The IMF has played a central role, through its policy guidance and financial support, in helping member countries cope with external debt problems. The IMF’s ultimate objective is to ensure that debtor countries achieve sustainable growth and balance of payments viability and establish normal relations with creditors, including access to international financial markets. While the instruments used have evolved over time, the basic elements of the IMF’s debt strategy remain the same:
- promotion of growth-oriented adjustment and structural reform in debtor countries,
- maintenance of a favorable global economic environment, and
- assurance of adequate financial support from official (bilateral and multilateral) and private sources.
Commercial bank debt operations
The IMF continues, on a case-by-case basis, to support operations to reduce the debt and debt service owed to commercial banks. It evaluates proposed packages in light of the strength of the member’s economic policies, the likelihood that the country would regain access to credit markets and attain external viability with growth, and the assurance that the package represents an efficient use of scarce resources.
The IMF takes into account the appropriate balance between reducing debt and reducing debt service in bank debt packages. It considers whether the resulting debt-service profile on restructured debt is consistent with the country’s likely ability to service its debt; whether the package is cost-effective; whether it would imply continued commercial bank involvement, where appropriate, and could facilitate a return to normal commercial financing; and whether the menu of options is balanced and broad enough to ensure a high rate of participation in the package.
Official bilateral debt rescheduling
Member countries seeking to reschedule their official bilateral debt normally approach the Paris Club. This is an informal arrangement that provides a forum for indebted countries and their official bilateral creditors to work out agreements. The agreements generally provide for the rescheduling of arrears and current maturities of eligible debt service falling due during the consolidation period (generally the period of the IMF arrangement), with a repayment period stretching over many years. To ensure that such relief helps restore balance of payments viability and achieve sustainable economic growth, the Paris Club links debt relief to the formulation of an economic program endorsed by the IMF. In deciding on the coverage and terms of individual rescheduling agreements, Paris Club creditors also draw upon the IMF’s analysis and assessment of countries’ balance of payments and debt situations.
Among the 30 middle-income countries that have rescheduled with Paris Club creditors during the last two decades, 24 have graduated from rescheduling, and a number of others are expected to graduate at the end of their current consolidation periods. Their exit from rescheduling reflects the significant progress made by many middle-income countries in macroeconomic stabilization and structural reform, which has improved their access to private foreign financing. In contrast, fewer than one-fourth of the 37 low-income rescheduling countries have graduated from the rescheduling process, partly because of the severity of their debt burdens and, in many of them, partly because of the uneven pace of macroeconomic stabilization and structural reform.
Since December 1994, Paris Club creditors have provided concessional reschedulings for low-income countries on “Naples terms,” under which debt service on eligible debt is reduced by up to 67 percent in net-present-value terms. Creditors have also provided exit reschedulings on the stock of eligible debt on Naples terms for low-income countries that have demonstrated a good track record under rescheduling agreements and IMF-supported programs.
An agreement was reached in September 1997 on Russia’s participation as a creditor in Paris Club reschedulings. It provides for up-front discounts on Russian claims on rescheduling countries to make them comparable to claims of traditional Paris Club creditors. This agreement has already facilitated the regularization of Russian claims on developing countries and the implementation of the Heavily Indebted Poor Countries (HIPC) Initiative for countries with large debts to Russia.
The IMF and the World Bank jointly developed a program of action—the HIPC Initiative—designed to resolve the debt problems of poor countries that follow sound policies but for which traditional debt-relief mechanisms are not sufficient to reduce their external debt to sustainable levels. For these countries, the burden of external debt is jeopardizing their adjustment and growth. The HIPC Initiative, adopted in September 1996, provides exceptional assistance to eligible countries to reduce their external debt burden to levels that they can service through export earnings, aid, and capital inflows. This exceptional assistance entails a reduction in the net present value of all claims on the indebted country.
