The Enhanced Initiative for Heavily Indebted Poor Countries Review of Implementation
September 7, 2000

Poverty Reduction Strategy Papers -- Progress in Implementation
September 7, 2000

Debt Initiative for the Heavily Indebted Poor Countries (HIPCs)

Poverty Reduction Strategy Papers (PRSPs)


Washington, D.C. 20431


September 7, 2000

To:Members of the International Monetary and Financial
Members of the Development Committee
Subject:  Heavily Indebted Poor Countries Initiative
and Poverty Reduction Strategy Papers—
Progress Reports

It is just a year since Ministers endorsed enhancements to the Heavily Indebted Poor Countries (HIPC) Initiative and proposals to link debt relief, as well as overall Bank and Fund concessional lending, more closely to comprehensive development strategies described in country-owned Poverty Reduction Strategy Papers (PRSPs). Initial Progress Reports were prepared for the Committees in April 2000. The attached reports summarize progress as of the September meetings of the Committees. We are doing everything possible to achieve speedy implementation of the HIPC Initiative and to make the PRSP approach a success. While there is no room for complacency, we believe that the ambitious program initiated a year ago is evolving effectively along the lines endorsed by Ministers. At the same time, we wish to draw Ministers’ attention to a number of issues that have arisen in the course of early implementation—issues that require continued and concerted efforts to maintain and accelerate soundly-based momentum, not only on the part of IDA and the IMF, but also of the international community as a whole.

A. The HIPC Initiative

At the core of the enhanced HIPC Initiative was the determination to provide broader, faster, and deeper debt relief for qualifying countries. These objectives are being met, and the Initiative is already reducing the debt burdens of poor countries.

Progress to Date. Under the original HIPC Initiative seven1 countries had reached their decision points and had assistance committed to them by September 1999; by mid-September 2000, six2 of these will have been provided the assistance committed under these decisions. Total assistance committed to these countries amounted to about US$7 billion in debt service relief or about US$3.5 billion in NPV terms. Under the enhanced Initiative, debt relief packages amounting to a further US$10.5 billion or over US$6 billion in NPV terms have been approved for 103 countries, including additional assistance for the countries noted above, as of mid-September 2000. As a result, the total assistance approved so far to 124 countries represents more than one-third of the estimated total debt relief of the entire HIPC Initiative and amounts to more than US$17 billion in savings over time or almost US$10 billion in NPV terms. For countries that have reached their decision points we estimate that, as a result of assistance under the HIPC Initiative from all creditors, on average after the completion point, total debt stock in NPV terms will be reduced by over 40 percent, debt service to exports ratios will fall to below 10 percent, and debt service to revenue ratios to below 12 percent. Taking assistance under the HIPC Initiative together with traditional debt relief mechanisms provided by Paris Club and other bilateral and commercial creditors and unilateral debt cancellations by creditors over and above HIPC Initiative relief, the debt of these countries will ultimately be reduced by about two-thirds.

Initiatives to Accelerate Implementation. We are continuing to work in partnership with governments, other creditors, and donors towards the goal of bringing countries as quickly as possible to their decision points within a framework of sound policies and a clear focus on poverty reduction. We have committed ourselves and our staffs to do everything possible to bring 20 countries to their decision points by the end of 2000. To this end we have taken, and the Executive Boards have endorsed, a series of actions including: (i) ensuring that the policy requirements for reaching the decision point are those essential to the success of countries’ poverty reduction and growth strategies; (ii) maintaining a flexible approach with respect to track record requirements, so that countries whose economic performance is broadly on track can be brought expeditiously to their decision points; (iii) continuing to stress the principle that I-PRSPs be flexible and easy to prepare, so as not to hold up the availability of HIPC debt relief or concessional assistance; and (iv) actively using the Joint Implementation Committee to monitor progress, accelerate it wherever possible, and identify and help resolve any problems in Bank-Fund collaboration.

An important innovation under the enhanced Initiative was to accelerate the availability of debt relief through interim assistance beginning immediately at the decision point. All countries that have reached their decision points under the enhanced Initiative are now receiving cash flow assistance under the Initiative.

