WORLD TRADE
ORGANIZATIONWT/WGTDF/W/2
8 May 2002
(02-2606)
Working Group on Trade, Debt and Finance Original:  English
COMMUNICATION FROM THE IMF
Reproduced hereunder are the statements made by the observer representatives of the
International Monetary Fund at the meeting of 15 April 2002.
_______________
IMF Conditionality
1. When the Fund provides financial support to member countries, it must be sure that the
members are pursuing policies that will improve or eliminate their external payments problems, so
that IMF resources are safeguarded and eventually repaid. The explicit commitment that members
make to implement corrective measures in return for the Fund’s support is known as “conditionality”.By ensuring that members are able to repay loans in a timely manner, the Fund can make its limited
pool of financial resources available to other members with balance of payments problems. IMF
financing, and the important role it plays in helping a country secure other financing, enables the
country to adjust in an orderly way without resort ing to measures that would harm its own or other
countries’ prosperity.
2. Conditions for IMF financial support may range from general commitments to cooperate with
the Fund in setting policies, to the formulation of specific, quantified plans for economic and financialpolicies. The Fund requires a “letter of intent” or a “memorandum of economic and financial
policies”, in which a government outlines its policy intentions during the period of the adjustment
program; any policy changes it will make before the arrangement can be approved; performance
criteria, which are objective indicators for certain policies that a country must implement in order to
draw IMF funds; and periodic reviews that allow the Executive Board to assess whether the member’spolicies are consistent with program objectives.
3. Conditions have been attached to IMF lending since the mid-1950s, focusing initially on
monetary, financial, fiscal, and exchange rate policies. Beginning in the late 1980s, the Fund
increasingly emphasized economic growth as a goal of its programs while also expanding its
involvement in countries whose severe structural problems prevented them from achieving asustainable balance of payments position. While the average program involved two to three structural
conditions a year in the mid-1980s, by the second half of the 1990s, that number had risen to 12 or
more.
4. This increase raised concerns that the Fund might be overstepping its mandate and expertise
by applying conditions outside its core areas of responsibility. Excessively detailed policy conditionscould undermine a country’s sense of “ownership” of a reform program—without which reform will
not happen. Moreover, poorly focused conditionality could strain the administrative capacity of
countries attempting to implement nonessential reforms at the cost of reforms truly needed for
economic growth and continued access to IMF financing.WT/WGTDF/W/2
Page 2
5. Driven by the Managing Director, the Fund has given high priority to streamlining
conditionality—to make it more efficient, effective, and focused, without weakening it—and
strengthening national ownership.
6. The broad lines of reform of conditionality are:
• Structural reforms crucial for achieving a program’s macroeconomic objectives need to be
covered by IMF conditionality.
• Reforms that are relevant, but not crucial, to the program’s objectives require a more focused and
parsimonious application of conditionality.
• The appropriate coverage and content of conditionality are likely to vary, depending on countries’
circumstances as well as on the applicable IMF facility.
• Coordination with the World Bank and other agencies is important.
• Increased reliance on program reviews, useful for both forward- and backward-looking
assessments of countries’ economic policies, should not weaken member countries’ confidence in
continued access to IMF resources.
• Structural benchmarks, useful for tracking progress in implementing structural reforms, should be
limited to important and representative steps towards a policy outcome that is important to
program objectives.
• Letters of intent should either focus only on those aspects of policy covered by conditionality, or,
in cases in which the authorities wish to use the letters to present their broad policy agenda,
clearly indicate with program elements are subject to conditionality.
• The negotiations of reform programs should allow country authorities to consider various policy
alternatives so that the resulting program reflects the circumstances and priorities of the country,
thus ensuring its “ownership” of the program.
