Future of the HIPC Initiative Jeffrey Lewis Director, PRMED MULTILATERAL DEVELOPMENT BANK MEETING ON DEBT ISSUES July 10 & 11, 2012 The World Bank, Washington, DC
Outline 1. Key Messages 2. Progress Update on HIPC Implementation 3. Further Ring-Fencing HIPC Eligibility 4. Remaining challenges 5. Monitoring and Reporting 6. Conclusions and next steps
1. Three Key Messages HIPC Initiative is largely implemented 36 out of 39 HIPCs have reached the decision point of which 33 have reached the completion point IDA and IMF Boards agreed to further ring-fencing HIPC eligibility to countries meeting the Initiative s income and indebtedness criteria based on end-2010 data Annual Status of Implementation Report of the HIPC Initiative and the MDRI will be discontinued and a new joint IMF-World Bank report will focus on debt vulnerabilities in LICs, including HIPCs
2. Progress Update: Implementation of HIPC Initiative Considerable progress has been achieved under the HIPC Initiative since 2006 Seven ring-fenced countries have reached the decision point of which six (all but Comoros) have reached the completion point Only three ring-fenced HIPCs that wish to avail to Initiative (Eritrea, Somalia and Sudan) have not reached the decision point since 2006
2. Progress Update: Implementation of HIPC Initiative Given substantial progress made, the Boards of IDA and IMF asked staff to reconsider the rules of the HIPC Initiative to define an exit strategy for countries that do not wish to avail themselves to debt relief: HIPC Initiative was never meant to be permanent Sunset clause took effect in 2006 The Boards decided that potential HIPC eligibility would be ring-fenced or only eligible to countries meeting the Initiative s income and indebtedness criteria based on end- 2004 data Timeframe for qualifying for eligibility would not be unlimited Countries with debt indicators below HIPC threshold were still formally on the list of potentially eligible HIPCs Some potentially eligible HIPCs expressed no intent to benefit from debt relief
3. Further Ring-Fencing HIPC Eligibility: Options under Consideration In December 2011, IDA and IMF Executive Directors considered two options for the future of the HIPC Initiative Maintaining HIPC Initiative as is Adding new income and indebtedness criteria as of end-2010 and further ring-fencing potentially eligible countries Other proposed options, during informal discussions in February and March 2011, did not receive Boards support Making the Initiative permanent Not consistent with its original intent Not justified by the current debt sustainability outlook in LICs Closing the Initiative in the near future It would not allow the debt situation of some potentially eligible countries to be addressed It would create moral hazard
3. Further Ring-Fencing HIPC Eligibility: Options under Consideration Maintaining HIPC Initiative as is Pros: Initiative close to new entrants All potentially eligible countries would retain their eligibility indefinitely HIPCs could obtain debt relief on a timetable suitable to their individual circumstances Cons: It perpetrates moral hazard, including for the countries that have hitherto not expressed an interest in debt relief under the Initiative
3. Further Ring-Fencing HIPC Eligibility: Options under Consideration Adding new income and indebtedness criteria as of end-2010 and further ring-fencing HIPC eligibility -Pros: It would address moral hazard Shorten list of HIPCs by excluding those countries that: Have indebtedness indicators below the HIPC thresholds Did not wish to avail themselves of HIPC Initiative -Cons: Countries that are excluded would no longer be able to avail themselves of debt relief under the HIPC Initiative and the MDRI, even if their debt ratios were to exceed HIPC thresholds at some point in the future
Further Ring-Fencing HIPC Eligibility: Options under Consideration Original list of potentially eligible HIPCs based on 2006 ring-fencing : - included 14 countries (columns 3 and 4 excluding Afghanistan) - Bhutan, Lao P.D.R. and Sri Lanka and later Nepal and Kyrgyz Republic indicated no intent to avail themselves to HIPC Initiative - List could be expanded to all countries that would meet income and indebtedness criteria at end-2004: Afghanistan was added in 2007
3. Further Ring-Fencing HIPC Eligibility: Outcome In December 2011, IDA and IMF Boards agreed to further ring-fencing list of HIPC eligible countries meeting the Initiative s income and indebtedness criteria based on end- 2010 data (in addition to end 2004 data) Additional HIPC Eligibility Criteria based on end-2010 data Income criteria IDA only, ECF eligible country Indebtedness criteria PV of debt to Exports >150% PV of debt to Revenue > 250% To be considered if: X/GDP>30% and R/GDP>15%