A second major innovation under the enhanced Initiative was the adoption of a “floating completion point.” Floating completion points have eliminated the fixed three-year period from the decision point and instead have linked irrevocable debt relief to developing and implementing a PRSP, maintaining macroeconomic stability, and undertaking key reforms. The new arrangements strengthen countries’ ownership of the debt relief timetable and support the sustained implementation of reforms, while making it possible to accelerate the completion point. For the decision point cases reviewed this year, this approach could reduce the interim period to around one to two years. Looking beyond 2000, the sustained implementation of national poverty reduction strategies and reforms between the decision point and completion point will be critical to the successful implementation of the Initiative, given the irrevocable nature of debt relief at the completion point. Thus, we shall continue to emphasize the crucial links between PRSPs and completion point conditionality.

Finally, there are a few countries that have not yet met the entry requirement for the HIPC Initiative; many of them are troubled by conflict, civil unrest, governance problems or macroeconomic instability. For the moment, the international community must use other instruments to help these countries help themselves. Nevertheless, consistent with the goal of broadening the Initiative, the Boards have supported extension for two years of the “sunset clause”—which is intended to give HIPCs that had not yet adopted adjustment programs supported by IDA and the IMF an incentive to do so by end-2002.

These actions underpin the commitment of our two institutions to faster debt relief. We are determined to bring all countries that have demonstrated that they can make effective use of debt relief for poverty reduction to decision points in 2000. But we must also recognize that a number of countries suffer from conflicts—both external and internal—and serious problems of governance and corruption. For such countries, there is no guarantee that debt relief would be well used. In these countries, in particular the timetable of implementation of the HIPC Initiative is not under Bank/Fund control. We must all work together to make sure that all eligible countries can benefit from debt relief at the earliest possible point when they can put in place mechanisms for its effective and accountable use, and to help countries reach that point. The ultimate test of the success of the Initiative will remain how effectively debt relief contributes towards poverty reduction.

Financing the Enhanced HIPC Initiative. Positive developments to date and the initiatives being taken to accelerate implementation risk being undermined if further rapid progress is not made on financing. Total costs for the Initiative are now estimated at US$28.5 billion in end-1999 NPV terms—a slight increase compared to the end-1999 costing. The breakdown between bilateral and multilateral creditors has remained roughly even. Paris Club members account for most of bilateral creditor costs (US$11 billion in NPV terms), and IDA, the IMF, AfDB, and IaDB account for the bulk of multilateral creditor costs (in NPV, US$6.2, $2.2, $2.4, and $1.2 billion, respectively). Commitments from bilateral creditors have mostly come from Paris Club creditors (many of which have announced bilateral debt relief beyond their assistance under the HIPC Initiative). The staffs have been working on a case-by-case basis with non-Paris Club official creditors to discuss their participation, recognizing the difficulties some of them face—especially those that themselves qualify for assistance under the Initiative.

Meanwhile, there has been steady progress in securing confirmation of participation from multilateral creditors. In late June the African Development Fund’s Deputies agreed on the financing for its participation in the HIPC Initiative for the near-term countries. A financing framework has been agreed for the Inter-American Development Bank, but donor pledges remain to be secured, holding up the release of IMF interim assistance to Honduras. More generally, shortfalls in resources could emerge as soon as late 2000. For example, depending on progress with individual country cases, and consistent with the objectives of the overall funding package for the interim PRGF and the Fund’s contribution to the HIPC Initiative, the IMF would need to consider carefully whether to continue to provide debt relief under the HIPC Initiative beyond late 2000 in the absence of the release of the remainder of the investment income on the profits from gold transactions. Additional funding is also required for MDBs other than IDA, a funding need that will become particularly acute as the decision and completion points for countries with large exposure to the IaDB and AfDB are reached. IDA itself will require donor funding beginning around 2005. The Executive Boards of IDA and the IMF discussed the costing and financing issue at meetings on September 5, and called on all creditors to meet their obligations under the Initiative as expeditiously as possible, and to provide the additional financing needed to ensure full implementation of the HIPC Initiative.

