debt relief for · traditional debt-relief mechanisms for hipcs 2 paris club creditors 4 commercial...

Debt Relief forLow-Income Countries

The HIPC Initiative

Anthony R. Boote and Kamau Thugge

INTERNATIONAL MONETARY FUND

Washington, D.C.

1997

Pamphlet Series No 51

©International Monetary Fund. Not for Redistribution

Revised December 1997

ISSN 0538-8759ISBN 1-55775-661-9

Composition: Alicia Etchebarne-Bourdin


Contents

Preface v

Traditional Debt-Relief Mechanisms for HIPCs 2Paris Club Creditors 4Commercial and Non-Paris Club Bilateral Creditors 5Multilateral Creditors 6Positive Net Resource Transfers and New Financing

on Concessional Terms 8

The HIPC Initiative 8The Main Objectives of the HIPC Initiative 9Some Key Features of the HIPC Initiative 10Key Steps in Implementing the HIPC Initiative 13

Progress Made in the HIPC Initiative 15

Conclusion 16

Annex. The HIPC Initiative 18

Glossary of Terms 38

BoxParis Club Naples Terms 6

Tables1. Status of Paris Club Rescheduling Countries 222. HIPCs: Indicators of External Debt Burden 243. HIPCs: Characteristics of Existing External Debt 284. Evolution of Paris Club Rescheduling Terms 305. Commercial Bank Debt- and Debt-Service-Reduction

Operations, 1987-March 1997 326. HIPCs: Net Disbursements from Multilateral

Institutions 347. HIPCs: Net Concessional Flows, Debt Service Due

and Paid 36

Figures1. Developing Countries: Public External Debt

by Creditor, 1980-95 32. The HIPC Initiative: Summary 12

in


iv

CONTENTS

The following symbols have been used throughout this pamphlet:

. . . to indicate that data are not available;

— to indicate that the figure is zero or less than half the final digit shown, orthat the item does not exist;

- between years or months (e.g., 1996-97 or January-June) to indicate theyears or months covered, including the beginning and ending years ormonths;

/ between years (e.g., 1996/97) to indicate a crop or fiscal (financial) year.

"Billion" means a thousand million.

Minor discrepancies between constituent figures and totals are due to rounding.

The term "country," as used in this pamphlet, does not in all cases refer to aterritorial entity that is a state as understood by international law and prac-tice; the term also covers some territorial entities that are not states, but forwhich statistical data are maintained and provided internationally on a sep-arate and independent basis.


Preface

Since the onset of the debt crisis in the early 1980s, many heavily in-debted poor countries (HIPCs) continue to have difficulty in paying theirexternal debt-service obligations, largely because of exogenous factors,imprudent debt-management policies, and the lack of sustained adjust-ment or implementation of structural reforms. The international commu-nity over the past decade has implemented a wide range of traditionalmechanisms destined to provide needed external finance and alleviate thedebt burden of these countries. While these traditional mechanisms aresufficient to reduce the external debts of many HIPCs to sustainable lev-els provided these countries implement sound economic policies, they arelikely to be insufficient for a number of countries. To deal with thesecases, the World Bank and the IMF have jointly proposed and put in placethe HIPC Initiative; the goal is to reduce the debt burdens of all eligibleHIPCs to sustainable levels.

This pamphlet describes the HIPC Initiative and suggests that it shouldenable HIPCs to exit from the debt-rescheduling process. It argues thatimplementation of the Initiative should eliminate debt as an impedimentto economic development and growth and enable HIPC governments tofocus on the difficult policies and reforms required to remove the remain-ing impediments to achieving sustainable development. It describes theimplementation of the Initiative through the end of September 1997.

The authors would like to thank Jack Boorman, Doris Ross, andChristina Daseking, of the IMF's Policy Development and Review De-partment, and Fred Kilby and Axel van Trotsenburg of the World Bank,for helpful comments. Barbara Dabrowska provided valuable statisticalhelp, and Sulochana Kamaldinni typed numerous drafts as well as the finalversion of the pamphlet with her customary patience and efficiency.Thanks are also due to Esha Ray of the External Relations Department forher editorial assistance.

The opinions expressed in the pamphlet are those of the authors and donot necessarily reflect the views of the IMF or of its Executive Directors.

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Debt Relief forLow-Income Countries

The HIPC Initiative

The HIPC Initiative is a framework developed jointly by the IMF and theWorld Bank to address the external debt problems of the heavily indebted poorcountries (HIPCs). It is based on the following guiding principles: (I) the ob-jective is to target overall debt sustainability on a case-by-case basis, focus-ing on the totality of a country's debt; (2) actions should be envisaged onlywhen the debtor has shown, through a track record, ability to put to good usethe exceptional support provided; (3) the new measures should build, as muchas possible, on existing mechanisms; (4) additional action should be coordi-nated among all creditors involved, with broad and equitable participation;(5) action by multilateral creditors should preserve their financial integrityand preferred creditor status; and (6) new external finance for the indebtedcountries should be on appropriately concessional terms.

Since the onset of the debt crisis in the early 1980s, which affected bothmiddle- and low-income countries, the debt situation of middle-incomedebtor countries has improved significantly. Many of these countries havebenefited from concerted support by the international financial commu-nity. This support has been provided in the form of Paris Club flowreschedulings (Table 1), stock-of-debt arrangements under the Brady plan,and adjustment programs supported by the multilateral financial institu-tions. These instruments have proved to be effective mechanisms for al-lowing countries to normalize relations with external creditors and to re-sume sustainable growth. Recent years have witnessed a reentry tointernational capital markets by many middle-income countries that hadbeen most severely affected by the debt crisis.

However, the HIPCs, most of which are in sub-Saharan Africa, havecontinued to find it difficult to meet their external debt-service obligations.The difficulties can be traced to a combination of several factors. These in-clude (1) external shocks, such as a deterioration in the terms of trade, andadverse weather conditions; (2) civil strife; (3) the lack of sustained ad-justment or implementation of structural reforms; (4) the lending policiesof many creditors, especially the provision of loans at commercial interest

1


DEBT RELIEF FOR LOW-INCOME COUNTRIES: THE HIPC INITIATIVE

rates with short repayment periods; (5) the lack of prudent debt-manage-ment policies by debtor countries, driven in part by excessive optimism bycreditors and debtors about the prospects for increasing export earnings tobuild debt-servicing capacity; and (6) the lack of careful management ofthe currency composition of external debt. All these factors contributed toincreasing the debt burden of the HIPCs.

In several important respects, the external position of the HIPCs differswidely from country to country (Table 2). For example, in 1994, for someHIPCs the external current account was in surplus, while for others deficitsexceeded 100 percent of exports. In addition, scheduled debt-service obli-gations varied widely—from less than 20 percent of exports for some coun-tries to more than 100 percent for others, while the actual debt service paidranged from 5 percent of exports to as much as 50 percent. Finally, theHIPCs are indebted to a variety of creditors, including Paris Club bilateralcreditors, non-Paris Club bilateral creditors, commercial banks, and multi-lateral institutions (Table 3 and Figure 1).

Recognizing the highly varied external positions among the HIPCs, theinternational financial community has addressed the debt problems ofthese countries in a manner that takes into account the total debt of thecountry concerned and ensures that debt relief is given in support of ad-justment by debtors on a case-by-case basis, tailored to the individual cir-cumstances of each debtor country.

Traditional Debt-Relief Mechanisms for HIPCsTo address the debt burden of the low-income countries, the interna-

tional financial community (including Paris Club creditors, non-ParisClub bilateral and commercial creditors, and multilateral institutions) hasover the past decade introduced and implemented a wide range of tradi-tional mechanisms to alleviate the debt burden of these countries. In gen-eral, the main trend has been a move toward increasing the concessionalelement of the external assistance provided to the low-income countries.

The traditional mechanisms can be summarized as follows: (1) theadoption of stabilization and economic reform programs supported byconcessional loans from the IMF and the World Bank; (2) in support ofthese adjustment programs, flow-rescheduling agreements with Paris Clubcreditors on concessional terms followed by a stock-of-debt operationafter three years of good track records under both IMF arrangements and

2


Traditional Debt-Relief Mechanisms

FIGURE 1. DEVELOPING COUNTRIES:PUBLIC EXTERNAL DEBT BY CREDITOR

(In billions of U.S. dollars)

| Multilateral creditors (left scale) Q Private creditors (left scale)

I Official bilateral creditors (left scale) Public external debt total (right scale)

Sources: World Bank Debtor Reporting System; and IMF, International Financial Statistics.Note: Medium- and long-term public and publicly guaranteed debt, including to the IMF.!The estimates for 1996 are provisional.

3



rescheduling agreements; (3) agreement by the debtor country to seek atleast comparable terms on debt owed to non-Paris Club bilateral and com-mercial creditors facilitated by International Development Association(IDA) debt-reduction operations on commercial debt; (4) bilateral for-giveness of official development assistance debt by many creditors; and(5) new financing on appropriately concessional terms.

This process has significant advantages in that it ensures that new con-cessional financing and debt relief both under flow reschedulings (di-rectly) and under stock-of-debt operations (via the required track record)are given in support of an adjustment effort by the debtor. Moreover, theprocess provides for a case-by-case treatment of individual debtors—re-flecting, as noted above, their widely different external positions—both bycreditors (with Paris Club creditors tailoring effective debt relief to fi-nancing needs) and by donors (in the consultative group process).

Paris Club CreditorsIn the early 1980s, Paris Club creditors provided reschedulings for low-

income countries on nonconcessional standard terms with relatively shortgrace (five years) and maturity (ten years) periods and on market-relatedinterest rates. Although the reschedulings for the low-income countrieswere more comprehensive in coverage and provided for more cash reliefthan for other debtors, many of these countries continued to have difficul-ties adhering to the resulting repayment schedules. Consequently, therescheduling of interest led to rapid accumulation of debt. By the late1980s, Paris Club creditors recognized that repeated reschedulings onstandard terms over a prolonged period would not solve the debt problemsof the low-income countries and that most of these countries needed notonly cash-flow relief but also reductions of debt. Thus, in late 1988, ParisClub creditors agreed to provide concessional reschedulings for low-in-come countries on Toronto terms, a menu of options for debt and debt-ser-vice reduction to reduce the net present value (NPV) of rescheduledamounts by up to one third (Table 4). Although these reschedulings pro-vided for substantial debt reduction, it became increasingly obvious thatfor many low-income countries more far-reaching concessions would beneeded if their debt situation was to be improved on a durable basis.