Remaining issues and challenges
7. Drawing the line between measures crucial for program objectives and those relevant but not
so critical, and determining whether (or how) IMF conditionality would be applied to the latter areissues requiring judgment on a case-by-case basis. Related to that issue is the need to construct a
framework for coordination with the World Bank and other development institutions for those
program areas outside the IMF’s core areas of responsibility. On program design, the pace and
sequencing of structural reforms need further consideration, and work on tailoring conditionality to a
country’s ability to implement the reforms must continue. If the IMF were to be more selective inproviding financial support to programs with w eak country ownership—which can be difficult to
assess—it must also consider the costs to the country of withholding support.WT/WGTDF/W/2
Page 3
IMF Financial Facilities
8. The IMF provides financial assistance to member countries with temporary balance of
payments problems; it does not provide financing for specific purposes or projects, as developmentbanks typically do. The Fund’s financial assistance is intended to enable the member to rebuild its
reserves or to make larger payments for imports and other external purposes that would not have been
possible without it. Financing must be approved by the Executive Board.
9. The IMF provides two kinds of financial assistance: nonconcessional and concessional.
Nonconcessional assistance is made available to member countries under a number of policies and
facilities, whose terms reflect the severity and duration of the balance of payments problem that the
facility is designed to address. An individual line of credit normally takes the form of a financialarrangement with the member, under which the IMF gives assurances to the member that it will
provide funding in accordance with the terms of the arrangement.
10. Separately, the IMF also provides concessional (low-interest) loans to low-income member
countries through the Poverty Reduction and Growth Facility (PRGF), and provides grants or loans
under the Heavily Indebted Poor Countries (HIPC) Initiative to help reduce their external debt.
1. Regular financing facilities
11. The IMF provides financing to members from a revolving pool of funds consisting of
members’ subscriptions, which are held in the General Resources Account. The recipient member
uses its own currency to “purchase” reserve assets (in the form of widely accepted foreign currencies
and SDRs) from the IMF. These assets are usually deposited in the member’s central bank and canthen be used in the same manner as all other international reserves. The IMF levies charges on the
financing, and repayment periods vary by facility.  To repay, members “repurchase” their own
currency from the Fund. The amount of financing a member can obtain from the Fund (access limits)
is generally based on its quota.
12. IMF credit is subject to the recipient country’s observance of specific economic and financial
policy conditions, depending on the relative size of the financing involved. For purchases of up to 25
percent of a member’s quota (called the first “credit tranche”), members must demonstrate that they
are making reasonable efforts to overcome their balance of payments difficulties. Purchase above 25
percent of quota (upper credit tranche drawings) are made in installments as the member meets certain
established performance targets. Such drawings are normally associated with Stand-By and Extended
Fund Facility Arrangements. The Fund has also developed special facilities that seek to provide
additional nonconcessional assistance for certain specific balance of payments difficulties.
• Credit tranches and Extended Fund Facility
Credit tranche (1952) :  Designed to address balance of payments difficulties that are short- term or
cyclical; length of Stand-By Arrangements  is typically 12–18 months with a legal maximum of
three years.
Access limits:  Annual: 100 percent of quota; cumulative: 300 percent of quota.
Maturities (early repayment) / (obligatory repayment):  2¼ –4 years / 3¼ –5 years.WT/WGTDF/W/2
Page 4
Charges:   GRA1 rate of charge + level-based surcharges:  00 basis points on amounts above
200 percent of quota, and 200 basis points above 300 percent of quota.
Conditions:  Member adopts policies that provide confidence that its balance of payments
difficulties will be resolved within a reasonable period.
Phasing and monitoring:   Quarterly purchases contingent on observance of performance
criteria and other conditions
• Extended Fund Facility Arrangement (1974) :  Provides longer-term assistance to support
structural reforms that address longer-term balance of payments difficulties. Extended FundFacility Arrangements have upper credit tranche conditionality for access above 25 percent of
quota.
Acces s limits :  Annual: 100 percent of quota; cumulative: 300 percent of quota.
Maturities (early repayment) / (obligatory repayment) :  4½ – 7 years / 4½ – 10 years.
Charges:  GRA rate of charge + level-based surcharges: 100 basis points on amounts above
200 percent of quota, and 200 basis points above 300 percent of quota.
Conditions:  Member adopts 3-year program, with structural agenda, and provides annual
detailed statement of policies for the next 12 months.
Phasing and monitoring:  Quarterly or semiannual purchases contingent on observance of
performance criteria and other conditions.
2. Special facilities
• Supplemental Reserve Facilit y (1997) :  Provides short-term assistance to members with balance
of payments difficulties related to a sudden and disruptive loss of market confidence.
