-- Related Links -- Economic Policy and Debt HIPC Initiative World Bank Expert: Carlos A. Primo Braga

 At a Glance

• The World Bank Group provides debt relief to the poorest countries through the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). 
  
  
• As of September 2009, more than three quarters of eligible countries (35 out of 40) have reached the decision point and have qualified for HIPC Initiative assistance.¹ Of those, 26 countries have reached the completion point—when debt relief becomes irrevocable—and received debt relief under both the HIPC Initiative and the MDRI. 
  
  
• The total cost to creditors of HIPC Initiative debt relief for all eligible countries is estimated at US$74 billion in end-2008 net present value (NPV) terms. For the 26 countries that have reached the HIPC Initiative completion point, Bank debt relief is expected to total approximately US$26 billion in 2008 NPV terms, of which US$11 billion is being provided under the HIPC Initiative, and US$15 billion under the MDRI. If all 40 potentially eligible countries qualify for the HIPC Initiative and MDRI, total Bank debt relief is estimated to rise by an additional US$7 billion to about US$33 billion in end-2008 NPV terms.
  
  
• Debt-service payments of the 35 post-decision-point HIPCs—those that have qualified for debt relief—have declined as a result of the initiatives. For these countries, the average debt-service payment relative to GDP has dropped from 3.2 percent of GDP in 2001 to 1.1 percent of GDP in 2008.
  
  
• The decrease in debt-service has been accompanied by an increase in poverty-reducing expenditures, in areas including health, rural infrastructure, and education. For these 35 countries, such expenditures have increased on average from 6.3 percent of GDP in 2001 to 8.5 percent of GDP in 2008. In nominal terms, total poverty-reducing expenditures amounted to about US$28 billion in 2008, which represents an increase of almost US$22 billion since 2001. 

Background

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. Although the Paris Club and other bilateral creditors rescheduled and forgave many debts, a new debt relief initiative was called for to address the concern that poor countries’ debts were stifling poverty reduction efforts.

 In 1996 the International Development Association (IDA), the Bank’s fund that provides concessional credits and grants to the poorest countries in the world, and the IMF launched the HIPC Initiative. The Initiative calls for the voluntary provision of debt relief by all creditors, and aims to provide a fresh start to countries with a 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 end-June 2009, 35 countries had benefited from HIPC debt relief, 26 having reached the completion point, at which debt relief becomes irrevocable, and nine more are receiving interim assistance.

In 2006, following the 2005 Gleneagles Summit of the G8 group of nations, the 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 that had reached the completion point of the HIPC Initiative.

The HIPC Initiative in Practice

There are 40 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) in place, and debt burden indicators that are above the HIPC Initiative thresholds using the most recent data for the year immediately prior to the decision point. At the decision point, many creditors, such as the 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 back to 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 list of completion point triggers, achieving 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-six countries have reached the completion point: Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Ethiopia, the Gambia, Ghana, Guyana, Haiti, Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Tanzania, Uganda, and Zambia.
  
  
• Nine countries have reached the decision point: Afghanistan, Chad, Côte d’Ivoire, the Democratic Republic of Congo, Liberia, the Republic of Congo, Guinea, Guinea-Bissau, and Togo.
  
  
• Five countries remain potentially eligible for HIPC debt relief: Comoros, Eritrea, the Kyrgyz Republic, Somalia, and Sudan. 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.

100 Percent Cancellation: The Multilateral Debt Relief Initiative

On March 28, 2006, the Board of IDA approved IDA’s participation in the MDRI, requiring it to cancel all debt outstanding and owed by HIPCs as of end-2003, once 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 Inter-American Development Bank. Debt cancellation under the MDRI will be in addition to debt relief already committed under the HIPC Initiative.
  
  
• The total cost of the MDRI to all four creditor institutions for the 26 countries that have so far reached the completion point will be about US$24 billion (in end-2008 NPV terms), of which about US$15 billion will be borne by IDA.
  
  
• The MDRI aims to provide additional resources to help countries reach the Millennium Development Goals (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 IDA countries, and they are attributed according to a performance-based allocation mechanism.

Debt Reduction Facility (DRF) for IDA-only Countries

The World Bank’s Debt Reduction Facility (DRF) provides grants to HIPCs to buy back at a deep discount the debts owed to external, commercial creditors. DRF-supported 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 creation in 1989, the DRF has supported 25 completed buy-back operations in 22 low income countries, resulting in the extinguishing of some US$10 billion of debt. By reducing sovereign debt burdens, the DRF also helps reduce the risk of non-concessional creditors taking advantage of debt relief provided by IDA and other Multilateral Development Banks under the HIPC and the MDRI programs.

The DRF is managed by IDA, and financed as a trust fund through transfers from the International Bank for Reconstruction and Development, which lends to middle income countries, and grant contributions from donor countries. The DRF’s current mandate expires on July 31, 2012.

For more information on debt, see http://www.worldbank.org/debt.

Media Contact:

Media Contact: Alejandra Viveros, (202) 473-4306, aviveros@worldbank.org

Updated October 2009