WORLD TRADE
ORGANIZATIONWT/WGTDF/W/12
27 September 2002
(02-5185)
Working Group on Trade, Debt
and FinanceOriginal:  English
COMMUNICATION FROM THE WORLD BANK
The following communication, dated 25 September 2002, has been received from the World
Bank in advance of their presentation to the Working Group on 30 September.
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DEBT RELIEF FOR SUSTAINABLE DEVELOPMENT
"This initiative is a breakthrough ... It deals with debt in a comprehensive
way to give countries the possibility of exiting from unsustainable debt. It
is very good news for the poor of the world."
(James D. Wolfensohn, President, World Bank)
I. THE HIPC DEBT INITIATIVE
1. The Initiative was proposed by the World Bank and IMF and agreed by governments around
the world in the fall of 1996. It was the first comprehensive approach to reduce the external debt of
the world's poorest, most heavily indebted countrie s, and represented an important step forward in
placing debt relief within an overall framework of poverty reduction. While the Initiative yielded
significant early progress, multilateral organizations, bilateral creditors, HIPC governments, and civil
society have engaged in an intensive dialogue since the inception of the Initiative about the strengthsand weaknesses of the program. A major review in 1999 has resulted in a significant enhancement of
the original framework, and has produced a HIPC Initiative which is "deeper, broader and faster".
− "The people of Guyana appreciate the efforts of the multilateral and the bilateral agencies in
making Guyana eligible for debt relief under the HIPC Debt Initiative. Guyana has madesignificant progress in reforming its economy. However, much remains to be done. The
Government is keen to consolidate the recent economic gains and significantly reducepoverty. In this context, the HIPC debt relief agreed to this week will release resources from
debt servicing and enable us to increase budgetary allocations towards improving the health,
education and living standards of all Guyanese."
H.E. Bharrat Jagdeo, Guyana's Finance Minister, June 30, 1999
− "We very much welcome the actions of the World Bank and IMF in making Bolivia eligible
for HIPC debt relief ... This relief will enable us to make major improvements in the health,education and living standards of those below the poverty line."
H.E. Jorge Quiroga, Bolivian Vice President, September 1997WT/WGTDF/W/12
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− "On behalf of the government and people of Mozambique, I would like to thank the World
Bank and IMF... One cannot hide the joy we feel about the decision you have taken, for it willtake us a long way toward tackling the problems of our country... Your encouragement will
make us work...to improve the lives of our people - particularly in the countryside - in the
fields of education, health, and water."
H.E. Joaquim Alberto Chissano, President of Republic of Mozambique, April 1998
II. WHICH COUNTRIES QUALIFY
2. The poorest countries, those that are only eligible for highly concessional assistance from the
International Development Association (IDA), the part of the World Bank that lends on highly
concessional terms, and from the IMF's Poverty Reduction and Growth Facility (previously the
Enhanced Structural Adjustment Facility).
3. Those that also face an unsustainable debt situation even after the full application of
traditional debt relief mechanisms (such as application of Naples terms under the Paris Club
agreement).
III. WHAT ARE THE REQUIREMENTS OF HIPC ELIGIBLE COUNTRIES
4. To undertake sustained implementation of integrated poverty reduction and economic reform
programs.
IV. HOW THE HIPC INITIATIVE WORKS
5. Under the enhanced framework, countries for which existing mechanisms would not achieve
debt sustainability at the decision point will now receive assistance under the HIPC Initiative starting
at the decision point.  In contrast to the original  framework, where debt reduction was calculated on
projections of debt stock at the completion point, relief under the new framework will be committedbased on actual data at the decision point. This modification not only adds greater certainty to the
calculations, but will in most cases increase the amount of relief actually provided, as most countries
will reduce their NPV debt -to-export and debt-to-revenue ratios between the decision and completion
points.
6. In short, under the enhanced framework, the benefits of export and central government
revenue will accrue fully to the county, allowing for greater investment in poverty reduction
strategies.