Access limits:  None; this facility is available only when access under associated regular
arrangements would otherwise exceed either annual or cumulative limit.
Maturities (early repayment) / (obligatory repayment):  1–1½ years  / 2–2½ years.
Charges :  GRA rate of charge + 300 basis points rising to 500 after 2½ years.
Conditions:  Available only in context of a regular arrangement with associated program and
with strengthened policies to address a loss of market confidence.
Phasing and monitoring:  Facility available for one year; front-loaded access with two or
more purchases; subsequent purchases subject to conditionality.
• Contingent Credit Lines (1999) :  Serves as a precautionary line of defense for members with
strong track records of good policies in normal times to help them resist external financial
contagion.
Access limits:  None, but expected to be 300–500 percent of quota in practice.
                                                     
1 GRA:  General Resources Account.WT/WGTDF/W/2
Page 5
Maturities (early repayment) / obligatory repayment):  1–1½ years / 2–2½ years.
Charges:  GRA rate of charge + 150 basis points rising to 350 after 2½ years.
Conditions:  Eligibility criteria: (i) no balance of payments need from the outset; (ii) positive
assessment of policies by the IMF; (iii) constructive relations with private creditors and
satisfactory progress in limiting external vulnerability; (iv) satisfactory economic program.
Phasing and monitoring:  Resources approved for up to one year. Small purchase
(5–25 percent of quota) available on approv al. Presumption that one-third of committed
resources will be released on activation, with the disbursement of the remainder determined
by a post-activation review.
• Compensatory Financing Facility (1963):  Covers a shortfall in a member’s export earnings and
services receipts as well as an excess in cereal import costs that are temporary and arise from
events beyond the member’s control. (This facility was streamlined in 2000, with the elimination
of the contingency component of the former Compensatory and Contingency Financing Facility.)
Access limits:  Maximum 45 percent of quota for each element––export shortfall and excess
cereal import costs––for a combined limit of 55 percent of quota.
Maturities (early repayment) / (obligatory repayment):  2¼ – 4 years / 3¼ –5 years.
Charges:  GRA rate of charge; not subject to surcharges.
Conditions:  Available only when a member has an arrangement with upper credit tranche
conditionality or when its balance of payments position, apart from its export shortfall, is
otherwise satisfactory.
Phasing and monitoring:   Typically disbursed over a mini mum of six months in accordance
with the phasing provisions of the arrangement.
• Emergency assistance
1. Natural disasters (1962) :  Provides quick, medium-term assistance to members with
balance of payments difficulties related to natural disasters.
2. Postconflict (1996):  Provides quick, medium-term assistance for balance of payments
difficulties related to the aftermath of civil unrest or international armed conflict.
Access limits:  25 percent of quota, though larger amounts can be made available in
exceptional cases.
Maturities (early repayment) / (obligatory repayment):  No early repayment expectation / 3¼
–5 years.
Charges:  GRA rate of charge; not subject to surcharges; possibility of interest subsidy if
financing is available.
Conditions:  Reasonable efforts to overcome balance of payments difficulties, and focus on
institutional and administrative capacity building to pave the way toward an upper credit
tranche arrangement or an arrangement under the Poverty Reduction and Growth Facility.WT/WGTDF/W/2
Page 6
Phasing and monitoring:  None.
3. Facility for low-income members
• Poverty Reduction and Growth Facility (1999):  Provides longer-term assistance for deep-seated,
structural balance of payments difficulties; aims at sustained, poverty-reducing growth (replaced
the Enhanced Structural Adjustment Facility, created in 1987).
Access norms and lim its:  Norm for first-time users, 90 percent of quota; others, 65 percent of
quota; maximum, 40 percent of quota; exceptional maximum, 185 percent.
Maturities (early repayment) / (obligatory repayment):  No early repayment expectation / 5½
–10 years.
Charges:  Concessional interest rate: ½ of 1 percent a year; not subject to surcharges.
Conditions:  Based on a Poverty Reduction Strategy Paper (PRSP) prepared by the country in
a participatory process, and integrating macro, structural, and poverty- reduction policies.