B. The PRSP Process

In September 1999, the Development and Interim Committees endorsed a new framework for Bank and Fund efforts to support our low income members. Under this approach, building on the principles of the Comprehensive Development Framework (CDF), nationally-owned, participatory poverty reduction strategies (PRSs)—embodied in Poverty Reduction Strategy Papers (PRSPs)—form the basis for Bank and Fund concessional lending and for debt relief under the enhanced HIPC Initiative. Since the Boards’ discussions of the first interim PRSP (I-PRSP) in January 2000, momentum has been building steadily. By mid-September, 15 poverty reduction strategy papers had been considered by the Boards—13 I-PRSPs and two full PRSPs. Several other countries have either prepared I-PRSPs or are in advanced stages of drafting them. While we have a relatively small sample of country experiences to draw on, there have been a number of positive developments, and some emerging areas of concern.

Positive experience with early I-PRSPs and full PRSPs. Countries have responded favorably to the invitation to prepare nationally owned poverty reduction strategy documents. This favorable response includes in many cases: providing information that has substantially exceeded the minimum requirements for I-PRSPs; managing preparatory work at very high levels of political authority; and a much greater degree of participation in the preparatory process than had been envisaged for I-PRSPs. Countries have drawn on their own prior experience with poverty reduction programs in preparing I-PRSPs and full PRSPs, and have identified as priorities for poverty reduction not only expected areas (such as broad-based growth, priority attention to social sectors, provision of public services to the poor, and a strong focus on rural development) but also areas such as governance, anti-corruption, transparency and accountability. In addition, several countries have linked their priorities explicitly to the International Development Goals, and have highlighted special efforts to assist disadvantaged groups (notably women).

Areas of concern. At the same time, country experience to date has highlighted some problems countries are facing as they move from preparing I-PRSPs to full PRSPs. For example, some I-PRSP countries and both of the countries that have prepared full PRSPs have relatively good and up-to-date poverty data. Others, however, have had to rely on out-of-date or limited information. In some cases, multilateral and bilateral development partners are involved in supporting countries’ data upgrading efforts. Countries also have limited institutional and analytical capacity to prepare full PRSPs. While I-PRSPs have outlined the participatory processes countries intend to use in preparing full PRSPs, the depth and quality of these plans have varied (a point noted by the Boards in considering country documentation). In particular proposed participatory processes will need to deal with such issues as the capacity of civil society to participate meaningfully in strategy preparation, how best to ensure that the views of the poor themselves are fully taken into account, and the need to ensure that broad-based participation does not undermine national parliaments and existing democratic processes. The transition to full PRSPs is likely to present other problems including effective costing of inputs and outcomes; tracking poverty-related public expenditure; and integrating poverty reduction strategies into a consistent macroeconomic framework.

Meeting the Challenges of Implementation. Our overall assessment is one of encouraging early progress, but also of emerging challenges in implementation. In large part this reflects tensions that were inherent in the approach we all adopted a year ago: first, the tension between accelerating debt relief and maintaining the pace of IDA and IMF concessional assistance, while at the same time ensuring that HIPC resources and concessional financing are linked to country-owned strategies for sustainable poverty reduction; and second, the tension between country ownership and the requirement on the part of IDA and the IMF to assess whether the content of country strategies provides an adequate basis for the institutions’ concessional lending and debt relief. All the actors involved in the process—countries, IDA and the IMF, and other development partners—face a dilemma: the faster we all wish the provision of debt relief and concessional assistance to proceed, the greater the risk that the resources will not be effectively used for poverty reduction; the more assurances sought (in terms of strategy, content and process, and implementation and monitoring), the greater the difficulty of early delivery and of securing country ownership. Ultimately the pace at which our institutions can move in the directions we all desire reflects the nature of the approach endorsed by the international community and the pace at which countries themselves can work in accordance with this approach.

