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Debt Relief and Development

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Economic Policy and Debt
HIPC Initiative
  

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 2012, of the 39 eligible HIPC Initiative countries, 33 had reached the “completion point”—when debt relief becomes irrevocable. They received debt relief under both the HIPC Initiative and the MDRI. Another three are receiving interim assistance after having reached the “decision point”—when they qualify for HIPC.
  • If all 39 potentially eligible countries reach completion point, total debt relief provided by the Bank and all participating creditors is estimated at about US$38.9 billion and $112.5 billion, respectively, in end-2011 Present Value (PV) terms.
  • Debt-service payments have declined as a result of the initiatives in the 36 post-decision-point HIPCs. For these countries, the average debt-service payment relative to GDP has dropped from 3.1 percent of GDP in 2001 to 1.1 percent of GDP in 2011.
  • The decrease in debt-service has been accompanied by an increase in poverty-reducing expenditures in areas including health, rural infrastructure, and education. For the 36 countries that have benefited from debt relief, such expenditures have increased on average from 6.2 percent of GDP in 2001 to 9.6 percent of GDP, as estimated in 2011.

Background

A buildup of foreign debt owed by many low-income countries throughout the 1970s and 1980s left many nations with unsustainable debt burdens. Although the Paris Club and other bilateral creditors rescheduled and reduced many debts, a new initiative was called for to address the concern that debts were stifling poverty reduction efforts.

 

In 1996, the International Development Association (IDA), the Bank’s fund for the poorest, 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 of a burden on export earnings or fiscal revenues.

 

In 2006, following the 2005 Gleneagles Summit of the G8 group of nations, the Bank joined the IMF and the African Development Bank (ADB) in implementing the MDRI, forgiving 100 percent of eligible outstanding debt owed to these three institutions by all HIPC Initiative countries that had reached the completion point. In early 2007, the Inter-American Development Bank also decided to provide similar debt relief to the five HIPC Initiative countries in the Western Hemisphere. 

 

How debt relief works

Under the HIPC Initiative, 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 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 implementing policies to ensure that the money saved is redirected toward poverty alleviation efforts. The fraction of debt that creditors’ are asked to forgive (the common reduction factor) is calculated to bring the country’s debt 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, measurable objectives upon achievement of which the country will “graduate” from the HIPC Initiative. These include a continued track record of satisfactory performance in 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 ensure that debt relief assistance will be well-used.

 

  • The 33 countries that have reached completion point are: Afghanistan, Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Cote d’Ivoire, Democratic Republic of the Congo, Ethiopia, the Gambia, Ghana, Guinea-Bissau, Guyana, Haiti, Honduras, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Republic of Congo, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Tanzania, Togo, Uganda, and Zambia.
  • The three countries that have reached the decision point are: Chad, Comoros , and Guinea.
  • Three countries remain potentially eligible for HIPC debt relief: Eritrea, Somalia, and Sudan.

 

The most recent HIPC and MDRI – Status of Implementation report which was discussed at the Board of Executive Directors of IDA highlighted that the debt relief initiatives to the 36 post-decision point countries have significantly reduced debt burdens of HIPCs. Nevertheless, some challenges remain going forward, including achieving full participation of all creditors, addressing the issue of commercial creditor litigation, and providing debt relief to countries that are still at the pre-decision point stage. (See http://go.worldbank.org/LG6DPCAI60 for more)

 

The Debt Reduction Facility and Debt Management

The Bank also helps low-income countries reduce the burden of their commercial debt through the Debt Reduction Facility (DRF), which is managed by IDA. The DRF provides grants to HIPC Initiative countries to prepare a comprehensive debt reduction strategy and to buy back their public and publicly guaranteed external commercial debt at a deep discount, thereby extinguishing such debt obligations. http://go.worldbank.org/2CRHS4N500

 

In addition, the Bank is helping low-income countries achieve their development goals without creating future debt problems, keeping countries that have received debt relief under the HIPC Initiative and the MDRI on a sustainable track. It is doing so through the Debt Sustainability Framework (DSF) and the Debt Management Facility (DMF). The DSF, a framework jointly developed with the IMF, allows creditors to tailor their financing terms in anticipation of future risks and helps clients balance the need for funds with the ability to repay their debts. The DMF strengthens debt management capacity and institutions in low-income countries in order to reduce their vulnerability to external shocks and safeguard debt sustainability. http://go.worldbank.org/A5VFXZCCW0; http://go.worldbank.org/5V9TDVODH0

 

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

 

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

 

 

Updated September 2012.

 

 

 




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