Debt relief initiatives for poor countries

The Multilateral Debt Relief Initiative (MDRI)

Pier for loading iron ore in Mauritania

In June 2005, at the Gleneagles Summit in Scotland, the G8 finance ministers agreed on the Multilateral Debt Relief Initiative (MDRI).

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 World Bank's International Development Association (IDA) and the African Development Fund (ADF) written off in full. Since 2007, the Inter-American Development Bank (IDB) has also been involved in the MDRI.

Scope for investment

By the end of 2015, 36 countries had reached the HIPC Completion Point and thus qualified for the MDRI too. Whereas the cancellation ratio for multilateral debt within the HIPC Initiative is around 50 per cent, under the MDRI outstanding debts with the IMF, IDA, ADF and IDB are being cancelled in full. This gives participating states significantly more scope for increasing pro-poor spending and making investments that help them achieve the internationally agreed development goals.

In total, debts amounting to 42.4 billion US dollars were cancelled under the Multilateral Debt Relief Initiative in the period up to the end of 2015.

Additional incentives for reform

The Multilateral Debt Relief Initiative is designed to give heavily indebted poor countries an additional incentive to push ahead with their reforms. In order to ensure that all low-income countries are treated equally when beneficiary countries receive new assistance from IDA or the African Development Fund, the amount of multilateral debt relief that has been agreed is included in the calculations that are made.

The G8 countries have undertaken to provide additional donor contributions to make up the shortfall in repayments IDA and the ADF caused by debt write-offs. These compensatory payments are then allocated to IDA and ADF recipient countries on a new basis, namely on a performance basis. Whether and to what extent countries benefit from the allocation of such IDA and ADF resources depends on a number of criteria, including reform orientation and good governance. According to the World Bank, this arrangement provides added benefit for HIPCs.

Germany's contribution

To finance the MDRI, Germany will contribute a total of some 3.3 billion euros up to 2054 to make up for anticipated shortfalls in loan repayments at the World Bank and the African Development Fund. The purpose of these compensatory payments is to preserve the financial strength of the institutions during the period of the debt relief initiative and beyond, so that they can continue to help low-income countries achieve the global development goals enshrined in the 2030 Agenda.

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