High
levels of external debt have been increasingly recognized as a serious
constraint on the ability of poor countries to pursue sustainable
development and reduce poverty. In response, in September 1996, the
World Bank and the IMF launched the Initiative for Heavily Indebted
Poor Countries (HIPC). It was endorsed by some 180 governments around
the world as an effective and welcome approach to help poor, severely
indebted countries reduce debt as part of an overall poverty reduction
strategy. In September 1999, at the Annual Meetings of the World Bank
and IMF, the HIPC Initiative was significantly expanded to provide
more debt relief to more countries faster. This enhancement, and a
redesigned strategy to link debt relief to poverty reduction, will
help to eliminate debt as an obstacle to development and allow
countries to invest more in their future.
The Initiative is designed to reduce debts to
sustainable levels for poor countries that pursue economic and social
policy reforms, and is used specifically in cases where traditional
debt relief mechanisms will not be enough to help countries exit from
the rescheduling process. This Initiative is a breakthrough. Unlike
earlier debt relief mechanisms, the HIPC Initiative addresses debt
comprehensively and involves all creditors, including multilateral
financial institutions.
Translating Cooperation into Policy
In
the past three and a half years we have seen intense public interest
in the HIPC Initiative, and an extraordinary degree of coordination
among a wide range of parties to make this program work. These
partners include creditor and debtor governments, multilateral
organizations, and the important involvement of NGOs, churches, and
other groups from civil society.
The World Bank and IMF have capitalized on this
interest. In February 1999, both institutions set out to conduct a
thorough review of the HIPC Initiative. Two broad questions formed the
heart of the review: Does the HIPC framework help countries exit from
unsustainable debt burdens? And are countries able to link debt relief
to real poverty reduction? To ensure that we had every possible idea
on the table for consideration, we opened the HIPC review to global
public participation. Toward this end, the Bank and Fund created a
HIPC consultation web-page, with questions posted on key aspects of
the Initiative. In six months of the two-phase web-consultation, we
received hundreds of responses. In addition, we held
consultative meetings in Ethiopia, Germany, Honduras, Mozambique,
Norway, Togo, the United Kingdom, and the United States.
Altogether, the consultation generated more than 1,000
pages of detailed comments and proposals, which were delivered
directly to the Boards of both institutions for a formal
consideration. As a result of this process, and in response to
concrete views expressed by governments and civil society, the World
Bank and IMF outlined a number of important enhancements to the
original framework (described further below) designed to expand
significantly the amount of debt relief poor countries receive under
the Initiative.
This process has been extraordinarily valuable not
just for the HIPC Review, but as a model of how development policy can
and should be made in the future. Precisely because public interest in
the HIPC Initiative is growing and continues to be varied, it is
useful to periodically address some of the questions which are raised
in connection with its design and its implementation.
Q) What is the HIPC Initiative?
A)
The
Heavily Indebted Poor Country (HIPC) Initiative is an agreement among
official creditors designed to help the poorest, most heavily indebted
countries escape from unsustainable debt. It enables poor countries to
focus their energies on building the policy and institutional
foundation for sustainable development and poverty reduction. Top
Q)
What changed with the advent of the HIPC Initiative?
A) When the HIPC Initiative was launched in 1996, it
introduced a new approach to debt relief for the poorest countries by
focusing on overall debt sustainability. Relief, in short, is based on
a country's ability to pay within a total context of poverty reduction
and economic growth. It thereby enables countries to exit from the
debt rescheduling process. It also represents a commitment by the
international community, including all creditors, to act together in a
coordinated and concerted fashion to reduce debt to a sustainable
level.
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Q)
Which countries are eligible to participate in the Initiative?
A)
The
Initiative is open to the poorest countries, those that: (i) are
eligible only for highly concessional assistance such as from the
World Bank's International Development Association (IDA) and the IMF's
Poverty Reduction and Growth Facility (formerly called Enhanced
Structural Adjustment Facility); (ii) face an unsustainable debt
situation even after the full application of traditional debt relief
mechanisms; and (iii) have a proven track record in implementing
strategies focused on reducing poverty and building the foundation for
sustainable economic growth.
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Q)
How does the HIPC Initiative work?
A)
The Initiative involves two stages. The first stage is a three-year
period during which a HIPC country works in coordination with, and the
support of, the World Bank and IMF to establish a record of
implementing economic reforms and poverty reducing policies.
Particular focus is placed on developing a comprehensive poverty
reduction strategy prepared by the government with support from the
Bank, Fund and others. At the end of this three-year period, the
country reaches its decision point, where it is determined whether its
debt level is sustainable. For those countries whose debt burden
remains unsustainable, a package of debt relief is prepared and
committed to by creditors.
While interim debt relief by the Paris Club and some
multilaterals such as the World bank is provided between the decision
point and completion point, countries receive their full package of
debt relief once it has implemented a set of key, pre-defined
structural reforms. This approach—called a "floating
completion point"—replaces the fixed three-year performance
period of the original framework, and will enable countries to meet
ambitious policy targets early and accelerate the release of debt
relief.
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Q)
How is external debt sustainability determined?
A) Reducing the threshold for a poor country's
external debt to be considered unsustainable was an important area of
consensus of the HIPC review, and a major element of the enhancement
endorsed in September 1999. As with the original framework, external
debt sustainability will continue to be determined by a Debt
Sustainability Analysis (DSA) prepared by the debtor country, World
Bank and the IMF, to determine whether a country is facing an
unsustainable debt situation after the full application of traditional
debt relief mechanisms. The new framework also allows for two related
set of criteria to be considered. The first, which will continue to
apply to most HIPCs, is the ratio of a country's debt to its exports.
