Public Information Notice

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 3, 2003, 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 a 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 the assistance prudently by establishing a satisfactory track record under IMF- and International Development Association-supported programs. A key input in such programs is the poverty reduction strategy paper (PRSP), prepared with broad participation of civil society and development partners, 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 27 countries under the enhanced HIPC Initiative (Benin, Bolivia, Burkina Faso, Cameroon, Chad, Democratic Republic of Congo, Ethiopia, The Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, São Tomé and Príncipe, Senegal, Sierra Leone, Tanzania, Uganda, and Zambia), with total committed assistance estimated at some US$31 billion in NPV terms, or about US$51 billion in nominal terms. Of these countries, eight (Uganda, Bolivia, Mozambique, Tanzania, Burkina Faso, Mauritania, Mali, and Benin,) have reached their completion points under the enhanced Initiative, at which time debt relief was delivered unconditionally. In combination with traditional debt relief, the external indebtedness of these 27 countries will be reduced by about two-thirds in 2002 NPV terms (to US$26 billion from US$77 billion), bringing their indebtedness to levels comparable to the average for all developing countries. For the 27 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.

The latest report reviews progress in the implementation of the HIPC Initiative since September 2002¹. This includes updated information on the impact of HIPC relief, the estimated costs of the Initiative, and the status of creditor participation. The report discusses challenges facing HIPCs in reaching the decision and completion points. Prior to the decision point, countries are required to establish a track record of policy performance. Countries in the interim period between the decision and completion points are expected to implement sound macroeconomic policies, a poverty reduction strategy developed through a broad participatory process, and a set of specific social and structural reforms. This report also briefly examines the issues of governance and the maintenance of long-term debt sustainability in HIPCs.

A companion paper reviews the status of financing for PRGF and HIPC operations and the subsidization of post-conflict emergency assistance².

Executive Board Assessment

Executive Directors welcomed the progress made under the enhanced HIPC Initiative in providing debt relief to the world's poorest countries. They noted that together with associated debt forgiveness, debt relief committed under the HIPC Initiative to the 27 countries that are already past their decision points would lower the outstanding stock of external debt of these countries by about two-thirds and lower debt-service payments for most HIPCs to less than 10 percent of exports over the medium term.

Nevertheless, Directors reiterated that, in addition to debt relief, fiscal discipline and sustained economic growth are critical for achieving debt sustainability. In this context, they regretted that many countries in the interim period are taking longer than envisaged to reach the completion point, due mainly to the difficulties in implementation their macroeconomic programs. They emphasized that attaining macroeconomic stability, satisfactorily implementing PRSPs, and meeting other social and structural completion point triggers are critical to realizing the objectives of the HIPC Initiative. They encouraged HIPCs to stay on track with their economic reform and poverty reduction programs, especially the fiscal component of these programs, in order to reach their floating completion points without further delay. Directors underscored the importance of providing technical assistance, where possible, to alleviate constraints in PRSP design and implementation, particularly concerning the macroeconomic framework and public resource management.

Directors also recognized that while several members could adopt programs of adjustment and reform supported by the Fund and IDA before the sunset clause takes effect at the end of 2004, bringing the remaining countries to the decision point would be challenging, as most of these countries are affected by conflict, and a number of them have substantial arrears to official creditors. They urged the staff to continue to work with these countries and their development partners, wherever possible, to develop strategies to move ahead quickly. Some Directors were of the view that the sunset clause would need to be re-examined to ensure that countries moving toward HIPC debt relief, but not yet eligible for it, are not penalized, and to avoid a rush for countries to participate before 2004 at the expense of solid progress in key areas. In this regard, they welcomed the staff's indication that a review of the sunset clause would be discussed at the appropriate time in 2004.

Directors considered the emphasis on governance under the HIPC Initiative to be appropriate, observing that good governance practices require the concerted and continued efforts of both country authorities and the international community. They called on the staff to continue to strengthen the reporting on governance of HIPCs at their completion points.

Directors noted the challenges faced by HIPCs in mobilizing the financing to support reforms for achieving the Millennium Development Goals while ensuring long-term debt sustainability. They welcomed initiatives by the staff, in cooperation with other members of the international community, in developing a framework for assessing debt sustainability and its policy implications for HIPCs and their external creditors and donors.

Directors welcomed the increased participation of non-Paris Club creditors in the HIPC Initiative, and reiterated their call to the creditors that have not yet done so to contribute their share to reducing HIPCs' external debt to sustainable levels. They asked the staff to take all possible measures, within the existing legal and institutional constraints, to help increase creditor participation in the Initiative, including publicly identifying those creditors not participating in the Initiative. Directors regretted that a number of HIPCs face creditor litigation. Some Directors encouraged the staff to further reflect on ways and instruments to help HIPCs facing litigation initiated by creditors. Directors also looked forward to the staff's further consideration of options for resolving the issue of HIPC-to-HIPC debt relief, taking into account the basic principle of inter-creditor equity.

Directors welcomed the finding that, under the current framework, available PRGF loan, subsidy, and HIPC grant resources are estimated to be sufficient to cover the projected costs of PRGF lending through 2005 and the Fund's share of the HIPC Initiative assistance, including the currently projected amount of topping up of HIPC assistance at the completion point. Directors reaffirmed, however, that topping up should be used only in exceptional cases where a country's economic fundamentals have deteriorated significantly because of exogenous factors. Many Directors stressed that, in light of the uncertainties associated with projections and the lack of any pledges of extra financing by creditors, adopting a more costly approach to calculating topping-up assistance would be inappropriate and could endanger the financing of PRGF and HIPC operations. A number of other Directors, however, supported a change in the methodology for calculating topping up to exclude voluntary debt relief provided by some bilateral creditors, stressing that such bilateral debt relief was intended to be additional to the debt relief provided under the HIPC Initiative. There was some interest in a compromise proposal that would exclude voluntary bilateral debt relief in calculating topping up for countries that are not only suffering from exceptional exogenous shocks and but also have a good track record in terms of governance. In addition, a few Directors noted that they would support this alternative approach to calculating topping up assistance only if financing for the additional costs were secured ex ante. Directors urged that pending bilateral subsidy contributions to the PRGF-HIPC Trust be made effective as soon as possible. Directors expressed satisfaction that subsidy resources for post-conflict emergency assistance were estimated to be sufficient through end-2004.

Looking ahead, many Directors underscored that addressing the arrears and debt problems of Liberia, Somalia, and Sudan would require mobilization of substantial additional loan and subsidy resources and that this task would become urgent when a peace agreement is reached in Sudan. A few Directors, however, stressed that the financing of countries emerging from protracted arrears should be discussed separately. A number of Directors also expressed concern that, beyond 2005, the lending capacity under the so-called self-sustained PRGF framework would fall sharply and would not be adequate to provide for a suitable level of Fund financing for its low-income member countries. Some other Directors stressed that the planned self-sustained PRGF should not be questioned, noting that pressures on PRGF resources should be eased by the advance of the HIPC Initiative, the progressively lower financial needs of some low-income countries, and the consideration of alternative instruments that do not involve Fund financing to serve as signaling devices. Directors looked forward to the forthcoming staff paper on options for financing the continuation of the Fund's involvement in low-income member countries.

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¹ See paper, Heavily Indebted Poor Countries (HIPC) Initiative-Status of Implementation.
² See paper, Update on the Financing of PRGF and HIPC Operations and the Subsidization of Post-Conflict Emergency Assistance.