Factsheets List

The IMF and the World Bank have designed a framework to provide special assistance for heavily indebted poor countries that pursue IMF- and World Bank-supported adjustment and reform programs, but for whom traditional debt relief mechanisms are insufficient. The HIPC Initiative entails coordinated action by the international financial community, including multilateral institutions, to reduce to sustainable levels the external debt burden of these countries. This fact sheet describes the HIPC Initiative including the enhancements in September 1999 and progress in its implementation through March 2001.

What is the Heavily Indebted Poor Countries (HIPC) Initiative?

The HIPC Initiative is a comprehensive approach to debt reduction for poor countries that requires the participation of all creditors. It aims to ensure that no poor country faces a debt burden it cannot manage. Central to the HIPC Initiative is the country's continued effort toward macroeconomic adjustment and structural and social policy reforms. In addition, the Initiative focuses on ensuring additional finance for social sector programs—primarily basic health and education. Following a comprehensive review of the HIPC Initiative, a number of modifications were approved in September 1999 to provide faster, deeper and broader debt relief and strengthen the links between debt relief, poverty reduction and social policies.

The 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; their receipts of such assistance have been much larger than their debt-service payments for many years.

Why was the Heavily Indebted Poor Countries (HIPC) Initiative created?

It has been well recognized that the external debt situation for a number of low-income countries, mostly in Africa, has become extremely difficult. For these countries, even full use of traditional mechanisms of rescheduling and debt reduction—together with continued provision of concessional financing and pursuit of sound economic policies—may not be sufficient to attain sustainable external debt levels within a reasonable period of time and without additional external support.

In September 1996, the IMF and the World Bank launched a program to address this situation. The Initiative for the "Heavily Indebted Poor Countries" (HIPC Initiative) is designed to provide exceptional assistance to eligible countries following sound economic policies to help them reduce their external debt burden to sustainable levels.

Which are the Heavily Indebted Poor Countries (HIPCs)?

To be considered for HIPC Initiative assistance, a country must satisfy a set of criteria. Specifically, it must:

• face an unsustainable debt burden, beyond available debt-relief mechanisms;
• establish a track record of reform and sound policies through IMF- and World Bank-supported programs.

At present, the following developing countries are classified as being the heavily indebted poor countries: Angola, Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Congo, Côte d'Ivoire, Democratic Republic of the Congo, Ethiopia, Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Kenya, Lao PDR, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Myanmar, Nicaragua, Niger, Rwanda, São Tomé and Príncipe, Senegal, Sierra Leone, Somalia, Sudan, Tanzania, Togo, Uganda, Vietnam, Yemen, and Zambia. However, it should be noted that a debt sustainability analysis in 2000 indicates that Yemen has a sustainable debt burden after the application of traditional debt relief mechanisms. Angola, Kenya, and Vietnam are also expected to be sustainable without special help from the Initiative; and that Lao PDR has indicated that it does not intend to request assistance under the HIPC Initiative.

How does the HIPC Initiative work?

All countries requesting HIPC Initiative assistance must have (i) adopted a Poverty Reduction Strategy Paper (PRSP; see the fact sheet on the Poverty Reduction and Growth Facility) through a broad-based participatory process, by the decision point (see below); and (ii) have made progress in implementing this strategy for at least one year by the completion point (see below). On a transitional basis, given the time country authorities need to prepare a participatory PRSP, countries can reach their decision points based on an interim PRSP (I-PRSP) which sets out the government's commitment to and plans for developing a PRSP. For retroactive cases—countries that have already reached their decision points under the original Initiative—depending on overall progress in poverty reduction, a requirement for the completion point is adoption of a PRSP.

First phase. To qualify for assistance, the country must adopt adjustment and reform programs supported by the IMF and the World Bank and establish a satisfactory track record. During that time, it will continue to receive traditional concessional assistance from all the relevant donors and multilateral institutions, as well as debt relief from bilateral creditors (including the Paris Club).

Decision point. At the end of the first phase, a debt sustainability analysis will be carried out to determine the current external debt situation of the country. If the external debt ratio for that country after traditional debt relief mechanisms is above 150 percent for the net present value of debt to exports, it qualifies for assistance under the Initiative. In the special case of very open economies (with exports-to-GDP ratio above 30 percent) with a high debt burden in relation to fiscal revenues, despite strong revenue collection (above 15 percent of GDP), the net present value of debt-to-exports target may be set below 150 percent. In such cases, the target is set so that the net present value of debt would be 250 percent of fiscal revenues at the decision point.