V. DETERMINING A COUNTRY'S DEBT SUSTAINABILITY
• A Debt Sustainability Analysis is prepared by the staff of the World Bank and the
IMF, together with officials of the debtor country, to determine whether a country is
facing an unsustainable debt situation after the full application of the traditional debtrelief mechanisms.
• Under the new framework, sustainable debt-to-export levels are defined at a fixed
ratio of 150 percent (on a net present value basis).
• For very open economies where the exclusive reliance on external indicators may not
adequately reflect the fiscal burden of external debt: an NPV debt-to-export target
below 150 percent can be recommended if the country concerned meets two criteria
at the decision point: an export-to-GDP ratio of at least 30 percent and a minimum
threshold of fiscal revenue in relation to GDP of 15 percent. For countries meetingWT/WGTDF/W/12
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these thresholds, the NPV debt-to-export target will be set at a level which achieves a
250 per cent of the NPV debt-to-revenue ratio at the decision point. Côte d'Ivoire and
Guyana qualified under this criteria under the initial framework.
VI. ACTION BY ALL CREDITORS
7. All creditors participate in providing excep tional assistance beyond current mechanisms as
required to reach debt sustainability. Creditors share the costs of HIPC assistance on the basis of
broad and equitable burden sharing and provide relief on a basis that is proportional to their share of
the debt after the full application of traditional forms of debt relief; these forms include Naples terms
from Paris Club creditors which provide a 67 percent NPV reduction on eligible debt.
1. Bilateral and commercial creditors
• Paris Club creditors will provide additional debt reduction under the HIPC Initiative,
as part of the overall effort to enable the country to exit from unsustainable debt.
• Consistent with current practice, countries receiving assistance from the Paris Club
are required to seek treatment on debt owed to other bilateral and commercial
creditors on terms at least comparable to those agreed with the Paris Club.
2. Multilateral creditors
• Multilateral creditors are taking action to reduce the Present Value of their claims
sufficient to achieve debt sustainability, based on a fully proportional burden-sharingapproach by other creditors after the full application of Naples terms.
• Multilateral institutions participate in the Initiative through action to reduce the
Present Value of their claims either thr ough the HIPC Trust Fund or through parallel
action.
• Multilateral institutions may choose to provide assistance to help ease the burden of
debt after a country reaches the decision point. Such assistance, through interim
measures, would count as part of HIPC debt relief by the multilateral institutions. The
International Development Association (IDA) agreed to do this under the original
framework in Côte d'Ivoire, Mozambique and Uganda. Under the enhancedframework, it is expected that interim assistance will be integral part of debt relief
packages.
VII. THE HIPC TRUST FUND
• The HIPC Trust Fund provides debt relief to eligible HIPCs on debt owed to
participating multilaterals.
• The HIPC Trust Fund can prepay or purchase a portion of the debt owed to a
multilateral creditor and cancel such debt; or pay debt service as it comes due.
• The HIPC Trust Fund consists of contributions from participating multilateral
creditors and bilateral donors.WT/WGTDF/W/12
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• These contributions will help to ensure that all multilateral institutions are in position
to meet their share of the cost.  For more information, please see HIPC Trust Fund
(World Bank, September 2002, 27K pdf).
VIII.  THE WORLD BANK'S CONTRIBUTION
• The World Bank is prepared to commit HIPC assistance at the decision point to
achieve the agreed reduction in the present value of its claims on eligible countries.
Interim assistance can be made available between the decision point and the
completion point, with any remaining assistance provided at the completion point.
• The predominant method of delivering relief on IDA debt will be through the
forgiveness of a portion of IDA debt service as it comes due. IDA will forgive a
minimum of 50% of the annual debt service due on existing IDA debt. IDA will tothe extent possible deliver its full share of debt relief to the country within 20 years
after the decision point.
• The World Bank component of the HIPC Trust Fund will reimburse IDA, subject to
the availability of resources, for the debt service relief provided by IDA.
IX. THE IMF'S CONTRIBUTION
• The IMF is prepared to commit HIPC assistance at the decision point to achieve the
agreed reduction in the present value of its claims on eligible countries. Interim
assistance can be made available between the decision point and the completion
point, with any remaining assistance provided at the completion point.