Thus, in December 1991, creditors introduced London terms and in-creased the level of debt relief on eligible debt in NPV terms to 50 per-cent. Subsequently, in December 1994, the level of concessionality for

4



most countries was again increased to 67 percent of eligible debt in NPVterms under Naples terms (see Box). Under both London and Naplesterms, the flow-rescheduling agreements included a goodwill clause, inwhich participating creditor countries agreed to consider a stock-of-debtoperation for countries that had established a good track record of perfor-mance for at least three years under an IMF-supported program and ondebt-service payments to Paris Club creditors. Such a stock-of-debt oper-ation was viewed as an "exit rescheduling," and creditors had to be confi-dent that the debtor country would be able to meet future debt-serviceobligations without the need for additional debt relief. Since early 1995,six countries (Benin, Bolivia, Burkina Faso, Guyana, Mali, and Uganda)have agreed comprehensive stock-of-debt operations with Paris Clubcreditors under Naples terms.

In September 1997, agreement was reached between Russia and ParisClub creditors on the basis for Russia's participation in the Paris Clubreschedulings as a creditor. This agreement provides that Russian claimsinherited from the former Soviet Union will be reduced by an upfront dis-count, with a higher discount applied to claims on the poorest countries(eligible for Naples terms). After this discount, Russia will apply debt re-duction or debt relief on the same basis as other Paris Club creditors. Thisagreement is expected to facilitate the regularization of financial relationsbetween many developing countries and Russia.

Commercial and Non-Paris Club Bilateral Creditors

To ensure concerted support by the international community, Paris Clubrescheduling agreements include a comparability clause under which therescheduling country commits itself to seek at least comparable debt relieffrom commercial and non-Paris Club bilateral creditors. The clause is in-tended to ensure equitable burden sharing among the various categories ofcreditors. In addition, in recent years, low-income countries were able tobuy back most of their debt to private creditors that was being traded in thesecondary market at a large discount from the face value using funds fromthe Debt Reduction Facility of IDA and from bilateral donors (Table 5).

With respect to official creditors outside the Paris Club, there has beenlittle progress in normalizing relations between creditors and debtors.1

Major non-Paris Club bilateral creditors include China, Kuwait, the Libyan Arab Jamahiriya,Russia, and Saudi Arabia. Kuwait sometimes participates in Paris Club reschedulings.

5



Paris Club Naples Terms

Key elements of Naples terms, which at end-1994 replaced the previousconcessional (Toronto or London) terms, for low-income countries are as

fbllOWS*

* EHgibility. Decided by creditors on a case-by-case basis, based primarily on acountry's Income level. Countries that have previously received concessional'reschedulings (on Toronto or London terms) are eligible for Naples terms.

* Concessionality. Most countries receive a reduction m eligible nonofficial de-velopment assistance (ODA) debt of 67 percent in net present value (NPV)terms. Some countries with a per capita income of more than US$500 and aratio of debt to exports in present value tenss of le^s thaa 350 percent—de-cided on a case-by-case basis—revive a 50 perceat MFV redtictioa.

* Coverage. The coverage (inclusion in the rescheduling agreemest) of non-ODA pre-cutoff date debt is decided on a case-by-case basis in the light of bal-ance of payments needs. Debt previously rescheduled on concessional (either -Toronto or London) terms is rx>tentiaUy subject to further rescheduHng, to topup the amount of concessiotiality givai.1 ;:'»^:-£ ^''"* -"':^'; "' -/: -

* Choice of options. Creditors have a choice of two concessional options forK*W^&^ : ,; '; ->:'\

A debt reduction (DR) option (repayment over 23 years with 6 years''gimceXor

iUnder such topping up, tie NPV reduction is ioasased tea te original level givesmider Toronto or London terms to the new level agreed ua4erM^les ternis, namely 6? per-cent or 50 percent

2For a 50 percent NPV reduction, Die dei>t-sei lce ie<lucti€m option provides for re-payment over 23 years with 6 years* grace and the iong-mattirities option for repaymentover 25 years wii 16 years* grace.

Multilateral Creditors

Multilateral creditors have participated in the efforts of the international

community by helping debtor countries to design and implement adjustment

and structural reform programs that have been supported by concessional

loans from the IMF and the World Bank. Multilateral financing over the past

decade shows three major trends: (1) the share of multilateral debt in the

total for HIPCs has increased as multilateral continued to make large-scale

contributions to the financing of these countries; (2) increasingly, financing

6



has been provided on concessional terms, especially from the IMF (firstunder the Structural Adjustment Facility (SAF) and then under the En-hanced Structural Adjustment Facility (ESAF)) and the World Bank(through IDA including supplemental credits under the Fifth Dimension Fa-cility, which provides financial support to IDA-only eligible countries2 withoutstanding IBRD debts to cover part of their interest obligations on these

2That is, countries that receive funds from IDA but not from the International Bank for Re-construction and Development (IBRD).

aettieved by concessional teei^st fites (wltit repayment over 33 years)*3*4

These is also a commercial or long m&tiJiifie& (L$l) opfto&* proîdirig for tioHFV lediietibii" (repfi$OTeM crwar 40 jjwai§ with' 30 years* ''grace)*5

* ODA credits. Pre-cutoff date credits are rescheduled on interest rates atleast as concessional as the original interest rates over 40 years with 16years* graee (30 years* mataity wift* 12 years* grace far 50 pereemt NPVwdnction)*6

* flow reschedulings provide for the rescheduling of debt service en eligible debtfalling due during the consolidation period (generally in line with the period of

; iJie WF wmpmîl). ,. .. .... ; - . . . . - . . ''........ '......; ..;.. .. ........ .. ..

* Stock-of-debt operations, under which the entire stock of eligible pre-cutoffdate debt is rescheduled concessionally, me reserved for countries with a satis-factory track record for a minimum of three years with respect t® both paymentsunder rescheduling agreements and performance into IMF arrangements.Creditors must be confident that the country will be able to respect the debtagreement as an exit rescheduling (Mil no further reschedulings required) andthere must be a consensus among creditors to choose concessional options.

3For flow reschedulings, there is no grace period, and for stock-of-debt operations thegrace period is three years. ';,..„ ' ' -3

4There is, In addition, a capitalization of moratorium interest (CMI) option, which alsoachieves the NPV reduction by % lower interest rate over the same repayment (and grace)periods M the DSR option*

5Creditors choosing this option undertake best efforts to change to a concessional op-tion $l a later date when feasible.

<€iBdit0rs can also choose an opto* reducing te MPV of ODA debt by 67 (or 50)p&i giit*

..; - - ..AdteMHM^ thîrtPV-iediiotioEi

7



loans) providing de facto debt relief as more expensive debt (such as non-concessional exposure to the IMF) was replaced by concessional debt (suchas ESAF); and (3) despite the increase in multilateral debt to the HIPCs,debt-service payments on multilateral debt have remained relatively stableat about 8l/2 percent of exports each year during 1985-95, reflecting the in-creased concessionality of loans.3

Positive Net Resource Transfers and New Financing onConcessional Terms

It is important to note that the amounts of grants and new loan dis-bursements from the creditor/donor community to most HIPCs have ex-ceeded actual debt-service payments on interest and amortization and asa result net transfers were positive. For example, multilateral as a grouphave provided to the 41 HIPCs positive net disbursements averaging overUS$3 billion a year from 1990 to 1996 and positive net transfers averag-ing about US$1.5 billion a year over the same period (Table 6). Officialbilateral creditors and donors have, through such forums as ConsultativeGroup meetings and the Special Program of Assistance for Sub-SaharanAfrica, provided new concessional financing in the form of grants orhighly concessional loans partly to meet the financing requirements iden-tified under adjustment programs. Thus in 1994, inflows of grants andconcessional assistance from official donors were more than three timesactual debt service paid. During 1990-94, net resource flows (gross flowsless principal repayments) including bilateral grants to HIPCs have aver-aged around 8 percent of GNP (Table 7).

The HIPC Initiative

The traditional mechanisms for dealing with the debt problems of low-in-come countries are sufficiently robust to deal with the debt burden of manyHIPCs and to reduce their external debts to sustainable levels (see definitionbelow). As noted earlier, the external positions of the HIPCs vary widelyand indeed some countries such as Ghana, Kenya, and the Lao People's De-mocratic Republic have never received concessional reschedulings from the

3According to the World Bank's Debtor Reporting System, the ratio rose to ll!/2 percentin 1995 reflecting the clearance of Zambia's arrears to the IMF. Excluding Zambia, it re-mained at about 8 percent in 1995.

8


MIPC Initiative

Paris Club. Others, such as Equatorial Guinea and Vietnam, are unlikely toneed the full use of traditional debt-relief mechanisms in order to reach debtlevels that are sustainable. However, even with sound economic policies andfull use of traditional mechanisms for rescheduling and debt reduction andthe continued provision of concessional financing, a number of countries arenot expected to reach sustainable levels of debt within a reasonable periodof time. To deal with this problem, the IMF and World Bank jointly pro-posed and put in place in September 1996 the HIPC Initiative that aims atreducing the debt burdens of all eligible HIPCs to sustainable levels, pro-vided they adopt and pursue strong programs of adjustment and reform. TheInitiative builds on instruments available to the international community todeal decisively with the debt problems of the low-income countries and al-lows them to exit, once and for all, from the rescheduling process.

An important benefit of exiting from the rescheduling process is a returnto normal relations with the international financial community, character-ized by spontaneous financial flows and the full honoring of commitments.In addition, repeated reschedulings involve significant costs for policymak-ers and create uncertainty about future debt relief and may foster the beliefon the part of borrowers that financial contracts need not be honored. TheInitiative would also reduce what is known as the "debt overhang," namelythe negative impact of a large external debt burden on economic growth. Adebt overhang can contribute to investment disincentives, and could delayprivate capital flows required to generate sustainable growth. The HIPCsface a host of formidable challenges, of which the debt burden is only oneproblem. However, the removal of the debt overhang by implementing theHIPC Initiative will permit these countries to focus on the policies requiredto tackle other impediments to sustainable growth, such as inadequate phys-ical infrastructure, untrained workforces, and weak institutions.

