Meeting of Multilateral Development Banks on Debt Issues. Washington D.C., July 6-7, 2011 DRAFT MINUTES OF THE MEETING

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1 Meeting of Multilateral Development Banks on Debt Issues Washington D.C., July 6-7, 2011 DRAFT MINUTES OF THE MEETING Chair: Jeffrey Lewis, Director, Economic Policy and Debt Department (PRMED), World Bank. Attendees 1 : Messrs/Mmes: Benoit Chervalier, Senait Assefa and Josselyne Ahogny (AfDB), Hong Wei and Johanna Boestel (AsDB), Ian Durant (CDB), Jose Maria Ruisanchez (CAF), Hernan Alvardo and Nicolas Guell (CABEI), Rainer Wichern and Juana Aristizabal Pinto (EC), Bernard Ziller and Robert Schmidtz (EIB), Edgardo Demaestri, Eduardo Fernández Arias and Sylvia Gabriela Andrade (IaDB), Brian Baldwin (IFAD), Helge Semb, Mats Slotte and Linda Lundqvist (NDF). Observers: Messrs/Mmes: Tariq Al-Menayes and Khaled Alkhaled (KF), and Ahmad S. Al- Teraifi and Saeid Alkahtani (SF). Opening Remarks and endorsement of the Agenda: The chair welcomed the participants as the new Director of the PRMED. He noted that this is the sixteenth year that the MDBs meet to discuss debt and related issues. He discussed the history of the initiative and its achievement to date, which was originally envisaged as a short-term initiative to address the excessive debt levels of highly indebted poor countries and today, was largely completed. Indeed, 90% of HIPCs have reached the decision point and 80% the completion point. In this context, he urged the participants to consider whether the forum was still relevant in its current form and if so, how to enhance its effectiveness. The participants were invited to a tour de table. Proceedings: The meeting proceeded according to the agenda. Status of the HIPC and MDRI Implementation: The World Bank (The Bank) presented an update on the implementation of the HIPC Initiative and MDRI based on the preliminary findings of the HIPC Initiative and MDRI Status of Implementation Report. It was noted that progress has been slower than during the last 2 years where a total of nine countries reached the Completion Point (CP) and two, the decision point (DP). Since July 2010, two additional countries (Togo and Guinea-Bissau) have reached the CP bringing the number to 32 CP out of the 40 eligible countries. The number of countries that reached the DP remains at 36. The debt burdens of post-cp countries have been reduced by 90% compared to DP levels and key debt burden indicators have substantially declined. Most of the Interim countries (Comoros, Cote d Ivoire and Guinea) are making good progress on their CP triggers. Only Chad still faces 1 See Annex II for a complete list of participants including IMF and World Bank staff. 1

2 serious political challenges, unable to implement policies and to maintain macroeconomic stability, and all pre-cp HIPCs (except Kyrgyz Republic) are fragile states as per the Bank s definition. Further challenges on implementation of the HIPC Initiative were highlighted: (i) taking the remaining 8 pre-cp countries to the CP; (ii) ensuring full participation of all creditors; and (iii) maintaining debt sustainability. Debt relief alone, however, is not sufficient to guarantee debt sustainability. Strengthening debt management capacity and institutions in these countries is critical to maintain a sustainable debt level. It was reported that the annual reporting exercise on the delivery of debt relief captured 97% of the total cost of HIPC & MDRI. A total of 11 institutions provided data compared to 14 last year. It was highlighted that participation by other bilateral and commercial creditors is key for the delivery of debt relief to pre-cp countries. Non-Paris Club (NPC) official bilateral creditors and commercial creditors still need to participate more fully. For example, NPC creditors account for about 13% (US$10 billion) of total cost of HIPC Initiative debt relief and around 40% are estimated delivery by NPC creditors of expected HIPC relief to post-cp HIPCs. Updated status of implementation of the HIPC Initiative and MDRI is scheduled for end-october 2011 after the Annual Meetings and the deadline for MDBs submission is expected for August 26, 2011, which gives more time to capture further participation by other bilateral and commercial creditors. Options for the future of the Initiative are considered. The Bank presented the options that were discussed by the Boards of IDA and the IMF on the future of the HIPC Initiative. It was noted that the Initiative was never meant to be permanent. In fact, slower than expected progress required repeated extensions of the sunset clause since In 2004, the Boards decided that potential eligibility would be ring-fenced to countries meeting the Initiative s income and indebtedness criteria based on end-2004 data. In 2006, 14 countries were included on the list of potentially eligible countries that met income and indebtedness criteria at end Three of which indicated no interest (Bhutan, Lao P.D.R. and Sri Lanka) and Nepal followed in Afghanistan was added on the eligibility list in Myanmar and Zimbabwe are two countries where eligibility is still not confirmed. At present, the Boards of IDA and IMF have asked to reconsider the rules of the HIPC Initiative and define an exit strategy for countries that have expressed the intent not to avail themselves of HIPC Initiative debt relief. Informal discussions were held with IDA and IMF Executive Directors earlier this year on options to further ring-fence the HIPCs and maintain status quo. Making the initiative permanent or closing the initiative were two options that were not considered. Both the Boards of IDA and the IMF will consider the costing implication of the options for the future of the HIPC Initiative and make a decision at end of October