• HIPC assistance will be provided through special Poverty Reduction and Growth
Facility PRGF) grants--to be paid into an escrow account and used to cover debt-
service payments to the IMF.
• Resources sufficient to cover the IMF's share of the costs of the early cases have been
made available, while efforts to secure the full funding requirements of the PRGF-
HIPC Trust continue.
X. COST OF THE INITIATIVE
• The cost under the new framework rises from roughly $12.5 billion in present value
terms under the original framework to potentially more than $29.3 billion.  This costis divided approximately in half between bilateral and multilateral creditors. The
Bank will provide approximately $6.3 billion in NPV terms.
• It has been estimated that the net-present value of public debt in the 33 countries
likely to qualify (approximately $90 billion) would be reduced by about half after
HIPC and traditional debt relief.
XI. HIPC - FREQUENTLY ASKED QUESTIONS
A. I
NTRODUCTION
8. High levels of external debt have been increasingly recognized as a serious constraint on the
ability of poor countries to pursue sustainable development and reduce poverty. In response, inWT/WGTDF/W/12
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September 1996, the World Bank and the IMF launched the Initiative for Heavily Indebted Poor
Countries (HIPC). It was endorsed by some 180 governments around the world as an effective and
welcome approach to help poor, severely indebted countries reduce debt as part of an overall poverty
reduction strategy. In September 1999, at the Annual Meetings of the World Bank and IMF, the HIPC
Initiative was significantly expanded to provide more debt relief to more countries faster. Thisenhancement, and a redesigned strategy to link debt relief to poverty reduction, will help to eliminate
debt as an obstacle to development and allow countries to invest more in their future.
9. The Initiative is designed to reduce debts to sustainable levels for poor countries that pursue
economic and social policy reforms, and is used specifically in cases where traditional debt relief
mechanisms will not be enough to help countries exit from the rescheduling process. This Initiative is
a breakthrough. Unlike earlier debt relief mechanisms, the HIPC Initiative addresses debt
comprehensively and involves all creditors, including multilateral financial institutions.
1. Translating Cooperation into Policy
10. In the past three and a half years we have seen intense public interest in the HIPC Initiative,
and an extraordinary degree of coordination among a wide range of parties to make this program
work. These partners include creditor and debtor governments, multilateral organizations, and the
important involvement of NGOs, churches, and other groups from civil society.
11. The World Bank and IMF have capitalized on this interest. In February 1999, both institutions
set out to conduct a thorough review of the HIPC Initiative. Two broad questions formed the heart of
the review: Does the HIPC framework help countries exit from unsustainable debt burdens? And are
countries able to link debt relief to real poverty reduction? To ensure that we had every possible idea
on the table for consideration, we opened the HIPC review to global public participation. Toward this
end, the Bank and Fund created a HIPC consultation web-page, with questions posted on key aspects
of the Initiative. In six months of the two-phase web-consultation, we received hundreds of responses.
In addition, we held consultative meetings in Ethiopia, Germany, Honduras, Mozambique, Norway,
Togo, the United Kingdom, and the United States.
12. Altogether, the consultation generated more than 1,000 pages of detailed comments and
proposals, which were delivered directly to the Boards of both institutions for a formal consideration.
As a result of this process, and in response to concrete views expressed by governments and civil
society, the World Bank and IMF outlined a number of important enhancements to the original
framework (described further below) designed to expand significantly the amount of debt relief poor
countries receive under the Initiative.
13. This process has been extraordinarily valuable not just for the HIPC Review, but as a model
of how development policy can and should be made in the future. Precisely because public interest inthe HIPC Initiative is growing and continues to be varied, it is useful to periodically address some of
the questions which are raised in connection with its design and its implementation.
B. Q
UESTIONS AND ANSWERS
What is the HIPC Initiative?
The Heavily Indebted Poor Country (HIPC) Initiative is an agreement among official creditors
designed to help the poorest, most heavily indebted countries escape from unsustainable debt. It
enables poor countries to focus their energies on building the policy and institutional foundation for
sustainable development and poverty reduction.WT/WGTDF/W/12
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What changed with the advent of the HIPC Initiative?