Phasing and monitoring:  Semiannual (or occasionally quarterly) disbursements contingent
on observance of performance criteria and reviews.WT/WGTDF/W/2
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The IMF-World Bank HIPC Initiative
1. The HIPC Initiative is a framework designed by the IMF and the World Bank to provide
special assistance for heavily indebted poor countries (HIPCs) that pursue IMF- and World Bank-supported adjustment and reform programs, but for whom traditional debt relief mechanisms are
insufficient.
2. The HIPC Initiative entails coordinated action by the international financial community,
including multilateral institutions, to reduce to sustainable levels the external debt burden of those
countries.
2 3
3. The HIPC Initiative is designed to deal with one of three key elements of longer-term debt
sustainability—the outstanding stock of external de bt at the decision point. By reducing the stock of
external debt to sustainable levels at the decision point, the HIPC Initiative aims at eliminating any
debt overhang, thereby creating the conditions for strong growth and long-term debt sustainability.
However, debt relief alone, no matter how generous, cannot guarantee that a country will not fall back
to unsustainable levels of debt, nor does it deal directly with a country’ s vulnerability to future
exogenous shocks. While the existing stock of debt (and associated debt service) sets the point ofdeparture for determining long-term debt sustainability, the growth of income, exports, and fiscal
revenue—which, to a large extent, reflect a country’s economic policies—are the underlying
determinants of the evolution of a country’s capacity to service external debt over the longer term.
Similarly, the volume and terms of new external borrowing have a direct impact on the burden of
external debt, and an indirect offsetting effect through its effect on future investment and growth.
4. All countries requesting HIPC Initiative assistance must have (i) adopted a Poverty Reduction
Strategy Paper (PRSP) through a broad-based participatory process, by the decision point ; and (ii)
have made progress in implementing this strategy for at least one year by the completion point . On a
transitional basis, given the time country authorities need to prepare a participatory PRSP, countries
can reach their decision points based on an interim PRSP (I-PRSP) which sets out the government’scommitment to and plans for developing a PRSP. For retroactive cases—countries that have already
reached their decision points under the original Initiative—depending on overall progress is poverty
reduction, a requirement for the completion point is adoption of a PRSP.
                                                     
2 At present, the following developing countries are classified as being the heavily indebted poor
countries: Angola, Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad,Comoros, Congo, Côte d’Ivoire, Democratic Republic of the Congo, Ethiopia, Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Kenya, Lao PDR, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique,
Myanmar, Nicaragua, Niger, Rwanda, São Tomé and Pr Ρncipe, Senegal, Sierra Leone, Somalia, Sudan,
Tanzania, Togo, Uganda, Vietnam, and Zambia. However, it should be noted that a debt sustainability analysisin 2000 indicates that Yemen has a sustainable debt bu rden after the application of traditional debt relief
mechanisms. Angola, Kenya, and Vietnam are also expected to be sustainable without special help from theInitiative. This list may change from time to time.
3 External debt sustainability is a comprehensive concept and no single debt indicator or a particular
level of a debt indicator can fully inform an assessmen t of debt sustainability.  Analytically, public sector
external debt sustainability depends on three key determinants (and their development over time): the existing
stock of public and publicly guaranteed debt; the deve lopment of fiscal and external repayment capacity, which
is closely related to the outlook for output and export growth; and the prospective volume and concessionality ofnew external borrowing. An assessment of debt sustainability would thus involve a range of indicators,including both stock concepts and debt-service concepts  relative to variables associated with a country’s
potential repayment capacity.WT/WGTDF/W/2
Page 8
5. First phase : to qualify for assistance, the country must adopt adjustment and reform programs
supported by the IMF and the World bank and establish a satisfactory track record. During that time,
it will continue to receive traditional concessional assistance from all the relevant donors and
multilateral institutions, as well as debt relief from bilateral creditors (including the Paris Club).
