April 22, 2002
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On April 9, 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 PRGF and HIPC operations and the subsidization of post-conflict emergency assistance. As background to the discussion on the implementation of the HIPC Initiative, the Board also reviewed a paper on the achievement of debt sustainability in HIPCs, and a paper on external debt management in HIPCs.
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, five (Uganda, Bolivia, Mozambique, Tanzania, and Burkina Faso) 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 about 30 percent relative to annual debt service payments made in 1998-99.
Preliminary evidence indicates that annual net resource transfers defined as of new loans and grants minus debt-service payments for the public sector, to most of the 26 decision point countries increased in 2001 compared to levels observed during 1997-2000. This reflected in part the resumption of IMF and IDA support to several countries during this period, as well as delivery of debt relief.
The staffs have assessed the impact of the deterioration in the global economic environment on the external debt sustainability outlook of the 24 HIPCs that had reached their decision points under the enhanced Initiative as of January 2002, based on available information. The analysis finds that the recent slowdown, coupled with a significant decline in many primary commodity prices, has weakened the HIPCs' export performance in the last two years and led to a deterioration of their debt indicators for many but not all of these countries. There are considerable differences in the evolution of debt indicators across HIPCs, largely reflecting different implementation of economic reform programs and their different exposure to shocks. The external debt sustainability outlook for most of the twenty countries that were between their decision and completion points at the end of 2001 has worsened primarily because of lower exports, and for 8-10 of them, their NPV of debt-to-export ratio could remain above the 150 percent level at the completion point; deviations for six of these had already been anticipated at the time of the decision points, although to a lesser degree.
Executive Board Assessment
Directors considered the HIPC Initiative to be an important part of a comprehensive strategy to eradicate poverty. They therefore welcomed the steady progress that has been made to date under the enhanced HIPC Initiative, especially in bringing new countries to the decision point. They noted that 26 countries have reached their decision points, of which 4 countries have reached their completion points, by end-March 2002. The committed debt relief under the enhanced HIPC Initiative would lower the outstanding stock of external debt of these countries by two thirds. This relief would also lower, on average, debt-service payments during 2001-05, compared to 1998-99, by about one third relative to exports and by almost one half relative to government revenue thus allowing for significant increases in social and poverty-related spending. However, Directors emphasized that HIPC debt relief should not displace other forms of development aid, either to HIPCs or to non-HIPCs.
Directors urged the staff to continue to work with the remaining HIPCs, most of which are conflict-affected, to bring them to decision points as soon as conditions permit. Directors noted that progress has been slow in bringing countries that have reached their decision points to the completion point, when the remaining debt relief could be provided on an irrevocable basis. Directors underscored the need for these countries to remain on track with their economic reform and poverty reduction programs in order to reach their floating completion points, while acknowledging that this will require additional effort in the context of the current global economic slowdown and the decline in primary commodity prices.
Directors regretted that the participation so far in the delivery of HIPC Initiative assistance by non-Paris Club official and commercial creditors has been poor, and expressed concern about repeated attempts by some official bilateral creditors to sell their claims on HIPCs to the secondary market with attendant risk of litigation. They stressed that participation by all creditors is necessary for the successful implementation of the HIPC Initiative and urged the creditors that have not yet agreed to participate in the Initiative to do so as soon as possible. Directors called on the staff to take all possible measures, within the existing institutional constraints, to help secure a more effective participation of all creditors. In this regard, most Directors welcomed the new supplementary measures proposed by the staff. Some Directors expressed concern about the proposal that non-Paris Club creditors with Fund-supported programs be allowed to include the amount of their debt relief to HIPCs in their financing gaps.
Directors stressed that a track record of strong policy performance under Fund- and Bank-supported programs is central to the success of the HIPC Initiative. It was agreed, therefore, that the Bank and the Fund should retain the requirement of at least one-year of satisfactory PRSP implementation before the completion point under the HIPC Initiative (except as provided for in retroactive cases). Many Directors were of the view, however, that some flexibility in timing could be allowed in cases where there has been satisfactory progress in implementing the PRSP, the other completion point triggers have been met, and the financial cost of delaying the completion point is significant. In such cases, they considered that countries' completion point requests could be submitted for Board consideration without waiting for a full year of PRSP implementation; this would require an amendment of the HIPC Instrument. In interpreting the practical modalities of ascertaining the observance of the standard completion point condition on track record performance under a PRGF-supported program, most Directors agreed that, in the case of extended interruptions of policy performance (more than six months), a satisfactory track record in the form of the completion of one review of a PRGF-supported program covering a period of policy implementation of at least six months would be required immediately before the completion point. While agreeing that a satisfactory macroeconomic performance prior to the completion point is essential, many Directors felt that some flexibility should be applied in judging performance to take into account factors beyond the control of the authorities.