We share the concerns of countries and development partners about the need to move forward as quickly as possible with debt relief and to sustain the flow of concessional assistance. At the same time, the international community has emphasized the importance of securing broad-based country ownership of the associated poverty reduction strategies and reasonable assurances that the resources provided by debt relief and concessional assistance will be well used for poverty reduction. The introduction of I-PRSPs (preparation of which does not require prior participatory processes) and interim assistance under the HIPC Initiative are proving to be helpful. Still, the inherent challenge remains, and will emerge more strongly as countries move to full PRSPs, which are expected to be based on extensive participatory processes. Development partners, including our own two institutions, can make a difference by providing technical assistance to strengthen both strategy formulation and participation. But further analytical work is needed too, in particular on the links between growth and poverty. The Bank and Fund are intensifying their research efforts in this area. Countries have also sought extra guidance on the expected core content of PRSPs and the participatory processes to be used in preparing them; the staffs are working on new guidance in these areas.

Reflecting the concerns noted above, some countries and the Executive Boards in some cases have suggested that the originally envisaged one-year interval between discussion of an I-PRSP and completion of a full PRSP may be too short. At their meetings on September 5, the Boards supported a recommendation from the managements whereby countries unable to complete a full PRSP within a year of their initial I-PRSP could provide a progress report, accompanied by an updated Joint Staff Assessment, as a basis for obtaining continued access to concessional assistance and, where applicable, interim debt relief.

Ownership versus “assessment” is a particularly difficult issue. The process envisaged a year ago properly emphasized the need for country ownership of strategies; the concept that there could be no single blueprint for such strategies; and that home-grown approaches to poverty reduction, based on countries’ own unique circumstances, experience and capacities, were to be encouraged. The staffs (in Joint Staff Assessments) and the Executive Boards of IDA and the IMF (in discussions of country documents and staff assessments), however, were expected to take a view about the appropriateness of a country’s PRSP as a basis for debt relief and IDA and IMF concessional assistance. In addition the fiduciary framework underpinning concessional assistance considered desirable by the international community (including our own institutions) has tended to become stronger. Both countries and development partners have drawn attention to the implicit conflict between these two concepts. Yet, as the PRSP process has evolved, there has been a tendency on the part of development partners, including members of the NGO community, simultaneously to express concern (which we share) about ensuring genuine country ownership, but also to propose specific areas of policy that country strategies should cover.

Both our institutions are doing everything we can to respond to some of these concerns, for example by offering guidance that does not breach the principle of ownership in the context of joint missions to discuss strategy formulation with governments; through the development of a “PRSP Sourcebook” that offers information about issues and best practice with respect to aspects of poverty reduction, but does not propose “one size fits all” prescriptions; and through outreach and learning events. We are also reviewing our own procedures in order to streamline conditionalities and strengthen the link between PRSPs and the IDA assistance program and instruments (including through the use of a new Poverty Reduction Support Credit).

C. Conclusion

Frankness about core implementation issues should not blind us to what has been achieved in a relatively short space of time. The enhanced HIPC Initiative has begun to deliver broader, faster and deeper debt relief, and we are fully committed to do everything within our control to accelerate its successful implementation. It is imperative to resolve quickly the remaining problems associated with HIPC financing, but this can be done, given appropriate commitment and political will. The PRSP approach is widely supported by countries and development partners, and is rapidly gaining momentum. Countries, IDA and the IMF are moving purposefully to put poverty reduction at the center of nationally owned strategies. Development partners are already supporting country efforts or planning to do so, and are discussing ways in which they can help further. This is a truly global and collaborative effort, and early progress has been substantial. It needs sustained support not only by accelerated debt relief but also by action in the developed world to reduce barriers to poor countries’ exports and increase aid flows. The challenge of reducing poverty is formidable and will remain so for many years, but the global community is now primed to address it with better tools and a renewed and shared sense of purpose. We look forward with confidence to Ministers’ support in building on the progress already achieved and addressing the issues that all of us—poor countries and official and non-governmental development partners—face as we move forward together.

James D. Wolfensohn Horst Köhler

1Bolivia, Burkina Faso, Côte d’Ivoire, Guyana, Mali, Mozambique, and Uganda.
2All but Côte d’Ivoire.
3Benin, Bolivia, Burkina Faso, Honduras, Mali, Mauritania, Mozambique, Senegal, Tanzania, and Uganda.
4Countries in footnote 3 and Côte d’Ivoire and Guyana.