When the HIPC Initiative was launched in 1996, it introduced a new approach to debt relief for the
poorest countries by focusing on overall debt sustainability. Relief, in short, is based on a country's
ability to pay within a total context of poverty  reduction and economic growth. It thereby enables
countries to exit from the debt rescheduling process. It also represents a commitment by theinternational community, including all creditors, to act together in a coordinated and concerted
fashion to reduce debt to a sustainable level.
Which countries are eligible to participate in the Initiative?
The Initiative is open to the poorest countries, those that: (i) are eligible only for highly concessional
assistance such as from the World Bank's International Development Association (IDA) and the IMF'sPoverty Reduction and Growth Facility (formerly ca lled Enhanced Structural Adjustment Facility);
(ii) face an unsustainable debt situation even after the full application of traditional debt relief
mechanisms; and (iii) have a proven track record in implementing strategies focused on reducing
poverty and building the foundation for sustainable economic growth.
How does the HIPC Initiative work?
The Initiative involves two stages. The first stage is a three-year period during which a HIPC country
works in coordination with, and the support of, the World Bank and IMF to establish a record of
implementing economic reforms and poverty reducing policies. Particular focus is placed ondeveloping a comprehensive poverty reduction strategy prepared by the government with support
from the Bank, Fund and others. At the end of this three-year period, the country reaches its decision
point, where it is determined whether its debt level is sustainable. For those countries whose debt
burden remains unsustainable, a package of debt relief is prepared and committed to by creditors.
While interim debt relief by the Paris Club and some multilaterals such as the World bank is provided
between the decision point and completion point, countries receive their full package of debt relief
once it has implemented a set of key, pre-defined structural reforms. This approach – called a
"floating completion point"—replaces the fixed three-year performance period of the original
framework, and will enable countries to meet ambitious policy targets early and accelerate the release
of debt relief.
How is external debt sustainability determined?
Reducing the threshold for a poor country's external debt to be considered unsustainable was an
important area of consensus of the HIPC review, and a major element of the enhancement endorsed in
September 1999. As with the original framework, ex ternal debt sustainability will continue to be
determined by a Debt Sustainability Analysis (DSA ) prepared by the debtor country, World Bank and
the IMF, to determine whether a country is facing an unsustainable debt situation after the full
application of traditional debt relief mechanisms. The new framework also allows for two related set
of criteria to be considered. The first, which will c ontinue to apply to most HIPCs, is the ratio of a
country's debt to its exports. Under the enhanced  framework, sustainable debt-to-export levels are
defined at a fixed ratio of 150 percent (on a net present value basis, or NPV). The second, for those
HIPCs with very open economies where exclusive reli ance on external indicators may not adequately
reflect the fiscal burden of external debt, an NPV debt-to-export target below 150 can be
recommended if the country concerned meets two criteria at the decision point: an export-to-GDP
ratio of at least 30 percent and a minimum threshold of fiscal revenue in relation to GDP of 15percent. For these countries, the NPV debt-to-export target will be set at a level which achieves a 250
percent of the NPV debt-to-revenue ratio at the decision point. Côte d'Ivoire and Guyana qualified
under this criteria under the initial framework.WT/WGTDF/W/12
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What are the enhancements that were in troduced into the new HIPC framework?
The key changes introduced into the new framework are as follows:
Simplification
• Calculation of assistance at decision point on actual data not projections for the completion point.
• Apply single NPV debt-to-export target to all countries rather than decide target on a country-
specific basis within target range.
• Elimination of borderline option.
Modifications
• Lower NPV debt -to-export (150 percent) and debt -to-revenue target (250 percent) with lower
thresholds for latter (30 percent export-to-GDP, and 15 percent revenue-to-GDP).
• Floating completion points with the timing of completion points tied to implementation of key
structural reforms.
• Earlier delivery of assistance both from decision and completion points.
