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8.11 Debt relief committed under HIPC and MDRI Initiatives

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Modified on 2013/03/26 18:01 by The World Bank Categorized as Goal 8
Contents

GOAL AND TARGET ADDRESSED

Goal 8. Develop a global partnership for development. Target 8D. Deal comprehensively with the debt problems of developing countries through national and international measures in order to make debt sustainable in the long term.

DEFINITION AND METHOD OF COMPUTATION

Definition
The debt relief committed under HIPC and MDRI initiatives is the amount of debt relief committed under the heavily indebted poor countries (HIPC) initiative when a country reaches its decision point and the multilateral debt relief initiative (MDRI) when a country reaches its completion point under the enhanced HIPC Initiative.

This indicator is expressed in units of US dollars.

Concepts
The heavily indebted poor countries (HIPC) initiative is a major international effort targeted specifically at improving developing countries’ debt sustainability. Launched in 1996 and enhanced in 1999, the HIPC initiative is a joint effort of multilateral, official bilateral and commercial creditors to reduce the external debt of the world’s most debt-laden poor countries to sustainable levels.

The HIPC decision point is the date at which an HIPC commits to undertake additional reforms and to develop and implement a poverty reduction strategy under the HIPC initiative. HIPCs reach the decision point if they have a track record of macroeconomic stability, have prepared an Interim Poverty Reduction Strategy through a participatory process, and have cleared or reached an agreement on a process to clear outstanding arrears to multilateral and all other external creditors. To reach the decision point, the country also has to be still heavily indebted according to the most recent data prior to the decision point. A country's debt level is considered unsustainable if the present value of external public and publicly guaranteed debt-to-export levels of 150 percent; or, when the country has a very open economy where the exclusive reliance on external indicators may not adequately reflect the fiscal burden of external debt, the present value of external public and publicly guaranteed debt-to-government revenues are above of 250 percent. This is calculated using the most recent data prior to the decision point with a 3-month grace (i.e. end-2006 data may be used for a decision point date up to March 2008) The amount of debt relief necessary to bring countries’ debt indicators to HIPC thresholds is calculated, and countries begin receiving debt relief on a provisional basis.

The multilateral debt relief initiative (MDRI) was launched in 2005 to further reduce the debt of HIPCs and provide resources for meeting the Millennium Development Goals. Under the MDRI, the International Development Association (IDA), the International Monetary Fund (IMF), the African Development Fund (AfDF), and the Inter-American Development Bank (IDB) provide 100 percent debt relief on eligible debts due to them from countries having reached their completion points under the enhanced HIPC Initiative.

The HIPC completion point is the date at which countries successfully complete the key structural reforms agreed at the decision point, including the development and one-year implementation of a poverty reduction strategy. Countries must also have maintained macroeconomic stability under an Extended Credit Facility and other IMF supported programs. Countries then receive the balance of debt relief promised under the HIPC initiative without any further policy conditions.

Method of computation
Debt relief committed under the HIPC Initiative is calculated as the amount needed to bring the net present value (NPV) of the country's debt level at the decision point to the thresholds established by the HIPC Initiative –150 per cent of the value of exports or in certain cases 250 per cent of fiscal revenues. To qualify for relief of 250 per cent of fiscal revenues, a country must have a ratio of exports to Gross Domestic Product (GDP) exceeding 30 percent and a ratio of fiscal revenue to GDP exceeding 15 percent. If both thresholds are met, the amount of debt relief is the higher of the two amounts calculated under each threshold.

Debt NPVs are calculated using currency-specific average discount rates based on Commercial Interest Reference Rates (CIRR) from the Organisation for Economic Co operation and Development (OECD), and fiscal year-end exchange rates.

MDRI assistance is computed as the NPV of participating multilateral agencies’ (IDA, IMF, AfDF, and IDB) eligible debt claims on countries that have reached their completion point under the enhanced HIPC initiative. MDRI debt relief generally covers debt accrued before the end of 2004 (for the IMF, AfDF, and IDB) or the end of 2003 (for IDA), and debt that is still outstanding at the time the countries reach their completion point. The indicators are expressed in cumulative amounts of US dollars to the latest update.

