September 2006 marked the tenth anniversary of the HIPC Initiative. Started in 1996, the Initiative was enhanced in 1999 as an outcome of a comprehensive review by IDA and the IMF, including public consultations. The Initiative’s debt-burden thresholds were adjusted downward, which enabled a broader group of countries to qualify for larger volumes of debt relief. Moreover, a number of creditors, including the main multilaterals, started to provide earlier assistance to qualifying countries in the form of interim relief at decision point. Finally, the “floating completion point” was introduced, providing incentives to speed up reforms and increase country ownership.

The international community has focused on strengthening the links between debt relief and poverty-reduction efforts. Debt relief is linked to progress implementing the country’s Poverty Reduction Strategy (PRS). Consequently, in addition to the financial benefits debt relief has delivered, it has strengthened countries’ reform efforts.

Nominal debt service relief under HIPC to the 29 countries that have reached their decision points has been estimated to amount to about US$62 billion. Nominal debt service relief under HIPC to the 20 completion point countries has been estimated to amount to US$44 billion.

The poverty-reducing expenditures of HIPCs have increased since 1999, while debt-service payments have been declining. Debt service paid by the 29 post-decision point HIPCs has declined from about 4 percent of GDP in 1999 to about 2 percent in 2005. During the same period, poverty-reducing expenditures have increased from about 7 percent of GDP in 1999 to over 9 percent in 2005. In absolute terms, poverty-reducing expenditures amounted to nearly US$15 billion in 2005, more than five times debt-service payments. Pro-poor spending is expected to increase further from 2006 onwards with additional assistance under the MDRI.

Challenges remain to ensure that debt burdens do not return to unsustainable levels:

• Establishing a track record of reform in the remaining countries potentially eligible for HIPC; several of these countries are affected by conflict and several have problems of protracted external arrears.
• Strengthening management of debt and public finances.
• Ensuring full participation by creditors.

Beyond debt relief, long-term debt sustainability requires efforts by borrowers, lenders, and donors to promote prudent borrowing, suitably concessional finance, sustained economic growth, diversified exports, and greater access to markets in developed countries. Last but not least, concerns could arise if some creditors profit from the borrowing space created by debt relief by increasing their own lending.