3 Monitoring and reporting on debt vulnerabilities in LICs, including HIPCs, would be intensified. Many LICs were less affected by the 2008 crisis than developed countries and MICs because of debt relief and improved debt management capacity but the recent crisis highlighted the need to look at certain aspects of LICs better than before in order to track vulnerabilities. A need to monitor debt sustainability and the risks associated with their debt portfolios is even more critical. Reporting on debt relief delivery and litigation against HIPCs is discussed in the context of individual debt sustainability analysis, implying a change on the reporting. Participants welcomed both presentations, noting that the future of the HIPC is of actuality and should be followed. On that, the Bank queried on the input on MDBs own operations. Emerging Issues for Debt Management on MDBs operations: Four MDBs updated the participants on their experience over the year. African Development Bank (AfDB): Out of the 40 countries potentially eligible for HIPC/MDRI debt relief globally, 33 are regional member countries of the African Development Bank (AfDB). The impact of debt relief under HIPC/MDRI has been positive with significant decrease in stock of external public debt and improved fiscal space and ability to borrow. However, debt sustainability remains a serious concern for several countries despite having received debt relief they still have huge unmet financing needs and have important structural issues to address. AfDB highlighted that concerted efforts by MDBs and other donors would be required to tap into co-financing opportunities and enhancing leveraging effect of concessional resources. Debt issues in fragile and conflict states were also presented by AfDB. Seventeen out of the 33 regional member countries potentially eligible for HIPC/MDRI debt relief are designated as fragile states. Fragile and conflict-affected states present unique challenges and opportunities for debt practitioners. Key challenges include difficulty in prioritization of debt-related policy and institutional reforms; maintaining and deepening reforms already in place; and weak implementation capacity. At the same time, debt relief eligibility process and implementation of debt management programs provide a good opportunity to address some of the root causes of fragility and conflict, such as economic and governance reforms. The presentation also highlighted the cost of delay in HIPC/MDRI participation to creditors as well as eligible countries as they may fail to reap the full benefit of debt relief. Asian Development Bank (AsDB): Positive progress on the operations with half of the member countries having improved their debt distress level since The challenges that AsDB oversees for the region are capacity and political will. Some of the countries are not in position 3

