Press Release: Zambia to Receive $3.8 Billion in Debt Service Relief:The IMF and the World Bank Support Debt Relief for Zambia under the Enhanced HIPC Initiative
December 8, 2000
The International Monetary Fund (IMF) and the World Bank Group's International Development Association (IDA) agreed to support a comprehensive debt reduction package for Zambia under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Total debt service relief from all of Zambia's creditors is worth more than US$3.8 billion. This is equivalent to about US$2.5 billion in net present value (NPV)1 terms, or approximately 63 percent of the NPV of debt outstanding at end-1999 after the full use of traditional debt relief mechanisms.
The enhanced HIPC Initiative will help Zambia to advance its poverty reduction programs and stimulate economic growth, which will be essential in supporting efforts to achieve the International Development Goals of 2015. Compared to projected debt service obligations without HIPC assistance, Zambia's annual payments will be reduced by about US$260 million over 2001-05 and roughly US$130 million over 2006-15. This corresponds to a reduction in debt service obligations of about 45 percent. Compared to its projected debt service payments in 2000, Zambia will save an average of some US$30 million per year over the next fifteen years, with reductions beginning immediately and continuing over the coming three years.
The assistance committed by the IMF of US$602 million in NPV terms will be delivered quickly over a five-year period, and will cover on average about 62 percent of debt-service obligations to the Fund. The debt relief provided by IDA (of US$488 million) will be spread over a period of 20 years, covering about 84 percent of Zambia's debt-service obligations to IDA. The IMF and IDA will start providing interim debt relief immediately at the decision point.
Zambia will receive the bulk of the assistance under the enhanced HIPC Initiative when it satisfies a number of conditions, including adoption and implementation of a participatory poverty reduction strategy paper (see Annex).
Track record and poverty
Zambia has made substantial progress in implementing an ambitious set of economic reforms, including important efforts in the areas of privatization, deregulation and exchange and trade liberalization. Hyperinflation has been contained and economic management has been improved. These steps have yet to be reflected in sustained economic growth, however, and Zambia remains one of the poorest countries in the world. Social indicators remain stubbornly low and a high incidence of HIV-AIDs presents further challenges to Zambia's poverty reduction efforts. The government has undertaken a number of institutional reforms in social sectors and has put forward a broad strategy for growth and poverty reduction in the I-PRSP, including HIV-AIDS programs.
Steps to be taken before the completion point
The full assistance from the IMF and IDA will be delivered to Zambia upon completion of further progress in the following areas:
- Continued commitment of Zambia to the financial and economic program supported by the IMF's Poverty Reduction and Growth Facility (PRGF) and IDA's structural adjustment loans.
- The adoption of a full poverty reduction strategy paper (PRSP) to be prepared through a participatory process, and satisfactory progress with implementing and monitoring the PRSP for at least one year based on an annual report.
- Implementation of an agreed set of measures in the context of the government's poverty reduction strategy, particularly in the areas of HIV/AIDS, education, health, expenditure management and control, privatization and poverty reduction. These key measures and objectives for reaching the floating completion point are included in Box 2 of the HIPC Decision Point document.
- Confirmation of the participation of other creditors in the debt relief operation.
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. In October 1999, the international community agreed to make the Initiative broader, deeper and faster by increasing the number of eligible countries, raising the amount of debt relief each eligible country will receive, and speeding up its delivery. The enhanced Initiative aims at reducing the net present value (NPV) of debt at the decision point to a maximum of 150 percent of exports and 250 percent of government revenue, and will be provided on top of traditional debt relief mechanisms (Paris Club debt rescheduling on Naples terms, involving 67 percent debt reduction in NPV terms and at least comparable action by other bilateral creditors).
Eligible countries will qualify for debt relief in two stages. In the first stage, the debtor country will need to demonstrate the capacity to use prudently the assistance granted by establishing a satisfactory track record, normally of three years, under IMF- and IDA-supported programs. In the second stage, after reaching the decision point under the Initiative, the country will implement a full-fledged poverty reduction strategy, which has been prepared with broad participation of civil society, and an agreed set of measures aimed at enhancing economic growth. During this stage, the IMF and IDA grant interim relief, provided that the country stays on track with its IMF- and IDA-supported program. In addition, Paris Club creditors, and possibly others, are expected to grant debt relief on highly concessional terms. At the end of the second stage, when the floating completion point has been reached, the IMF and IDA will provide the remainder of the committed debt relief, while Paris Club creditors will enter into a highly concessional stock-of-debt operation with the country involved. Other multilateral and bilateral creditors will need to 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. Thirteen countries have now reached their decision point under the enhanced framework (Zambia joins Benin, Bolivia, Burkina Faso, Cameroon, Guyana, Honduras, Mali, Mauritania, Mozambique, Senegal, Tanzania, and Uganda), with total committed assistance estimated at roughly $23 billion, representing an average NPV stock-of-debt reduction of more than 45 percent on top of traditional debt relief mechanisms. Work is underway to have debt relief packages in place for some 20 countries by the end of the year.
1Net Present Value (NPV) of debt is the discounted sum of all future debt-service obligations (interest and principal) on existing debt. The NPV of debt is a measure that takes into account the degree of concessionality. It is defined as the sum of all future debt-service obligations (interest and principal) on existing debt, discounted, under the HIPC Initiative, at the market interest rate. Whenever the interest rate on a loan is lower than the market rate, the resulting NPV of debt is smaller than its face value, with the difference reflecting the grant element.