## 1. Outstanding Arrears to Selected Multilateral Creditors

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### Introduction and Policy Problem
- Core question: How can Liberia (and similarly situated pre-decision-point HIPCs) be given credit for implementing strong macroeconomic stabilization and structural reform programs during periods when the Fund and/or other international financial institutions lacked sufficient financing assurances for arrears clearance and debt relief?
- Timeline of prior actions:
  - July 11, 2007: Executive Directors briefed on Management’s preliminary proposals to modify some Fund policies.
  - September 14, 2007: Board conditionally approved modalities for financing the Fund’s debt relief to Liberia through partial distribution of First Special Contingent Account (SCA-1) resources and proceeds of Liberia-related deferred charges adjustments.
- Purpose of paper: propose modifications to HIPC Initiative policy as implemented in the Fund, respond to Directors’ issues, and set modalities and decision required to implement changes; modifications would also apply to future similarly situated pre-decision-point HIPCs.

### Background: HIPC fundamentals, constraints, and effects on track record
- HIPC Initiative fundamentals and MDRI:
  - Enhanced HIPC Initiative coordinates debt reduction for HIPCs pursuing Fund- and IDA-supported programs; participants include Fund, IDA, AfDB, IaDB, AsDB, and Paris Club members.
  - MDRI (2005) allows 100 percent relief on eligible debts by the Fund, IDA, and the AfDF for countries completing HIPC; Fund also provided MDRI relief to two non-HIPCs with per capita income below US$380. IaDB provides 100 percent relief at completion point under IaDB 2007 Initiative.
- Eligibility and track record requirements (Fund rules):
  - Eligibility: (i) be PRGF-ESF-eligible and eligible for full debt relief under traditional mechanisms; (ii) have end-2004 debt above relevant HIPC threshold even after assumed application of traditional mechanisms; and (iii) adopt a qualifying Fund-supported program.
  - Decision-point requirements: (i) debt above relevant HIPC threshold at reference date after full application of traditional mechanisms; (ii) satisfactory poverty reduction strategy (or interim PRS); and (iii) a track record of strong policy performance under a qualifying Fund- and IDA-supported program.
  - Interim assistance begins after decision point; full and irrevocable reduction at completion point after further track record, completion-point triggers, and satisfactory PRSP implementation.
  - Fund conditions both interim assistance and reaching completion point on satisfactory assurances from other creditors that they will provide their share of debt relief; in practice: minimum 70 percent of HIPC-eligible debt for interim assistance and 80 percent for completion point (creditors’ participation assurances).
- Practical impediments to establishing track record:
  - PRGF-HIPC Trust Instrument requires track record under a specified list of instruments (PRGF, ESF, Extended Arrangements, case-by-case: SAF, SBAs, RAP, or EPCA). Management practice requires a minimum track record of six months under qualifying programs before recommending decision point, though the Instrument envisages normally a three-year period.
  - Apart from the RAP, access to these instruments requires clearance of all arrears to the Fund. Fund policy also requires qualifying programs—aside from RAP—to be fully financed, including clearance of arrears to other creditors on terms compatible with the program and commitments from creditors to provide financing necessary for program viability (“program financing assurances”).
  - SMPs do not necessarily require arrears clearance or program financing assurances and can be approved/endorsed without HIPC financing assurances.
- Financing shortfall for protracted arrears cases:
  - PRGF-HIPC Trust financing frameworks for enhanced HIPC Initiative and MDRI did not include costs for three protracted arrears cases—Liberia, Somalia, and Sudan. PRGF-HIPC Trust resources insufficient to commit Fund debt relief to these countries at HIPC decision point; additional financing must be identified before normalization can start.
  - Some other multilateral creditors also need to secure additional funds to finance their relief to HIPCs with large arrears.
- Consequences of delays:
  - Delays can prevent members with large arrears from starting a track record under qualifying Fund-supported programs despite strong policies.
  - Example: Liberia’s strengthened reforms could have warranted PRGF or RAP support, but lack of financing assurances precluded use of RAP; approval for a RAP for Liberia would have required modifying RAP policy to allow accumulation of arrears to the Fund during RAP period.
  - Absence of assurances prevents counting SMP performance toward a decision-point track record, effectively penalizing countries by requiring longer post-assurance track record and risking erosion of political support for reforms and delays in resolving private creditor arrears.
  - World Bank’s Debt Reduction Facility (DRF) becomes technically available only after decision point, further delaying arrears resolution to private creditors.

