September 28, 2002
| Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. |
On September 6, 2002, the Executive Board of the International Monetary Fund (IMF) discussed the status of implementation of the Heavily Indebted Poor Countries (HIPCs) Initiative, and an update on financing of the Poverty Reduction and Growth Facility (PRGF) and HIPC operations and the subsidization of post-conflict emergency assistance.
Background
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 International Development Association-supported programs. A key input in this process is the poverty reduction strategy paper (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, bilateral, and commercial 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 26 countries under the enhanced HIPC Initiative framework (Benin, Bolivia, Burkina Faso, Cameroon, Chad, Ethiopia, The Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, São Tome and Príncipe, Senegal, Sierra Leone, Tanzania, Uganda, and Zambia), with total committed assistance estimated at some US$25 billion in NPV terms, or about US$41 billion in nominal terms. Of these countries, six (Uganda, Bolivia, Mozambique, Tanzania, Burkina Faso, and Mauritania) have reached their completion points under the enhanced Initiative, at which time debt relief was delivered unconditionally. In combination with traditional debt relief and pledges of additional bilateral debt forgiveness, the external indebtedness of these 26 countries will be reduced by almost two-thirds in NPV terms (from US$62 billion to US$22 billion), bringing their indebtedness to levels below the average for all developing countries. For the 26 countries taken together, overall debt service paid during 2001-05 is expected to be cut by almost 40 percent relative to annual debt service payments made in 1998-99.
The latest review of the implementation of the HIPC Initiative consists of two parts. Part I of the report reviews progress in the implementation of the Initiative since March 2002. Amongst other items, this includes information on the status of implementation in countries during their interim period, the latest estimate of overall costs, and the status of creditor participation under the Initiative, including on creditor litigation against HIPCs. As a follow up to earlier analysis of long-term debt sustainability, Part II of the paper updates the HIPCs' external debt outlook and discusses key issues that are important for achieving long-term debt sustainability. The discussion includes a review of long-term projections under the HIPC Initiative, an analysis of the impact of an increase in grant financing, and a brief account of proposals to modify the HIPC framework.
Executive Board Assessment
Executive Directors welcomed the continued progress being made under the enhanced HIPC Initiative in providing debt relief to the world's poorest countries. They noted that two-thirds of the countries expected to require HIPC debt relief are already past their decision points and six countries have now reached the completion point. Together with associated debt forgiveness, HIPC debt relief to these countries represents a reduction in their outstanding debt stock by two-thirds. This will reduce debt-service payments for most HIPCs to less than 10 percent of exports, helping these countries to increase substantially their poverty-reducing expenditures.
Directors generally considered that the existing criteria and framework for debt relief under the HIPC Initiative provide a sound basis for reducing the debt burden of HIPCs to sustainable levels, and that the key priority in the period ahead is to implement the existing framework successfully. They recognized, however, that implementation of the Initiative in the period ahead will face substantial challenges in view of the global economic downturn and depressed commodity prices. In particular, bringing the remaining dozen countries to the decision point will remain a daunting task, as these countries are mostly conflict-affected and a number of them have substantial arrears to official creditors. They also encouraged HIPCs that are in the interim period to stay on track with their economic programs and to push ahead with their poverty reduction strategies in order to reach their completion points without delay. Some Directors stressed the importance of technical assistance to these countries to strengthen their program implementation capacity while some also urged greater flexibility with regard to HIPC framework requirements to help them reach their decision and completion points quickly. In this context, a few Directors reiterated the call made at the April discussion for flexibility regarding the requirement for one year of implementation of the full PRSP prior to reaching the completion point.
Directors welcomed the review of HIPCs' debt sustainability outlook, noting that the findings of the latest review remain broadly unchanged from those of the Spring 2002 Progress Report. Directors expressed concern that debt indicators in 15 out of the 24 HIPCs under the review had worsened in 2001 relative to decision point projections, largely as a result of the global economic downturn and depressed commodity prices. They noted that based on the current projections of commodity prices, the external debt indicators for some eight to ten countries may exceed the HIPC thresholds at their respective completion points.