4 to manage their debt having problem of capacity. AsDB also discussed their own capacity issue when following IMF mission. They discussed that more and more of their countries members were going to non-traditional creditors to finance large infrastructure projects, especially projects under the Public Private Partnerships. Inter-American Development Bank (IaDB): A number of issues on debt management in LAC are discussed to improve debt statistics; estimate and manage contingent liabilities; manage natural disaster risks with lending facilities and lending support; coordinate asset and liability management; and develop debt sustainability methodology. Their aim is to support its member countries through network support; operational and policy dialogue support; and knowledge products. IaDB also noted that they were looking for voluntary member countries to serve as pilot countries in all areas of operations. European Investment Bank (EIB): EIB highlighted that it was important to distinguish between EIB Debt Relief Implementation on behalf of the EU, which is EU Funds and EIB Implementation on its own behalf, which is EIB funds. They then presented two recent operations, one on behalf of the EU and one on behalf of the EIB s own contribution which presented particular challenges. The case of Guinea Bissau and Ghana were discussed. The first case led to a compromise to find an amicable solution when dealing with the parties. The second case led to lead to Policy Revision. Questions were raised on regional policy coordination. IaDB mentioned their financing window for natural resources. The AfDB raised the issue of the need to have in place a structured coordination mechanism to track implementation of Non-concessional borrowing (NCB) policy by various MDBs and bilateral donors. Investment-Growth Nexus and Infrastructure Lending, the DRC Congo case. According to a study done by a number of stakeholders 2 (including African Union, NEPAD, DFID, KFW ), Africa remains a challenge with high cost to develop its infrastructure. In fact, it was reported that transforming Africa s infrastructure will require an additional US$31 billion a year and huge efficiency gains. Some interesting findings were highlighted: one third of the infrastructure needs should be directed to operations and maintenance; almost half of the spending needs are associated with power; three quarters of infrastructure spending is financed by African tax-payers and consumers. Obviously, the extent of infrastructure challenge varies across countries the Democratic Republic of Congo was discussed. Lack of infrastructure was recognized as one key constraint for most development. AsDB and the Caribbean Development Bank (CDB) later in the day, provided participants on their 2 See presentation Key Findings from the Africa Infrastructure Country Diagnostic by Cecilia Briceno-Garmendia 4

5 experience with infrastructure lending activities. AsDB discussed the infrastructure lending on local currency financing to avoid currency mixed match. They noted that infrastructure today is different from traditional definition. Environment and social issues are part of today s definition. Protecting Multilateral Aid from Lawsuits by Creditors. Anne-Marie Leroy, Senior Vice President & Group General Counsel from the Bank, Guest Speaker of the meeting, discussed the risks that IFIs and MDBs should be concerned about lawsuits, the legal and policy rationale for enhanced protections and options available. She noted that IFIs are increasingly on the radar screen for creditor litigation. Much of the concern arises from the activities of vulture funds but these are often legally indistinguishable from any other creditor. They may serve a useful purpose but could be extremely disruptive to the lending program and the debt relief effort. Financial transactions are still vulnerable and the threat of creditor litigation remains ever present. She mentioned that she and her team were in contact with most MDBs counterparts and collaborative frameworks are being proposed between IFIs and MDBs. The Debt Reduction Facility (DRF). The Bank presented an update on the DRF which has helped resolve many litigation cases, but not all. The DRF was established in 1989 to help IDAonly HIPC countries reduce their sovereign external commercial debt (ECD) as part of a broader debt resolution program, through ECD buyback operations at a deep discount. Since 1991, DRF has supported 25 debt reduction operations in 22 IDA-only countries. Beneficiary countries extinguished US$10.4 billion of external commercial debt at a cost of about US$754 million. Significant resources and time are still required to eliminate remaining external commercial debt claims, estimated to US$12 billion. The market is still uncertain with litigation threat remaining and vulture funds monitoring developments. In the meantime, it was noted that the DRF multi-trust facility was ending in The AfDB reported that the African Legal Support Facility (hosted by the AfDB) was established in 2009 to primarily address vulture fund litigation issues in African countries. Thus far, the demand for such assistance has been relatively low (less than 10 percent of total request). Implementation of the Non-Concessional Borrowing and the debt sustainability framework. The Fund presented the new debt limit policies, which are implemented in close coordination between IMF and the Bank, are moving away from a single design policy for concessionality requirements to a menu of options. The new policies have been made more flexible to address the NCB, except when capacity is low and vulnerabilities high, hence preserving consistency of the NCB policies. The implementation of the new policies has raised a few operational issues which will need to be reconsidered in the context of the forthcoming review of the debt limits policy. 5

