris Club official creditors have granted HIPC Initiative debt relief, but 21 non-Paris Club official bilateral creditors have not yet delivered any HIPC Initiative debt relief.

Some commercial creditors have granted debt relief to indebted African countries, but still their participation remains low. In addition, some of them are bringing lawsuits against some of the countries, which present a growing challenge to the implementation of the HIPC Initiative.

To date, 19 lawsuits have been brought against 8 African HIPCs. The IMF and the World Bank have stepped up their efforts to increase creditor participation in the HIPC Initiative through moral suasion, public dissemination of information, and the provision of technical support.

Challenges facing African HIPCs

Many of the countries that have not yet reached their completion point are having difficulty doing so. Those that have not yet reached their decision point are facing such obstacles as internal conflict (for example, in Comoros, Somalia, and Sudan), substantial arrears to multilateral institutions (Liberia, Somalia, and Sudan), governance issues, and, more generally, difficulties in formulating viable macroeconomic and poverty-reduction programs. Some countries that have received debt relief are grappling with maintaining macroeconomic stability, preparing poverty-reduction strategy papers, and implementing reforms that will enable them to meet the criteria for the completion point.

Long-term debt sustainability remains a concern for most of the African countries that have received debt relief. To mitigate debt-related vulnerabilities, they need to increase domestic revenue mobilization, diversify their production and export bases, and strengthen public institutions.

How the IMF helps

The IMF is actively engaged with all heavily indebted poor countries in Africa to help them progress toward debt relief. These countries need to design sustainable financing strategies that will allow them to advance toward the MDGs without accumulating unsustainable debts. To this end, the IMF offers policy advice, financial support, and technical assistance. Working with the countries' authorities, it regularly prepares debt sustainability assessments, and assists countries' efforts to strengthen their debt management capacities.

Comments on this article should be sent to imfsurvey@imf.org


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