### Empirical inventory — outstanding arrears (selected figures)
- Table 1. Outstanding Arrears to Selected Multilateral Creditors (In millions of U.S. dollars) — creditor columns labeled by reporting dates: IMF (As of November 30, 2007) / World Bank Group (As of November 30, 2007) / African Development Bank Group (As of October 31, 2007)
  - Comoros: IMF: -- ; World Bank Group: -- ; AfDB Group: 34.5
  - Côte d’Ivoire: IMF: 0.0 ; World Bank Group: 503.1 ; AfDB Group: 529.4
  - Eritrea: IMF: -- ; World Bank Group: -- ; AfDB Group: 0.5
  - Liberia: IMF: 859.1 ; World Bank Group: 510.8 ; AfDB Group: 250.9
  - Somalia: IMF: 378.9 ; World Bank Group: 171.6 ; AfDB Group: 69.2
  - Sudan: IMF: 1,635.5 ; World Bank Group: 458.6 ; AfDB Group: 196.8
  - Togo: IMF: 0.0 ; World Bank Group: 132.1 ; AfDB Group: 19.7

### Proposed policy change: count qualifying SMPs toward HIPC decision point
- Primary proposal:
  - Amend PRGF-HIPC Trust Instrument so performance under staff-monitored programs (SMPs) may be counted as a track record toward reaching the HIPC Initiative decision point.
  - SMPs count only where the Board agrees with staff that macroeconomic and structural policies under the SMP meet policy standards associated with programs supported by arrangements in the upper credit tranches or under the PRGF (“SMPs of UCT quality policies”).
- Justification and safeguards:
  - UCT quality standard is same as in RAP context and more stringent than currently required for EPCA.
  - SMPs can be approved/endorsed in absence of HIPC financing assurances and need not require arrears clearance or program financing assurances, allowing members to begin establishing track record while financing assurances are mobilized.
  - Conforming amendment would include qualifying SMPs among programs that members may use to establish formal eligibility for HIPC debt relief.
  - Proposed amendment requires decision by Fund, as Trustee of PRGF-HIPC Trust, by majority of votes cast.

### Observations and current practice
- Board views:
  - February 2007 and July 2007: most Directors agreed Liberia’s SMP policies met standards associated with upper credit tranche arrangements; a few Directors reserved position or noted Board assessment not aligned with character of SMP.
- Management practice:
  - Minimum track record of six months under qualifying programs in practice before recommending decision point (corresponds to minimum time to complete one PRGF review). PRGF-HIPC Trust Instrument envisages normally a three-year performance period leading up to decision point, but Management practice has shortened to six-month minimum.

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### 12. Implementing the proposed change in the track record requirement under the HIPC Initiative

### A. Criteria for Determining an SMP’s UCT Quality
- Board assessment rule:
  - An SMP is of UCT quality if strength of macroeconomic and structural policies under SMP would be sufficient to justify Fund support in the upper credit tranches or under PRGF should sufficient financing assurances for the program and debt relief be available.
- Sole obstacles to Fund financial support may be: member’s ineligibility to use Fund resources, absence of full financing assurances for the program, and, if applicable, participation in HIPC Initiative and MDRI.
- A qualifying SMP would require neither full program nor HIPC financing assurances to count toward HIPC track record.
- Objectives required for UCT or PRGF:
  - solving the member’s balance of payments problem without recourse to measures destructive of national or international prosperity, and
  - achieving medium-term external viability while fostering sustainable economic growth.
- Judgment criteria:
  - SMP policies judged of UCT quality when deemed adequate to restore a viable external position and sustainable economic growth if combined with sufficient program financing and debt relief.
  - Staff projections must show that continued application of these policies, combined with program financing and debt relief, would lead to sustained improvement over the medium term of macroeconomic performance, including external payment capacity.
  - Whether policies meet UCT standards generally depends on financing available; tighter policies may be required when financing is constrained.
- Innovation: RAPs and proposed approach bring forward elements of financing (e.g., arrears clearance) that will be delivered in the future for policy-quality assessment.

