October 4, 2007
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 September 26, 2007, the Executive Board of the International Monetary Fund (IMF) discussed the status of implementation of the HIPC Initiative and the MDRI, a paper prepared jointly by the IMF and World Bank, and an update of the financing of the Fund's concessional assistance and debt relief to low-income member countries. An additional joint Fund-Bank paper reviewing the status of non-Paris Club official bilateral creditor participation under the enhanced HIPC Initiative was presented as background information.
Background
The HIPC Initiative aims at reducing to sustainable levels the external debt burdens of heavily indebted poor countries by encouraging the voluntary participation and coordinated action of the international financial community, including multilateral institutions, governments, and private sector. To qualify for debt relief under the Initiative, eligible countries need to establish a satisfactory track record of policy performance under IMF- and International Development Association (IDA)-supported programs and by having put in place a poverty-reduction strategy.
The overall cost of HIPC Initiative debt relief for the 41 HIPCs is estimated at US$67.7 billion in end-2006 Net Present Value (NPV) terms. Nearly one-half of this total cost represents irrevocable debt relief to the 22 post-completion-point countries. Since 2005, the overall cost of the Initiative has increased by US$1.1 billion in end-2006 NPV terms, mainly due to the inclusion of Afghanistan on the list of eligible countries and the topping-up for Malawi and São Tomé and Príncipe. Multilateral creditors account for about 46 percent of the total end-2006 NPV cost, Paris Club creditors account for 35 percent, and non-Paris Club and commercial creditors for 13 and 6 percent, respectively.
Most multilateral financial institutions have provided debt relief under the HIPC Initiative, while some small multilateral organizations have not yet delivered their share of debt relief. Paris Club creditors have delivered their expected share of HIPC Initiative debt relief and, on a bilateral basis, they have provided additional debt forgiveness beyond that committed under the Initiative. Based on partial responses to surveys, staffs estimate that non-Paris Club official bilateral creditors have delivered about one third of their expected share of HIPC Initiative debt relief. However, delivery varies significantly across these creditors. It was also estimated that delivery of debt relief by commercial creditors has improved, but remains low. Litigation against HIPCs presents a growing challenge to the implementation of the HIPC Initiative.
The MDRI was launched in 2005 to further reduce the external debt of qualifying low-income countries by providing additional resources to help them meet the Millennium Development Goals. The MDRI is separate from the HIPC Initiative, but linked to it operationally. Three multilateral institutions—the IMF, IDA, and the African Development Fund (AfDF)—provide 100 percent debt relief on eligible claims of countries having reached, or upon reaching, the completion point under the enhanced HIPC Initiative. In addition, the Fund has also provided MDRI assistance to two non-HIPCs (Cambodia and Tajikistan) with a per capita income at or below US$380. The implementation of MDRI by the IMF commenced on January 6, 2006, and by IDA and the AfDF on July 1, 2006. In March 2007, the Inter-American Development Bank (IaDB) also joined this Initiative.
The overall cost of the MDRI for the four multilaterals is estimated at US$47.9 billion in nominal terms, which is additional to HIPC Initiative debt relief. IDA, IMF, AfDF and IaDB have provided approximately 69, 9, 15, and 7 percent of the total MDRI debt relief, respectively. MDRI assistance already delivered to post-completion-point HIPCs is estimated at US$37.6 billion in nominal terms.
The IMF has already delivered US$6.9 billion in end-2006 NPV terms in HIPC Initiative and MDRI debt relief to post-completion HIPCs, and Cambodia and Tajikistan. In addition, the IMF provides concessional financing to its low-income members through subsidized lending under the Poverty Reduction and Growth Facility (PRGF), the Exogenous Shocks Facility (ESF), and Emergency Assistance for Post-Conflict and Natural Disasters (EPCA and ENDA). The resources for financing the IMF's concessional assistance and debt relief come from bilateral contributions and the IMF itself. These resources are channeled through trusts and administered accounts, which the IMF administers on behalf of contributors.
Executive Board Assessment
Executive Directors reiterated their strong support for the Enhanced HIPC Initiative and welcomed the continued progress with its implementation and with that of the MDRI.
Directors noted that the HIPC Initiative debt relief committed to countries that have reached the decision point would reduce their overall debt stock by two-thirds. Taking into account also the estimated MDRI assistance and additional bilateral debt relief, their overall debt stock would be reduced by more than 90 percent. As a result, debt service payments for post-decision point countries are expected to decline to less than 5 percent of exports, thus giving them room to spend more on poverty-reducing and social expenditures. Directors asked staff to follow closely and monitor the use of debt relief savings by HIPCs, including with a view to ensuring the quality of pro-poor spending.