6 The Bank updated on the implementation of the DSF and noted that improving the DSF is an ongoing effort. The revision of the DSF that was done in 2009 has enhanced its flexibility and has stressed the importance of better assessing the investment-growth nexus in each DSA. The revision has been ongoing to better understand the framework itself. However, simplifying the framework should not jeopardize the validity and the richness of the analysis. A joint Board paper is being prepared to present possible ways to modify the framework and a modified framework could be available in 2012 after the Boards guidance. Questions were raised on how a country is downgraded and the reason of such downgrade. A number of indicators were available for such analysis the CPIA indicators are public and available to MDBs for their analysis. CPIA was also noted as the best indicator so far. On the DSF, it was highlighted that the framework was difficult to understand. On that, one participant mentioned that maybe the problem was on the macro-economic, not a DSF problem. One participant welcomed the DFS flexibility but noted the challenge in making it as standard for all countries. An internal mechanism needed to be put in place when dealing with one particular country. Investment growth and growth assessment were also discussed. It was noted that institutions were trying to be more transparent in their assessment, and the underlying parameters. It was also noted that the DSA was a discipline on its own and may not be expected for all countries. The fund informed that on the Togo case, a documentary on the DSA discussion will be soon released. Sudan and Zimbabwe were presented as interest was expressed as possible HIPC case. The Fund and the Bank reported that both Sudan and Zimbabwe will likely remain in debt distress in the medium term. The latter was not on the 2004 list of countries qualifying for HIPC assistance and its HIPC eligibility would need to be determined. If Zimbabwe were to qualify for HIPC debt relief, the international community would have to be mobilized for further funding. AfDB also noted that they have ramped up support to Zimbabwe since 2010 when the country office was reopened and the multi-donor trust fund (Zim-Fund) was revived with new resources. Substantial challenges remain on the political front. Participants raised a number of questions regarding MDBs involvement in Sudan and Zimbabwe, including when to mobilize funding for debt relief and how to plan assistance to both countries. More generally, a key issue for many donors, including MDBs, is how best to engage in politically complex settings, especially when operational programs were suspended due to arrears or security issues. Other questions were raised on the AfDB s facility for fragile state and how it works. AfDB reported that the Facility was established in 2008 and has 3 pillars which provide: (i) additional 6

7 resources to top-up eligible country s performance-based allocations; (ii) resources for arrears clearance; and (3) targeted support for capacity building and technical assistance. The Facility is designed to provide flexible and country-differentiated support. Implementation of the work program on debt management technical assistance was updated. The Bank updated the participants on the debt management work program financed by the Debt Management Facility (DMF), a multi-trust fund managed on behalf of donors by PRMED and focusing on Low Income Countries. During FY11, 29 countries underwent the Debt Management Performance Assessment (DeMPA), 10 countries developed a reform plan, and 16 joint Bank-Fund medium-term debt management (MTDS) missions were undertaken. The outreach program included 14 training events and the Debt Manager's Practitioners' Program was operationalized with 7 participants having joined the program to-date. Key lessons were articulated including country ownership is critical to reforms; Reform priorities should be articulated by authorities; and, programmatic approach, with DeMPA, Reform Plan and MTDS has proved useful. Questions were raised on the coordination at country level, on the coordination with PEFA and coordination with donors. Administrative questions were also raised on the DMF. One participant queried whether private sectors undermine the DeMPA/MTDS work. It was noted that capacity was a challenge and the main idea of the facility was to train the trainer. The Bank also presented the importance of Subnational Debt in Developing Countries, highlighting the impact of the global financial crisis on state and local debt. Questions were raised on what could happen if a subnational defaulted, on subnational borrowing and the impact on DSA. Issues were given particular weight by participants: How to tell the HIPCs stories: Greater effort is required to publicize the achievements of HIPC/MDRI, the benefits of debt relief, and the significance of forward-looking initiatives the Bank, the IMF and its partners have established to prevent the re-accumulation of unsustainable levels of debt in client countries; Litigation by vulture funds: Vulture funds are disruptive to development and to the very gains HIPCs have achieved through debt relief. This threat is taken seriously. Collective action clauses are presently on the agenda to prevent further litigations cases; Other suggestions were discussed: Have more case studies on the MICs and share lessons learned; provide solutions on how to reduce arrears in client countries; explore options for a dedicated forum for information sharing and coordination of MDBs implementation of NCB 7

8 policy; improve efficiency and effectiveness of debt-related efforts by combining DMF forum with MDBs meeting, a thought for next meetings?; and Investment-growth nexus remains a key area - How to link DSF, NCB and investment growth. G-20 coordination on the HIPC agenda: Broader issues are discussed at the G-20 level and participants would like to maintain such exchange of information - and monitor strategy related to the future of the HIPC. Concluding Remarks. It was agreed by all participants that the MDB meetings were still relevant and needed to continue in the current form. The chair mentioned that participants would be kept informed about on-going work in the Bank and the G-20 concerning the future of HIPC. 8