RATIONALE AND INTERPRETATION

A global partnership for development requires increased debt reduction for heavily indebted poor countries. The HIPC initiative and the MDRI provide substantial debt relief to free up resources to help heavily indebted poor countries reach the MDGs. Measures of debt relief committed under the HIPC initiative and the MDRI enable countries to monitor progress toward full implementation of the initiatives.

SOURCES AND DATA COLLECTION

Data on HIPC initiative debt relief are compiled by the IMF and the World Bank from HIPC decision and completion point documents. For each "pre-decision-point" country, World Bank and IMF staffs complete a Debt Sustainability Analysis (DSA) which includes data reconciliation between creditor and debtor loan statements, and the calculation of the NPV of debt.

Data on MDRI debt relief are estimated by IDA, IMF, AfDF, and IDB staff in collaboration with country authorities. The lag between the reference year and the actual production of data series is around one year.

DISAGGREGATION

The indicator is shown separately for HIPC and MDRI. Other disaggregation is not applicable for this indicator.

COMMENTS AND LIMITATIONS

This indicator is limited because it is applicable only to HIPCs and does not include other countries that may also experience debt that reduces their ability to meet the MDGs.

The indicator measures committed debt relief under the assumption that creditors will honour future debt relief commitments. Hence, the indicator does not reflect the actual debt relief received by HIPCs. Furthermore, although most creditors have committed to debt relief, some commercial creditors and some that are not in the Paris Club do not participate in the initiative, which generates a shortfall in HIPC assistance.

The enhanced HIPC Initiative aims to provide HIPCs with a base from which to achieve debt sustainability and exit the debt rescheduling cycle. However, debt reduction alone is not a sufficient instrument to affect the multiple drivers of debt sustainability. Sustained improvements in measures that fall outside the ambit of the HIPC Initiative are also needed such as improvements in export diversification, fiscal management, the terms of new financing, and public debt management.

The techniques used by the HIPC Debt Sustainability Assessment (DSA) to estimate the NPV of debt have some limitations. First, the DSA makes assumptions about future growth rates of exports and GDP. These assumptions have profound implications for determining the likely outcomes and overall success of the HIPC Initiative. For example, the higher the assumed export growth rate, the more likely it is that a country’s projected debt-to-export ratio will reach a level defined as sustainable. Inaccurate projections are thus detrimental to measures of future debt sustainability. Secondly, domestic debt is excluded from the HIPC DSA. Thirdly, the HIPC DSA uses currency-specific short-term interest rates when discounting debt which are known to cause volatility in NPV calculations.

Another limitation to the indicator is that debt relief commitments may be revised at the completion point. The HIPC Initiative framework allows for additional debt relief at the completion point - topping-up, if a HIPC has experienced a significant, unanticipated deterioration in its debt burden. For topping-up assistance to be granted, the deterioration must be primarily attributable to exogenous factors. Topping-up assistance may be provided proportionately by all creditors in order to raise the NPV of debt to the HIPC Initiative threshold at the completion point. In most cases, the primary factors that influence the need to provide topping-up are unanticipated changes in the exchange and discount rates, or export growth rates.

GENDER EQUALITY ISSUES

Not applicable for this indicator.

DATA FOR GLOBAL AND REGIONAL MONITORING

Regional and global estimates are produced by simply summing debt relief committed under the HIPC Initiative and MDRI initiative to all HIPCs.

SUPPLEMENTARY INFORMATION



EXAMPLES



REFERENCES

INTERNATIONAL DEVELOPMENT ASSOCIATION and INTERNATIONAL MONETARY FUND (annual). Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI)—Status of Implementation. Washington DC. Available from http://go.worldbank.org/LG6DPCAI60

INTERNATIONAL MONETARY FUND (annual). Debt Relief under the Heavily Indebted Poor Countries (HIPC) Initiative. Washington, D.C. Internet site http://www.imf.org/external/np/exr/facts/hipc.htm

WORLD BANK (annual). Completion Point Documents. Washington, D.C. Internet site http://go.worldbank.org/T0OFS29N10

WORLD BANK (annual). Decision Point Documents. Washington, D.C. Internet site http://go.worldbank.org/9W8I0X55A0

WORLD BANK (annual). The Enhanced Heavily Indebted Poor Countries Initiative. Washington, D.C. Internet site http://go.worldbank.org/85B908KVE0

WORLD BANK (annual). Steps of the HIPC Initiative. Washington, D.C. Internet site http://go.worldbank.org/76G2TJJO30

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