Principal Changes
Elimination of:
• Projections of position at completion point as basis for assistance;
• Vulnerability analysis as a basis for country -specific determining of targets;
• Target ranges for the completion point.
This will permit a simplified preliminary HIPC Initiative document which could focus on the
track record and proposed timing of decision  point, key structural policies, and enhanced
framework for poverty reduction.
Forward-looking focus in decision point document switched to:
• Identification of key structural policies to which floating completion points would be tied.
• Country-by-country assessment of appropriate levels for interim relief and front -loading of the
delivery of assistance in the light of absorption capacity and projections of key debt indicators.
• Steps to improve debt management.
At completion point:
• discretionary reassessment for debt situation with the option of providing more assistance if, as a
result of exogenous factors, there has been a major upward deviation in debt outcomes. This
would be decided on a case-by -case basis consulting all creditors involved.
What is the estimated cost of the enhanced HIPC framework?
The enhanced framework marks a dramatic expansion of the existing framework. The cost.(and
therefore debt relief provided) under the new framework has more than doubled. The projected $55
billion in debt relief over time will be divided roughly in half between bilateral and multilateral
creditors. The World Bank is expected to provide nearly $11 billion of this debt relief.
What effect will the enhanced HIPC framework have on debt reduction?WT/WGTDF/W/12
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With regard to implications for overall debt reduction, a rough estimate suggests that after HIPC and
traditional debt relief, including ODA cancellation, the net -present value of public debt in the three-
dozen countries likely to be cut by two-thirds.
What can be done to ensure that debt relief translates into real poverty reduction?
As part of the HIPC review and consultative proc ess, much attention was devoted to the question of
how to link debt relief more firmly and transparently to poverty reduction efforts. Clear consensus has
developed on a number of important points: first and foremost, debt relief must be part of a
comprehensive poverty reduction strategy comprised of a range of polices aimed at improved social
programs, good governance and widely shared economic growth. In addition to deeper, broader andfaster relief, governments in September 1999 endorsed a joint World Bank-IMF paper which sets out
such an approach. As part of an enhanced framework for poverty reduction, debt relief under HIPC
would be linked to the establishment of national poverty reduction strategies developed by
governments to ensure that debt relief – and external development assistance more broadly – makes a
real difference in the lives of the poor. The paper, which is called the poverty reduction strategy paper(PRSP), will be country-driven and developed transpar ently with broad participation of civil society,
key donors and regional development banks. The Bank and Fund, in coordination with the larger
development community, will provide assistance to countries in developing PRSPs. Strategies will be
clearly linked to the agreed international developmen t goals, with measurable indicators and progress.
These national strategies should normally be in place by the decision point. However, on a transitionalbasis, countries could reach their decision points without agreement on a PRSP, but in all cases
demonstrated progress in implementing a poverty reduction strategy would be required by the
completion point.
What is the current status of the implementation of the enhanced HIPC Initiative?
Relief under the enhanced HIPC framework has been  agreed for twenty-six countries: Benin, Bolivia,
Burkina Faso, Cameroon, Chad, Ethiopia, Ghana,  The Gambia, Guinea, Guinea-Bissau, Guyana,
Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Sao
Tome and Principe, Senegal, Sierra Leone, Tanzania, Uganda, and Zambia, yielding more than
$41 billion in debt service relief over time.
Given the new framework, can HIPC relief take the place of development assistance?
No. HIPC debt relief can be fully beneficial to a c ountry only if it is provided in addition to previous
rates of development assistance. A comparison of current debt service payments and concessional
assistance illustrates how important continued aid programs are to these countries. The ratio of grossinflows (from long-term debt and grants) to debt service paid averaged about two-to-one for the
HIPCs as a group during the 1990s, and ranged upwards four-to-one in half of these countries. Annual
net transfers to the HIPCs on medium- and long-t erm resource flows (including grants) averaged
about 10 percent of GNP over the 1990- 96 period. Debt reduction must be additional to development
assistance.
A Fact Sheet giving more detailed information on the HIPC Debt Initiative can be found on the World
Bank and IMF websites:  http://www.worldbank.org and http://www.imf.org
.
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