The Main Objectives of the HIPC Initiative

The Initiative is intended to deal in a comprehensive manner with theoverall debt burden of eligible countries and to reduce it to a sustainablelevel within a reasonable period of time. The Initiative involves a commit-ment made at the decision point—after a three-year track record—by the in-ternational financial community to provide sufficient debt relief to reducethe debt burden of eligible countries to sustainable levels, provided thecountry completes a further three-year period of strong policy performance.

9



A country can be considered to achieve external debt sustainability if itis expected to be able to meet its current and future external debt-serviceobligations in full, without recourse to debt relief, rescheduling of debts, orthe accumulation of arrears, and without unduly compromising growth.Key indicators of external debt sustainability include the NPV of debt-to-exports ratio and the debt-service ratio. On the basis of experience of alarge number of countries, target ranges for determining debt sustainabilityhave been established. Sustainable debt levels under the Initiative will bedefined on a case-by-case basis within the range of 200 percent to 250 per-cent for the debt-to-exports ratio expressed in NPV terms and 20 percent to25 percent for the ratio of debt service to exports. Of course, other factorsplay an important role, and while countries with indicators above thesethresholds may be more likely to encounter debt-service difficulties, it isalso true that countries that have had debt-service difficulties and accumu-lated arrears or rescheduled had widely differing debt burdens. Thus, othercountry-specific "vulnerability factors," such as the concentration and vari-ability of exports, the fiscal burden of external debt service, external debtin relation to GDP, the resource gap, the level of international reserves, andthe burden of private sector debt, would need to be taken into account indetermining whether to target the lower or the upper end of the two ranges.

In addition, for countries with very open economies (an export-to-GDPratio of at least 40 percent) and making strong efforts to generate revenue(with a minimum threshold of fiscal revenue in relation to GDP of 20 per-cent) an NPV debt-to-export target below 200 percent at the completionpoint can be considered. For countries meeting these two openness and fis-cal revenue thresholds, the NPV debt-to-export target will be set at a levelthat achieves a 280 percent ratio of the NPV of debt to revenue at the com-pletion point. This modification of the interpretation of the Initiative wasagreed to ensure that a small number of very open economies were able toattain a sustainable external debt situation from a fiscal point of view.

Some Key Features of the HIPC InitiativeThe HIPC Initiative is based on six guiding principles that have been en-

dorsed by the Executive Boards of the IMF and the World Bank and by theInterim and Development Committees (see Figure 2 and the Annex for amore detailed description of the Initiative). These are (1) the Initiative shouldtarget overall debt sustainability case by case, thus providing a durable exitstrategy from the rescheduling process; (2) action would be envisaged only

10


HIPC Initiative

after the debtor country has shown, through a track record, an ability to putto good use whatever debt relief would be provided; (3) new measures willbuild on existing mechanisms as far as possible; (4) additional action will becoordinated among all creditors involved, with broad and equitable partici-pation; (5) actions by the multilateral creditors will preserve their financialintegrity and their preferred creditor status; and (6) new external financingfor the countries concerned will be on appropriately concessional terms.

The Initiative has been developed around the following key buildingblocks: (1) eligibility will be limited to IDA-only and ESAF-eligible coun-tries that have established a strong track record of performance under ad-justment programs supported by the IMF and the World Bank and that arenot expected to achieve a sustainable external debt situation after the fulluse of traditional debt-relief mechanisms; (2) eligibility will be based on adebt sustainability analysis (DSA); at the decision point (after the firstthree-year track record), the staffs of the IMF and the World Bank willjointly recommend targets for the completion point (after the second three-year track record) for the NPV of debt-to-exports ratio and the debt-serviceratio based on this analysis within the ranges mentioned above after givingfull consideration to the vulnerability indicators; (3) the country wouldneed to meet performance criteria during the second stage to receive sup-port under the Initiative; these criteria would include macroeconomic indi-cators, progress on key structural reforms, and social reforms (for example,improving basic health care and education, and reducing poverty); and fi-nally (4) all relevant creditors will be expected to participate.

As regards burden sharing between creditor groups, the Boards of the Bankand the IMF as well as other multilateral creditors have broadly supported aproportional approach toward sharing the burden of costs of the HIPC Ini-tiative between multilaterals and official bilateral and commercial creditors.Under this approach, the costs of the HIPC Initiative would be shared by bi-lateral and multilateral creditor groups in proportion to the present value oftheir outstanding claims at the completion point. For this calculation, theclaims of bilateral creditors would be measured after the full application oftraditional forms of debt relief, that is, Naples terms from Paris Club credi-tors involving a 67 percent NPV reduction on eligible debt, and at least com-parable action by other bilateral and commercial creditors. This is the basison which all cases currently considered (see below) have been prepared.

Paris Club creditors have also endorsed proportional burden sharing,flexibly interpreted, with multilateral creditors. Specifically, they have

11


to

FIGURE 2. THE HIPC INITIATIVE: SUMMARY

First Stage

• Paris Club provides flow rescheduling on Naples terms, namely rescheduling of debt service on eligi-ble debt falling due during the three-year consolidation period (up to 67% reduction on eligible maturi-ties on a net present value (NPV) basis).• Other bilateral and commercial creditors provide at least comparable treatment.• Multilateral institutions continue to provide adjustment support in the framework of an IMF- and World-Bank-supported adjustment program.• Country establishes first three-year track record of good performance.

Exit

isecisiou r 01111

Eligible Borderline

• Or Paris Club stock-of-debt operation (on Naples terms) not sufficient for the country's overalldebt to become sustainable by the completion point — country requests additional support underthe HIPC Initiative and IMF and World Bank Boards determine eligibility.

• Either Paris Clubstock-of-debt oper-ation under Naplesterms (up to 67%present value re-duction of eligibledebt) and compa-rable treatment byother bilateral andcommercial credi-tors are adequatefor the country toreach sustainabil-ity by the comple-tion point — coun-try not eligible forHIPC Initiative.

• Paris Club goes beyond Naples terms to provide more concessional debt reduction of up to80% in present value terms.• Other bilateral and commercial creditors provide at least comparable treatment.• Donors and multilateral institutions provide enhanced support through interim measures.• Country establishes a second track record of good performance under IMF- and World-Bank-supported programs.

Second Stage

• Or for borderline cases,where there is doubt aboutwhether sustainability would beachieved by the completionpoint under a Naples termsstock-of-debt operation, thecountry would receive furtherflow reschedulings underNaples terms.//"the outcome at the comple-tion point is as projected, orbetter than projected, the coun-try would receive a stock-of-debt operation on Naples termsfrom Paris Club creditors andcomparable treatment fromother bilateral and commercialcreditors.If the outcome at the comple-tion point is worse than pro-jected, the country could re-ceive additional support underHIPC Initiative, so as to be ableto exit from unsustainable debt.

• All creditors take coordinated action to provide sufficient assistance to reduce the country'sdebt to a sustainable level on the basis of proportional burden sharing (after the full use of tra-ditional debt relief mechanisms).• Paris Club provides deeper stock-of-debt reduction of up to 80% in present value terms oneligible debt.• Other bilateral and commercial creditors provide at least comparable treatment on stock of debt.• Multilateral institutions take action to reduce the NPV of their claims, taking into accountthe assistance provided by nonmultilateral creditors and their own preferred creditor status.

Completiom Point


HIPC Initiative

indicated a willingness to provide debt reduction in NPV terms of up to 80percent, on a case-by-case basis, with a flow rescheduling during the sec-ond stage, and a stock-of-debt operation (equivalent to an NPV reductionof up to 80 percent on eligible debt) at the completion point. Paris Clubcreditors have also indicated a readiness to consider carefully the appro-priate coverage of debt subject to 80 percent NPV reduction to achievedebt sustainability. Other nonmultilateral creditors would be expected toprovide debt relief on terms at least comparable with the Paris Club. Mul-tilateral creditors for their part would provide assistance on a proportionalbasis (as defined above) in accordance with their own charters in a waythat would preserve their preferred creditor status.

Key Steps in Implementing the HIPC Initiative

For those HIPCs that would require the full use of traditional mecha-nisms and enhanced assistance under the Initiative to achieve debt sus-tainability, the following key steps are envisaged:

• The first stage of the Initiative builds on the existing three-year trackrecord needed to qualify for a stock-of-debt operation from Paris Clubcreditors (see the Annex for details). During this stage, the country es-tablishes the required good track record of policy implementation andmakes full use of the traditional debt-relief mechanisms (Naples termsrescheduling with 67 percent NPV reduction).

• As the country completes the first stage and reaches the decision point,the Executive Boards of the IMF and the World Bank would decide thecountry's eligibility for the Initiative on the basis of a comprehensiveDSA agreed jointly by IMF and World Bank staff members and the coun-try's authorities. The assessment would indicate whether the full appli-cation of traditional debt-relief mechanisms (Paris Club stock-of-debtoperation on Naples terms involving a 67 percent NPV reduction with atleast comparable action from official bilateral and commercial creditors)would be sufficient for the country to reach a sustainable level of debt bythe completion point. There are three possible outcomes: (1) a country isdeemed to have a sustainable external debt situation at the completionpoint, in which case the country would not be eligible for assistanceunder the Initiative and would request a stock-of-debt operation onNaples terms; (2) a country is considered to be a borderline case (see Fig-ure 2 and the Annex), in which case it could request to defer a stock-of-

13



debt operation by Paris Club creditors to the completion point and re-quest a flow rescheduling on Naples terms during the second stage; and(3) a country is deemed to be eligible for assistance under the Initiative.

• In the last outcome, a preliminary HIPC Initiative document would beprepared jointly by IMF and World Bank staff members discussing el-igibility, and recommending country-specific debt sustainability targetranges.4 Consistent with these targets and the assumed action by bi-lateral and commercial creditors, the IMF and World Bank staff mem-bers, after consultation with concerned creditors, would recommendthe required action by multilaterals, which would be proportional tothat provided by bilateral creditors as a group.

• During the second stage of the Initiative, Paris Club creditors wouldprovide flow reschedulings involving up to 80 percent NPV reductionas needed on a case-by-case basis and commit to provide at the end ofthe second stage—the completion point—a stock-of-debt operationwith NPV reduction of up to 80 percent, provided the adjustment pro-gram supported by the IMF and the World Bank is implemented satis-factorily. Other bilateral and commercial creditors would be expectedto offer at least comparable terms for the flow rescheduling and for thestock-of-debt operation. Donors, bilateral creditors, and multilateral in-stitutions would provide financial assistance in the form of grants andconcessional loans. The World Bank would provide IDA grants andsupplemental IDA allocations during the second stage.

