Press Release: IMF and the World Bank Support Ethiopia's Completion Point and Approve Topping-Up of Debt Relief Under the Enhanced HIPC Initiative

IMF News, April 22, 2004

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Canonical URL: Press Release: IMF and the World Bank Support Ethiopia's Completion Point and Approve Topping-Up of Debt Relief Under the Enhanced HIPC Initiative

The IMF and the World Bank's IDA agreed that Ethiopia has made sufficient progress to reach its completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative, making Ethiopia the thirteenth country to reach this point.
The exceptional topping-up of assistance was approved because exogenous factors—particularly changes in the discount rate and exchange rate since the decision point—fundamentally changed Ethiopia's economic circumstances and adversely affected its debt sustainability, raising the NPV of debt-to-exports ratio at end-2002/03 substantially above the 150 percent threshold established under the enhanced HIPC framework.
The authorities' track record in policy and reform implementation was judged strong, and borrowing was described as prudent despite a severe drought and lower coffee prices.

Total debt service relief under the enhanced HIPC Initiative from all of Ethiopia's creditors amounts to approximately US$3.3 billion in nominal terms.
This assistance comprises:
- US$1.3 billion in NPV terms agreed at the decision point, plus
- a topping-up of the assistance in an amount equivalent to US$700 million in NPV terms, approved at the completion point.
Including topping-up, multilateral creditors would provide debt relief amounting to about US$1.3 billion in NPV terms, of which:
- US$60.9 million is from the IMF, and
- US$800 million from the World Bank (equivalent to US$1.3 billion in nominal terms).
Bilateral and commercial creditors would provide debt relief amounting to US$700 million in NPV terms.
Most Paris Club creditors have indicated their intention to provide additional relief beyond the HIPC Initiative estimated to total about US$300 million in NPV terms.
Following the IMF Executive Board review, Directors agreed to provide additional assistance beyond that committed at the decision point in the amount of US$707 million in order to reduce Ethiopia's debt-to-export ratio to 150 percent as of the end-2002/03.

Resources made available by HIPC debt relief are being allocated to pro-poor expenditure programs.
In 2001/02 and 2002/03, poverty-targeted spending increased by US$259 million (3.3 percent of GDP), substantially more than HIPC relief, reflecting the resumption of donor assistance and a reduction in military spending.

Ethiopia is a landlocked country in the Horn of Africa with a per capita GDP of about US$100.
Recent national household surveys find 44 percent of the people below the basic needs poverty line.
Following the 1991 regime change, reforms supported by the IMF and World Bank aimed at raising real GDP growth and reducing poverty while maintaining macroeconomic stability.
Real GDP growth averaged about 5 percent per year during 1991/92-2001/02, while inflation has been relatively contained despite the border war of 1998-2000 and the continued decline in coffee prices since 1997/98.

At the decision point in November 2001, Ethiopia committed to:
- (i) Completion of a full PRSP through a participatory process and its satisfactory implementation for at least one year;
- (ii) Preservation of a stable macroeconomic environment; and
- (iii) Implementation of key structural reforms and social (particularly health and education) measures.
The approval of irrevocable debt relief underscores recognition of satisfactory progress in implementing sound macroeconomic and structural policies.
Ten of the thirteen completion-point conditions were met; satisfactory progress was achieved on the remaining conditions (improvement in fertilizer markets, reduction in the repetition rate at the primary school level, and consolidation of the federal and regional budgets), and waivers were granted on the three outstanding triggers.

A new DSA based on end-2002/03 debt data and an updated long-term macroeconomic framework shows that even after additional bilateral debt relief, the NPV of Ethiopia's stock of debt is likely to remain above the equivalent of 150 percent of exports until 2022—significantly longer than envisaged at the decision point.
Since the decision point, changes in exchange rates and lower international discount rates reduced the concessionality of Ethiopia's outstanding debt stock and raised debt service obligations in U.S. dollar terms.

To ensure future debt sustainability, Directors encouraged Ethiopia to continue pursuing a cautious borrowing policy and to persevere in implementing the reform agenda set out in the PRSP.
Directors called on the donor community to provide full support to Ethiopia's reform efforts, preferably in the form of grants.

The Ethiopian authorities built a sound track record of policy implementation under the PRGF since reaching the decision point in 2001, evidenced by the satisfactory conclusion of the fifth review under the program on February 27, 2004.
Despite the impact of the recent drought, macroeconomic stability has been maintained.
The PRGF-supported program for 2003/04 projects real GDP growth of 6.7 percent, and consumer price inflation is projected to decline to an average of 5.5 percent.
Directors concurred that Ethiopia met the conditions for reaching the completion point and agreed to provide additional assistance of US$707 million to reduce the NPV debt-to-exports ratio to 150 percent as of end-2002/03.

Press Release No. 04/82 — April 22, 2004