Directors expressed concern that the recent global slowdown, coupled with a significant decline in primary commodity prices, has weakened HIPCs' growth and export performance over the past two years and led to a deterioration of external debt indicators for many of them. Continued export volume growth in most HIPCs has moderated the slowdown in real GDP growth, and the overall impact of recent changes in the international economic environment has varied considerably across HIPCs. Of the four countries that have reached their completion points, two seem to be in a good position to maintain long-term debt sustainability, but the situation of the other two is more mixed. For the 20 countries that reached their decision points by end-2001, 8 to 10 are likely to have NPV of debt-to-exports ratios at the completion point above the 150 percent threshold; for 6 of these countries, such deviations were anticipated at the time of their decision points, but to a lesser degree. Directors recognized that these projections would necessarily be modified in the light of the actual developments in these countries before their completion points are attained.
Directors recalled that the enhanced HIPC Initiative provided for the consideration on a case-by-case basis of additional debt relief at the completion point in cases where exceptional exogenous shocks have caused fundamental changes in a country's economic circumstances. They stressed that the potential additional HIPC relief is not meant to compensate for slippages in policy reform and/or imprudent new external borrowing, nor could it be provided on an ongoing basis to deal with future economic shocks. In this context, they also noted the need for greater recognition of downside risks in debt sustainability analyses and in projections for growth and exports at the decision point. Directors recognized that any additional debt relief at the completion point would increase the overall costs of the HIPC Initiative. The financing implications of this would need to be explored in due course.
Overall, Directors noted that virtually all HIPCs are heavily dependent on primary commodities for their export earnings and government revenue, and, as a result, they would remain vulnerable to adverse developments in the external environment. Directors agreed that the objective of the enhanced HIPC Initiative is to achieve a lasting exit from unsustainable debt for eligible countries. But many emphasized that HIPC debt relief was not the only factor in ensuring debt sustainability. They emphasized that the achievement of long-term debt sustainability would require, on the one hand, a combination of continued policy reforms aimed at accelerating growth and diversifying the export base, as well as a strengthened external debt management capacity by the HIPCs themselves, and on the other hand, improved access for their exports to world markets and external financing on appropriate terms.
Directors underscored that given HIPCs' limited repayment capacity, almost all new financing should be in the form of highly concessional loans and grants. Directors encouraged HIPCs to significantly strengthen their debt management capacities during the HIPC process, especially in increasing transparency and accountability on new borrowing and on the use of borrowed resources. Directors stressed the importance for HIPCs, as well as the Fund and the Bank, to closely monitor HIPC country debt indicators in order to detect potential debt servicing problems at an early stage.
Directors welcomed the progress made in securing financing for the interim PRGF and the Fund's participation in the HIPC Initiative. They were pleased to note that new PRGF loan resources of SDR 4.4 billion had been pledged, of which SDR 4.1 billion are now available, and that nearly all the pledged bilateral subsidy contributions to the PRGF-HIPC Trust have become effective. Directors urged that the remaining bilateral contributions to the PRGF-HIPC Trust be made effective soon to ensure full funding of PRGF-HIPC operations.
Directors welcomed contributions by several countries to subsidize post-conflict emergency assistance and encouraged further pledges by other members to ensure that resources remain sufficient to subsidize charges by the poorest members beyond 2002.
Directors were in broad agreement with staff analysis that available and pledged loan and subsidy resources appeared sufficient to finance PRGF operations and the Fund's share of HIPC Initiative assistance. They also agreed that accumulated balances in the Reserve Account adequately protected providers of both current and new loans to the PRGF Trust. They noted, however, that consideration might need to be given to mobilizing additional loan and subsidy resources should the recent high demand for PRGF resources continue. Over the long term, the adequacy of the level of self-sustained PRGF operations would also need to be assessed. Directors also noted that any expansion of the list of eligible countries under the HIPC Initiative, or significant topping up at the completion points, if warranted, would increase the cost of the Fund's HIPC Initiative assistance, necessitating the mobilization of additional resources. Some Directors also called for a fuller assessment of the potential costs of topping up going forward. Directors looked forward to a further discussion later this year of the Fund's concessional assistance to low-income countries.