• At the completion point, provided the country has met the perfor-mance criteria under the Initiative, the stock-of-debt operation (in-volving up to 80 percent debt reduction in NPV terms) committed toby Paris Club creditors would take effect and multilateral institutionswould provide the committed reduction in the NPV of their claimsproportional to that provided by bilateral creditors as a group—unlessactual debt-service indicators fall outside the agreed target range. TheIMF would provide assistance to a country at the completion pointthrough a special ESAF grant or loan that would be paid into an es-crow account and used to cover debt service to the IMF. The WorldBank would provide assistance at the completion point via the HIPC

4A target range for the NPV debt-export ratio would be specified (plus or minus 10 per-centage points of the target) to allow for some variability in the outcome without the needfor creditors to adjust their committed action.

14


Progress Made in the HIPC Initiative

Trust Fund. Most other multilateral are currently seeking the appro-priate institutional approvals to enable them to participate in the Ini-tiative including, in many cases, via the HIPC Trust Fund.

• The six-year performance period under the Initiative would be imple-mented flexibly on a case-by-case basis, with countries receivingcredit for already established track records in the first stage. Excep-tionally, the second stage of three years might be shortened for coun-tries that already have sustained records of strong performance.

• A key element of the Initiative would be the provision of external fi-nance on appropriately concessional terms to prevent a buildup of fu-ture debt-service problems.5 Thus, the ESAP programs accompanyingthe stages of the HIPC Initiative would involve restrictive limits on allnonconcessional borrowing. Efforts would be made to build up theHIPCs' debt-management capacities to help avoid the future recur-rence of excessive indebtedness. In this respect, private lenders wouldalso be encouraged to exercise restraint.

• Support under the Initiative would remain available to countries em-barking on adjustment programs supported by the IMF and the WorldBank before October 1, 1998. A comprehensive review of the Initia-tive would be held by then to decide whether to extend it.

Progress Made in the HIPC InitiativeOn April 22 and 23, 1997, the Executive Boards of the World Bank and

the IMF approved Uganda's eligibility for assistance under the HIPC Ini-tiative. They agreed to an NPV debt-to-exports target of 202 percent for acompletion point of April 1998. Based on this, Uganda is expected to re-ceive assistance equivalent to around US$340 million (in April 1998 U.S.dollars), which represents a reduction in Uganda's debt of 20 percent. TheWorld Bank's share of this assistance is around US$160 million and theIMF's share of this assistance is around US$70 million. These amountswill be delivered in April 1998 subject to satisfactory assurances of actionby Uganda's other creditors and Uganda's continued strong performanceunder its ESAF- and IDA-supported programs. The resulting total reduc-tion in Uganda's nominal debt service is likely to be much higher—de-pending on how the assistance is delivered—at around US$700 million.

5Such problems should also be reflected in the current NPV debt-to-exports ratio.

15



In September 1997, the Executive Boards of the World Bank and IMF de-cided assistance under the Initiative for Bolivia and Burkina Faso. For Bo-livia, the Boards agreed to an NPV debt-to-exports target of 225 percent fora completion point of September 1998. Bolivia is expected to receive assis-tance equivalent to around US$450 million, which represents a reduction ofBolivia's debt of around 13 percent. The World Bank's share of this assis-tance is around US$50 million and the IMF's around US$30 million; inview of Bolivia's heavy debt-service burden, both the Bank and the IMF in-tend to front load use of their assistance. These amounts will be delivered inSeptember 1998 subject to satisfactory assurances of action by Bolivia'sother creditors and Bolivia's continued strong performance under its ES AF-and IDA-supported programs.

For Burkina Faso, the Boards agreed to a target of 205 percent and a com-pletion point of April 2000 involving assistance of around US$110 million(US$40 million from the Bank and US$10 million from the IMF) repre-senting a debt reduction of around 14 percent. The Boards also decided thatthe external debt burden of Benin—after the stock-of-debt operation onNaples terms from Paris Club creditors in October 1996—was sustainablewithout any assistance under the Initiative. The World Bank and IMFBoards have also had preliminary discussions of the eligibility for assistanceunder the Initiative for Cote d'lvoire, Guyana, and Mozambique and staffare consulting other creditors of these countries. Cote d'lvoire and Guyanawould qualify for assistance under the Initiative under the fiscal/opennesscriteria described earlier. The objective is to bring these three countries totheir decision points under the Initiative during 1997 or early 1998.

ConclusionThe HIPC Initiative is not a panacea for all of the economic problems of

the HIPCs. Even if, hypothetically, all of the external debts of the HIPCswere forgiven, most would still continue to need large-scale concessionalexternal assistance; as noted earlier, currently their receipts of such assis-tance are much larger than their debt-service payments. Given their highlevels of poverty and limited domestic resources available to meet the costsof social programs that address the needs of the poor, most HIPCs arelikely to continue to be dependent on aid. The HIPC Initiative does notimply a cessation of aid to HIPCs: if it leads to withdrawal of aid, it willfail. However, given the pressures on aid budgets in major donor countries,which are likely to prevail in the foreseeable future, continuing aid will be

16


Conclusion

most effective if it catalyzes private financial flows, particularly invest-ment. There is a limit to the extent to which these flows can be debt creat-ing, if future overindebtedness is to be avoided. This suggests a need for in-stitution building that is essential for attracting private investment as wellas for providing support for putting in place necessary infrastructure.

Some HIPCs also need to address problems of governance, particularlyas they influence investor confidence, such as the establishment of appro-priate commercial codes of conduct, functioning judicial systems, and theeffective application of the rule of law. To attract foreign investors, whocan transfer technology, HIPCs need to provide much more information ina transparent way, remove red tape, and strengthen legal systems—on suchissues as property rights. They also need to improve their financial systems,including payment and settlement systems. HIPCs are competing withother countries in attracting such foreign investment, and given adverse in-vestor perceptions, have to offer attractive combinations of rate of returnrelative to risk.6 All of these are difficult issues that are likely to take a longtime to resolve even with the full support of the international community.Most of the HIPCs will need to continue to pursue adjustment and reformpolicies to meet the economic aspirations of their citizens for long afterthey have benefited from Naples terms stock-of-debt operations or fromenhanced debt relief under the HIPC Initiative.

The HIPC Initiative is intended to complete the array of instrumentsavailable to the international community for dealing with debt problems oflow-income countries. The Initiative deals with the external debt of HIPCsin a comprehensive way that involves all creditors, and thus establishes anew paradigm for international action. Not all HIPCs will need assistanceunder the Initiative in order to achieve sustainable debt levels. However, forthe HIPCs for which traditional debt-relief mechanisms are unlikely toachieve debt sustainability, the Initiative involves a commitment by the in-ternational community to take such additional action as may be required toreduce the debt burden to sustainable levels, and for the country to exit fromthe rescheduling process, provided that it is prepared to adopt and pursuestrong programs of adjustment and reform. The Initiative should eliminatedebt as an impediment to economic development and growth and enableHIPC governments to concentrate on the difficult policies and reforms forachieving sustainable development.

6Risk can be reduced through such action as participation in investment insurance pro-grams such as Multilateral Investment Guarantee Agency.

17


Annex. The HIPC Initiative

At their meetings in September 1996, the IMF's Interim Committee and theIMF and World Bank's Development Committee endorsed specific proposalsput forward jointly by the IMF and the World Bank to address the problemsof a limited number of HIPCs that follow sound policies, but for which tra-ditional debt-relief mechanisms are inadequate to secure a sustainable exter-nal debt position over the medium term. The Committees requested the twoinstitutions to proceed quickly with the implementation of the Initiative.

The Interim and Development Committees endorsed in September 1996a program of action proposed by the Managing Director of the IMF and thePresident of the World Bank to resolve the debt problems of HIPCs. TheHIPC Initiative represents a commitment by the international financialcommunity to reduce to sustainable levels the external debt burden of an el-igible country that successfully completes a period of strong policy perfor-mance. This would reinforce these countries' efforts toward macroeco-nomic adjustment and structural and social policy reforms and assure that acountry's debt burden does not inhibit its capacity for sustained growth. So-cial development policies would be selected according to their importancein the debtor's reform program and effect on reducing poverty, including es-pecially actions to improve basic health care and education. Proceduresadopted for implementing the Initiative require all relevant creditors anddonors to coordinate their action in the context of a number of steps to betaken at various stages, as outlined below and illustrated in Figure 2:

• First stage. Paris Club creditors will provide a flow reschedulingunder Naples terms (up to 67 percent reduction of the NPV of eligibledebt) along with comparable action by other bilateral and commercialcreditors. Multilateral institutions and bilateral donors will continue toprovide support under adjustment programs supported by the IMF andthe World Bank. Countries would establish their first three-year trackrecord of good performance.

• Decision point. Toward the end of the first stage, the IMF and theWorld Bank will agree with the country authorities on a DSA in con-sultation with other creditors concerned. Based on this analysis, ifstrong policies and a Paris Club stock-of-debt operation on Naplesterms are sufficient to put the country in a sustainable external debtposition within three years (completion point), the country would re-

18



quest such a stock-of-debt operation and would not be eligible for as-sistance under the Initiative. Alternatively, if the assessment indicatesthat a country's overall debt burden will not be sustainable by thecompletion point, it will be deemed eligible for and may request sup-port under the Initiative. In borderline cases, the country may defer thestock-of-debt operation and request a further flow rescheduling underNaples terms and would be assured of additional action at the com-pletion point, if needed to achieve debt sustainability.

• Second stage. For countries that are deemed eligible for support underthe Initiative, the Paris Club—along with other bilateral and commer-cial creditors—will provide, on a case-by-case basis, flow reschedul-ings on more concessional terms involving an NPV reduction on eli-gible debt of up to 80 percent in present value terms. The countrywould establish a further three-year track record of good performanceunder adjustment programs supported by the IMF and the World Bankduring which time some of the exceptional assistance committed bymultilateral creditors could be provided, in addition to the flowrescheduling on enhanced terms agreed with nonmultilateral creditors.