Eligibility. The HIPC Initiative is open to all heavily indebted poor countries that are eligible for funding under the IMF’s Enhanced Structural Adjustment Facility (ESAF) and the World Bank’s International Development Association. It is a comprehensive, integrated, and coordinated approach to external debt that requires the participation of all creditors—bilateral, multilateral, and commercial. It is consistent with past approaches and, indeed, reinforces them. To qualify for debt relief from the international community, the debtor country must adopt appropriate policies to help ensure that this relief is put to effective use. Central to the initiative, therefore, are the country’s continued efforts toward macroeconomic adjustment and its implementation of structural and social policy reforms.
Developments. By June 1999, the IMF and the World Bank had considered 12 countries for eligibility under the HIPC Initiative and had agreed to assist 7 of them. In April 1998, Uganda became the first country to reach the completion point under the initiative, and, since then, three other countries have reached their completion points: Bolivia (September 1998), Guyana (May 1999), and Mozambique (June 1999). Total assistance granted to these four countries under the initiative amounts to about $7 billion is nominal terms.
In addition, three countries have reached their decision points and have received commitments of assistance: Burkina Faso, Côte d’Ivoire, and Mali. These three countries are scheduled to reach their completion points under the initiative at various dates between now and 2001.
Proposals to enhance the HIPC Initiative
At a June 1999 summit held in Cologne, Germany, the heads of state or government of the Group of Eight industrial countries noted that the HIPC Initiative had yielded positive results since it was launched in 1996—particularly in bringing together the different creditors in a comprehensive framework for debt relief. However, given the continued difficulties of many heavily indebted poor countries, the leaders suggested enhancing the HIPC Initiative. They endorsed a proposal to offer faster, deeper, and broader debt relief for those countries demonstrating a commitment to reform and poverty alleviation. Under the proposed enhanced initiative, the debt stock of qualifying countries would be reduced substantially, lowering interest payments and freeing resources for priority social spending, particularly in health and education. They also proposed that the HIPC Initiative be strengthened to provide an enhanced framework for poverty reduction.
HIPC Initiative is reviewed
Concern has been widespread that the HIPC Initiative has not enabled poor countries to escape fully the burden of their foreign debts. In 1998/99, the issues of debt relief and possible changes to strengthen the HIPC Initiative attracted widespread attention from nongovernmental organizations, religious groups, the media, international organizations, and governments.
The IMF and the World Bank launched a comprehensive two-stage review of the HIPC Initiative in early 1999 that began with extensive public consultations. The first stage addressed possible modifications to the framework of the initiative; the second focused on strengthening the link between debt relief and poverty reduction. The Boards of the IMF and the World Bank have provisionally endorsed, contingent on the availability of the necessary funding, a number of far-reaching proposals to enhance the initiative by providing for deeper, faster, and broader debt relief. These proposals build on the comments offered by civil society, governments, and multilateral institutions, as well as the proposals made by the Group of Seven finance ministers and endorsed at the summit held in Cologne, Germany, in June 1999.
At the same time, the IMF, together with the World Bank, has proposed a nationally led, enhanced framework for poverty reduction. The underlying premise is that the best way to ensure a strong link between debt relief and poverty reduction is to make HIPC debt relief an integral part of countries’ broader efforts to implement strategies to reduce poverty using all resources available to them. Such a framework, which would provide a base for ESAF-supported programs, would ensure consistency between a country’s macroeconomic, structural, and social policies and the goals of poverty reduction and social development.
If these proposals are endorsed at the 1999 Annual Meetings of the IMF and the World Bank, and if financing is secured, the two institutions intend to implement the enhanced initiative as rapidly as possible, particularly for countries that have already reached their decision points.
The Boards of the IMF and the Bank are considering proposals to enhance the HIPC Initiative, to strengthen the links between debt relief and poverty reduction, and to finance the large cost increases faced by the IMF and the International Development Association. (See box on the review of the HIPC Initiative, page 19.) The Interim and Development Committees are expected to discuss these issues immediately prior to the 1999 annual meetings.