WB FAQs HIPC
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This is a copy of the World Bank FAQs on HIPC

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Introduction 

High levels of external debt have been increasingly recognized as a serious constraint on the ability of poor countries to pursue sustainable development and reduce poverty. In response, in September 1996, the World Bank and the IMF launched the Initiative for Heavily Indebted Poor Countries (HIPC). It was endorsed by some 180 governments around the world as an effective and welcome approach to help poor, severely indebted countries reduce debt as part of an overall poverty reduction strategy. In September 1999, at the Annual Meetings of the World Bank and IMF, the HIPC Initiative was significantly expanded to provide more debt relief to more countries faster. This enhancement, and a redesigned strategy to link debt relief to poverty reduction, will help to eliminate debt as an obstacle to development and allow countries to invest more in their future.

The Initiative is designed to reduce debts to sustainable levels for poor countries that pursue economic and social policy reforms, and is used specifically in cases where traditional debt relief mechanisms will not be enough to help countries exit from the rescheduling process. This Initiative is a breakthrough. Unlike earlier debt relief mechanisms, the HIPC Initiative addresses debt comprehensively and involves all creditors, including multilateral financial institutions.

Translating Cooperation into Policy

In the past three and a half years we have seen intense public interest in the HIPC Initiative, and an extraordinary degree of coordination among a wide range of parties to make this program work. These partners include creditor and debtor governments, multilateral organizations, and the important involvement of NGOs, churches, and other groups from civil society.

The World Bank and IMF have capitalized on this interest. In February 1999, both institutions set out to conduct a thorough review of the HIPC Initiative. Two broad questions formed the heart of the review: Does the HIPC framework help countries exit from unsustainable debt burdens? And are countries able to link debt relief to real poverty reduction? To ensure that we had every possible idea on the table for consideration, we opened the HIPC review to global public participation. Toward this end, the Bank and Fund created a HIPC consultation web-page, with questions posted on key aspects of the Initiative. In six months of the two-phase web-consultation, we received hundreds of responses.  In addition, we held consultative meetings in Ethiopia, Germany, Honduras, Mozambique, Norway, Togo, the United Kingdom, and the United States.

Altogether, the consultation generated more than 1,000 pages of detailed comments and proposals, which were delivered directly to the Boards of both institutions for a formal consideration. As a result of this process, and in response to concrete views expressed by governments and civil society, the World Bank and IMF outlined a number of important enhancements to the original framework (described further below) designed to expand significantly the amount of debt relief poor countries receive under the Initiative.

This process has been extraordinarily valuable not just for the HIPC Review, but as a model of how development policy can and should be made in the future. Precisely because public interest in the HIPC Initiative is growing and continues to be varied, it is useful to periodically address some of the questions which are raised in connection with its design and its implementation.
 

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Q) What is the HIPC Initiative?

A) The Heavily Indebted Poor Country (HIPC) Initiative is an agreement among official creditors designed to help the poorest, most heavily indebted countries escape from unsustainable debt. It enables poor countries to focus their energies on building the policy and institutional foundation for sustainable development and poverty reduction.  Top

Q) What changed with the advent of the HIPC Initiative?

A) When the HIPC Initiative was launched in 1996, it introduced a new approach to debt relief for the poorest countries by focusing on overall debt sustainability. Relief, in short, is based on a country's ability to pay within a total context of poverty reduction and economic growth. It thereby enables countries to exit from the debt rescheduling process. It also represents a commitment by the international community, including all creditors, to act together in a coordinated and concerted fashion to reduce debt to a sustainable level. Top

Q) Which countries are eligible to participate in the Initiative?

A) The Initiative is open to the poorest countries, those that: (i) are eligible only for highly concessional assistance such as from the World Bank's International Development Association (IDA) and the IMF's Poverty Reduction and Growth Facility (formerly called Enhanced Structural Adjustment Facility); (ii) face an unsustainable debt situation even after the full application of traditional debt relief mechanisms; and (iii) have a proven track record in implementing strategies focused on reducing poverty and building the foundation for sustainable economic growth. Top

Q) How does the HIPC Initiative work?

A) The Initiative involves two stages. The first stage is a three-year period during which a HIPC country works in coordination with, and the support of, the World Bank and IMF to establish a record of implementing economic reforms and poverty reducing policies. Particular focus is placed on developing a comprehensive poverty reduction strategy prepared by the government with support from the Bank, Fund and others.  At the end of this three-year period, the country reaches its decision point, where it is determined whether its debt level is sustainable. For those countries whose debt burden remains unsustainable, a package of debt relief is prepared and committed to by creditors. 

While interim debt relief by the Paris Club and some multilaterals such as the World bank is provided between the decision point and completion point, countries receive their full package of debt relief once it has implemented a set of key, pre-defined structural reforms.  This approach—called a "floating completion point"—replaces the fixed three-year performance period of the original framework, and will enable countries to meet ambitious policy targets early and accelerate the release of debt relief.  Top

Q) How is external debt sustainability determined?