• Completion point. The Paris Club will provide, along with other bilat-eral and commercial creditors, on a case-by-case basis, a stock-of-debtreduction of up to 80 percent in present value terms on eligible debt.Multilateral institutions will take proportional action to that providedby bilateral creditors as a group for the country to reach a sustainabledebt situation, while ensuring broad and equitable participation by allcreditors.

EligibilityThe Initiative would be open to all HIPCs that pursue programs of adjust-

ment and reform supported by the IMF and the World Bank before October1998, after which the Initiative would be reviewed and a decision madewhether it should be continued. To qualify for exceptional assistance underthe Initiative, countries would have to be eligible under ES AF and IDA-onlyand face an unsustainable debt situation after the full application of tradi-tional debt-relief mechanisms and would have to demonstrate an appropriatetrack record of adjustment and reform. Whether or not a particular countrywould be eligible for action will be determined by the Executive Boards ofthe World Bank and the IMF at the decision point, based on DS As prepared

19



jointly by the staff of both institutions in close cooperation with the countryauthorities. Currently Bank and IMF staff members are preparing DSAs forseveral countries that could be considered likely, based on their track recordsof performance (see below), to reach their decision points in 1997.

Track Record of PerformanceDebt is only one of the serious problems confronting the HIPCs and a

track record of policy performance will be necessary to ensure a lasting so-lution not only to the country's debt problems but to its underlying eco-nomic difficulties; it will also be necessary in order to give confidence tocreditors and donors that the exceptional assistance will be put to good use.

The required six-year performance period under the Initiative would beimplemented flexibly on a case-by-case basis. The six countries (Benin,Bolivia, Burkina Faso, Guyana, Mali, and Uganda) that have already beengranted a stock-of-debt operation by the Paris Club on Naples terms in1995-96 can be considered to have established the track record requiredunder the first stage of the Initiative. Other countries that have embarkedon IDA- and ESAF-supported programs would be considered to be al-ready engaged in the first stage. Exceptionally, the second stage of threeyears might be shortened for countries that have already established sus-tained records of strong performance (such as Bolivia and Uganda).

Action by All CreditorsAll creditors are expected to participate in providing exceptional assis-

tance beyond current mechanisms as required to reach debt sustainability—the fundamental objective of the Initiative. There is broad support from allcreditor groups for a proportional approach, flexibly interpreted, towardsharing the costs of the HIPC Initiative between multilateral and official bi-lateral creditor groups. Under this approach, the costs of the HIPC Initiativewould be shared by bilateral and multilateral creditor groups in proportion tothe present value of their outstanding claims at the completion point. For thiscalculation, the claims of bilateral creditors would be measured after the fullapplication of traditional forms of debt relief, that is, Naples terms from ParisClub creditors involving a 67 percent NPV reduction in eligible debt, and atleast comparable action by other bilateral and commercial creditors. Allcreditors will be fully consulted on the action that would involve them underthe Initiative.

20



» Bilateral and commercial creditors: Paris Club creditors are ready togo beyond Naples terms and provide NPV debt reduction of up to 80percent, on a case-by-case basis. They have indicated a readiness toconsider carefully the appropriate coverage of debt subject to 80 per-cent NPV reduction to achieve debt sustainability. Consistent with cur-rent practice, debtors would seek treatment on debt owed to other bilat-eral and commercial creditors on terms at least comparable to thoseagreed with the Paris Club.

1 Multilateral creditors will take proportional action to that provided bybilateral creditors as a group so that the country can achieve overall debtsustainability. The assistance provided by multilateral creditors shouldinvolve broad and equitable participation by all creditors and shouldpreserve the financial integrity of the institutions and their preferredcreditor status. Multilateral institutions will participate in the Initiativethrough action to reduce the NPV of their claims either through theHIPC Trust Fund or through parallel action.

• The World Bank is committed to take action during the second stage—through the selective use of IDA grants and supplemental IDA alloca-tions—and at the completion point. The principal vehicle envisaged forBank participation, together with some other multilateral creditors, is amultilateral HIPC Trust Fund administered by IDA. The World Bankhas set aside US$500 million from its IBRD surplus as an initial contri-bution to the HIPC Trust Fund. Funds transferred by the World Bank tothe HIPC Trust Fund will be earmarked to provide relief on debt owedto IDA. Additional transfers of IBRD net income to the HIPC TrustFund are envisaged, as needed, for the World Bank's contribution todebt relief, subject to the IBRD income allocation framework and theapproval of IBRD's Executive Directors and Board of Governors.

' IMF: Implementation of annual ESAF arrangements will form theeconomic policy basis for the IMF's participation in the Initiative, andthe needed financial resources will come from the pool of resourcesfor ESAF operations. However, in the context of the Initiative, specialoperations will take the form of grants or highly concessional loans onextended maturities that will be used to retire obligations falling dueto the IMF and result in a reduction in the NPV of IMF claims on thedebtor country.

21



TABLE 1. STATUS OF PARIS CLUB RESCHEDULING COUNTRIES(As of September 30, 1997)

Low-IncomeCountries1

Lower-Middle-IncomeCountries2

Other Middle-IncomeCountries Total

Countries that graduated from reschedulings3

"Benin"Cambodia

Gambia, The*** Guy ana"Haiti

Malawi*"Mali

* Vietnam

Number ofcountries 11 12 31

Countries with rescheduling agreements in effect+"Bolivia^"Burkina Faso"Chad" Congo,

Rep. of" Ethiopia"Guinea" Guinea-

Bissau"Madagascar"Mauritania"Mozambique** Niger"Senegal"Sierra Leone** Tanzania"Togo

+" Uganda"Zambia

Number ofcountries

12/956/968/98

6/9910/9912/999

12/9711/9912/976/996/99

12/9712/9711/9910

9/972/95

12/98

17

GabonJordanPeru

11/982/99

12/988

AlgeriaRussia

5/983/998

22

3 2 22

10/966/979/875/963/965/895/96

12/934

Dominican Rep.EcuadorEgyptEl SalvadorGhanaGuatemalaJamaicaKenyaMoroccoPhilippinesPoland

3/9312/946/949/914/964.5

3/939/954

1/944.612/927/947

4/91

ArgentinaBrazilBulgariaChileCosta RicaCroatiaFYR MacedoniaMexicoPanamaRomaniaTrinidad and

TobagoTurkey

3/958/934/95

12/886/934

12/956/965/923/92

12/83

3/916/83

8


Tables

TABLE 1 (CONCLUDED)

Low-Income Lower-Middle-Income Other Middle-IncomeCountries1 Countries2 Countries Total

Countries with previous rescheduling agreements, but without currentrescheduling agreements, which have not graduated from reschedulings

Angola** Cameroon* Central African

Rep.Congo, Dem.

Rep. of the+*C6te d'lvoire* Equatorial

Guinea** Honduras

Liberia** Nicaragua

SomaliaSudanYemen, Rep. of

Number ofcountries

All countries

Source: Paris Club.Notes: Includes agreements of Russia and Turkey with official bilateral creditors; stock

treatment underlined. Dates refer to end of current or last consolidation period. In the caseof a stock-of-debt operation, canceled agreements, or rescheduling of arrears only, dateshown is that of relevant agreement.

** denotes rescheduling on London terms, and **denotes rescheduling on Naples terms, •'•de-notes countries for which Paris Club creditors have indicated their willingness to provide debtrelief on Lyon terms in the context of the HIPC Initiative. # denotes stock treatment subject todecisions (not yet made) on eligibility for assistance under the HIPC Initiative.

2Defined here as countries that obtained lower-middle-income but not concessional termswith Paris Club reschedulings.

3For some countries, this inevitably represents an element of judgment: in certain cir-cumstances, for example, if hit by an external shock, a country may need further resched-ulings. Some of the low-income countries may be eligible for enhanced action under theHIPC Initiative.

Rescheduling of arrears only.5Limited deferral of long-standing arrears to three creditors on nonconcessional terms.6Nonconcessional rescheduling at the authorities' request.7The 1994 rescheduling agreement was canceled at the authorities' request.8Agreement includes a reprofiling of the stock of certain debts at the end of the consoli-

dation period.Involved debt relief of 50 percent in NPV terms.10Agreement subject to entry-into-force clause.nFormer Socialist Federal Republic of Yugoslavia.12Last rescheduling on Toronto terms.

23

9/90 Nigeria9/969

3/95

6/9012

3/97

2/961/979

6/856/97

12/8812/846/97

12

37

3/92

1

15

Yugoslavia11 6/89

1

15

14

67



TABLE 2. HIPCs: INDICATORS OF EXTERNAL DEBT BURDEN1

BeninBoliviaBurkina FasoCameroonChad

Congo, Dem.Rep. of the

Congo, Rep. ofCote d'lvoireEquatorial

GuineaEthiopia

GhanaGuineaGuinea-BissauGuyanaHonduras

KenyaLao People's

Dem. Rep.MadagascarMaliMauritania

MozambiqueNicaraguaNigerNigeriaRwanda

Sao Tome andPrincipe

SenegalSierra LeoneSudanTanzania

24

270.2275.2352.7160.5

742.7261.0360.6

599.7

253.1177.9

1,293.2180.4211.6

147.1

514.1254.2282.6

780.8661.9303.4

745.9

1,454.6147.7392.8

551.2

9.725.418.056.510.0

32.411.917.9

33.8

27.318.059.814.632.3

24.3

6.844.712.320.2

30.3108.9

14.2

49.6

26.615.736.0

194.340.8

35.912.238.7

43.7

21.883.628.6

36.8

37.456.319.922.5

7.3

19.912.347.152.0

15.520.150.6

55.8

50.217.852.8

12.8

CottonZincCotton

Cotton

37.932.154.7

67.7

Diamonds 45.7Crude oil 93.1Cocoa 47.5

Coffee

BauxiteCashewSugarCoffee

Tea

WoodCoffeeCotton

PrawnsCoffeeUranium

Coffee

CocoaFishRutile

Coffee

46.5

58.264.048.246.3

15.7

54.725.675.1

21.839.869.3

66.9

80.332.297.3

26.8

15.020.923.1

13.6

26.6

10.5

17.9

11.930.834.013.3

18.3

69.820.220.6

32.630.319.3

38.2

11.611.718.6

32.7

-5.2-5.8

-12.1

-16.0

-4.5-39.6

-6.8

-6.5-11.2-4.4-2.7

-1.7

-17.3-3.8

-13.7-4.9

-22.2-16.5-9.7

-27.7

-5.0-14.7

-13.7

-0.67.8

CFA zoneCFA zoneCFA zone

0.1CFA zoneCFA zone

CFA zone8.7

2.82.85.22.7

3.6

2.62.3

CFA zone2.6

3.21.0

CFA zone

3.2

CFA zone1.4

1.9

Percent Share in Noninterest.., . irkr._ f Current Reserve

NPVto Debt- Exports m 1995 of: Account Covefage

Exports Service Three main Variability (In percent (In monthsCountry2 Ratio3 Ratio3 Main product products of Exports4 of GDP)5 of imports)6


