In 1996, the World Bank and the International Monetary Fundrecognized the enormous burden that excessive debt places on the world's poorest countries. We then jointly launched an unprecedented comprehensive program, the Debt Initiative for Heavily Indebted Poor Countries (HIPC), to give countries the possibility of exiting from unsustainable debt owed to multilateral creditors. It was triggered by a concern that excessive debt levels in these countries were a drag on economic growth and were stifling efforts to reduce poverty.

In July 2005, the G8 Meeting in Gleneagles, Scotland, agreed to provide 100 percent cancellation of the eligible debts owed by to the World Bank (IDA), the International Monetary Fund (IMF), and the African Development Fund (AfDF). This additional debt relief known as Multilateral Debt Relief Initiative (MDRI), would go to the world's most indebted countries, most of which are in Africa, and provide 'dollar-for-dollar' compensation to IDA and AfDF to preserve their long-term financial capacity.

Under these initiatives, thirty countries are receiving debt relief worth over US$63 billion in 2005 net present value terms (NPV). The World Bank's share is expected to total US$25 billion NPV: US$10 billion under HIPC and US$15 billion under the MDRI. Ten other countries are potentially eligible, if they qualify, this total could rise to about US$30 billion (NPV).

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The HIPC Initiative involves an agreement among all of the major international lenders to provide an opportunity for a fresh start to countries struggling to cope with heavy debt. The HIPC Initiative was further strengthened in 1999 as the Enhanced HIPC Initiativeto provide deeper, broader and faster debt relief to a larger group of eligible countries and to strengthen the program's links to ongoing poverty reduction efforts in these countries. Virtually all of the world's multilateral creditors are participating in HIPC. To date, multilateral creditors have committed to provide over 99% of their calculated amount of total debt relief required.

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In return for debt relief, governments in countries that decide to participate in the HIPC Initiative pledge to introduce a series of key reforms in those countries that are designed to encourage sustainable economic growth that will drive reductions in poverty levels. These reforms include introducing sound overall national economic (macroeconomic) policies, creating a sound legal system, and establishing a reliable and accountable financial system. They also develop detailed plans to improve the quality of their public services and access to those services by the poor and to provide the poor in the country with a better quality of life.

The decision point for participation is reached when a country makes this pledge to reform; has established a track record of macroeconomic stability; has prepared an interim Poverty Reduction Strategy Paperfor the World Bank that describes key structural and social reforms; and has cleared any outstanding arrears. Then it is accepted into the scheme, and debt relief is granted.

To reach the completion point, a country must maintain macroeconomic stability under an International Monetary Fund (IMF) Poverty Reduction Growth Facility-supported program; satisfactorily carry out the key structural and social reforms in its poverty reduction strategy, which were agreed upon at the decision point, for one year; and maintain macroeconomic stability. The amount of debt relief then becomes permanent.

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To be eligible for the HIPC Initiative a country must:

• Face an unsustainable debt situation after the full application of traditional debt relief mechanisms, such as the application of Naples terms under the Paris Club agreement. A country's debt level is considered unsustainable, if the country's debt-to-export levels are above a fixed ratio of 150%; or if the country has a very open economy and exclusive reliance on external indicators may not adequately reflect the fiscal burden of external debt, the debt-to-government revenues are above 250%.
• Only be eligible for highly concessionary assistance from IDA, the part of the World Bank that lends on highly concessionary terms, and from the IMF Poverty Reduction and Growth Facility (PGRF).
• Establish a track record of reform and develop a Poverty Reduction Strategy Paper (PRSP) that involves civil society participation

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At the present time, 40 countries- 32 of them in sub-Saharan Africa - are potentially eligible for debt relief under the HIPC Initiative and the MDRI. On July 1, 2006, the IMF, the World Bank (IDA) and the AfDF began cancellation of 100% (US$50 billion) of the eligible debts of 22 countries out of HIPC and MDRI commitments. By Jan. 2007, 30 countries had benefited from HIPC debt relief, 22 having reached the completion point, at which debt relief becomes irrevocable. Eight more are receiving some debt relief and a further ten are potentially eligible for HIPC debt relief, pending the agreement of macroeconomic reforms, poverty reduction strategies, or arrears clearance plans.

