Briefing on the Multilateral Debt Relief Initiative (MDRI)
Monday, April 24, 2006 / 9:00 – 10:30 am
MEETING NOTES
The purpose of this event was to brief participants on the policy implications, operational details, and implementation schedule of the Multilateral Debt Relief Initiative (MDRI) after having their endorsement by the World Bank and International Monetary Fund (IMF) Boards. The session was chaired by World Bank Civil Society Specialist, Mr. John Garrison. The panelists were Mr. Akihiko Nishio - Manager, Resource Mobilization Department (World Bank), Ms. Sona Varma - Senior Economist, Economic Policy and Debt Development Department (World Bank), Mr. Herve Joly, Deputy Division Chief, Policy Development and Review Department (IMF). Civil Society participants included representatives of Eurodad, Action Aid and Jubilee UK. Presentation by Mr. Akihiko Nishio (World Bank) Mr. Nishio in his presentation outlined the key features of the MDRI. The initiative involves100 percent stock cancellation of debts owed by Highly Indebted Poor Countries (HIPCs) that have reached completion point (the point at which a country has met all the criteria set for accessing debt relief) to the International Development Association (IDA), the African Development Fund (AfDF), and the IMF. It does not cover debts owed to the International Bank for Reconstruction and Development, the African Development Bank or other Multilateral Development Banks. The MDRI provides a framework that seeks to achieve two objectives: Deepening debt relief to HIPCs to help them reach the MDGs, while safeguarding the long-term financial capacity of IDA and the AfDF. The Initiative also commits donors to provide additional resources to IDA and AfDF to compensate for forgone credit reflows. The cutoff date for the debt that will be subjected to relief is December 31, 2003 for IDA, December 31, 2004 for IMF and AfDF. The World Bank’s Board approved the implementation of the Initiative on 28 March, 2006. The African Development Bank also approved MDRI implementation on 19 April, 2006 while the IMF Broad approved the Initiative in November 2005. Implementation by the Bank of the MDRI is expected to start from July 2006, at the start of the new fiscal year. The total cost of Initiative is approximately $50 billion in nominal terms. Of this amount, IDA is expected to provide about US$37 billion in debt relief over 40 years Presentation by Sona Varma (World Bank) Ms. Varma, in her presentation, first indicated how countries were selected for the Initiative. First, 18 Highly Indebted Poor Countries HIPCs who had reached completion pointed were selected for consideration. These countries were then reviewed according to three criteria: Satisfactory macroeconomic performance under the Poverty Reduction and Growth Facility (PRGF) or equivalent; Satisfactory progress in implementing a poverty reduction strategy Existence of public expenditure management systems that meet minimum standards for governance and transparency in use of public resources.
While strong public financial management (PFM) systems are essential to realize benefits of debt relief, this is not a condition for MDRI. According to the criteria, 17 post-completion point HIPCs were immediately found to be eligible. Only Mauritania was found to need to improve public expenditure management and macroeconomic performance before it could access MDRI relief. However, there are signs now that Mauritania has made progress on these indicators and may soon be eligible to join the Initiative. Other HIPCs will also be eligible once they reach completion point. Countries that qualify under the so called HIPC ‘sunset clause’ are also eligible. Through a number of graphs, Ms. Varma showed that the MDRI will significantly reduce both debt stock ratios and debt service in HIPCs. As regards debt stock Uganda, for instance, will experience a reduction of nearly five fold. On debt service the level of reduction of IDA debt will peak around 2025 but with the IMF because of the short term nature of its loans, debt service reduction is largely front loaded. Debt service for AfDF is more evenly distributed across the coming years.
Ms Varma concluded her presentation by highlighting emerging policy concerns with regard to the MDRI. A key concern is to prevent MDRI recipients from immediately re-accumulating unsustainable debt levels. The Debt Sustainability Framework can help identify medium term debt vulnerability and ensure that new flows to MDRI recipients are provided on terms that are commensurate with their risk of debt distress. There is also the “free rider” problem, i.e. situations in which lenders indirectly obtain financial gain from IDA’s grants and debt relief by offering non-concessional finance to low-income countries. The Bank’s response to such free riding instances through a two-pronged approach, which involves: Presentation by Herve Joly (IMF) In his presentation Mr. Joly emphasized the aspects of the MDRI that are unique to the IMF. He said the IMF board approved the MDRI deal in November 2005. Debt relief already started from the beginning of 2006. In deciding to implement the MDRI, the IMF Executive Board modified the original G-8 proposal to fit the requirement, specific to the IMF, that the use of the IMF's resources be consistent with the principle of uniformity of treatment. Thus, it was agreed that all countries with per-capita income of US$380 a year or less (whether HIPCs or not) will receive MDRI debt relief financed by the IMF's own resources through the "MDRI-I Trust". HIPCs with per capita income above that threshold will receive MDRI relief from bilateral contributions administered by the IMF through the "MDRI-II Trust". The main difference with the IDA program was that all those with per capita income below US$380 and outstanding debt to the Fund at end-2004, are eligible for the MDRI. According to this formula, 20 countries were found to be eligible for consideration, i.e. the 18 HIPC countries plus Cambodia and Tajikistan. The Board determined that 19 countries qualified for MDRI relief following a review of the criteria: satisfactory macroeconomic performance under PRGF or equivalent; satisfactory progress in implementing a poverty reduction strategy; and existence of public expenditure management (PEM) system that meets minimum standards. These 17 HIPCs had reached completion point, and two non-HIPC countries whose per capita income was below the established threshold. Mauritania was the only post completion point HIPC that was disqualified because it had failed to meet the criteria. However there are now signs of improvement in Mauritania and it may soon be able to joint the Initiative. In addition countries that have not yet reached the completion point under the HIPC Initiative will qualify for MDRI relief upon reaching the completion point.