### B. Program Financing Issues (complementary requirements)
- General: protect payments discipline when focusing on policy quality rather than full financing.
- For members not eligible for a RAP:
  - qualifying SMP only if they have no arrears to the Fund, and
  - if they have arrears to the World Bank, there must be an agreed financing plan and timetable for normalizing relations with the Bank.
  - Arrears to other creditors may be tolerated if macroeconomic and structural policies continue to be of UCT quality.
- RAP-eligible members (Liberia, Somalia, Sudan) — greater flexibility:
  - Generally same financing requirements as non-RAP eligible members, except they would not be required to clear existing arrears to the Fund either prior to or during a qualifying SMP.
  - Normally expected to remain current on new obligations falling due to the Fund.
  - RAP-eligible members emerging from conflict with severely limited payments capacity could be allowed to accumulate new arrears to the Fund during period of a qualifying SMP to the extent payments capacity requires it.
  - Assessment of payment capacity would take into account overall external position, including debt service falling due and payments to other creditors; member expected to agree that payments to other creditors will also be limited if severely constrained.

### C. Role of the Executive Board and operational modalities
- SMPs continue to be approved by Management, not by the Board.
- Determination that an SMP is of UCT quality is only for purposes of determining member’s eligibility and qualification for HIPC assistance at decision point.
- Board retains determinative role in assessing whether member’s actual policy performance is sufficient to justify reaching decision point.
- Requirements for using an SMP as track record:
  - Board agreement with staff’s assessment that policies under the program were of UCT quality, and
  - Board satisfaction with actual implementation after an appropriate performance period.
- Operational modalities (Box 2):
  - Board’s agreement with staff assessment recorded in a Summing Up or Chairman’s Closing Remarks.
  - Relevant period of policy performance begins on date of Board determination.
  - Reaching decision point requires Board assessment that member’s performance under SMP has been satisfactory for a sufficient period (minimum of six months under current practice). Board to follow similar modalities/practices as for Fund-supported programs in assessing performance.

### D. Uniformity of treatment (application and current program status)
- Amendment applies uniformly to all members eligible or potentially eligible for HIPC debt relief and not yet at decision point.
- Greater flexibility available not only to Liberia but to any pre-decision-point HIPC that adopts and implements an SMP of UCT quality.
- Program status of pre-decision-point HIPCs (as of December 1, 2007):
  - Comoros: No current program engagement
  - Cote d’Ivoire: EPCA approved on 08/03/07
  - Eritrea: No current program engagement
  - Kyrgyz Republic: PRGF approved on 3/15/05. In a letter dated 3/25/07, the Kyrgyz authorities indicated that they do not wish to participate in the HIPC Initiative
  - Liberia: RAP-eligible; SMP in place for the period starting February 2006 to present
  - Nepal: PRGF approved on 11/19/03, and extended until 11/18/2007
  - Somalia: RAP-eligible; no current program engagement
  - Sudan: RAP-eligible; SMPs in place since 1997, with current one for the period of July 2007 to December 2008
  - Togo: SMP was in place for the period of October 2006 to June 2007
- Amendment would apply to Board determinations of UCT quality made both before and after amendment becomes effective; prior Board assessments in February 2007 and July 2007 that Liberia’s SMP policies were of UCT quality would enable Liberia’s SMP performance to be considered for establishing a track record.

