WASHINGTON, April 12, 2012 - The Board of Executive Directors of the World Bank’s International Development Association (IDA), the Bank’s fund for the poorest, approved today the extension of the Debt Reduction Facility (DRF) until the end of July, 2017 in order to help heavily indebted poor countries continue to reduce their external commercial debt.
“Fostering debt sustainability in the poorest developing countries requires action to reduce their stock of external commercial debt,” said Jeffrey D. Lewis, World Bank Director for Economic Policy and Debt. “The DRF has already helped many such countries buy back debts owed to external commercial creditors at a deep discount, and with the five-year extension agreed today, such efforts can continue.”
According to the report, Debt Reduction Facility for IDA-Only Countries: Progress Update and Request for Extension, the DRF has supported 25 external commercial debt reduction operations in 21 countries since its establishment in 1989. It has also helped extinguish an estimated US$10.27 billion in external commercial debt obligations in the beneficiary countries –US$5.05 billion in outstanding principal and US$5.22 in accrued interest, arrears and penalties.
These operations, which included Liberia’s elimination of all its commercial debt in 2010, were financed (35 percent) with contributions from the World Bank’s International Bank for Reconstruction and Development (IBRD), which lends to middle-income countries, grant contributions from donor countries (33 percent), and beneficiary governments’ own resources (32 percent).
The objective of the IDA-run DRF is to help heavily indebted poor countries, known as HIPCs, reduce their external commercial debt as part of a comprehensive debt resolution program by providing grants to finance the preparation and implementation of buyback operations.
In 2004 the DRF was explicitly linked to the HIPC Initiative*. Since then the DRF has promoted greater creditor participation and an equitable burden sharing among creditors in the delivery of debt relief. It has also helped reduce the threat of litigation by non-concessional creditors against HIPC countries by contributing to the settlement of commercial creditors’ claims.
* As of December 2011, of the 39 eligible Heavily Indebted Poor Countries (HIPCs), 32 had reached the “completion point”—when debt relief becomes irrevocable, and another four are receiving interim assistance after having reached the “decision point”—when they qualify for HIPC.
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