For 19 countries debt stock will be reduced by 94%. This is about 3% of their GDP.
Questions and Answer Session: Several questions and concerns were raised by CSO representatives related to the MDRI and its implementation: Questions focused on the exclusion of CSOs in the Bank/Fund country assessments process for the 18 post completion point countries, the inclusion of Tajikistan and Cambodia in the Initiative, the use of freed resources for poverty reduction by the governments, and the "free rider" issue. A major concern expressed by civil society was the apparent lack of consultation of civil society in the assessment of eligible countries for the Initiative. In response the Bank and IMF staff expressed regret that the time constraints they faced had not allowed for consultations with stakeholders. Nevertheless they argued that assessments had been thorough and had basically verified if the 18 post-completion point countries had not regressed in their overall performance since reaching HIPC completion point. The criteria used mirror those employed to determine whether the countries were qualified to reach HIPC completion point, and help lay the foundation to ensure that savings from debt relief will be used for productive purposes. Countries were also expected to be current on repayment obligations to IDA.
Questions were also directed to the IMF in particular on Tajikistan and Cambodia’s inclusion in the Initiative. Specifically the question was raised as to why Haiti has to go through HIPC conditionalities while Tajikistan and Cambodia were exempt from these measures? Also how does one know that a country like Malawi is not better placed to be included in the Initiative? In response the IMF representative argued that it was evident that while Tajikistan and Cambodia had passed the three tests regarding macroeconomic performance, poverty reduction and public expenditure management (see above). However it was clear that Haiti and Zambia would not be able to pass these tests.
A related question raised by civil society was if indebted countries like Kenya and Ecuador would be granted access to the MDRI. Both the Fund and Bank representatives responded in stating that the major obstacle to extending the MDRI beyond the HIPCs that had reached completion point was a lack of donor resources to finance the forgone credit reflows. There was also a need to ensure that the countries were in a good position to maximize benefits from debt relief
On the question of how the Bank deals with so called “free riders”, the Bank representative informed the meeting that the issue is of major concern. Many of the beneficiaries of the MDRI may now be offered concessional loans from other sources, some of which may lead again to unsustainable debts. The problem is complicated by the large number of players involved. The Bank addresses the problem by trying to enhance creditor coordination around an agreed debt sustainability framework, and encouraging Low Income Countries to implement sustainable borrowing strategies. Regarding CSOs call for assurance that the freed resources are indeed going to be spent on poverty reduction, the World Bank representative expressed the hope that the money indeed will be used in the best and most effective way. But as it is up to the governments of the beneficiary countries to decide how they spend their budget, the Bank has no authority to control that beyond the measures inherent with the PRGF and Poverty Reduction Strategies programs of the Bank and the Fund. Concerning a question on the situation for the Bank in financing the MDRI, the answer was that significant progress had been made in securing funding for the MDRI. Donors have indicated their intention to provide financing pledges for some 87% of IDA’s MDRI costs for the first set of 18 completion-point HIPCs. This is much higher than the 60% that was initially deemed necessary to start the process by the start of the next fiscal year. Hopefully, over time, further donor pledges will be received covering all of IDA’s costs so as to ensure the full additionality for HIPC countries of the debt relief provided under the MDRI. A civil society representative answered to this by stating that civil society could better advocate countries to honor their pledges if they were better consulted on the process. In response a representative of the Bank suggested that the Bank and civil society explore the possibility of a strategic alliance on the issue. In their closing remarks the Bank and IMF representatives stated their appreciation for the dialogue and expressed the wish for regular dialogue with civil society on the topic. Participants in the discussion Photos More Information:
2006 Spring Meetings Civil Society Dialogues Program - main page
2006 Spring Meetings - general information for CSOs |
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