### IV. Other Policy Considerations

- A. Satisfactory “Creditors’ Participation” Assurances
  - No change proposed in minimum Management-applied creditor participation threshold for Fund’s interim assistance under HIPC.
  - Management will recommend Board approval of Fund interim assistance only where there are satisfactory assurances that creditors holding a minimum of 70 percent of HIPC-eligible debt (after traditional debt relief) will provide their expected share of HIPC relief.
  - Provisional commercial debt data suggest most pre-decision-point HIPCs, including Liberia, would be eligible under current threshold to receive interim assistance from the Fund once they reach decision point.
  - Among pre-decision-point HIPCs, only Sudan currently has obligations to non-Paris Club official bilateral creditors and commercial creditors accounting for over 30 percent of its HIPC-eligible debt.
- Table 3. Share of Selected Creditor Groups in HIPC-Eligible Debt (In percent)
  - Comoros: Non-Paris Club Creditors 11.5, Commercial Creditors 1.3
  - Côte d'Ivoire: Non-Paris Club Creditors 0.5, Commercial Creditors 25.2
  - Eritrea: Non-Paris Club Creditors 22.7, Commercial Creditors 0.0
  - Kyrgyz Republic: Non-Paris Club Creditors 2.6, Commercial Creditors 0.0
  - Liberia: Non-Paris Club Creditors 3.3, Commercial Creditors 18.2
  - Nepal: Non-Paris Club Creditors 0.9, Commercial Creditors 0.0
  - Somalia: Non-Paris Club Creditors 11.3, Commercial Creditors 0.0
  - Sudan: Non-Paris Club Creditors 31.3, Commercial Creditors 6.9
  - Togo: Non-Paris Club Creditors 10.0, Commercial Creditors 0.0
  - Average for pre-decision-point HIPCs: Non-Paris Club Creditors 10.5, Commercial Creditors 5.7
  - Average for post-decision-point HIPCs: Non-Paris Club Creditors 9.5, Commercial Creditors 2.9
  - Note: Data for pre-decision-point HIPCs are estimates and may understate commercial claims, as additional commercial claims tend to surface during HIPC process.
- Box 3 — Commercial creditors’ participation: delivery by non-Paris Club and commercial creditors remains low relative to Paris Club and multilaterals; commercial creditors’ lawsuits against HIPCs challenge the process and can divert resources; World Bank’s DRF can provide grant assistance to help HIPCs extinguish commercial debt through buybacks at deep discount after decision point, though private creditors may be unwilling to participate given deep discounts and expectations for higher future recoveries.

- B. Delivery of MDRI-type, beyond-HIPC Relief to Protracted Arrears Cases
  - Fund will provide MDRI-type, beyond-HIPC debt relief to all protracted arrears countries that reach completion point if resources become available.
  - Not proposed to amend existing MDRI Trusts to make these countries eligible under the Trusts.
  - Instead, country-specific administered accounts with terms similar to MDRI Trusts could be established to facilitate fund-raising and delivery of beyond-HIPC relief to protracted arrears countries.
  - A structure has been approved by the Board to deliver beyond-HIPC debt relief to Liberia via a new administered account.

### V. Conclusion — staff assessment and mitigating modalities
- Staff view: proposed amendment balances preserving spirit of HIPC Initiative with allowing strong-performing members without adequate financing assurances to build necessary track record toward decision point.
- Mitigating modalities and safeguards:
  - UCT quality requirement for qualifying SMPs constrains risk of diluting HIPC substantive policy standards.
  - Executive Board’s determinative role limits such risks.
  - Amendment applies uniformly to all similarly situated pre-decision-point HIPCs, aligning with uniformity of treatment principles.

*Source: IMF staff paper on HIPC Initiative modalities and proposed amendment to the PRGF-HIPC Trust Instrument (excerpts as provided).*

### 1. Outstanding Arrears to Selected Multilateral Creditors........................................................6

### 1. Outstanding Arrears to Selected Multilateral Creditors

### Introduction: problem statement and context
- Core question: How can Liberia (and similarly situated pre-decision-point HIPCs) be given credit for implementing strong macroeconomic stabilization and structural reform programs during periods when the Fund and/or other international financial institutions lacked sufficient financing assurances for arrears clearance and debt relief?
- Timeline of prior management/Board actions:
  - July 11, 2007: Executive Directors were briefed on Management’s preliminary proposals to modify some Fund policies to address the issue.
  - September 14, 2007: The Board conditionally approved modalities for financing the cost of the Fund’s debt relief to Liberia through partial distribution of the First Special Contingent Account (SCA-1) resources and proceeds of Liberia-related deferred charges adjustments to facilitate bilateral contributions.
- Purpose of the paper: to focus on proposed modifications to HIPC Initiative policy as implemented in the Fund, respond to key policy issues raised by Directors at the July informal briefing, and set out modalities and the decision required to implement proposed changes. If adopted, modifications would also apply to future similarly situated pre-decision-point HIPCs.
- Paper organization (as provided): 
  - Section II: background and proposed amendment to the PRGF-HIPC Trust Instrument.
  - Section III: key policy and implementation issues raised by the proposed amendment and suggested modalities.
  - Section IV: two additional policy modifications discussed earlier but not currently proposed.
  - Section V: concluding observations.
  - Section VI: proposed decision.