Tables

BeninBoliviaBurkina FasoCameroonChad

Congo, Dem.Rep. of the

Congo, Rep. ofCote d'lvoireEquatorial

GuineaEthiopia

GhanaGuineaGuinea-BissauGuyanaHonduras

KenyaLao People's

Dem. Rep.MadagascarMaliMauritania

MozambiqueNicaraguaNigerNigeriaRwanda

Sao Tome andPrincipe

SenegalSierra LeoneSudanTanzania

25

Public SectorExternal Debt Service Payable Fiscal Indicators9

. , . . . , „ ,. _ - __ _ Public and Publiclyin 1996 as a Percent of:? as a Percent of GDP Guaranteed Deb/

Government Government Tax Official Primary as Percentrevenue8 expenditure revenue grants balance of GDP7 Country

17.3

17.093.522.9

223.927.2

26.8

29.132.668.942.470.7

27.8

8.7102.6

17.412.6

50.8134.625.5

38.5

127.430.422.2

63.6

11.9

10.5

9.5

56.125.2

18.3

20.930.637.159.9

26.6

5.249.611.615.4

27.499.313.4

10.1

24.727.113.3

47.9

12.217.411.2

9.0

12.8

7.17.9

31.816.5

25.1

10.77.8

12.717.5

12.8

7.4

7.8

9.013.910.4

12.8

5.42.47.3

6.9

0.90.9

6.3

3.111.12.30.2

1.3

3.83.17.12.2

7.85.24.0

16.3

23.51.93.7

2.5

--6.7

-8.7

0.2

10.7

-5.5

-4.5-10.2

2.62.9

5.3

8.5-1.1-6.9

8.6

-9.9-6.5

0.6

-2.7

-4.70.6

-1.2

-1.2

50.744.630.5

32.7

181.7144.4143.2

74.1

33.5199.9160.571.7

45.3

43.190.647.6

134.1

158.7205.9

42.5

38.3

342.842.058.7

112.7

NPV of



TABLE 2 (CONCLUDED)

TogoUgandaVietnamYemen,

Rep. ofZambia

Source: IMF staff estimates.*A11 data refer to 1996 (1995/96) unless otherwise indicated.2Excluded are those HIPCs for which no debt sustainability analysis has been prepared

(Angola, Burundi, the Central African Republic, Liberia, Myanmar, and Somalia).3Excluding workers' remittances. For the NPV ratio, present value of external debt service

on disbursed public and publicly guaranteed debt in percent of the average of exports ofgoods and services over three years ending in 1996. For debt service ratio, one year of ex-ports, 1996 is used.

4Defmed as the standard deviation in export values over the ten-year period 1986-95(1985/86-1994/95), in percent of the average.

26

Percent Share in Noninterest. , „ „ , , Current Reserve

NPVto Debt- Exports m 1995 of: Account Coverage

Exports Service Three main Variability (In percent (In monthsCountry2 Ratio3 Ratio3 Main product products of Exports4 of GDP)5 of imports)6

211.8293.8

86.8

306.8326.5

17.718.16.8

33.026.3

19.568.414.1

48.0

Phosphate 46.0Coffee 74.0Crude oil 28.7

Copper

22.435.238.8

20.0

-5.0-6.3

-10.3

-7.9

CFA zone3.62.1

1.5


Tables

TogoUgandaVietnamYemen,

Rep. ofZambia

5Current account balance excludes interest and net official transfers.6Imports of goods and services.7After assumed debt rescheduling or relief, including Paris Club stock-of-debt operation

on Naples terms, where applicable.8Excluding grants.9Central government. For Bolivia, Burkina Faso, the Lao People's Democratic Republic,

Madagascar, Mali, Nicaragua, and Vietnam, government refers to general government.

27

Public SectorExternal Debt Service Payable Fiscal Indicators9

• * MS r, r i « r ^.r^r, Public and Publiclyin 1996 as a Percent of:? as a Percent of GDP Guaranteed Deb/

Government Government Tax Official Primary as Percentrevenue8 expenditure revenue grants balance of GDP7 Country

31.018.211.4

41.033.5

28.711.311.0

25.1

14.010.519.6

14.9

2.84.50.6

2.1

-3.4-1.0

1.2

4.5

54.931.026.2

96.2

NPV of


TABLE 3. HIPCs: CHARACTERISTICS OF EXISTING EXTERNAL DEBT

AngolaBeninBoliviaBurkina FasoBurundi

CameroonCentral African Rep.ChadCongo, Dem. Rep. of theCongo, Rep. of

Cote d'lvoireEquatorial GuineaEthiopiaGhanaGuinea

Guinea-BissauGuyanaHondurasKenyaLao People's Dem. Rep.

EligibleTotal External fnr pflr:c

Debt (End-1996)' J^ Debt b? ^'P*1Club Stock- Non-Paris Club Creditor Group3

Total Of which: of-Debt(In billions of multilateral Operations on Debt to Commercial Multilateral institutionsU.S. dollars) (In percent) Naples Terms2 Russia banks IMF World Bank Other

9.31.64.81.21.2

8.10.91.09.94.8

12.40.35.15.23.0

0.92.14.06.12.2

2.460.861.695.885.6

22.875.983.427.715.0

35.849.452.870.954.0

61.440.255.553.734.8

/*

/<

/4

/

/

/

/

/

/

/

/

/

/4

/

/

/

/

/

/

/

/

/

/

/

/

/

/

/

/

/

/

/

/

/

/

/

/

/

/


LiberiaMadagascarMaliMauritaniaMozambique

MyanmarNicaraguaNigerNigeriaRwanda

Sao Tome and PrincipeSenegalSierra LeoneSomaliaSudan5

TanzaniaTogoUgandaVietnamYemen, Rep. of

Zambia

Sources: World Bank Debtor Reporting System; and IMF staff estimates.1 Total public and publicly guaranteed debt.V indicates whether Paris Club concessional rescheduling has taken place.V indicates significant debt to the respective creditor.4Stock-of-debt operation on Naples terms was agreed in 1995 or 1996.5Figures for 1993.6Exit rescheduling, no stock-of-debt clause.

1.43.73.02.35.6

5.25.31.4

28.21.0

0.33.61.22.1

10.7

6.31.43.7

23.95.6

6.4

51.248.453.747.132.3

25.430.465.217.986.3

71.963.856.844.728.7

50.961.677.44.1

25.7

54.4

///4 // / // / / /

// / / //

// / /

/ /// / /

/ / / // /

///4 / / //6 / /

/

/ /


TABLE 4. EVOLUTION OF PARIS CLUB RESCHEDULING TERMS

Implemented

Grace (in years)

Maturity (in years)

Repaymentschedule

Interest rate6

Reduction in netpresent value(in percent)

Memorandum itemsODA credits

Grace (in years)Maturity (in year

Source: Paris Club.'Since the 1992 agreements with Argentina and Brazil, creditors have made increasing use of graduated payments schedules (up to 15 years'

maturity and 2-3 years grace for middle-income countries; up to 18 years' maturity for lower-middle-income countries.

Lower- Low-Income Countries2

Middle- :Income Naples terms4 options

Middle- Countries Toronto London DSRIncome (Houston terms options terms* options Maturing

Countries terms)1 DR DSR LM DR DSR CMI LM DR flows Stocks CMI LM

Since Oct. 1988-. . . Sept. 1990 -i Jun. 1991 *- ^_Dec. 1991-Dec. 1994 ^ ^ Since Jan. 1995

5-61 Up to 81 8 8 14 6 — 5 165 6 — 3 8 20

91 151 14 14 25 23 23 23 25 23 33 33 33 40

Flat/ Flat/graduated graduated ^ Flat ^ ^ Graduated ^ ^ Graduated ^

M

5-610

M

Up to 1020

M

33

1425

R7

20-3011

1425

M

1425

M

50

1230

R8

50

1230

R8

50

1230

M

1625

M

67

1640

R9

67

1640

R9

67

1640

R9

67

1640

M

2040


2DR refers to the debt-reduction option; DRS to the debt-service-reduction option; CMI denotes the capitalization of moratorium interest; LMdenotes the nonconcessional option providing longer maturities. Under London, Naples, and Lyon terms, there is a provision for a stock-of-debtoperation, but no such operation took place under London terms.

3These have also been called "Enhanced Toronto" and "Enhanced Concessions" terms.4Most countries are expected to secure a 67 percent level of concessionality; countries with a per capita income of more than US$500 and an

overall indebtedness ratio on net present value loans of less than 350 percent of exports may receive a 50 percent level of concessionality decidedon a case-by-case basis. For a 50 percent level of concessionality, terms are equal to London terms, except for the debt-service-reduction optionunder a stock-of-debt operation that includes a three-year grace period.

5Fourteen years before June 1992.Interest rates are based on market rates (M) and are determined in the bilateral agreements implementing the Paris Club Agreed Minute. R =

reduced rates.7The interest rate was 3.5 percentage points below the market rate or half of the market rate if the market rate was below 7 percent.8Reduced to achieve a 50 percent net present value reduction.9Reduced to achieve a 67 percent net present value reduction; under the DSR option for the stock operation, the interest rate is slightly higher,

reflecting the three-year grace period.10Reduced to achieve an 80 percent net present value reduction.HThe reduction of net present value depends on the reduction in interest rates and therefore varies. See footnote 7.