A) Reducing the threshold for a poor country's external debt to be considered unsustainable was an important area of consensus of the HIPC review, and a major element of the enhancement endorsed in September 1999. As with the original framework, external debt sustainability will continue to be determined by a Debt Sustainability Analysis (DSA) prepared by the debtor country, World Bank and the IMF, to determine whether a country is facing an unsustainable debt situation after the full application of traditional debt relief mechanisms. The new framework also allows for two related set of criteria to be considered. The first, which will continue to apply to most HIPCs, is the ratio of a country's debt to its exports. Under the enhanced framework, sustainable debt-to-export levels are defined at a fixed ratio of 150 percent (on a net present value basis, or NPV). The second, for those HIPCs with very open economies where exclusive reliance on external indicators may not adequately reflect the fiscal burden of external debt, an NPV debt-to-export target below 150 can be recommended if the country concerned meets two criteria at the decision point: an export-to-GDP ratio of at least 30 percent and a minimum threshold of fiscal revenue in relation to GDP of 15 percent.  For these countries, the NPV debt-to-export target will be set at a level which achieves a 250 percent of the NPV debt-to-revenue ratio at the decision point. Côte d'Ivoire and Guyana qualified under this criteria under the initial framework. Top

Q) What are the enhancements that were introduced into the new HIPC framework?

A) The key changes introduced into the new framework are as follows:

Simplification
bulletCalculation of assistance at decision point on actual data not projections for the completion point.
bulletApply single NPV debt-to-export target to all countries rather than decide target on a country-specific basis within target range.
bulletElimination of borderline option.

Modifications
bulletLower NPV debt-to-export (150 percent) and debt-to-revenue target (250 percent) with lower thresholds for latter (30 percent export-to-GDP, and 15 percent revenue-to-GDP).
bulletFloating completion points with the timing of completion points tied to implementation of key structural reforms.
bulletEarlier delivery of assistance both from decision and completion points.

Principal Changes

Elimination of:
bulletProjections of position at completion point as basis for assistance;
bulletVulnerability analysis as a basis for country-specific determining of targets;
bulletTarget ranges for the completion point.
This will permit a simplified preliminary HIPC Initiative document which could focus on the track record and proposed timing of decision point, key structural policies, and enhanced framework for poverty reduction.

Forward-looking focus in decision point document switched to:
bulletIdentification of key structural policies to which floating completion points would be tied.
bulletCountry-by-country assessment of appropriate levels for interim relief and front-loading of the delivery of assistance in the light of absorption capacity and projections of key debt indicators.
bulletSteps to improve debt management.

At completion point:

bulletdiscretionary reassessment for debt situation with the option of providing more assistance if, as a result of exogenous factors, there has been a major upward deviation in debt outcomes. This would be decided on a case-by-case basis consulting all creditors involved. Top

Q) What is the estimated cost of the enhanced HIPC framework?

A) The enhanced framework marks a dramatic expansion of the existing framework.  The cost (and therefore debt relief provided) under the new framework has more than doubled.  The projected $55 billion in debt relief over time will be divided roughly in half between bilateral and multilateral creditors. The World Bank is expected to provide nearly $11 billion of this debt relief. Top

Q) What effect will the enhanced HIPC framework have on debt reduction?

A) With regard to implications for overall debt reduction, a rough estimate suggests that after HIPC and traditional debt relief, including ODA cancellation, the net-present value of public debt in the three-dozen countries likely to be cut by two-thirds. Top

Q) What can be done to ensure that debt relief translates into real poverty reduction?

A) As part of the HIPC review and consultative process, much attention was devoted to the question of how to link debt relief more firmly and transparently to poverty reduction efforts. Clear consensus has developed on a number of important points: first and foremost, debt relief must be part of a comprehensive poverty reduction strategy comprised of a range of polices aimed at improved social programs, good governance and widely shared economic growth.  In addition to deeper, broader and faster relief, governments in September 1999 endorsed a joint World Bank-IMF paper which sets out such an approach. As part of an enhanced framework for poverty reduction, debt relief under HIPC would be linked to the establishment of national poverty reduction strategies developed by governments to ensure that debt relief—and external development assistance more broadly—makes a real difference in the lives of the poor. The paper, which is called the poverty reduction strategy paper (PRSP), will be country-driven and developed transparently with broad participation of civil society, key donors and regional development banks. The Bank and Fund, in coordination with the larger development community, will provide assistance to countries in developing PRSPs.  Strategies will be clearly linked to the agreed international development goals, with measurable indicators and progress. These national strategies should normally be in place by the decision point. However, on a transitional basis, countries could reach their decision points without agreement on a PRSP, but in all cases demonstrated progress in implementing a poverty reduction strategy would be required by the completion point.  Top

Q) What is the current status of the implementation of the enhanced HIPC Initiative?

A) As of August 2000, eligibility has been reviewed for 16 countries.
bulletRelief under the enhanced HIPC framework has been agreed for ten countries: Benin, Bolivia, Burkina Faso, Honduras, Mali, Mauritania, Mozambique, Senegal, Tanzania, and Uganda, yielding more than $16 billion in debt service relief.
bulletSeven countries, Cameroon, Chad, Guinea, Malawi, Nicaragua, Rwanda, and Zambia have completed their preliminary review, and are scheduled to qualify for an additional $15 billion in debt relief.
bulletWork is under way to have agreements in place for a total of 20 countries by the end of the year, for projected debt service relief of well over $30 billion. Top

Q) Given the new framework, can HIPC relief take the place of development assistance?

A) No. HIPC debt relief can be fully beneficial to a country only if it is provided in addition to previous rates of development assistance. A comparison of current debt service payments and concessional assistance illustrates how important continued aid programs are to these countries. The ratio of gross inflows (from long-term debt and grants) to debt service paid averaged about two-to-one for the HIPCs as a group during the 1990s, and ranged upwards four-to-one in half of these countries. Annual net transfers to the HIPCs on medium- and long-term resource flows (including grants) averaged about 10 percent of GNP over the 1990-96 period. Debt reduction must be additional to development assistance.  Top

Prepared by Staff of the World Bank's HIPC Unit and the World Bank's External Affairs Department in September 2000.