Directors noted that, if necessary, the Initiative has the flexibility to provide, where appropriate, additional debt relief at the completion point. They stressed that such "topping up" should continue to be based on a careful case-by-case review of countries that have suffered a fundamental change in their economic circumstances due to exceptional exogenous shocks. Recalling that the threshold was lowered at the time of the enhancement of the Initiative in order to build in an additional financial cushion, and that country circumstances will vary, some Directors pointed out that a ratio temporarily above the threshold of NPV of debt to exports of 150 percent should not necessarily be interpreted as signifying an unsustainable debt situation. On how to assess the case for and calculate the amount of topping up that might be warranted, some Directors suggested that additional debt relief provided by bilateral creditors should be excluded from the calculations. However, others disagreed, as this could misrepresent the countries' actual debt situation. Some Directors suggested that further discussion would be helpful on the methodology for calculating the topping up.
Directors again considered the implications of the Initiative for long-term debt sustainability in HIPCs. Most believed that over the longer term, HIPC relief provides a good basis, but no guarantee, for achieving sustainability. Rather, debt sustainability will need to be ensured by attention to the broader development agenda for each country based on sound economic policies and good governance, aided by technical assistance and adequate financial support on appropriately concessional terms from donors and creditors. Directors stressed the importance of prudent debt management policies by HIPCs, and suggested that new borrowing by HIPCs be closely monitored and that the Board be kept informed. A few Directors advised caution on new borrowing by HIPCs even on concessional terms, noting these countries' limited absorption capacity. Directors agreed that continuing debt relief is not the right instrument for dealing with future economic shocks. They confirmed that the PRSP provides the appropriate framework for macroeconomic management within which HIPC authorities should seek to maintain their external debt at sustainable levels and pursue an overall strategy for accelerated growth. In this context, Directors noted that export diversification will be critical for reducing external vulnerability and dependence on a few primary commodity exports subject to volatile world prices. They also urged the staff to incorporate more realistic growth and export projections as well as stress testing in HIPC documents. The development of alternative macroeconomic scenarios will highlight countries' vulnerabilities and facilitate faster policy adjustment and contingency planning. In addition, steps by all countries to lower trade barriers and expand market access will be helpful for boosting the exports of HIPCs and securing debt sustainability over time.
Directors noted that the majority of HIPCs' bilateral creditors have agreed to provide debt relief, and attached high priority to ensuring the full participation of non-Paris Club and commercial creditors. Directors welcomed the staff's work on creditor litigation against HIPCs, and asked the staff to continue efforts to seek increased creditor participation in the Initiative. Some Directors suggested that the Fund publicly identify those creditors not participating in the Initiative. They also urged IFIs to provide technical and financial assistance to countries facing litigation. Directors called on the creditors that have not yet done so to participate in the HIPC Initiative. They acknowledged that HIPC-to-HIPC debt relief remains a major challenge meriting further reflection.
Directors welcomed the further progress made in securing financing for the continuation of PRGF operations and the Fund's participation in the HIPC Initiative. They were pleased to note that, in the current framework, available loan and subsidy resources appear to be sufficient to cover the projected cost of PRGF subsidies and the Fund's HIPC Initiative assistance, including the relatively modest amount of topping-up assistance as envisaged in the HIPC progress report. Directors suggested that, given the uncertainties associated with the projections, the adequacy of financing will need to be monitored closely in light of the actual use of these resources and developments in market interest rates. In particular, a few Directors expressed concern that the proposed level of self-sustained PRGF might not be sufficient, especially if countries currently in arrears enter the HIPC Initiative. They urged bilateral contributors to the PRGF-HIPC Trust to make the remaining contributions effective as soon as possible to ensure full funding of PRGF-HIPC operations.
Directors welcomed contributions by a number of countries to the subsidization of the rate of charge on the Fund's post-conflict emergency assistance, and were pleased to note that adequate resources have been secured for this purpose through 2004. Directors agreed with the proposal to make countries in arrears to the Fund ineligible for such subsidization, thus bringing this policy in line with the Fund's general policy that disallows countries in arrears to the Fund access to Fund resources.
Directors supported an extension of the sunset clause of the HIPC Initiative to end-2004, so as to provide an opportunity for all eligible HIPCs to establish a policy track record that would allow them to benefit from HIPC relief. Directors stressed, however, that the HIPC Initiative is not intended as a permanent mechanism of debt relief.
Most Directors also agreed to replace the current semi-annual cycle for HIPC Initiative implementation reviews with an annual cycle beginning in September 2002, together with a six-monthly statistical update on the status of implementation and the adequacy of resources, as well as periodic reports on policy issues as needed.
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