### Background: HIPC modalities, financing constraints, and effects on track record
- HIPC Initiative fundamentals (Box 1 summary):
  - The enhanced HIPC Initiative is a coordinated approach to reduce external debt burdens of HIPCs pursuing Fund- and IDA-supported adjustment and reform programs, with participation of Fund, IDA, AfDB, IaDB, AsDB, and Paris Club members.
  - The MDRI (2005) supplemented the enhanced HIPC Initiative allowing for 100 percent relief on eligible debts by the Fund, IDA, and the AfDF for countries completing the HIPC process; the Fund also provided MDRI relief to two non-HIPCs with per capita income below US$380. The IaDB provides 100 percent relief at completion point under the IaDB 2007 Initiative.
  - Eligibility for HIPC Initiative assistance (Fund rules): (i) be PRGF-ESF-eligible and eligible for full debt relief under traditional mechanisms; (ii) have end-2004 debt above the relevant HIPC threshold even after assumed application of traditional debt-relief mechanisms; and (iii) adopt a qualifying Fund-supported program.
  - Decision-point requirements include: (i) debt above relevant HIPC threshold at reference date after full application of traditional mechanisms; (ii) satisfactory poverty reduction strategy (or interim PRS); and (iii) a track record of strong policy performance under a qualifying Fund- and IDA-supported program.
  - Interim assistance may begin after decision point; full and irrevocable reduction provided at completion point after further track record, implementation of completion-point triggers, and satisfactory PRSP implementation.
  - Fund conditions both interim assistance and reaching completion point on receiving satisfactory assurances from other creditors that they will provide their share of debt relief (“creditors’ participation assurances”). In practice: assurances from creditors accounting for a minimum of 70 percent of HIPC-eligible debt required for interim assistance and 80 percent for completion point.
- Application to Liberia and similarly situated countries:
  - Existing rules could delay access to debt relief despite strong policy performance because of the dual requirements of: (a) establishing a track record under qualifying instruments to reach decision point, and (b) securing assurances that the Fund will have sufficient resources to finance its HIPC Initiative and beyond-HIPC debt relief.
  - Under PRGF-HIPC Trust Instrument, HIPCs must establish a track record of strong policy performance under a specified list of instruments in the period leading up to the decision point (PRGF, ESF, Extended Arrangements, case-by-case: SAF, SBAs, RAP, or EPCA). Management practice now requires a minimum track record of six months under qualifying programs before recommending decision point, though the Instrument envisages normally a three-year period.
  - Apart from the RAP, access to these instruments requires clearance of all arrears to the Fund. Fund policy also requires qualifying programs—aside from the RAP—to be fully financed. This includes clearance of arrears to other creditors on terms compatible with the program and commitments from creditors to provide financing necessary for program viability (“program financing assurances”).
  - SMPs (staff-monitored programs) do not necessarily require arrears clearance or program financing assurances and can be approved by Management and endorsed by the Board even in the absence of HIPC financing assurances.
- Financing resource shortfall for protracted arrears cases:
  - The PRGF-HIPC Trust financing frameworks for the enhanced HIPC Initiative and the MDRI did not include costs for the three protracted arrears cases—Liberia, Somalia, and Sudan. As a result, PRGF-HIPC Trust resources are currently insufficient to commit Fund debt relief to these countries at HIPC decision point, so additional financing must be identified and secured before normalization can start for these countries.
  - Some other multilateral creditors also need to secure additional funds to finance their relief to HIPCs with large arrears.
- Consequences of delays:
  - Delays in mobilizing resources could prevent a member with large arrears from starting a track record under a qualifying Fund-supported program despite having policies sufficient to warrant Fund support.
  - Example: Liberia had strengthened macroeconomic and structural reforms to a level that could have warranted PRGF or RAP support, but lack of financing assurances precluded use of RAP; given limited payment capacity, approval for a RAP for Liberia would also have required modifying RAP policy to allow accumulation of arrears to the Fund during the RAP period.
  - The absence of assurances prevents counting SMP performance toward a decision-point track record, effectively penalizing countries by requiring a longer post-assurance track record and risking erosion of political support for reforms and delays in resolving private creditor arrears. The World Bank’s Debt Reduction Facility (DRF) becomes technically available only after decision point, which can further delay arrears resolution to private creditors.

