Press Release: IMF and World Bank Support Afghanistan's Decision Point Under the Enhanced HIPC Initiative

July 9, 2007

Press Release No. 07/155

The International Monetary Fund (IMF) and the World Bank's International Development Association (IDA) have agreed that the Islamic Republic of Afghanistan has taken the steps necessary to reach its decision point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. The Islamic Republic of Afghanistan becomes the 31st country to reach its decision point and now qualifies for interim debt relief under the Initiative.1

Mr. Murilo Portugal, Deputy Managing Director of the IMF, said: "Despite a difficult security environment and persistent expenditure pressures, Afghanistan continued to make progress by maintaining macroeconomic stability and advancing its structural reform agenda. However, the external debt position will remain difficult, even after the provision of HIPC debt relief. Efforts to improve public financial management, external debt management, and public expenditure policy—together with continued donor support on highly concessional terms—will be crucial to achieving debt sustainability over the medium to longer term."

Mr. Alastair J. McKechnie, the World Bank Country Director for the Islamic Republic of Afghanistan, said: "Afghanistan's authorities are building a credible track record for implementing economic governance reforms. HIPC debt relief will support national reformers to sustain and deepen this record, while also freeing up resources that will be channeled toward the provision of basic healthcare, education and other essential services that are supported by IDA and other donors through the national budget."

The Government of the Islamic Republic of Afghanistan will receive interim debt relief from certain creditors, but in order to qualify for irrevocable debt relief at the completion point, the Islamic Republic of Afghanistan has committed to implementing a broad set of reforms. In particular, the Islamic Republic of Afghanistan is expected to maintain macroeconomic stability as evidenced by satisfactory performance under the IMF's Poverty Reduction and Growth Facility (PGRF); prepare and implement a Poverty Reduction Strategy for at least one year; implement pivotal reforms in the areas of public financial management, public expenditure policy, external debt management as well as other structural and social measures.

The Islamic Republic of Afghanistan will also be eligible for assistance under the Multilateral Debt Relief Initiative (MDRI) upon reaching the HIPC completion point. This will further increase the resources available to the Government in order to reduce poverty.

Specifics of the Debt Relief Operation

  • • The Islamic Republic of Afghanistan's public and publicly-guaranteed external debt was estimated at US$11.9 billion in nominal terms as of March 20, 2006, equivalent to US$1.1 billion in net present value (NPV) terms.2,3

    • Debt relief under the enhanced HIPC Initiative is estimated at US$571.4 million in NPV terms, equivalent to a 51.0 percent reduction of its debt after the full application of traditional debt relief mechanisms. Over time, this will reduce the Islamic Republic of Afghanistan's debt service payment obligations by about US$1.3 billion.

    • Immediately following approval of the decision point by the Boards of IDA and the IMF, IDA will begin to provide its share of HIPC assistance (US$75.2 million in NPV terms). The Islamic Republic of Afghanistan does not have any HIPC-eligible debt to the IMF. Under the enhanced HIPC Initiative's burden sharing approach, the remaining estimated HIPC debt relief will be provided by other creditors of the Islamic Republic of Afghanistan.

    • MDRI debt relief from IDA could amount to US$14.3 million in NPV terms or approximately US$37.6 million over time, assuming that the Islamic Republic of Afghanistan reaches its completion point mid-2009. The Islamic Republic of Afghanistan has no MDRI-eligible debt to the IMF.

Note to Editors:

More than two decades of conflict and political instability have left Afghanistan one of the poorest countries in the world. Per capita income is estimated to have been US$271 in 2005 and Afghanistan ranks well behind its neighbors on most human development indicators. However, there has been significant progress in recent years toward Afghanistan's political, economic, and social transformation. The transitional political process agreed in late 2001 is now complete, with the adoption of a new Constitution (January 2004), and presidential and parliamentary elections (October 2004 and December 2005, respectively). In 2002-2003, Afghanistan cleared its arrears to the Asian Development Bank, World Bank and IMF. Since 2002, IDA has financed more than 20 projects and three budget support operations in Afghanistan. This engagement focuses on: (i) building the capacity and accountability of the state to ensure the provision of affordable, accessible and adequate quality services; (ii) promoting growth of the rural economy and improve rural livelihoods; and (iii) supporting the growth of a formal, modern, and competitive private sector. Sustained performance under an IMF staff monitored program paved the way for a three-year arrangement under the IMF's Poverty Reduction and Growth Facility, approved in June 2006. This facilitated a further step in the regularization of relations with creditors, with a Paris Club rescheduling agreement in July 2006. The government presented its Cabinet-approved I-PRSP to a Donor Conference in London in January 2006. Preparations toward the full PRSP are progressing well.

The HIPC Initiative

In 1996, the World Bank and IMF launched the HIPC Initiative to create a framework in which all creditors, including multilateral creditors, can provide debt relief to the world's poorest and most heavily indebted countries, and thereby reduce the constraints on economic growth and poverty reduction imposed by the debt-service burdens in these countries. The Initiative was modified in 1999 to provide three key enhancements:

  • Deeper and Broader Relief. External debt thresholds were lowered from the original framework. As a result, more countries have become eligible for debt relief and some countries have become eligible for greater relief;

    Faster Relief. A number of creditors began to provide interim debt relief immediately at the "decision point." Also, the new framework permitted countries to reach the "completion point" faster; and

    Stronger Link Between Debt Relief and Poverty Reduction. Freed resources were to be used to support poverty reduction strategies developed by national governments through a broad consultative process.

To date, 31 HIPC countries have reached their decision points, of which 22 have reached completion point.

1 Countries begin receiving debt relief on an interim basis until the completion point is reached.
2 The Net Present Value (NPV) of debt is the discounted sum of all future debt service obligations (interest and principal). It is a measure that takes into account the borrowing terms of a country's debt stock. Whenever the interest rate on a loan is lower than the prevailing market rate, the resulting NPV of debt is smaller than its face value, with the difference reflecting the grant element. Nominal terms means the actual dollar value of debt service forgiven over a period of time.
3 Note that the Islamic Republic of Afghanistan's nominal value of debt is presented before an up-front 80 percent discount on Russian debt while the NPV of debt is presented after the impact of the Russian discount.


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