1998 IMF Survey Supplement on the Fund / September 1998

Debt Strategy

IMF Involvement Emphasizes Guidance and Adequate Financial Support

The IMF has played a central role, through its policy guidance and financial support, in helping member countries cope with both official and commercial external debt problems. The IMF’s ultimate objective is to ensure that debtor countries achieve sustainable growth and balance of payments viability and establish normal relations with creditors, including access to international financial markets. While the instruments used have evolved over time, the basic elements of the IMF’s debt strategy continue to be:
  • promotion of growth-oriented adjustment and structural reform in debtor countries;
  • maintenance of a favorable global economic environment; and
  • assurance of adequate financial support from official (bilateral and multilateral) and private sources.
Commercial Bank Debt Operations

The IMF continues to support commercial bank debt- and debt-service-reduction operations on a case-by-case basis. It evaluates proposed packages in light of the strength of the member’s economic policies, the likelihood that the country would regain access to credit markets and attain external viability with growth, and the assurance that the package represents an efficient use of scarce resources.

The Executive Board takes into account the appropriate balance between debt- and debt-service-reduction in bank debt packages. It considers whether the resulting debt-service profile on restructured debt is consistent with a country’s likely debt-servicing capacity; whether the package is cost-effective; whether it would imply continued commercial bank involvement, where appropriate, and where it could facilitate a return to normal commercial financing; and whether the menu of options is both balanced and sufficiently broad to ensure a high rate of participation in the package.

Official Bilateral Debt Rescheduling

Member countries seeking to reschedule their official bilateral debt normally approach the Paris Club. This is an informal arrangement that provides a forum for indebted countries and their official bilateral creditors to work out agreements that generally provide for the rescheduling of arrears and current maturities of eligible debt service falling due during the consolidation period (generally the period of the IMF arrangement), with a repayment period stretching over many years. To ensure that such relief helps restore balance of payments viability and achieves sustainable economic growth, the Paris Club links debt relief to the formulation of economic programs endorsed by the IMF. In deciding on the coverage and terms of individual rescheduling agreements, Paris Club creditors also draw upon the IMF’s analysis and assessment of countries’ balance of payments and debt situations.

Among the 30 middle-income countries that have rescheduled with Paris Club creditors during the last two decades, 24 have graduated from rescheduling, and 3 (Jordan, Peru, and Russia) are expected to graduate at the end of their current consolidation periods. Their exit from rescheduling reflects the significant progress in macroeconomic stabilization and structural reform that contributed to improved access by many middle-income countries to private foreign financing. In contrast, less than one-fourth of the 37 low-income rescheduling countries have graduated from the rescheduling process, reflecting in part the severity of their debt burdens, but also, in many of them, an uneven pace of macroeconomic stabilization and structural reform.

Since December 1994, Paris Club creditors have provided concessional reschedulings for low-income countries on “Naples terms,” under which debt service on eligible debt is reduced by up to 67 percent in net-present-value terms. Creditors have also provided exit reschedulings on the stock of eligible debt on Naples terms for low-income countries that have demonstrated a good track record under rescheduling agreements and IMF-supported programs. Sound policies coupled with new concessional financial assistance and these traditional debt-relief mechanisms under Naples terms are expected to allow many indebted low-income countries to achieve debt sustainability over the medium term (namely, that a country’s export earnings, capital, and aid flows are sufficient to service its debt comfortably).

Prospects for the remaining low-income countries have been significantly enhanced by the adoption of the Initiative for the Heavily Indebted Poor Countries (HIPC Initiative). In the context of the HIPC Initiative, Paris Club creditors agreed in November 1996 to provide a net-present-value reduction of up to 80 percent under Lyon terms.

Also, an agreement was reached in September 1997 on Russia’s participation as a creditor in Paris Club reschedulings. It provides for up-front discounts on Russian claims on rescheduling countries, to make them comparable to claims of traditional Paris Club creditors. This agreement has already facilitated the regularization of Russian claims on developing countries and the implementation of the HIPC Initiative for countries with large debts to Russia.

The HIPC Initiative

James Wolfensohn, World Bank President (left); Jack Boorman, Director of the IMF’s Policy Development and Review Department; and Michel Camdessus, IMF Managing Director, at a briefing on the HIPC Initiative.
For some HIPCs, the burden of external debt has become extremely heavy, jeopardizing adjustment and growth. Against this background, the IMF and the World Bank jointly developed a program of action designed to resolve the debt problems of poor countries that follow sound policies but for which traditional debt-relief mechanisms are not sufficient to reduce their external debt to sustainable levels. This program, the so-called HIPC Initiative, was adopted by the IMF’s Interim Committee and the IMF and the World Bank’s Development Committee in September 1996. The Initiative provides exceptional assistance to eligible countries to reduce their external debt burden to levels that they can service through export earnings, aid, and capital inflows. This exceptional assistance entails a reduction in net present value of all claims on the indebted country.

The Initiative is a comprehensive, integrated, and coordinated approach to external debt that requires the participation of all creditors—bilateral, multilateral, and commercial. It is consistent with past approaches and, indeed, reinforces them, in that debt relief by the international community is linked to the adoption of appropriate policies by the debtor country to help ensure that this relief is put to effective use. Central to the Initiative, therefore, are the country’s continued efforts toward macroeconomic adjustment and its implementation of structural and social policy reforms; social sector reform programs focus primarily on basic health and education.

The Initiative is open to all heavily indebted poor countries that are eligible for funding under the IMF’s Enhanced Structural Adjustment Facility (ESAF) and the World Bank’s International Development Association (IDA) and that pursue or adopt adjustment programs supported by the IMF and the World Bank through the fall of 1998. The Initiative will be reviewed in early September 1998, and it is expected to be extended through the end of 2000.