3. Further Ring-Fencing HIPC Eligibility: Outcome New criteria would not apply to countries that have already reached the decision point The eligibility of pre-decision point countries (Sudan, Somalia and Eritrea) would not be affected by the further ring-fencing The status of other countries (Zimbabwe, Myanmar) would not be affected by the further ring-fencing HIPC Initiative relief would not be considered for countries meeting only the new income and indebtedness criteria (Staffs assessment is that there likely are no such countries)
3. Further Ring-Fencing HIPC Eligibility: Outcome HIPCs end - 2010 External Debt Relative to Exports and Revenues 2006 "Ring-Fenced" Countries that have not qualify for HIPC After Application of Tradition Debt Relief PV of PPG External Debt /Exports (Percent) PV of PPG External Debt /Revenues (Percent) Bhutan 125 180 Eritrea 596 172 Kyrgyz Republic 75 184 Lao P.D.R. 113-117 236-246 Nepal 173 112 Somalia 410 N/A Sudan 184 201 All 7 HIPCs met income eligibility criterion as at end-2010 Eritrea, Nepal, Somalia and Sudan also met the end-2010 indebtedness criterion Bhutan, the Kyrgyz Republic and Lao PDR did not meet the end- 2010 indebtedness criterion
3. Further Ring-Fencing HIPC Eligibility: Outcome Further Ring-Fencing HIPC eligibility: Retains Eritrea, Nepal, Somalia, and Sudan on the list of potentially eligible HIPCs Excludes Bhutan, Lao PDR and the Kyrgyz Republic Nepal remains a special case: External debt (based on LIC DSA) is deemed sustainable Not captured in HIPC eligibility assessment since PV/ exports does not include remittances Remittances are > 20 percent of GDP and twice > than exports
4. Remaining Challenges Taking interim HIPCs to completion point Guinea (September, 2012); Comoros (December, 2012) Chad (Uncertain) Pre-decision point countries face difficult political and security-related situations Eritrea: authorities intention to participate in HIPC Initiative remains uncertain Somalia: has no functioning government; future relations with the international community are highly uncertain Sudan: a Technical Working Group is assisting the government Other Countries Zimbabwe faces an unsustainable debt situation, but its eligibility under the HIPC Initiative is still to be assessed Myanmar the potential eligibility, which could not be assessed in 2006 because of lack of data, remains in doubt
5. Monitoring and Reporting 160 140 120 100 Debt burdens of HIPCs have been reduced by 90% compared to DP levels (in US$ billions, in end -2011 PV terms) Given that most HIPCs have reached the completion point Debt relief has opened space for contracting new debt, including non-concessional 80 60 140 116 IMF and IDA Boards agreed 40 20 58 48 Intensify monitoring and reporting on debt vulnerabilities in LICs, including HIPCs 0 Before traditional debt relief After traditional debt relief After HIPC Initiative debt relief 12 After After MDRI additional bilateral det relief Further streamlining HIPC Initiative and MDRI progress reporting
5. Monitoring and Reporting A significant share of LICs, including HIPCs, face higher debt vulnerabilities as assessed by recent LIC DSAs IDA-only countries (54) HIPCs (39) 14 12 10 8 6 12 12 14 13 10 8 4 2 0 3 0 Low Moderate High In debt All 39 HIPCs 33 Post-CP HIPCs distress In the case of IDA, the graph reflects only countries for which a DSA is available. The graph for HIPCs includes: Bolivia and Honduras (both Blend countries) and Somalia (for which a DSA is not available).
5. Monitoring and Reporting Increased debt vulnerabilities and changed economic and financial environment facing LICs underscore the need for close monitoring of evolving debt vulnerabilities in LICs Debt sustainability indicators have worsened due to the fall in exports, remittances and government revenues and increase in debt service in the medium term A number of LICs (some due to debt relief and improved debt management capacity) have begun to resort to non-concessional external borrowing to finance critical infrastructure investment ODA is likely to represent a smaller financing source for infrastructure Debt sustainability might be further strained as some LICs have implemented fiscal stimulus
6. Conclusions and Next Steps A new joint IMF-World Bank report will focus on debt vulnerabilities in LICs, including HIPCs Annual Status of Implementation Report of the HIPC Initiative and the MDRI will no longer be prepared Statistical updates are going to be published on the World Bank and the Fund websites: Estimates of costs of HIPC and MDRI Initiatives to various creditors and creditor groups would continue to be updated regularly and released on dedicated sections of the IMF and World Bank s websites The progress of HIPCs in increasing poverty reducing expenditure and reaching their MDGs would continue to be tracked and information posted on the IMF and World Bank s websites Monitoring of debt relief delivery and litigations against HIPCs would be conducted in the context of individual annual debt sustainability analysis and summarized regularly
Thank you