The HIPC Initiative

Boy in a slum in El Salvador.

In 1996, at the instigation of the G7 states, the World Bank and the In­ter­na­ti­o­nal Monetary Fund (IMF) adopted an initiative to reduce the debt burden faced by heavily indebted poor countries (HIPC). This HIPC Initiative made coordinated debt relief by in­ter­na­ti­o­nal financial institutions and official bilateral creditors from the Paris Club possible for the first time. The HIPC Initiative was enhanced at the G8 Summit in Cologne in 1999 at the instigation of the German government, giving rise to the Enhanced Heavily Indebted Poor Countries Initiative (HIPC II).

In addition to bilateral debt cancellation, HIPC II also provides for limited multilateral debt relief by in­ter­na­ti­o­nal financial institutions such as the World Bank and the IMF – though only to the extent necessary to restore a ‘sustainable’ level of debt. Whereas all borrowing countries that are experiencing serious payment problems can negotiate with the Paris Club, the HIPC Initiative is reserved solely for those countries that qualify as highly indebted poor countries as defined by the World Bank’s current indebtedness criteria.

Participation criteria

Countries must meet the following conditions to qualify for the HIPC Debt Initiative:

  • The country must be eligible for concessionary loans from the World Bank and the IMF (under the Extended Credit Facility for poor countries). This means currently that the annual per capita income of a country seeking debt relief should not be significantly higher than 1,000 US dollars.

  • The country’s NPV debt-to-export ratio must be in excess of 150 per cent. Alternatively, its NPV debt-to-fiscal revenue ratio must total more than 250 per cent, whereby state revenue has to exceed 15 per cent and exports 30 per cent of gross domestic product.

Thirty-nine countries currently fall into this category; most of them are in sub-Saharan Africa.

On average, countries have two thirds of their debt cancelled. Overall, the volume of debt relief granted through the HIPC Initiative amounts to around 76.4 billion US dollars (as of early 2012). This includes commercial debt that has passed to governments of individual creditor countries, for example as the result of state credit guarantees, debt from official bilateral de­vel­op­ment co­op­er­a­tion and, to a limited extent, debts owed to the World Bank, the IMF, regional de­vel­op­ment banks and many smaller, multilateral organisations.

Poverty Reduction Strategy Papers (PRSP)

The HIPC Initiative is designed to reduce poverty. There are set rules and procedures governing the process of debt cancellation. One condition is that the participating developing country prepares a Poverty Reduction Strategy Paper (PRSP), prioritises implementation of the strategy and is able to furnish verifiable proof thereof over a certain period of time. Another condition is that funds released as a result of debt relief are used directly to reduce poverty.

The principle of PRSPs is based on the fact that the poorer countries are themselves responsible for deciding upon and implementing the key measures required to develop their respective economies and social systems. The World Bank, In­ter­na­ti­o­nal Monetary Fund and creditors support these strategies. Each PRSP should be created in a participatory process, which means that civil society should be involved in drawing up the strategy. PRSPs cover elements of economic policy as well as financial and social aspects and are geared towards the Millennium De­vel­op­ment Goals.

Deadline extended

The HIPC Debt Relief Initiative was originally scheduled to run until the end of 2006, by which time the highly indebted countries were supposed to have qualified for participation. But not all of them succeeded in doing so – political instability, domestic conflicts and deteriorating economic conditions caused delays for some countries. In accordance with a decision by the IMF and the World Bank, the HIPC Initiative and the Multilateral Debt Relief Initiative would remain open to these countries, provided they had satisfied the eligibility criteria based on end-2004 data. This also applies to countries that may in the future, on the basis of improved data, be assessed to have met these criteria. This rule was applied to Afghanistan, for example, which was accepted into the Initiative in July 2007.

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