In spite of these achievements, Directors recognized that the remaining interim and pre-decision-point countries face challenges that need to be addressed to speed up their progress under the HIPC Initiative. Directors encouraged interim HIPCs to continue implementing their Fund-supported programs with a view to maintaining macroeconomic stability and creating an enabling environment to foster economic growth. They also called on these countries to press ahead with the preparation of their poverty-reduction strategy papers and the implementation of reform, which would allow them to reach the completion point under the Initiative. Directors urged staff to maintain an ongoing dialogue and provide the required technical assistance to countries facing difficulties in formulating and implementing viable macroeconomic and poverty-reduction programs. Some Directors considered that the international community, including the Fund and the Bank, will need to respond proactively to assist countries address the challenging environment faced by them as they seek to secure debt relief under the HIPC Initiative.
Directors expressed concern that, in spite of the delivery of HIPC Initiative and MDRI assistance and the resulting declines in debt ratios, long-term debt sustainability remains a key challenge for most HIPCs. While seeing a role for all players, Directors considered that the primary responsibility for meeting this challenge lies with the countries themselves. Directors emphasized that HIPCs need to increase domestic revenue mobilization, diversify their production and export bases, and strengthen their public institutions to address their underlying vulnerabilities and ensure long-term debt sustainability. Directors also strongly underscored the importance of strengthening public debt management, and encouraged HIPCs to follow responsible financing strategies based on their respective debt sustainability analyses. In addition, Directors emphasized that staff should continue to assist HIPCs with technical assistance to improve debt management capabilities and to help develop medium-term debt strategies. In this context, many noted the importance of cooperation among technical assistance providers to avoid duplication and maximize dissemination of information and know-how. Equally, Directors called on all creditors to ensure that lending to HIPCs avoids a rapid re-accumulation of debt, and is provided in a transparent manner. They also emphasized the need for borrowers to share information on new lending, and suggested that developments in this area be monitored closely.
Directors welcomed the continued delivery of debt relief by most multilateral financial institutions and Paris Club creditors. They were concerned with the low delivery of debt relief by several non-Paris Club official bilateral creditors, which some Directors attributed to political and legal constraints, and an insufficient understanding of the HIPC Initiative. Directors emphasized the need to gather more information to assess and monitor better the delivery of HIPC Initiative debt relief. They asked staff to continue to address HIPC Initiative issues during Article IV consultations and other missions in creditor countries, and urged staff to use all opportunities, including in the context of high-level meetings, to encourage all creditors to deliver their full share of HIPC Initiative debt relief.
Directors will continue to convey to their non-Paris Club constituencies the importance of full participation in the Initiative. Directors broadly supported staff's proposal to publish a "scorecard" on the Fund's and Bank's external websites identifying the HIPC Initiative debt relief granted by each bilateral creditor, including non-Paris Club creditors, as another way to encourage further participation in the Initiative. A few Directors, however, were skeptical of the usefulness of a scorecard. Directors also asked staff to report on debt relief by non-Paris Club creditors and status of negotiations in the context of staff reports for HIPCs.
Directors noted that the delivery of debt relief by commercial creditors has remained low. They expressed concern about the growing number of lawsuits by private creditors against HIPCs, which presents a major challenge to the implementation of the Initiative. Directors agreed that additional efforts are required to respond to these problems. Consistent with the voluntary nature of creditor participation in the HIPC Initiative and the principle of Fund neutrality, Directors called on the staff to remain vigilant and to continue to use moral suasion to promote full participation of all creditors in the HIPC Initiative. In this context, most Directors agreed that staff could prepare, at the authorities' request, contextual notes on HIPC Initiative issues that could be used by the authorities for any purpose they deem appropriate, including providing information to creditors or courts on the HIPC Initiative. Some Directors also called for consideration of an international legal framework to enhance commercial creditor participation in the HIPC Initiative.
Directors welcomed the update on the financing of the Fund's concessional assistance and debt relief to low-income member countries. They acknowledged that substantial resources are needed for delivery by the Fund of HIPC Initiative, MDRI and MDRI-type beyond HIPC debt relief, including to the three protracted arrears cases that are potentially eligible for the HIPC Initiative (Liberia, Somalia, and Sudan). Directors underscored the importance of mobilizing expeditiously the necessary financing related to arrears clearance and debt relief for Liberia. Directors also noted the need to mobilize additional subsidy resources to allow the Fund to meet future requests by low-income countries for emergency assistance on concessional terms.
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