AT A GLANCE: - The World Bank Group provides debt relief to low-income countries through the Debt Relief Initiative for Heavily Indebted Poor Countries (HIPC), created in 1996, and the Multilateral Debt Relief Initiative (MDRI), created in 2006.
Thirty-three countries are receiving debt relief under one or both of these initiatives and eight other countries are potentially eligible. 1 This debt relief is worth around US$70 billion in 2006 net present value (NPV) terms if all creditors participate. For these 33 countries, World Bank debt relief is expected to total about US$25 billion in 2006 NPV terms, of which US$11 billion is being provided under the HIPC Initiative and about US$14 billion under the MDRI. If all potentially eligible countries qualify, total World Bank debt relief is estimated to rise to about US$31 billion in 2006 NPV terms. - Debt-service payments of the 33 post-decision-point HIPCs –those that have qualified for debt relief – have declined as a result of the HIPC Initiative and the MDRI. For HIPCs, the median debt-service payment per capita has decreased from US$9.2 in 2000 to US$4.5 in 2005 – a reduction of more than 50 percent.
- The decrease in debt-service has been accompanied by an increase in poverty-reducing expenditures, such as health, rural infrastructure, and education. In post-decision-point HIPCs, these have increased on average from under 7 percent of GDP in 2000 to 9 percent in 2006. In nominal terms, poverty-reducing expenditures amounted to US$17 billion in 2006, which represent an increase of US$3 billion since 2005. These expenditures are more than five times the level of debt-service payments after debt relief.
Overview A buildup of foreign debt owed by many low-income countries throughout the 1970s and 1980s, combined with low growth, falling commodity prices, and other economic shocks, left many nations with unsustainable debt burdens. By 1992, the 33 most indebted low-income countries faced debts whose present value had more than doubled in ten years to over six times their annual exports. Starting in the late 1980s, the Paris Club and other bilateral creditors rescheduled and forgave many of these debts. But by the mid 1990s, with an increasing share of debt owed to multilateral lenders such as the World Bank, the IMF, and regional development banks, a new debt relief initiative was called for, involving these creditors, to address the concern that poor countries’ debts were stifling poverty reduction efforts. In response, in 1996 the International Development Association (IDA), the World Bank’s fund for the poorest countries, and the IMF launched the HIPC Initiative. The Initiative is comprehensive – it calls for the voluntary provision of debt relief by all creditors, whether multilateral, bilateral, or commercial – and aims to provide a fresh start to countries struggling to cope with foreign debt that places too great a burden on export earnings or fiscal revenues. The HIPC Initiative was enhanced in 1999 to provide deeper, more rapid relief to a wider group of countries, and to increase the Initiative’s links with poverty reduction. By mid-March 2008, 33 countries had benefited from HIPC debt relief, 23 having reached the completion point, at which debt relief becomes irrevocable, and ten more receiving interim assistance. A further eight countries are potentially eligible for HIPC debt relief, pending the agreement of macroeconomic reforms, poverty reduction strategies, and/or arrears clearance plans. In 2006, following the 2005 Gleneagles Summit of the G8 group of nations, the World Bank joined the IMF and the African Development Bank in implementing the MDRI, forgiving 100 percent of eligible outstanding debt owed to these three institutions by all HIPC countries reaching the completion point of the HIPC Initiative. In 2007, the Inter-American Development Bank (IADB) joined the World Bank, the IMF, and the AFDB in providing 100 percent relief on eligible debt to HIPCs upon reaching the completion point. The MDRI will effectively double the volume of debt relief already expected from the enhanced HIPC Initiative. The HIPC Initiative in Practice There are 41 HIPCs. The first stage of qualification for debt relief is the decision point, at which the country must have a current track record of satisfactory performance under IMF and IDA-supported programs, a Poverty Reduction Strategy (PRS), or an interim PRS in place, and an agreed plan to clear any arrears to foreign creditors. At the decision point, many creditors, such as the World Bank, the IMF, multilateral development banks, and Paris Club bilateral creditors, begin to provide debt relief, although many of these institutions maintain the right to revoke this if policy performance falters. The provision of debt relief depends on policies being in place to ensure that it effectively contributes to poverty reduction. The fraction of debt that creditors’ are asked to forgive (the common reduction factor) is then calculated to bring the country’s debt ratio back to a sustainable level (150 percent of exports or in certain cases 250 percent of fiscal revenues). Debt relief from participating creditors becomes irrevocable at the completion point. At the decision point, the country agrees on a short list of completion point triggers, upon which the country will “graduate” from the HIPC Initiative. These include a continued track record of satisfactory performance on an IMF program and the implementation for at least one year of the PRS. Some triggers may relate to progress in social areas such as health and education, while others may relate to improving governance or fighting corruption to give donors sufficient confidence that debt relief assistance will be well used. Twenty-three countries have reached the completion point: Benin, Bolivia, Burkina Faso, Cameroon, Ethiopia, the Gambia, Ghana, Guyana, Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Tanzania, Uganda, and Zambia.
