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Instruments
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The HIPC Initiative
In 1996, at the instigation of the G8 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, as it became known, made possible for the first time coordinated debt relief by international financial institutions and official bilateral creditors from the Paris Club. 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.
On average, countries have two thirds of their debt cancelled – this includes individual, bilateral debt relief packages of creditor countries. Overall, the volume of debt relief granted through the HIPC Initiative amounts to around 66 billion US dollars (as at October 2008). This includes commercial debt that has passed to governments, for example as the result of state credit guarantees, debt from development cooperation and, to a limited extent, debts owed to the World Bank, the International Monetary Fund, regional development banks and many smaller, multilateral organisations.
Participation criteria
Countries must meet the following conditions to qualify for the HIPC Debt Initiative:
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The country must be eligible for concessionary loans from the World Bank and the IMF. 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.
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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.
Forty-one countries currently fall into this category; most of them are in sub-Saharan Africa.
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.
The participating developing country must, for example, prepare a Poverty Reduction Strategy Paper (PRSP), prioritise implementation of the strategy and be able to furnish verifiable proof thereof over a certain period of time.
As well as taking stock of the present situation, a country’s PRSP maps out the way forward. Poverty reduction must be at the heart of economic, social and health policy. But it is not just about using the money freed up by debt relief to combat poverty, but rather about re-aligning budgetary and financial policies as a whole to bring about long-term change.
This is particularly important in the post-debt-relief period. So as not to fall back into debt, the countries concerned have to pursue a sustainable economic policy that will help eliminate the structural causes of poverty. The PRSP sets out the priorities and the concrete steps to be taken in each area of activity.
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 will remain open to these countries, provided they satisfy 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.