Under the enhanced framework, sustainable debt-to-export levels are
defined at a fixed ratio of 150 percent (on a net present value basis,
or NPV).
The
second, for those HIPCs with very open economies where exclusive
reliance on external indicators may not adequately reflect the fiscal
burden of external debt, an NPV debt-to-export target below 150 can be
recommended if the country concerned meets two criteria at the
decision point: an export-to-GDP ratio of at least 30 percent and a
minimum threshold of fiscal revenue in relation to GDP of 15 percent.
For these countries, the NPV debt-to-export target will be set at a
level which achieves a 250 percent of the NPV debt-to-revenue ratio at
the decision point. Côte d'Ivoire and Guyana qualified under this
criteria under the initial framework. Top
Q)
What are the enhancements that were introduced into the new HIPC
framework?
A) The key changes introduced into the new framework
are as follows:
Simplification
 | Calculation of assistance at decision point on actual data not
projections for the completion point.
| Apply single NPV debt-to-export target to all countries rather
than decide target on a country-specific basis within target
range.
| Elimination of borderline option. |
| |
Modifications
| Lower NPV debt-to-export (150 percent) and debt-to-revenue
target (250 percent) with lower thresholds for latter (30 percent
export-to-GDP, and 15 percent revenue-to-GDP).
| Floating completion points with the timing of completion points
tied to implementation of key structural reforms.
| Earlier delivery of assistance both from decision and completion
points. |
| |
Principal Changes
Elimination of:
| Projections of position at completion point as basis for
assistance;
| Vulnerability analysis as a basis for country-specific
determining of targets;
| Target ranges for the completion point.
This will permit a simplified preliminary HIPC Initiative document
which could focus on the track record and proposed timing of
decision point, key structural policies, and enhanced framework
for poverty reduction. |
| |
Forward-looking focus in decision point document
switched to:
Q)
What is the estimated cost of the enhanced HIPC framework?
A)
The enhanced framework marks a dramatic expansion of the existing
framework. The cost (and therefore debt relief provided) under
the new framework has more than doubled. The projected $55
billion in debt relief over time will be divided roughly in half
between bilateral and multilateral creditors. The World Bank is
expected to provide nearly $11 billion of this debt relief. Top
Q)
What effect will the enhanced HIPC framework have on debt reduction?
A)
With regard to implications for overall debt reduction, a rough
estimate suggests that after HIPC and traditional debt relief,
including ODA cancellation, the net-present value of public debt in
the three-dozen countries likely to be cut by two-thirds.
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Q)
What can be done to ensure that debt relief translates into real
poverty reduction?
A)
As part of the HIPC review and consultative process, much attention
was devoted to the question of how to link debt relief more firmly and
transparently to poverty reduction efforts. Clear consensus has
developed on a number of important points: first and foremost, debt
relief must be part of a comprehensive poverty reduction strategy
comprised of a range of polices aimed at improved social programs,
good governance and widely shared economic growth.
In addition to deeper, broader and faster relief, governments in
September 1999 endorsed a joint World Bank-IMF paper which sets out
such an approach. As part of an enhanced framework for poverty
reduction, debt relief under HIPC would be linked to the establishment
of national poverty reduction strategies developed by governments to
ensure that debt relief—and external development assistance more
broadly—makes a real difference in the lives of the poor. The paper,
which is called the poverty reduction strategy paper (PRSP), will be
country-driven and developed transparently with broad participation of
civil society, key donors and regional development banks. The Bank and
Fund, in coordination with the larger development community, will
provide assistance to countries in developing PRSPs. Strategies
will be clearly linked to the agreed international development goals,
with measurable indicators and progress. These national strategies
should normally be in place by the decision point. However, on a
transitional basis, countries could reach their decision points
without agreement on a PRSP, but in all cases demonstrated progress in
implementing a poverty reduction strategy would be required by the
completion point. Top
Q)
What is the current status of the implementation of the enhanced HIPC
Initiative?
A)
As of August 2000, eligibility has been reviewed for 16 countries.
| Relief under the enhanced HIPC framework has been agreed for ten
countries: Benin, Bolivia, Burkina Faso, Honduras, Mali,
Mauritania, Mozambique, Senegal, Tanzania, and Uganda, yielding
more than $16 billion in debt service relief.
| Seven countries, Cameroon, Chad, Guinea, Malawi, Nicaragua,
Rwanda, and Zambia have completed their preliminary review, and
are scheduled to qualify for an additional $15 billion in debt
relief.
| Work is under way to have agreements in place for a total of 20
countries by the end of the year, for projected debt service
relief of well over $30 billion. Top |
| |
Q)
Given the new framework, can HIPC relief take the place of development
assistance?
A)
No. HIPC debt relief can be fully beneficial to a country only if it
is provided in addition to previous rates of development assistance. A
comparison of current debt service payments and concessional
assistance illustrates how important continued aid programs are to
these countries. The ratio of gross inflows (from long-term debt and
grants) to debt service paid averaged about two-to-one for the HIPCs
as a group during the 1990s, and ranged upwards four-to-one in half of
these countries. Annual net transfers to the HIPCs on medium- and
long-term resource flows (including grants) averaged about 10 percent
of GNP over the 1990-96 period. Debt reduction must be additional to
development assistance.
Top
Prepared by Staff of the World Bank's HIPC Unit and
the World Bank's External Affairs Department in September 2000
.
WB FAQs HIPC
