Supplementary memorandum submitted by
HM Treasury
PROGRESS REPORT ON THE HEAVILY INDEBTED POOR
COUNTRIES (HIPC) INITIATIVE
The Heavily Indebted Poor Countries (HIPC) Initiative
was agreed by governments around the world in 1996. It was the
first comprehensive approach to reduce the external debt of the
world's poorest, most heavily indebted countries, and represented
an important step forward in placing debt relief within an overall
framework of poverty reduction.
A major review of the Initiative in 1999 resulted
in a significant enhancement of the original framework, and has
produced an Enhanced HIPC Initiative, which is "deeper, broader
and faster".
PROGRESS TO
DATE
In terms of countries at Decision Point, the
Democratic Republic of Congo became the twenty-seventh country
to reach Decision Point in July 2003. Of the remaining ten unsustainable
countries seeking debt relief, seven—Burundi, the Central
African Republic, the Republic of Congo, Cote d'Ivoire, Liberia,
Somalia and Sudan—are affected by conflict. It is expected,
however, that the ongoing peace process in Sudan will mean that
it will reach Decision Point by 2006. Comoros and Myanmar continue
to suffer from political instability, and the continued postponement
of elections in Togo remains a barrier to process. In addition,
Lao PDR is eligible for the HIPC Initiative, but has so far not
opted to participate.
Benin and Mali reached Completion Point in March
2003. A further four countries—Ethiopia, Guyana, Niger and
Senegal—could reach Completion Point by April 2004. Beyond
this, it is difficult to predict, as Guinea, Guinea-Bissau, Honduras,
Malawi, Nicaragua, Rwanda and São Tomé e Príncipe
have all had at least a short spell of programmes going off-track,
which has delayed their progress.
Relief on debts of over US$70 billion has already
been agreed for the countries at Decision Point and Completion
Point, and it is expected that this sum will rise towards the
total of US$100 billion pledged at the Cologne Summit in 1999,
as more countries progress through the Initiative.
The UK continues to be a champion of the Initiative
and is committed to write off 100% of the debts owed by HIPC countries
as they qualify, worth around £2 billion. It has also pledged
a total of US$474 million through the multilateral institutions—such
as the World Bank, the African Development Bank, the Inter-American
Development Bank and the IMF—to further support the Initiative.
The 27 countries between Decision Point and
Completion Point used to spend an average of 27% of their revenue
on debt service. As a result of receiving debt relief through
the HIPC Initiative, they now spend 11%. Furthermore, annual social
expenditure in these countries has risen by around US$4 billion
since 1999, equivalent to 2.7% of GDP. On average, health and
education spending accounts for 65% (40% on education) of the
use of HIPC debt relief.
METHODOLOGY FOR
CALCULATING TOPPING
UP AT
COMPLETION POINT
At Completion Point all creditors deliver the
quantum of debt relief determined at the Decision Point, with
the debt relief provided between Decision Point and the Completion
Point counting towards that required. An updated Debt Sustainability
Analysis (DSA) is then prepared and if the debt is unsustainable
(the debt-to-export ratio is in excess of 150%) then the country
can be considered for additional debt relief—or "topping
up"—to reduce the debt-to-export ratio to 150%. The
principle of topping up was agreed in Spring 2001 as it became
increasingly clear that many HIPCs were likely to reach Completion
Point with a much worse outlook for debt sustainability than envisaged
at Decision Point. So far only one country—Burkina Faso—has
received topping up at Completion Point, although Ethiopia and
Niger are likely to reach Completion Point in the next few months
and may be eligible for topping up.
Most Paris Club creditors, and all of the G7,
go beyond the provision of 90% debt relief and deliver 100% relief,—although
the treatment from some creditors does vary (in particular, some
creditors impose cut-off date limits on export credit debt write-downs).
When the Enhanced HIPC Initiative was agreed in Cologne, many
bilateral creditors—including the UK—intended this
additional relief to be a bonus to countries, providing them with
a further cushion against unforeseen events. However, in September
2001 the IMF and World Bank adopted operational guidelines for
the calculation of topping up relief that includes this additional
bilateral assistance (ABA) in the DSA prepared at Completion Point.
As a result of this, the ABA that creditor countries—including
the UK—are providing is not reaching the debtor countries
but is instead subsidising creditors that are choosing not to
provide additional assistance.
The UK has been pressing for agreement to change
the methodology for calculating topping up at Completion Point
so that it does not include ABA. A recent World Bank and IMF paper
shows that excluding ABA could provide an additional US$1 billion
in debt relief to HIPCS to support increased pro-poor expenditure.
The UK is also pushing for more systematic topping up for countries
at Completion Point to ensure they exit the Initiative with debt-to-export
ratios of 150% or less.
DEBT SUSTAINABILITY
Moving beyond the HIPC Initiative the key objective
is how to ensure continued debt sustainability, while enabling
countries to access sufficient finance for their poverty reduction
strategies. Topping up can support countries in reducing their
debt-to-expert ratio to 150% or lower, but it does not guarantee
long-term debt sustainability.
IMF and World Bank projections suggest that
nearly half of the participating countries are likely to exit
the Initiative with a debt-to-export ratio in excess of 150% (the
Initiative's target and threshold definition of debt sustainability),
and many HIPCs may remain vulnerable to exogenous shocks for the
foreseeable future.
The UK has asked the IMF and the World Bank
to undertake more work on long-term debt sustainability in low-income
countries, and we are working actively with them. Possible ways
to achieve long-term debt sustainability may include: more flexible
approaches to post-HIPC financing instruments (including a rethink
of grant and loan financing mixes); new country specific approaches
to debt sustainability; and the feasibility of an enhanced PRGF
facility.
The report being prepared by the World Bank
and IMF on this issue is due to be completed in February 2004,
with the aim of informing discussion and the development of an
appropriate policy response at the Spring Meetings.
CREDITOR PARTICIPATION
The UK has also been pressing for increased
creditor participation in the HIPC Initiative, as several non-Paris
Club creditors have yet to deliver debt relief. Although many
of these creditors are themselves developing countries, low-income
countries have on the whole delivered their share of the relief,
and the main problem lies with Upper Middle Countries. For example,
Saudi Arabia has so far only offered partial relief on debts of
US$190 million. Advanced country creditors—particularly
Kuwait and Taiwan—have also been slow to deliver. However,
there has been some progress over the last two years: Libya and
India have both now agreed to deliver relief; and certain high-profile
commercial creditors—for example, Booker Tate in Guyana—have
now abandoned their claims. Moreover, in 2002 the World Bank and
IMF started to include details on creditor participation in published
reports, which will help the international community to put pressure
on recalcitrant creditors. Up until now the burden of seeking
"comparable treatment" has rested almost entirely with
the HIPCs themselves.
November 2003
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