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 (the most concessional being 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. The international financial institutions defined a group of 40 countries in such a situation and considered them as potential candidates for the HIPC initiative .
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 resources to finance their productive investments for economic development. Beyond implementing sound economic policies and mobilizing further domestic resources, many countries will also continue to depend on significant levels of concessional external assistance.
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) was designed to provide exceptional assistance to eligible countries following sound economic policies to help them reduce their external debt burden to sustainable levels. Sustainable levels are defined as debt ratios that will comfortably enable them to service their external debt through export receipts, 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.
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, even after full use of traditional debt-relief mechanisms such as Naples terms (which allow to low-income countries a reduction of eligible external non-ODA debt of 67 percent );
• establish a track record of reform and sound policies through IMF and World Bank supported programs.
Full details regarding the HIPC initiative can be found on the web sites of the World Bank and of the IMF.
Forty countries were initially considered as potentially eligible for the HIPC initiative by the IMF and the World Bank. This list has been revised after a process of ring-fencing of potential beneficiaries of the initiative (list of HIPC countries). As of 1st January 2010, 26 countries have reached completion point, 9 countries are in an interim period, and 5 countries are potentially eligible but have not yet reached decision point.
3/ Participation of Paris Club creditors in the HIPC initiative
3.1. Preliminary period. To qualify for assistance, a debtor country must adopt and implement adjustment and reform programs supported by the IMF and the World Bank and to establish an appropriate track record. When the country is declared eligible for the initiative, it will receive preliminary debt relief from Paris Club creditors (using Naples terms of treatment) 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 preliminary period, a debt sustainability analysis is carried out by the IMF and World Bank to determine the current external debt situation of the country. If the ratio of the present value of external debt to exports for that country after traditional debt relief mechanisms is above 150 percent, 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 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 international community commits to provide sufficient assistance by the completion point (see below) for the country to achieve debt sustainability calculated as of the decision point. The delivery of assistance committed by the Fund and Bank depends on satisfactory assurances of debt relief by other creditors.
3.3. Interim period. On a case-by-case basis, Paris Club creditors may provide interim relief to a debtor country making satisfactory performance on its appropriate IMF programme between the decision point and the expected date for the completion point, through a flow treatment with a 90% debt reduction on commercial claims and a long-term rescheduling of the remaining 10% and of 100% of ODA claims (Cologne terms), 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 under 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. The remainder of the debt relief, defined at the decision point, is provided at this point, through a reduction in the stock of eligible debt by the Paris Club, subject to fair burden sharing, with at least comparable debt treatments by other creditors.
All 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.