Public Information Notice: IMF Executive Board Discusses The Challenge of Maintaining Long-Term External Debt Sustainability of HIPCs

May 4, 2001

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On April 11, 2001, the Executive Board of the International Monetary Fund (IMF) discussed the challenge of maintaining long-term external debt sustainability of heavily indebted poor countries (HIPCs)


The HIPC Initiative was launched by the IMF and the World Bank in 1996 as the first comprehensive effort to eliminate unsustainable debt in the world's poorest, most heavily indebted countries. It was enhanced in the fall of 1999, and aims at reducing the net present value (NPV) of debt at the decision point to a maximum of 150 percent of exports, or for small open economies, 250 percent of government revenue.

Eligible countries need to demonstrate the capacity to use prudently the assistance granted by establishing a satisfactory track record under IMF- and IDA-supported programs. A key input in this process is the PRSP, prepared with broad participation of civil society, and intended to serve as the basis for implementing the country's poverty reduction strategy.

Once a decision is made to grant HIPC relief, and provided that the country stays on track with its IMF and IDA-supported program, the IMF, IDA, Paris Club, and some other creditors grant relief on current maturities. When specific measures needed to strengthen poverty reduction efforts and macroeconomic management have been implemented, the IMF and IDA provide the remainder of the committed debt relief, and Paris Club creditors reduce the stock of debt as agreed; other multilateral and bilateral creditors also contribute to the debt relief on comparable terms.

Some three-dozen HIPCs are expected to qualify for assistance under the enhanced HIPC Initiative, the great majority of which are sub-Saharan African countries. Debt relief packages are now in place for 22 countries under the enhanced HIPC Initiative framework (Benin, Bolivia, Burkina Faso, Cameroon, The Gambia, Guinea, Guinea-Bissau, Guyana, Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, São Tome & Príncipe, Senegal, Tanzania, Uganda and Zambia), with total committed assistance estimated at some US$34 billion. In combination with traditional debt relief and pledges of additional bilateral debt forgiveness, the external indebtedness of these 22 countries will be reduced by almost two-thirds in NPV terms (from US$53 billion to US$20 billion), bringing their indebtedness to levels below the average for all developing countries.

In each of these 22 cases, the staff paper analyzed the prospects for debt sustainability, based on their decision point documents. This analysis confirmed that assuring long-term debt sustainability depends not only on debt relief and the absolute level of debt, but also on the development of fiscal and external repayment capacity, which is linked closely to economic growth, and the availability and concessionality of new external support. Even after debt has been reduced, debt sustainability can only be achieved if the underlying causes that triggered past debt problems are addressed. This requires the successful implementation of a comprehensive set of policies that achieve better economic performance and poverty reduction, on strengthening governance and public institutions, on assuring access to adequate concessional flows from the international community, on sound debt management, and on developments in the global economy. These areas need to be given full attention in order to build on debt reduction and ensure long-term debt sustainability for these countries.

Executive Board Assessment

Executive Directors agreed with the general thrust of the joint staff report, in particular with the view that HIPC debt relief provides a good basis for assuring long-term debt sustainability, but that this also requires continued adherence to sound macroeconomic management and structural reforms, adequate flows of concessional external resources, and increased access to export markets.

Directors stressed that creditor countries have a key role to play to ensure the permanent exit by HIPCs from debt rescheduling. They underscored the critical importance of increased access to industrial country export markets, adequate financing after the completion point, disciplined lending to countries with heavy debt burdens, and technical assistance to strengthen debt management. In addition, Directors reiterated their call for all creditors to deliver relief in a timely manner under the HIPC Initiative. Directors stressed that debt relief should not replace development assistance, and that additional assistance to HIPCs should not come at the expense of non-HIPCs. Some Directors considered that creditor countries can also help by regularly publishing data on their exposure to HIPCs and by coordinating their development assistance.

Directors noted that sound policies by debtor countries—including macroeconomic policies, structural reforms, public sector management, good governance and social inclusion—are critically needed to increase domestic saving and to stimulate output and export growth, in order to reduce external vulnerabilities and eventually the dependence on aid. Also, given the importance of the private sector in the long-term growth prospects of the HIPCs, Directors emphasized that HIPCs should ensure an enabling environment that will stimulate private economic activity and investment, and attract private equity, particularly foreign direct investment.

Directors recognized that the projections of debt sustainability were very sensitive to the levels and composition of new borrowing. Therefore, they recommended that new financing for the HIPCs should be on highly concessional terms, as much as possible in the form of grants. A number of Directors noted, however, that some financing on nonconcessional terms to public enterprises for economically viable projects may be warranted, on a case-by-case basis. Directors stressed the importance of transparency and the monitoring of new lending to HIPCs, particularly of lending on nonconcessional terms.

Directors felt that the HIPC Initiative provides a good basis to achieve debt sustainability after the completion point. However, they noted that in a few HIPCs the ratio of NPV of debt to exports is only expected to fall below 150 percent over the medium term, largely because of the projected levels of new borrowing, and in some cases low export growth. While recognizing that these new borrowings were needed to support investment and output growth in the medium term, Directors commented that higher debt ratios raised the vulnerability of these countries to external shocks. They welcomed the fact that, as a result of the HIPC Initiative, these countries would have relatively low projected levels of debt service and that additional voluntary bilateral debt relief already announced would further reduce the debt and debt service ratios.

Directors also noted that the projected output and export growth rates for a number of countries were significantly more ambitious than historical trends, but recognized that in many cases this reflected a period of recovery from war and natural disasters and that output and exports are growing from a very low base. Several Directors expressed concern that some countries' debt might not be sustainable if the projected output and export growth rates do not materialize. Others stressed that these more ambitious targets were necessary, as the countries move to make significant inroads into poverty reduction and progress toward the International Development Goals.

Consequently, Directors agreed that completion point documents should contain a thorough analysis and discussion of the prospects for long-term debt sustainability. They reaffirmed their willingness to consider—within the existing framework of the enhanced HIPC Initiative—additional debt relief in exceptional cases, where exogenous factors cause fundamental changes in a country's economic circumstances, based on a comprehensive reassessment of a HIPC's situation at the completion point. A few Directors also suggested that periodic post-completion point monitoring of a country's external debt situation could serve as an early warning system for potential problems. Some Directors called for further work on these issues, before completion point cases started coming to the Board.

Directors also stressed that debt management needs to be strengthened. In this regard, they encouraged HIPCs to focus on transparent accounting and on ensuring coordination of debt management with monetary and fiscal policies, and the staff to continue to work with the authorities, specialized agencies, and providers of technical assistance to enhance debt management capacity.


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