The Initiative is set up in two stages. In the first stage, the debtor country pursues a strong adjustment and reform program, supported by the IMF and the World Bank, and receives flow reschedulings on Naples terms from bilateral creditors. The decision point is typically reached after the country has established a three-year policy track record. At this point, the country’s eligibility for assistance under the Initiative is assessed. IMF and World Bank staff, together with the country authorities, analyze the sustainability of the country’s debt burden projected for the completion point (typically, three years later) on the basis of:
  • the net present value of public and publicly guaranteed external debt in percent of exports, which should fall below a country-specific target level in the range of 200 to 250 percent;
  • the ratio of external debt service to exports, which should decline below 20 to 25 percent; or
  • for very open economies with a high fiscal burden of debt service and strong efforts to generate fiscal revenue, the net present value of the debt-to-fiscal revenue ratio, which should not exceed 280 percent.
A country with a debt burden that the full use of traditional debt-relief mechanisms (notably, Naples terms from Paris Club creditors) cannot reduce to sustainable levels would be expected to continue to demonstrate a strong track record under a second three-year adjustment program, with continued financial support from the international financial community. The country’s creditors would make a commitment to bring its debt burden to sustainable levels at the completion point. The required six-year performance period is implemented flexibly on a case-by-case basis, particularly for countries that already have established a long track record of adjustment and reform. For five of the six countries that have reached the decision point so far, this performance period has been shortened.

To finance the IMF’s participation in the Initiative, the Executive Board established the ESAF-HIPC Trust in February 1997. The IMF will provide its assistance at the completion point mainly through special ESAF grants that will be used to retire obligations falling due to the IMF.

In April 1998, Uganda became the first country to reach the completion point under the HIPC Initiative, as performance under its ESAF- and IDA-supported programs remained strong, and Uganda’s other creditors had provided satisfactory assurances of their participation in assistance under the HIPC Initiative. Uganda is receiving assistance equivalent to approximately $350 million in net-present-value terms. This has reduced Uganda’s ratio of net present value of debt-to-exports to 196 percent, well within the 192–212 percent target range agreed at the decision point; the saving in nominal debt service is estimated at nearly $650 million. The IMF’s assistance has already been disbursed to an account owed by Uganda and lowered the present value of its claims on Uganda by about $70 million, representing about $80 million in nominal terms. This will cover about one-fifth, on average, of Uganda’s annual debt service to the IMF over the next nine years.

In addition, during 1997/98, five countries reached the decision point: Bolivia and Burkina Faso in September 1997, Guyana in December 1997, Côte d’Ivoire in March 1998, and Mozambique in April 1998. The assistance committed to these five countries at the decision point totals about $2.6 billion in net-present-value terms, which is estimated to reduce debt service in nominal terms by some $5 billion. These five countries are scheduled to reach their completion points under the Initiative at various dates between September 1998 and March 2001.

In March and April 1998, the Boards of the IMF and IDA discussed preliminary HIPC documents for Guinea-Bissau and Mali and indicated that the countries were approaching their decision points and could qualify for assistance under the Initiative. Mali is expected to reach its decision point in September 1998. The debt situation of Guinea-Bissau will need to be reviewed once the current conflict has been resolved.

Heavily Indebted PoorCountries Initiative

First Stage

  • Paris Club provides flow rescheduling on Naples terms; that is, rescheduling of debt service on eligible debt falling due during the three-year consolidation period (up to 67 percent reduction on eligible maturities on a net-present-value basis).
  • Other bilateral and commercial creditors provide at least comparable treatment.
  • Multilateral institutions continue to provide adjustment support in the frameworkof World Bank- and IMF-supported adjustment programs.
  • Country establishes first three-year track record of good performance (performance prior to the start of the HIPC Initiative can be taken into account).
  • DecisionPoint
    Arrows defining the chart
  • Paris Club stock-of-debt operation under Naples terms (up to 67percent present value reduction of eligible debt) and comparable treatment by other bilateral andcommercial creditors judged adequate for the country to reach sustainability by the completionpoint
    country not eligible for HIPC initiative.
  • Eligible
  • Paris Club stock-of-debt operation (on Naples terms) juged not sufficient for thecountry's overall debt to become sustainable by the completion point
    country requests additional support under the HIPC initiative and IMF and World BankBoards determine eligibility.

  • Second Stage
  • Paris Club goes beyond Naples terms to provide more concessional debtreduction of up to 80 percent in present value terms.
  • Other bilateral and commercial creditors provide at least comparable treatment.
  • Donors and multilateral institutions provide enhanced support through interimmeasures.
  • Country establishes a second track record of good performance under IMF- and Bank-supported programs.

  • Completion Point
  • All creditors take coordinated action to provide sufficient assistance to reduce thecountry's debt to a sustainable level.
  • Paris Club provides deeper stock-of-debt reduction of up to 80 percent in presentvalue terms on eligible debt.
  • Other bilateral and commercial creditors provide at least comparable treatment onstock of debt.
  • Multilateral institutions take action to reduce the net present value of theirclaims, taking into account the assistance provided by nonmultilateral creditors and theirown preferred creditor status.
  • Borderline
  • For borderline cases, where there is doubt about whether sustainabilitywouldbe achieved by the completion point under a Naples terms stock-of-debt operation, thecountry would receive further flow reschedulings under Naples terms.
    If the outcome at the completion point is better than or as projected, the countrywould receive a stock-of-debt operation on Naples terms from Paris Club creditors andcomparable treatment from other bilateral and commercial creditors.
    If the outcome at the completion point is worse than projected, the country couldreceive additional support under the HIPC initiative, so as to be able to exit fromunsustainable debt.