At the decision point, the Executive Boards of the IMF and World Bank will formally decide on a country's eligibility, and the international community will commit to provide sufficient assistance by the completion point (see below) for the country to achieve debt sustainability calculated at the decision point. The delivery of assistance committed by the Fund and Bank will depend on satisfactory assurances of action by other creditors.

Net Present Value of DebtThe face value of the external debt stock is not a good measure of a country's debt burden if a significant part of the external debt is contracted on concessional terms with an interest rate below the prevailing market rate. The net present value (NPV) of debt is a measure that takes into account the degree of concessionality. It is defined as the sum of all future debt-service obligations (interest and principal) on existing debt, discounted at the market interest rate. Whenever the interest rate on a loan is lower than the market rate, the resulting NPV of debt is smaller than its face value, with the difference reflecting the grant element.

Second phase. Once eligible for support under the Initiative, the country must establish a further track record of good performance under IMF/World Bank-supported programs. The length of this second period under the enhanced framework is not time bound, but depends on the satisfactory implementation of key structural policy reforms agreed at the decision point, the maintenance of macroeconomic stability, and the adoption and implementation of a poverty reduction strategy developed through a broad-based participatory process. The use of "floating" completion points would permit strong performers to reach their completion point earlier. During this second phase, bilateral and commercial creditors are generally expected to reschedule obligations coming due, with a 90 percent reduction in net present value. Both the World Bank and the IMF are expecting to provide "interim relief" between the decision and completion points, and other multilateral creditors are considering also to advance some of the assistance from the completion point.

Completion point. Remaining assistance will be provided at this point. This will imply the following -

• For bilateral and commercial creditors: a reduction in the net present value of the stock of debt proportional to their overall exposure to the HIPC. Many bilateral creditors have announced that they will also provide debt forgiveness over and above HIPC Initiative assistance, particularly on ODA debt.
• For multilateral creditors (the IMF, the World Bank, and the other multilateral institutions): a (further) reduction in the net present value of their claims on the country based on broad and equitable action by all creditors sufficient to reduce the country's debt to a sustainable level.

What progress has been made in implementing the HIPC Initiative?

Rapid progress has been made by the international financial community in implementing the HIPC Initiative since it was endorsed by the Interim and Development Committees of the IMF and World Bank in September 1996. A total of 22 countries reached their decision point under the enhanced HIPC Initiative by end-December 2000. These countries are: Benin, Bolivia, Burkina Faso, Cameroon, The Gambia, Guinea, Guinea-Bissau, Guyana, Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, São Tomé and Príncipe, Senegal, Tanzania, Uganda, and Zambia. A total of $20.3 billion of debt relief in net present value terms ($33.6 billion in nominal debt service relief) has been committed to these 22 countries under the HIPC Initiative. Combined with traditional debt relief and likely additional bilateral debt forgiveness, the HIPC Initiative will reduce the debt stock of the 22 countries by almost two-thirds from $53 billion in net present value terms to roughly $20 billion. For further details, see the IMF website (www.imf.org/external/np/hipc/index.asp).

How is the HIPC Initiative financed?

The total cost of providing assistance to 32 countries under the enhanced HIPC Initiative is estimated to be about $29 billion in 1999 net present value terms, freeing countries from $50 billion in payments. Half of this will be provided by bilateral creditors, and most of the rest will come from multilateral lenders. Because the IMF and other multilaterals are financial intermediaries, it has been important to find funding for this part of the Initiative. Good progress has been made in financing the multilateral components of the Initiative. Total pledges to the HIPC Trust Fund, administered by the World Bank, have reached $2.5 billion. Paid-in contributions are almost $1 billion. Financing for the IMF's costs of the HIPC Initiative has been largely secured. On November 30, 2000, the Executive Board authorized using the balance of investment income generated from IMF gold sales (about $800 million) for the PRGF-HIPC Trust. Nearly 90 percent of pledged bilateral contributions to the PRGF-HIPC Trust have been received or are being provided on the basis of an agreed schedule.