### Empirical inventory: outstanding arrears (Table 1)
- Table 1. Outstanding Arrears to Selected Multilateral Creditors (In millions of U.S. dollars)
  - IMF (As of November 30, 2007) / World Bank Group (As of November 30, 2007) / African Development Bank Group (As of October 31, 2007)
  - Comoros: IMF: -- ; World Bank Group: -- ; AfDB Group: 34.5
  - Côte d’Ivoire: IMF: 0.0 ; World Bank Group: 503.1 ; AfDB Group: 529.4
  - Eritrea: IMF: -- ; World Bank Group: -- ; AfDB Group: 0.5
  - Liberia: IMF: 859.1 ; World Bank Group: 510.8 ; AfDB Group: 250.9
  - Somalia: IMF: 378.9 ; World Bank Group: 171.6 ; AfDB Group: 69.2
  - Sudan: IMF: 1,635.5 ; World Bank Group: 458.6 ; AfDB Group: 196.8
  - Togo: IMF: 0.0 ; World Bank Group: 132.1 ; AfDB Group: 19.7

### Proposed policy change and rationale
- Primary proposal:
  - Amend the PRGF-HIPC Trust Instrument so that performance under staff-monitored programs (SMPs) may be counted as a track record toward reaching the HIPC Initiative decision point.
  - SMPs would count for this purpose only where the Board agrees with staff that macroeconomic and structural reform policies under the SMP meet the policy standards associated with programs supported by arrangements in the upper credit tranches or under the PRGF (“SMPs of UCT quality policies”).
- Justification and safeguards:
  - This approach preserves HIPC Initiative standards because the UCT quality standard is the same as applicable in the RAP context and is more stringent than that currently required for EPCA (another qualifying instrument).
  - SMPs can be approved/endorsed in the absence of HIPC financing assurances and do not necessarily require arrears clearance or program financing assurances, allowing strong-performing members to begin establishing the track record while financing assurances are being mobilized.
  - A conforming amendment would include such qualifying SMPs among programs that members may use to establish formal eligibility for HIPC Initiative debt relief.
  - The proposed amendments would require a decision by the Fund, as Trustee of the PRGF-HIPC Trust, taken by a majority of the votes cast.

### Observations from prior Board discussions and staff assessment
- In February 2007 and July 2007, most Directors agreed with staff that Liberia’s policies under its SMP met standards associated with upper credit tranche arrangements. A few Directors reserved their position or noted that a Board assessment would not be in line with the character of an SMP.
- Management now requires a minimum track record of six months under qualifying programs in practice before recommending decision point, corresponding to the minimum time normally needed to complete one review under PRGF-supported programs. The PRGF-HIPC Trust Instrument envisages a normal three-year performance period leading up to decision point, but Management practice has shortened that to the six-month minimum in practice.

*Source: IMF staff paper on HIPC Initiative modalities and proposed amendment to the PRGF-HIPC Trust Instrument (excerpts as provided).*

### 12. Implementing the proposed change in the track record requirement under the

### 12. Implementing the proposed change in the track record requirement under the HIPC Initiative

### A. Criteria for Determining Staff-Monitored Program’s (SMP’s) Upper Credit Tranche (UCT) Quality
- Board assessment: an SMP is of UCT quality if the strength of the macroeconomic and structural policies under the SMP would be sufficient to justify Fund support in the upper credit tranches or under the PRGF should sufficient financing assurances for the program and debt relief be available.
- Sole obstacles to Fund financial support may be: the member’s ineligibility to use Fund resources, the absence of full financing assurances for the program, and, if applicable, its participation in the HIPC Initiative and MDRI.
- A qualifying SMP would require neither full program nor HIPC financing assurances in order to count toward the HIPC Initiative track record.
- Objectives of policies required for an upper credit tranche or PRGF arrangement:
  - solving the member’s balance of payments problem without recourse to measures destructive of national or international prosperity, and
  - achieving medium-term external viability while fostering sustainable economic growth.
- Judgment criteria:
  - SMP policies judged of UCT quality when they are deemed adequate to restore a viable external position and sustainable economic growth if combined with sufficient program financing and debt relief.
  - Staff projections must show that continued application of these policies, combined with program financing and debt relief, would lead to a sustained improvement over the medium term of macroeconomic performance, including external payment capacity.
  - Whether policies meet UCT standards generally depends on financing available; tighter policies may be required when financing is constrained.
- Innovation noted: in RAPs and the proposed approach, certain elements of financing (e.g., arrears clearance) that will only be delivered in the future are brought forward in time for policy-quality assessment.

