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1/ History
2/ Eligibility
3/ Participation of Paris Club creditors to the HIPC initiative
4/ Comparability of treatment in the framework of the HIPC initiative
5/ Issues related to agressive litigation against HIPC
The international financial community recognized in 1996 that the external debt situation for a number of low-income countries, mostly in Africa, had become extremely difficult and influenced the prospects for economic development. For these countries, even full use of traditional mechanisms of rescheduling and debt reduction (Naples terms) - 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. A group of 41 countries in such a situation and potentially considered for the HIPC initiative was defined by the international financial institutions.
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. The HIPC Initiative was enhanced in September 1999.
The HIPC initiative will not solve all the difficulties of the countries. Even if all of the external debts of these countries were forgiven, most would still need to mobilize significant resource to finance their productive investments for economic development. Beyond implementing sound economic policies and mobilizing further domestic resources, many countries will also depend on significant levels of concessional external assistance.
1/ History
In September 1996, the Interim and Development Committees of the IMF and the World Bank endorsed a program jointly proposed by the two institutions 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. That is, to levels that will comfortably enable them to service their debt through export earnings, aid, and capital inflows. This assistance entails a reduction in the net present value (NPV) of the future claims on the indebted country. Such assistance helps to provide the incentive for investment and broaden domestic support for policy reforms.
The HIPC initiative requires the participation of all multilateral creditors, beyond the traditional debt relief mechanisms provided by official bilateral and private creditors.
2/ Eligibility
A country must satisfy a set of criteria to be eligible for special assistance. Specifically, it must:
be eligible only for concessional assistance from the IMF and World Bank ("IDA-only");
face an unsustainable debt burden, beyond available debt-relief mechanisms such as Naples terms (where low-income countries can receive a reduction of eligible external debt of 67 percent in NPV terms);
establish a track record of reform and sound policies through IMF- and World Bank-supported programs.
Full details of computation under the HIPC initiative can be found on the web sites of the World Bank and of the IMF.
41 countries had been initially regarded as potentially eligible for the HIPC initiative by the IMF and the World Bank. As of March 31, 2008, 23 countries have reached completion point, 10 countries are in interim period and 8 countries are potentially eligible but have not reached decision point.
3/ Participation of Paris Club creditors to the HIPC initiative
3.1. Preleminary period. To qualify for assistance, the country must adopt adjustment and reform programs supported by the IMF and the World Bank and pursue those programs for three years. During that time, it will continue to receive debt relief from Paris Club creditors and other official bilateral and private creditors, as well as traditional concessional assistance from all the relevant donors and multilateral institutions.
3.2. Decision point. At the end of the first phase, a debt sustainability analysis is 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 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 NPV of debt-to-exports target may be set below 150 percent. In such cases, the target is set so that the NPV 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 formally decide on a country's eligibility, and the international community commits 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.
3.3. Interim period. On a case-by-case basis, Paris Club creditors may provide interim relief between the decision point and the expected date for the completion point, through a flow treatment with a 90% debt reduction, with the scope of the debt to be treated varying on a case by case basis, or through the reduction of the amounts to be billed according to the previous Paris Club treatments. Countries that had previously received a stock treatment under Lyon terms or for which Cologne terms do not provide any significant relief beyond their previous Paris Club treatment do not receive additional interim relief under Cologne terms.
3.4. Completion point. Remaining assistance, defined at the decision point, is provided at this point, through a reduction in the stock of eligible debt of up to 90 percent in present value terms by the Paris Club (or more if needed), subject to fair burden sharing, with at least comparable action by other creditors.
Many Paris Club creditors have announced that they will also provide debt forgiveness over and above HIPC Initiative assistance, particularly on ODA debt. HIPC Initiative - IMF and IDA annual report.
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