A Factsheet
International Monetary FundSeptember 2003
The HIPC Initiative is a comprehensive approach to debt reduction for heavily indebted poor countries pursuing IMF- and World Bank-supported adjustment and reform programs. To date, debt reduction packages have been approved for 27 countries, 23 of them in Africa, providing $51 billion in debt service relief over time.
What is the Heavily Indebted Poor Countries (HIPC) Initiative?
The HIPC Initiative was first launched in 1996 by the IMF and World Bank, with the aim of ensuring that no poor country faces a debt burden it cannot manage. The Initiative entails coordinated action by the international financial community, including multilateral organizations and governments, to reduce to sustainable levels the external debt burdens of the most heavily indebted poor countries. Following a comprehensive review in September 1999, a number of modifications were approved to provide faster, deeper and broader debt relief and to strengthen the links between debt relief, poverty reduction and social policies. Countries' continued efforts toward macroeconomic adjustment and structural and social policy reforms — including higher spending on social sector programs like basic health and education — are now central to the enhanced HIPC Initiative.
Yet the HIPC Initiative is not a panacea. Even if all of the external debts of these countries were forgiven, most would still depend on significant levels of concessional external assistance, since their receipts of such assistance have been much larger than their debt-service payments for many years.
How the HIPC Initiative works
To be considered for HIPC Initiative assistance, a country must:
The first step is to carry out a debt sustainability analysis to determine the debt relief needs of the country. If a country's external debt ratio after traditional debt relief mechanisms is above a threshold for the value of debt to exports (or, in special cases, the value of debt to fiscal revenues), it qualifies for assistance under the Initiative. Once a country has made sufficient progress in meeting the criteria for debt relief, the Executive Boards of the IMF and World Bank formally decide on a country's eligibility, and the international community commits to reducing debt to the sustainability threshold. This is called the decision point.
Once a country reaches its decision point, it may immediately begin receiving interim relief on its debt service falling due. In order to receive the full and irrevocable reduction in debt available under the HIPC Initiative, however, the country must establish a further track record of good performance under IMF- and World Bank-supported programs. The length of this second period depends on (i) the satisfactory implementation of key policy reforms agreed at the decision point, (ii) the maintenance of macroeconomic stability, and (iii) the adoption and implementation for at least one year of the PRSP.
Once a country has met these criteria, it can reach its completion point, at which time lenders are expected to provide the full relief committed at the decision point.
How the HIPC Initiative is financed
The total cost of providing assistance to the 37 countries potentially qualified under the enhanced HIPC Initiative is estimated to be about $50 billion in net present value terms. A little over half of this will be provided by bilateral creditors, and the rest will come from multilateral lenders. The IMF's share of the cost is financed primarily by the investment income on the net proceeds from off-market gold sales in 1999 that were deposited to the IMF's PRGF-HIPC Trust. Additional contributions to this trust have been provided by member countries.
How countries have benefited from the HIPC Initiative
For the 27 countries for whom packages have already been approved, debt service falling due between 1998 and 2004 will drop by more than half in relation to both exports and government revenue. Yet for debt reduction to have a tangible impact on poverty, the additional resources need to be targeted at the poor. Before the HIPC Initiative, eligible countries were, on average, spending slightly more on debt service than on health and education combined. This is no longer the case in the 27 countries receiving HIPC relief. Under their recent IMF- and World Bank-supported programs, these countries have increased markedly their expenditures on health, education and other social services and, on average, such spending is now almost four times the amount of debt service payments. While country-by-country data demonstrate that these countries are seeing clear gains, it has taken time and effort to ensure that money is redirected to aid the poor in ways that most reduce poverty. And difficult problems remain. For example, in war-ravaged Rwanda and Ethiopia, pressing reconstruction needs may mean large new loans at the same time that old debt is being reduced.
Difficult problems also remain in HIPCs that have not yet been able to reach their decision points. Some of these countries are plagued by uneven policy records or poor governance, which in turn may be caused by the serious problems that their governments confront, including civil conflict. Some HIPCs have debts too large to write off given current funding for the Initiative. This is true, for example, in Liberia and Sudan, which are both afflicted by civil conflict. None of these are easy problems. But the IMF and World Bank are looking for solutions, with poverty reduction as the central focus.
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