Ten countries have reached the decision point: Afghanistan, Burundi, Central African Republic, Chad, the Democratic Republic of the Congo, Liberia, the Republic of Congo, Guinea, Guinea-Bissau, and Haiti.
Eight countries remain potentially eligible for HIPC debt relief: Comoros, Côte d’Ivoire, Eritrea, the Kyrgyz Republic, Nepal, Somalia, Sudan, and Togo. Many of these have been beset by civil war, cross-border armed conflict, and governance challenges (including in some cases the buildup of substantial arrears on external debt).
A review of the HIPC Initiative by the World Bank Group’s Independent Evaluation Group found that it has enabled higher spending on countries’ social programs and poverty reducing investments but also noted the need to manage expectations of what debt relief can realistically achieve. Long-run debt sustainability ultimately relies on countries’ broader success in building the institutions to support sustained economic growth.
100 Percent Cancellation: The Multilateral Debt Relief Initiative
On March 28, 2006, the Board of IDA approved IDA’s participation in the MDRI, requiring IDA to cancel all debt outstanding and owed by HIPCs to IDA as of end-2003 as soon as these countries reached the HIPC completion point. The Bank began providing MDRI debt relief on July 1, 2006. The MDRI provides HIPCs that have reached the completion point irrevocable, up-front cancellation of debt owed to IDA, the African Development Fund, the IMF, and the IADB. Debt cancellation under the MDRI will be in addition to debt relief already committed under the HIPC Initiative.
The full benefit of the MDRI from all four institutions to the 23 countries that have so far reached completion point will be over US$21 billion (in 2006 NPV terms), of which about US$14 billion is from IDA.
The MDRI aims to provide additional resources to help countries reach the MDGs, at the same time preserving the financing capacity of the International Financial Institutions. IDA donors therefore agreed to compensate IDA for all MDRI assistance provided.
MDRI donor contributions to IDA are used to benefit all IDA recipients: they are attributed to countries according to the performance-based allocation mechanism used by IDA.
Debt Reduction Facility (DRF) for IDA-only Countries
The Boards of the IBRD and the IDA established the DRF in July 1989 to help reforming, heavily indebted IDA-only countries reduce their sovereign commercial external debt, as part of a broader debt resolution program, and thereby to contribute to growth, poverty reduction and debt sustainability. DRF-supported commercial debt reduction operations typically involve a Government buying back its public and publicly guaranteed debts from external commercial creditors for cash at a deep discount, thereby extinguishing such debts from the books of the public sector. Since its establishment, the DRF has supported 24 commercial debt reduction operations in 21 IDA-only countries, extinguishing about US$4.8 billion of external commercial debt principal and an estimated US$4.2 billion of associated interest arrears and penalties. By reducing sovereign debt burdens, the DRF facilitates the improvement of creditor burden sharing under the HIPC Initiative. It also helps reduce the risk of non-concessional creditors taking advantage of debt relief provided by IDA and other Multilateral Development Banks under the MDRI. The DRF’s current mandate expires on July 31, 2012.
Avoiding the Need for another Debt Relief Initiative: The Debt Sustainability Framework for Low-Income Countries The debt sustainability framework is a forward-looking approach to guide borrowing and lending decisions to devote resources toward achieving the MDGs without creating the buildup of unsustainable debt. By assessing each country’s circumstances, the framework balances the need for funds with current and prospective ability to repay debt. This approach puts responsibilities on both borrowers and creditors. Low-income countries that seek new loans are responsible for strengthening policies and institutions to enhance capacity to manage debt and reduce vulnerability to shocks. Creditors, for their part, review long-term debt projections, which incorporate forward-looking economic analysis and account for possible shocks.
1The HIPC Initiative sunset clause took effect on December 31, 2006. The Executive Boards of the International Development Association (IDA) and the International Monetary Fund (IMF), however, have decided to grandfather all countries that met the income and indebtedness eligibility criteria based on end-2004 data, including countries that might be assessed in the future to have met these criteria. As a result, countries that did not meet the policy performance eligibility criterion of the HIPC Initiative by the end-2006 sunset clause date may nonetheless become eligible for HIPC Initiative assistance if they adopt, at any time, a qualifying IMF- and IDA-supported program. - ### - For more information on debt, see http://www.worldbank.org/debt Updated April 2008 Alejandra Viveros (202) 473-4306
Aviveros@worldbank.org |
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