The countriesdeemed eligible were Benin, Bolivia, Burkina Faso, Cameroon, Ethiopia, Ghana, Guyana, Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Tanzania, Uganda and Zambia.

Eight more countries have reached their "decision" points and are receiving interim debt relief from IDA under HIPC. Therefore, three fourths of those eligible, 30 countries, currently receive debt relief, which could amount to up to US$63 billion (2005 NPV) in lower debt service payments over time. The remaining 10 HIPC countrieswill be eligible for debt cancellation, once they have completed the requirements of the HIPC Initiative. Many of these countries have been beset by civil war, cross-border armed conflict, and governance challenges that include the buildup of substantial arrears on external debt, in some cases.

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Even though a country has not graduated, its debt relief starts immediately after the decision point, when an agreement is reached on the parameters of the program between the country and its creditors. This means that interim debt service relief through HIPC is already flowing to 30 of the 40 potentially eligible countries.

Reform takes time to implement and to take hold. In some cases formulating poverty reduction strategies-one requirement under the HIPC Initiative-is taking longer than expected. That is because countries are engaged in broad consultations with stakeholders, a process that needs to be encouraged. Most of the countries have floating completion point triggers to lessen pressure to rush through reforms. The last thing we want is for countries to meet arbitrary deadlines at the expense of the quality of their actions.

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The standards were designed to make sure that maximum benefits are attained through HIPC and that the freed-up money is used well and reaches the poor. It is important to maintain these prerequisites, so that countries achieve sustainable economic growth and deliver high-impact poverty reduction programs.

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No amount of debt forgiveness can guarantee a country's future financial solvency. Long-term debt sustainability depends on solid economic growth that is based on sound government policies, including prudent external borrowing and debt management.

Recognizing the importance of debt sustainability, the World Bank and International Monetary Fund have implemented a Debt Sustainability Framework in Low-Income Countries, which seeks to make the challenge less difficult by providing guidance on new lending to low-income countries whose main source of financing is official loans. The framework has been developed with the intention to better monitor and prevent the accumulation of unsustainable debt.

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International events in the 1970s and 1980s-particularly oil price shocks, high interest rates, weak commodity prices and recessions in industrial countries -contributed heavily to the debt problem that engulfed many low-income countries.

During the 1970s, the prevailing view was that governments should play a leading role in the industrialization of their economies. Governments in poor countries borrowed heavily, based on predominant development thinking at the time, particularly the strategy of industrialization by import-substitution. Low-income countries were encouraged to invest in industry and infrastructure and replace goods and services purchased outside the country with goods and services produced within the country. States and state-owned enterprises borrowed the money for these efforts. In addition, commodity prices slumped in the early 1980s, lowering the value of exports, and oil prices rose, raising the cost of imports. Consequently, governments compensated for the fact that their imports were outstripping their exports by even more borrowing.

Domestic factors also played a significant role in the debt run-up. Many countries building up debt, in both the middle- and low-income categories, continued living beyond their means, with high trade and budget deficits and low savings rates. They borrowed more heavily, but this new borrowing often did not translate into productive investments that would generate returns necessary to service their debt. More specifically, poor public sector management and poor project selection by donors and lenders meant that loan funds intended to increase productivity and generate exports failed to produce expected yields and brought no long-term benefit in terms of capacity to earn foreign exchange. Droughts, floods, civil wars, weak economic policies and poor governance all exacerbated the debt build up. Some loans were then taken out solely to service existing debt.

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Countries in the so-called tiger economies of East Asia, China and India dramatically cut their rates of poverty through the use of concessionary funds and did not suffer a debt crisis as a result of international economic events in the 1970s and 1980's. They used borrowed funds to diversify their exports away from a reliance on commodities. This insulated them from the commodity price slump of the early 1980s. Through improved investment climates, they were also able to attract significant investment and generate growth, which contributed toward poverty reduction.

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