### B. Program Financing Issues
- General complementary requirements to protect payments discipline when focusing on policy quality rather than full financing.
- For members not eligible for a RAP:
  - a qualifying SMP only if they have no arrears to the Fund, and
  - if they have arrears to the World Bank, there must be an agreed financing plan and a timetable for normalizing financial relations with the Bank.
  - Arrears to other creditors may be tolerated if macroeconomic and structural policies continue to be of UCT quality.
- Greater flexibility for RAP-eligible members (the remaining RAP-eligible members are Liberia, Somalia, and Sudan):
  - Generally subject to same financing requirements as non-RAP eligible members, except they would not be required to clear existing arrears to the Fund either prior to or during a qualifying SMP.
  - Normally expected to remain current on new obligations falling due to the Fund.
  - RAP-eligible members that have emerged from conflict and have severely limited payments capacity could, to the extent their payments capacity required it, be allowed to accumulate new arrears to the Fund during the period of a qualifying SMP.
  - Assessment of the member’s payment capacity would take into account the member’s overall external position, including debt service falling due and payments to other creditors; the member would be expected to agree that payments to other creditors will also be limited if severely constrained.

### C. The Role of the Executive Board
- SMPs continue to be approved by Management, not by the Board.
- The determination that a given SMP is of UCT quality would be only for purposes of determining the member’s eligibility and its qualification for HIPC Initiative assistance at the decision point.
- The Board retains its determinative role in assessing whether the quality of a member’s actual policy performance is sufficient to justify reaching the decision point.
- Determination that an SMP should provide the track record requires:
  - Board agreement with staff’s assessment that policies under the program were of UCT quality, and
  - Board satisfaction with actual implementation of the program after an appropriate performance period.
- Box 2 — Operational Modalities for Using SMPs of UCT Quality as Track Record under the HIPC Initiative:
  - The Board’s agreement with staff assessment that the macroeconomic and structural policies under a given SMP are of UCT quality would be recorded in a Summing Up or the Chairman’s Closing Remarks of the Board discussion.
  - The relevant period of policy performance would begin as of the date of the Board determination.
  - Reaching the decision point would require an assessment by the Board that the member’s performance under the SMP has been satisfactory for a sufficient period of time (a minimum of six months, under current practice). In making this assessment, the Board would be expected to follow similar modalities and practices to those used in assessing performance under Fund-supported programs (e.g., taking into account the factors considered in granting waivers of nonobservance of performance criteria).

### D. Uniformity of Treatment
- The proposed amendment would apply uniformly to all members that are eligible or potentially eligible for HIPC Initiative debt relief and have not yet reached the decision point.
- Greater flexibility would be available not only to Liberia, but to any other pre-decision-point HIPC that adopts and implements an SMP of UCT quality.
- As of December 1, 2007, program status of pre-decision-point HIPCs:
  - Comoros: No current program engagement
  - Cote d’Ivoire: EPCA approved on 08/03/07
  - Eritrea: No current program engagement
  - Kyrgyz Republic: PRGF approved on 3/15/05. In a letter dated 3/25/07, the Kyrgyz authorities indicated that they do not wish to participate in the HIPC Initiative
  - Liberia: RAP-eligible; SMP in place for the period starting February 2006 to present
  - Nepal: PRGF approved on 11/19/03, and extended until 11/18/2007
  - Somalia: RAP-eligible; no current program engagement
  - Sudan: RAP-eligible; SMPs in place since 1997, with the current one for the period of July 2007 to December 2008
  - Togo: SMP was in place for the period of October 2006 to June 2007
- The proposed amendment would apply to Board determinations of UCT quality made both before and after the amendment becomes effective.
  - Accordingly, the assessment by most Executive Directors in February 2007 and July 2007 that the macroeconomic and structural policies under Liberia’s current SMP were of UCT quality would enable Liberia’s performance under the SMP to be considered for establishing a track record toward the decision point.
  - The Board has not expressed the view that macroeconomic and structural policies under any other SMP now in place are of UCT quality; the amendment would apply if such a determination were to be made by the Board for any other SMP before the amendment becomes effective.

