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Instruments
Multilateral Debt Relief Initiative (MDRI)
In June 2005, the G8 finance ministers agreed on the Multilateral Debt Relief Initiative (MDRI) at the Gleneagles Summit in Scotland. The MDRI builds on the mechanism of the HIPC Initiative. Countries that have reached completion point under the HIPC Initiative can have their debts to the International Monetary Fund (IMF), the International Development Association (IDA) and the African Development Fund (AfDF) written off in full. The Inter-American Development Bank (IDB) has taken part in the MDRI since 2007. Other regional development banks and multilateral creditors are not covered by the MDRI, however.
By July 2009, 26 countries had reached the HIPC completion point and thus qualified for the MDRI too. Whereas the cancellation ratio for multilateral debt within the HIPC is around 50 per cent, under the MDRI outstanding debt with the IMF, IDA and AfDF is being cancelled in full. This gives participating states significantly more scope for increasing pro-poor spending and investment with a view to achieving internationally agreed development goals. To date, a total of 43.5 billion US dollars of debt has been cancelled under the Multilateral Debt Relief Initiative (as at December 2007).
Additional incentives for reform
The Multilateral Debt Relief Initiative is designed to give highly indebted poor countries an additional incentive to push ahead with their reforms. In order that all low-income countries should be treated equally, the agreed additional multilateral debt relief is imputed to the beneficiary countries in the provision of new assistance by the IDA and the African Development Fund.
The G8 countries have undertaken to provide additional donor contributions to fill the financing gap caused by debt write-offs at the IDA and the AfDF. These compensatory payments will then be allocated to IDA and AfDF recipient countries on a new basis, namely on a performance basis.
Whether and to what extent countries benefit from the performance-based allocation of IDA and AfDF resources will depend on a number of criteria, including reform orientation and good governance. According to World Bank calculations with initial models, HIPCs stand to benefit disproportionately from this arrangement.
Germany’s contribution
To finance the MDRI, Germany will contribute some 3.5 billion euros to make up for anticipated shortfalls at the World Bank and the African Development Fund as a result of the non-repayment of loans. The aim of the compensatory payments is to preserve the financial strength of these institutions beyond the debt relief initiative so that they can continue to help the low-income countries to achieve the Millennium Development Goals.
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