TABLE 5. COMMERCIAL BANK DEBT- AND DEBT-SERVICE-REDUCTION OPERATIONS, 1987-MARCH 19971

(In millions of U.S. dollars)

Albania (1995)Argentina (1992)Bolivia

(1987)(1993)

Brazil (1992)Bulgaria (1993)

Chile (1988)Costa Rica (1989)6

Dominican Rep. (1993)Ecuador (1994)Ethiopia (1996)

Guyana (1992)Jordan (1993)Mauritania (1996)Mexico6

(1988)(1989)

Mozambique (1991)

Nicaragua (1995)Niger (1991)Nigeria (1991)6

Panama (1995)Peru (1995)

37119,397643473170

40,6006,186

4391,456776

4,522230

6973653

51,9023,67148,231

124

1,099111

5,8111,9144,157

146

33125378

798

439991272

230

69

53

124

1,099111

3,390

1,608

2,35623218250

4,9741,865

1771,180

84

7,9531,1156,838

38247

2254,291

29

293,996

826

111

6,484

6,484

6519894

Concluded agreements

337421

101

353467

2,73920713

3,891443

3663596

117

7,777555

7,222

35282138

3719,386612442170

13,1983,527

4391,128511

2,602230

6931253

22,2141,67020,544

124

1,099111

4,393571

2,554

100.048.495.293.5

100.032.557.0

100.077.565.857.5

100.0

100.042.5

100.042.845.542.6

100.0

100.0100.075.630.061.4

963,059

613526

3,900652

24819614958318

101185

7,677555

7,12212

8823

1,70892798

987

101

85

1,272

1,272

30233

Debt and Debt-Service Reduction (DDSR)2 Totaj Debt an(J

Prepayments Debt-ServiceRestructured Principal through Reduction/DebtUnder DDSR Discount collateralized Other collaterali- Restructured

Operation3 Buyback exchange4 par bond bonds4 zation Total (In Percent) Cost of IMF(1) (2) (3) (4) (5) (6) (7)=sum[(2). ..(6)](8)=(7)/(l) Reduction5 Contribution


Philippines(1989)(1992)

Poland (1994)Sao Tome" and Principe (1994)Senegal (1996)Sierra Leone (1995)

Uganda (1993)Uruguay (1991)Venezuela (1990)Zambia (1994)

Total

Memorandum items:Coted'Ivoire(1996)7

Vietnam (1996)8

Source: IMF staff estimates.!Debt and debt-service reduction are estimated by comparing the present value of the old debt with the present value of the new claim, and adjusting for

prepayments made by the debtor. The methodology is described in detail in Annex 1 of Private Market Financing for Developing Countries (Washington:International Monetary Fund, December 1992). The amounts of debt reduction contained in this table exclude debt extinguished through debt conversions.Year in parentheses refers to the date of the agreement in principle.

2The figure for debt-service reduction represents the expected present value of the reduction in future interest payments arising from the below-marketfixed interest rate path on the new instruments relative to expected future market rates. The calculation is based on the estimated term structure in interestrates for U.S. treasury bonds at the time of agreement in principle.

3Excludes past due interest. Includes debt restructured under new money options for Mexico (1989), Uruguay (1991), Venezuela (1989), the Philippines(1992), Poland (1994), Panama (1995); the Philippines' (1989) new money option was not tied to a specific value of existing debt.

4Excludes prepayment of principal and interest through guarantees.5Cost at the time of operation's closing. Includes principal and interest guarantees, buyback costs, and, for Venezuela, resources used to provide com-

parable collateral for bonds issued prior to 1990. Excludes cash downpayments related to past due interest.includes estimated value recovery clauses.7Assumes an allocation of 30 percent to the straight buyback option, 6 percent to the discount bond, and 64 percent to the Front Loaded Interest Re-

duction Bond.8Assumes an allocation of 50 percent each to the par and discount bonds and no buyback.

5,8121,3394,4739,989

1071230

1521,60819,700200

178,368

2,415338

2,6021,3391,2632,424

101

230

152633

1,411200

17,324

7250

2,427

511

22,044

9782

516

516796

69

1602,012

20,358

74

116

11674

471

2,340

467

467611

951,639

19,066

Pending agreements

661 3327

1,516183

62.854.1

20735 —

3,7011,3392,3626,332

1071230

152oooooo

6,043200

81,131

63.7100.052.863.4100.0100.0100.0

100.055.230.7100.0

45.5

1,795670

1,1251,933

11232

18463

2,58522

26,354

293123170283

883

4,167


TABLE 6. HIPCs: NET DISBURSEMENTS FROM MULTILATERAL INSTITUTIONS!

Angola1

BeninBoliviaBurkina FasoBurundi1

CameroonCentral African Rep.ChadCongo, Dem. Rep. of the1

Congo, Rep. of

Cote d'lvoireEquatorial Guinea1

EthiopiaGhanaGuinea1

Guinea-Bissau1

Guyana1

HondurasKenyaLao People's Dem. Rep.1

Liberia1

MadagascarMaliMauritaniaMozambique

739147416876402913935-8

75189592519258922

15108623854

217813485567346767227114

20018713624531076466-2709149164

In percent ofIn millions of U.S. dollars exports of goods and services

29732631092052259-1-21149

11751501541274732104

4615866188

3060132765112512118

-103101606

238106632626-383296-43439368314

0.39.5

25.810.259.9

3.722.317.66.74.0

-0.224.110.120.913.1

179.5

0.44.0

31.1

4.027.616.510.726.8

0.614.513.920.252.1

3.023.833.6

1.82.83.3

15.725.616.518.3

106.06.39.32.8

35.9

13.516.810.745.1

0.812.620.529.714.1

-1.69.6

22.0

-1.7

3.31.1

15.49.3

21.5

25.61.12.61.1

23.1

5.924.112.238.8

0.710.39.6

20.128.7

4.75.3

46.7-5.00.63.96.2

22.56.98.0

102.23.7

-2.11.1

19.2

-8.39.4

14.912.157.3

8 8

Annual Average Annual Average

1985–89 1990—94 1995Prov.1996 198689 1990–94 1995

Prov..1996


Myanmar1

NicaraguaNigerNigeriaRwanda

Sao Tome" and PrincipeSenegalSierra LeoneSomalia1

Sudan1

TanzaniaTogoUgandaVietnam1

Yemen, Rep. of1

Zambia

Memorandum items:Total net disbursementsGross disbursementsNet transfer

Sources: World Bank Debtor Reporting System; and IMF, International Financial Statistics.Note: Disbursements on medium- and long-term public and publicly guaranteed debt, including to the IMF. The data are derived from the

Debtor Reporting System except for the data on lending by the IMF.1 Annual average of net disbursements in percent of exports of goods and services is calculated only for selected years due to the lack of export

data.

51146428550

710965495

1213570-25274

2,4874,5111,260

12792921845

2080351196

17328207523785

3,2045,6281,5%

-241039

-3756

1264104

"-3

1304118818256579

3,2547,8751,398

-1792378226

1793107

8

1562426529816385

3,1356,2071,491

14.35.5

17.34.3

28.1

87.110.42.7

59.110.5

29.56.3

21.0

6.8

7.814.34.0

2.019.69.21.7

33.2

203.65.3

20.4

16.7

28.26.6

86.70.91.47.2

6.711.83.3

14.13.1

-0.336.8

89.83.7

98.7

10.312.829.22.71.7

44.7

5.814.02.5

-1.213.514.00.6

14.5

116.45.1

85.1

0.611.96.8

45.43.74.75.9

4.99.72.3


TABLE 7. HIPCs: NET CONCESSIONAL FLOWS, DEBT SERVICE DUE AND PAID1

AngolaBeninBoliviaBurkina FasoBurundi

CameroonCentral African Rep.ChadCongo, Dem. Rep. of theCongo, Rep. of

Cote d'lvoireEquatorial GuineaEthiopiaGhanaGuinea

Guinea-BissauGuyanaHondurasKenyaLao People's Dem. Rep.

1990 1991 1992 1993 1994

Net con- Debt Net con- Debt Net con- Debt Net con- Debt Net con- ™*~cessional service cessional servlce cessional service cessional servlce cessional service

flows Due Paid flows Due Paid flows Due Paid flows Due Paid flows Due Paid

2.511.88.78.3

19.1

3.815.320.67.96.8

6.541.5

9.612.08.9

39.571.012.016.722.3

8.46.1

15.71.83.87.43.81.6

16.350.7

29.115.55.16.0

10.3

19.1154.125.19.61.1

3.32.19.11.33.84.22.31.04.8

21.8

13.74.02.85.96.5

3.6107.5

14.29.71.0

2.711.714.912.315.9

2.913.316.07.52.4

6.214.79.5

11.911.5

39.8107.223.610.115.1

11.93.3

10.32.93.3

6.12.31.3

16.630.624.420.14.55.08.2

21.773.614.110.40.8

3.41.66.71.73.4

3.61.20.92.3

12.4

15.23.21.44.44.8

3.647.811.29.40.8

3.011.18.6

11.322.7

5.210.314.12.42.1

5.725.010.87.8

13.2

29.032.211.07.69.1

16.62.69.51.54.1

10.22.81.5

12.722.6

19.511.24.74.7

10.6

23.056.616.810.20.8

3.51.26.11.23.7

3.51.20.91.06.3

12.82.11.14.93.04.1

38.612.48 0.00.8

3.69.56.6

12.618.4

3.511.413.7

1.43.6

6.818.314.98.9

12.8

21.629.59.7

10.69.2

26.72.79.71.94.5

8.03.11.69.8

22.4

18.15.25.25.37.3

19.840.717.515.22.1

2.81.66.71.33.9

4.30.81.10.35.9

12.50.81.55.12.7

1.924.811.812.32.1

9.112.98.0

10.331.4

9.315.518.92.6

29.025.49.2

18.28.98.3

28.912.28.67.99.2

29.23.58.01.54.5

16.09.12.8

15.0131.2

45.313.88.96.27.4

28.636.016.221.0

1.3

2.02.86.51.54.6

5.52.71.60.8

47.823.4

1.22.06.52.92.8

21.214.913.71.3

(In percent of GNP)


LiberiaMadagascarMaliMauritaniaMozambiqueMyanmar

NicaraguaNigerNigeriaRwandaSao Tome and Principe

SenegalSierra LeoneSomaliaSudanTanzania

TogoUgandaVietnamYemen, Rep. ofZambia

All HIPCs

Source: World Bank Debtor Reporting System.!Net concessional flows consist of net concessional flows from multilateral and bilateral creditors and grants (excluding technical cooperation).