### IV. Other Policy Considerations
- A. Satisfactory “Creditors’ Participation” Assurances
  - No changes proposed in the minimum Management-applied creditor participation threshold for the Fund’s interim assistance under the HIPC Initiative.
  - Management will continue to recommend Board approval of Fund interim assistance only where there are satisfactory assurances that creditors holding a minimum of 70 percent of HIPC-eligible debt (i.e., after traditional debt relief) will provide their expected share of HIPC Initiative relief.
  - Provisional commercial debt data suggest that most pre-decision-point HIPCs, including Liberia, would be eligible under the current threshold to receive interim assistance from the Fund once they reach decision point.
  - Among pre-decision-point HIPCs, only Sudan currently has obligations to non-Paris Club official bilateral creditors and commercial creditors accounting for over 30 percent of its HIPC-eligible debt.
  - Table 3. Share of Selected Creditor Groups in HIPC-Eligible Debt (In percent):
    - Comoros: Non-Paris Club Creditors 11.5, Commercial Creditors 1.3
    - Côte d'Ivoire: Non-Paris Club Creditors 0.5, Commercial Creditors 25.2
    - Eritrea: Non-Paris Club Creditors 22.7, Commercial Creditors 0.0
    - Kyrgyz Republic: Non-Paris Club Creditors 2.6, Commercial Creditors 0.0
    - Liberia: Non-Paris Club Creditors 3.3, Commercial Creditors 18.2
    - Nepal: Non-Paris Club Creditors 0.9, Commercial Creditors 0.0
    - Somalia: Non-Paris Club Creditors 11.3, Commercial Creditors 0.0
    - Sudan: Non-Paris Club Creditors 31.3, Commercial Creditors 6.9
    - Togo: Non-Paris Club Creditors 10.0, Commercial Creditors 0.0
    - Average for pre-decision-point HIPCs: Non-Paris Club Creditors 10.5, Commercial Creditors 5.7
    - Average for post-decision-point HIPCs: Non-Paris Club Creditors 9.5, Commercial Creditors 2.9
  - Note: Data available for pre-decision-point HIPCs are estimates and may understate the size of commercial claims, as additional commercial claims tend to be brought to light as the HIPC Initiative process unfolds.
  - Box 3 — Commercial Creditors’ Participation in the HIPC Initiative:
    - Delivery of debt relief by non-Paris Club and commercial creditors remains low relative to Paris Club and multilateral institutions.
    - Commercial creditors’ lawsuits against HIPCs represent a growing challenge, diverting resources and forcing uneven sharing of the debt-relief effort.
    - HIPCs are expected to negotiate with all creditors in good faith; participating creditors have relied on moral suasion and stepped up efforts to discourage litigation and provide technical and legal advice.
    - The World Bank’s Debt Reduction Facility for IDA-Only Countries can channel grant assistance to help HIPCs extinguish commercial debt through buybacks at a deep discount after decision point, but private creditors may be unwilling to participate given deep discounts and expectations for higher recovery prices in the future.
- B. Delivery of MDRI-type, beyond-HIPC Relief to the Protracted Arrears Cases
  - The Fund will provide MDRI-type, beyond-HIPC debt relief to all the protracted arrears countries that reach the completion point if resources for such relief become available.
  - It is not proposed that the existing MDRI Trusts be amended to make these countries eligible under the Trusts.
  - Instead, country-specific administered accounts with terms similar to the MDRI Trusts could be established to facilitate fund-raising and delivery of beyond-HIPC debt relief to the protracted arrears countries.
  - A structure has already been approved by the Board to deliver beyond-HIPC debt relief to Liberia via a new administered account.

### V. Conclusion
- Staff view: the proposed amendment represents a reasonable balance between preserving the spirit of the HIPC Initiative and allowing strong-performing members without adequate financing assurances to build the necessary track record toward the decision point.
- Mitigating modalities:
  - The UCT quality requirement for qualifying SMPs constrains the risk of watering down HIPC Initiative substantive policy performance standards.
  - The Executive Board’s determinative role in the process further limits such risks.
  - The amendment applies uniformly to all similarly situated, pre-decision-point HIPCs, aligning with uniformity of treatment principles.

*Source: _121907 - 12. Implementing the proposed change in the track record requirement under the (PDF).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/2007/eng/_121907.pdf_