December 7, 1999

Contents

1. Introduction and Purpose

2. Assumptions and Caveats

3. Updated Costing under the Enhanced HIPC Initiative Framework

4. Publication of Preliminary HIPC Initiative Documents

1. The Database

1. Multilateral Institutions' Outstanding Claims on 40 HIPCs
2. Possible Timeline of HIPC Initiative Country Documents, Q4 1999 to Q2 2000
3. HIPC Initiative Estimates of Potential Costs by Creditor
4. HIPC Initiative Costs by Other Multilateral Creditors
5. HIPC Initiative Timeline of Costs by Main Creditors

ACRONYMNS

I. Introduction and Purpose

1.  In September 1999, the Development and Interim Committees of the World Bank and the International Monetary Fund endorsed - subject to the availability of funding - faster, deeper and broader debt relief under the HIPC Initiative. The enhancements to the framework that were endorsed included a modified debt sustainability target of 150 percent net present value (NPV) of debt-to-exports, and for very open economies,¹ of 250 percent NPV of debt-to-revenues. Assistance under the enhanced framework would begin at the decision point. Preliminary costing estimates of these enhancements to the HIPC Initiative were presented in the paper "Modifications to the Heavily Indebted Poor Countries (HIPC) Initiative."²

2.  The purpose of updating the costs of the enhanced Initiative is the need to take into consideration the following factors:

• Since early this year, when the database for the earlier costing exercises was developed, staffs have undertaken, together with the country authorities, 13 new loan-by-loan debt sustainability analyses (DSAs) (see Box 1);

• Given the substantial financing challenges for multilateral institutions to cover their costs under the enhanced framework, a disaggregated costing exercise was initiated to provide more accurate information for individual multilateral development banks (MDBs). This information is essential to further the internal deliberations within multilateral institutions with respect to (a) confirming their participation in the enhanced Initiative, and (b) identifying potential financing gaps that may need to be covered through bilateral contributions; and

• To determine the impact of the shift of decision points for a number of early cases from 1999 to 2000.

II.  Assumptions and Caveats

3.  As in earlier costing exercises, the data bases rely on the most recent country-specific DSAs prepared by Bank and Fund staff in collaboration with country authorities as well as data provided by multilateral creditors (see below). In the absence of detailed DSAs, the cost estimates rely on aggregated data collected by country teams, and are based on key assumptions with respect to the macroeconomic situation and the debt levels (see Box 1). Many of the country-specific DSAs are based on data that have not been fully reconciled between creditors and debtor governments. The costing estimates need to be interpreted with caution, as they are subject to a wide margin of uncertainty.

4.  In making estimates for the timing of decision/completion points of countries under the enhanced framework, the staffs have aimed to provide realistic but conservative estimates of costs. Where there was some doubt about timing, the earlier timing was assumed - implying a higher cost in most cases. Actual timing will, in large part, be driven by a country's policy performance and the Poverty Reduction Strategy Paper (PRSP) process, and ultimately will have to be decided by the Boards. This exercise is not intended to prejudge the results of the loan-by-loan DSAs nor the Boards' decisions with respect to eligibility for assistance under the HIPC Initiative.

5.  Table 1 provides a summary of the exposure of individual multilateral institutions to the 40 HIPCs. The use of creditor information -- to improve earlier debtor-side information in some of the more tentative DSAs and enable detailed costing breakdowns for all multilateral creditors-- represents a major shift in methodology in the costing database used thus far, which has been based on submissions from individual country desks. This new data is expected to be used in the preparation of new DSAs over the next few months.

6.  The possible timing of HIPC Initiative country documents through end-June, 2000 is shown in Table 2. Based on actual performance under reform programs and the pace at which countries are able to advance in their PRSP process, some decision points may be reached later than envisaged. Interim assistance would start at the decision point under the enhanced framework.

III.  Updated Costing under the Enhanced HIPC Initiative Framework

7.  Total costs for the HIPC Initiative are now estimated at US$26.6 billion in 1998 NPV terms. These costs exclude the potential costs under the HIPC Initiative for Ghana, as the Ghanaian authorities have decided not to pursue relief under the HIPC Initiative. Had Ghana been included, the costs would be about US$1 billion higher,³ up slightly from the aggregate estimates made in July 1999 (Table 2).⁴ While in the aggregate these numbers have remained relatively stable, there have been shifts in costs among creditors. The main factors leading to changes in the distribution of costs include:

• The use of loan-by-loan creditor data for the multilateral creditors, which may be higher or lower than that estimated in previous DSAs.

• Revised exports and revenues, and revised debt data for several countries where recent DSAs have been completed.

• Application of the 6-month average interest rates at end-1998 for all multilateral creditors. As these rates were at a low point since the start of the Initiative, this led to increases in the costs of multilateral creditors compared to the higher implicit rate used in previous costings.

• Variations in disbursement amounts by creditors.

• The shift of decision points from 1999 to 2000 for a number of HIPCs.

10.  Under the enhanced framework, the shares of HIPC Initiative costs for bilateral and multilateral creditors are estimated to shift slightly, with the multilateral costs now matching the bilateral costs. This reflects, in part, a low level of new lending by bilateral creditors, with a shift in bilateral official development assistance towards grant funding. There are also some significant shifts in costs within the multilateral group. In particular, the cost share of the World Bank has increased substantially, that of the AfDB and the IaDB has increased marginally, while that of other multilateral creditors as a group decreased. Detailed costs for other multilateral creditors are shown in Table 4.

11.  A breakdown of the costs for the early cases - i.e., the retroactive countries, plus all new cases that are assumed to reach their decision point before the end of 2000 - are shown in Table 5 in end-1999 NPV terms. This shows that 3/4 of the costs represent those countries, which are assumed to reach their decision points by end-2000, and could start receiving interim relief in 2000 or early 2001. The retroactive cases alone account for US$7.7 billion of the costs, of which about US$2.8 billion represent the cost of the original framework for the 4 completion point cases (Uganda, Mozambique, Bolivia, and Guyana).

IV.  Publication of Preliminary HIPC Initiative Documents

The enhanced framework shifts the determination of assistance under the Initiative from the completion to the decision point. Thus the preliminary HIPC document is the only document indicating likely costs expected for individual creditors before a decision point is reached, at which point the bulk of creditors will need to indicate their willingness to participate in providing debt relief. Also, the enhanced HIPC Initiative has forged closer ties to poverty reduction and, given the movement to a more participatory process to developing poverty reduction strategies in HIPCs, there is a greater need for transparency of data related to debt service as an input into the discussions of the PRSP. Staffs thus propose that all preliminary documents be published on the HIPC websites of the Fund and the Bank after their consideration by both Boards, unless the authorities object to the document's release within working 15 days from the date of issuance of the documents to the Executive Boards.⁵