Debt service due and debt service paid include payments related to the regularization of arrears.

5.618.113.415.674.7

1.2

50.812.80.78.6

90.0

12.79.2

43.96.9

37.112.111.8

5.023.6

9.0

20.013.35.9

21.952.73.0

98.06.7

21.81.0

20.8

7.311.328.819.121.8

10.16.3

8.941.1

15.5

0.37.42.6

15.54.90.6

1.64.1

11.40.95.9

5.92.01.30.67.4

5.43.5

2.76.7

6.6

10.717.413.315.078.10.8

69.512.30.6

14.7130.9

8.212.720.39.3

34.5

8.814.7-0.13.4

23.7

8.5

14.715.97.5

18.631.22.8

157.06.8

18.41.5

18.0

8.010.722.215.020.9

6.07.9

25.29.6

28.0

14.0

1.36.51.39.15.30.7

41.04.79.91.54.0

5.92.2

0.37.63.44.62.44.6

20.0

5.9

7.210.311.115.685.90.7

43.112.30.5

15.7114.4

9.314.790.36.7

41.7

8.720.12.74.6

30.0

8.1

2.914.06.1

22.552.42.7

66.05.5

23.11.7

24.3

5.937.216.48.3

31.6

6.37.6

31.518.923.0

14.2

3.51.57.56.20.4

7.92.3

13.81.56.8

3.65.8

0.59.52.24.25.13.6

12.3

5.8

9.89.28.2

31.463.20.4

16.812.7-0.217.0

104.2

6.532.294.0

3.141.2

5.118.30.25.0

21.5

7.1

5.310.17.1

40.227.82.5

21.87.4

18.22.1

40.96.1

12.816.76.4

35.0

6.87.2

10.416.619.2

11.5

1.62.41.5

14.38.20.7

9.44.25.81.47.7

2.24.3

0.210.0

2.15.23.93.8

11.04.4

3.512.315.221.372.00.7

22.120.8-0.3

105.9159.4

14.317.257.72.9

34.8

11.714.44.42.8

16.9

8.3

10.822.910.819.529.63.4

106.316.117.85.5

37.2

12.525.520.09.8

25.8

12.04.6

15.89.8

20.1

15.8

1.03.37.1

10.87.51.0

13.34.45.91.1

11.5

5.319.7

8.2

2.63.91.93.9

11.4

5.3


Glossary of Terms

Bilateral creditors. These creditors are governments. Their claims are loansextended by, or guaranteed by, governments or official agencies, such as exportcredit agencies. Certain official creditors participate in debt reschedulings underthe aegis of the Paris Club (see below).

Brady plan. Approach adopted in the late 1980s to restructure debt to com-mercial banks which emphasizes voluntary market-based debt- and debt-service-reduction (DDSR) operations. The cornerstone of DDSR operations is some com-bination of a buyback at a discount, and the issuance of "Brady bonds" by thedebtor country in exchange for banks' claims. Such operations complement coun-tries' efforts to restore external viability through the adoption of medium-termstructural adjustment programs supported by the IMF and other multilateral andofficial bilateral creditors.

Completion point. A point at which the country concerned completes a secondthree-year track record of good performance under adjustment programs supportedby the IMF and the World Bank, at which time additional measures will be takento assist the country to reach a sustainable level of debt.

Debt sustainability. The position of a country when the net present value ofdebt (public and publicly guaranteed)-to-exports ratio and the debt service (onpublic and publicly guaranteed loans)-to-exports ratio are below certain country-specific target levels within ranges of 200-250 percent and 20-25 percent, re-spectively. Country-specific targets within these ranges would be determined forthe completion point in light of vulnerability factors, such as the concentration andvariability of exports, and with particular attention to the fiscal burden of externaldebt service.

Debt sustainability analysis (DSA). A study jointly undertaken by staff of theIMF and the World Bank and the country concerned, in consultation with credi-tors, at the decision point. On the basis of this DSA the country's eligibility forsupport under the HIPC Initiative will be determined.

Debt service-to-exports ratio. Scheduled debt service (interest and principalpayments due on public and publicly guaranteed debt during a year) for the samecoverage of debt as in the NPV debt-to-exports ratio, expressed as a percentage ofexports for that year.

Decision point. A point at which a HIPC completes its first (three-year) trackrecord of good performance under adjustment programs supported by the IMF andthe World Bank, and when, based on the debt sustainability analysis, a country'seligibility for the HIPC Initiative is determined.

38


Glossary of Terms

Heavily indebted poor countries (HIPCs). As used at present: a group of 41developing countries, including 32 countries with a 1993 GNP per capita ofUS$695 or less and 1993 present value of debt to exports higher than 220 percentor present value of debt to GNP higher than 80 percent. Also includes 9 countriesthat have received concessional rescheduling from Paris Club creditors (or are po-tentially eligible for such rescheduling). However, this concept will evolve in thecourse of implementing the Initiative to include all countries eligible under theESAF and IDA only that face unsustainable debt situations even after traditionaldebt-relief mechanisms are applied fully. Countries must also undertake adjust-ment programs supported by the IMF and the World Bank.

HIPC Initiative. Framework adopted jointly by the IMF and the World Bankfor action to resolve the external debt problems of heavily indebted poor countries.The Initiative envisages comprehensive action by the international financial com-munity, including the multilateral institutions, to achieve debt sustainability, pro-vided a country builds a track record of strong policy performance.

HIPC Trust Fund. The HIPC Trust Fund will provide debt relief to eligibleHIPCs on debt owed to participating multilaterals. It will either prepay, or pur-chase a portion of the debt owed to a multilateral creditor and cancel such debt, orpay debt service as it comes due. The HIPC Trust Fund will be administered byIDA and receive contributions from participating multilateral creditors and frombilateral donors. Contributions can be earmarked for debt owed by a particulardebtor or to a particular multilateral creditor. Donors can also provide contribu-tions to an unallocated pool and would participate in decisions regarding the useof these unallocated funds. The overall structure of the Trust Fund allows multi-lateral creditors to participate in the Trust Fund in ways consistent with their fi-nancial policies. It also addresses the resource constraints for certain multilateralcreditors and the potential requirements of donors.

International Development Association (IDA). IDA is the concessional lend-ing arm of the World Bank Group. IDA assistance is available to low-incomemember countries.

Multilateral creditors. These creditors are multilateral institutions such as theIMF and the World Bank, and other multilateral development banks.

Naples terms. Concessional debt-reduction terms for low-income countries ap-proved by the Paris Club in December 1994 and applied on a case-by-case basis.Countries can receive a reduction of eligible external debt of up to 67 percent innet present value terms.

Net present value (NPV) of debt The sum of all future debt-service obligations(interest and principal) on existing debt, discounted at the market interest rate.

39



Whenever the interest rate on a loan is lower than the market rate, the resulting NPVof debt is smaller than its face value, with the difference reflecting the grant element.

Net present value (NPV) of debt-to-exports ratio. Net present value (NPV)of outstanding public and publicly guaranteed external debt at the end of the pe-riod, expressed as a percentage of exports of goods and services.

Official development assistance (ODA). ODA is defined by the Organizationfor Economic Cooperation and Development (OECD) as grants or loans extendedby a government on concessional terms to developing countries with the promo-tion of economic development and welfare as the main objective.

Paris Club. Informal group of creditor governments mainly from industrialcountries (i.e., the OECD) that has met on a regular basis in Paris since 1956 withthe French Treasury providing the Secretariat. Creditors meet with debtor coun-tries in order to agree with them on restructuring their debts as part of the interna-tional support provided to a country that is experiencing debt-servicing difficultiesand is pursuing an adjustment program supported by an arrangement with the IMF.

Structural Adjustment Facility (SAF)TEnhanced Structural AdjustmentFacility (ESAF). The SAP, established in 1986 and no longer operational, and theESAF, established in 1987 and extended and enlarged in 1993, are the conces-sional loan windows of the IMF. These facilities are available to low-incomemember countries.

40


INTERNATIONAL MONETARY FUND PAMPHLET SERIES

(All pamphlets have been published in English, French, and Spanish,unless otherwise stated)

38. Fund Conditionality: Evolution of Principles and Practices, by Manuel Guitian.1981.

39. Order in International Finance, the Promotion of IMF Stand-By Arrangements, andthe Drafting of Private Loan Agreements, by Joseph Gold. 1982.

40. SDRs, Currencies, and Gold: Sixth Survey of New Legal Developments, byJoseph Gold. 1983.

41. The General Arrangements to Borrow, by Michael Ainley. 1984.

42. The International Monetary Fund: Its Financial Organization and Activities, byAnand G. Chandavarkar. 1984.

43. The Technical Assistance and Training Services of the International MonetaryFund. In English. Reprinted 1989.

44. SDRs, Currencies, and Gold: Seventh Survey of New Legal Developments, byJoseph Gold. 1987.

45. Financial Organization and Operations of the IMF, by the Treasurer's Department.First edition, 1990. Fourth edition, 1995. Third edition also in Russian.

46. The Unique Nature of the Responsibilities of the International Monetary Fund, byManuel Guitian. 1992.

47. Social Dimensions of the IMF's Policy Dialogue, by the staff of the IMF. 1995.

48. Unproductive Public Expenditures: A Pragmatic Approach to Policy Analysis, bythe Fiscal Affairs Department. 1995.

49. Guidelines for Fiscal Adjustment, by the Fiscal Affairs Department. 1995.

50. The Role of the IMF: Financing and Its Interactions with Adjustment and Surveil-lance, by Paul R. Masson and Michael Mussa. 1995.

51. Debt Relief for Low-Income Countries: The HIPC Initiative, by Anthony R. Booteand Kamau Thugge. 1997. French and Spanish versions forthcoming.

Photographic or microfilm copies of all English editions, including numbers thatare out of print, may be purchased direct from University Microfilms International, 300North Zeeb Road, Ann Arbor, Michigan 48106, U.S.A. or from Information Publica-tions International, White Swan House, Godstone, Surrey, RH9 8LW, England.

Copies of these pamphlets and information on earlier issues in the IMF PamphletSeries may be obtained from:

International Monetary Fund, Publication Services700 19th Street, N.W., Washington, D.C. 20431, U.S.A.

Telephone number: (202) 623-6430Telefax number: (202) 623-7201

Internet:publications @ imf.org


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