6. Decision point : at the end of the first phase, a debt sustainability analysis will be carried out
to determine the current external debt situation of the country. If the external debt ratio for that
country after traditional debt relief mechanisms is above 150 percent for the net present value of debt
to exports, it qualifies for assistance under the Initiative. In the special case of very open economies
(with exports-to-GDP ratio above 30 percent) with a high debt burden in relation to fiscal revenues,
despite strong revenue collection (above 15 percent of GDP), the net present value of debt-to-exports
target may be set below 150 percent. In such cases, the target is set so that the net present value of
debt would be 250 percent of fiscal revenues at the decision point.
7. At the decision point, the Executive Boards of the IMF and World Bank will formally decide
on a country’s eligibility, and the international community will commit to provide sufficient
assistance by the completion point for the country to achieve debt sustainability calculated at the
decision point. The delivery of assistance committed by the Fund and Bank will depend on
satisfactory assurances of action by other creditors.
8. Second phase : once eligible for support under the Initiative, the country must establish a
further track record of good performance under IMF/World Bank-supported programs. The length of
this second period under the enhanced framework is not time bound, but depends on the satisfactory
implementation of key structural policy reforms agreed at the decision point, the maintenance of
macroeconomic stability, and the adoption and implementation of a poverty reduction strategydeveloped through a broad-based participatory process. The use of “floating” completion points
would permit strong performers to reach their completion point earlier. During this second phase,
bilateral and commercial creditors are generally expected to reschedule obligations coming due, with
a 90 percent reduction in net present value. Both the World Bank and the IMF are expecting to
provide “interim relief” between the decision and completion points, and other multilateral creditorsare considering also to advance some of the assistance from the completion point.
9. Completion point:  remaining assistance will be provided at this point. This will imply the
following:
• For bilateral and commercial creditors: a reduction in the net present value of the stock of debt
proportional to their overall exposure to the HIPC. Many bilateral creditors have announced that
they will also provide debt forgiveness over and above HIPC Initiative assistance, particularly onODA debt.
• For multilateral creditors (the IMF, the World Bank, and the other multilateral institutions): a
(further) reduction in the net present value of their claims on the country based on broad andequitable action by all creditors sufficient to reduce the country’s debt to a sustainable level.
10. At this stage and in the current international context, the implementation of the Initiative will
continue to face challenges.  First, countries already past their decision points will need to strive toremain on track in their economic reform and poverty reduction programs to reach their floating
completion points.  Several countries in this group have encountered problems in the implementation
of their macroeconomic programs (Guinea, Guin ea-Bissau, Guyana, Honduras, Malawi, Nicaragua,
Niger, Rwanda, Senegal, and São Tomé and Príncipe
4) although for some (Honduras, Niger, and
Rwanda), this was temporary.  Some other countries (e.g., Mauritania) have found that
                                                     
4 A staff-monitored program has recently been agreed with São Tomé and Principe.WT/WGTDF/W/2
Page 9
implementation of certain completion point triggers in social and structural areas would take longer
than previously anticipated.  Other countries (e.g., Benin, Burkina Faso, Cameroon, and Mali) have
experienced delays in preparing full PRSPs.  In addition, for many of these countries, securing the
delivery of relief from creditors, as anticipated at the decision point, remains an important challenge.
11. Second, the remaining countries (most of which are conflict-affected and/or have substantial
arrears problems) need to be brought to their decision points as soon as conditions in these countries
permit.  The challenges are daunting as these countries strive to achieve peace and internal stability,
pursue sound economic policies, and develop their economic management capacity.  The PRSP
process may be particularly difficult for some of these countries, as many of them have large
displaced populations and are facing difficulties in undertaking a broadly-based participatory process.
Staffs continue to work with the authorities in th ese countries to develop, where possible, strategies
for moving ahead, acknowledging the need for flexibility in these strategies.  Some progress has beenmade with the Democratic Republic of Congo, and a preliminary HIPC document is under
preparation.
12. Finally, the challenge of achieving and maintaining external debt sustainability has become
more difficult with the deterioration of the global economic environment.
5 Virtually all HIPCs are
heavily dependent on primary commodities for their export earnings and government revenue, and asa result they would remain vulnerable to declines in world commodity prices and other adverse
exogenous developments.  In such circumstances, it would be unrealistic to expect external debt
indicators to follow a smooth monotonic downward trend after the HIPCs have reached their
completion points, or that countries will always stay below the HIPC debt sustainability thresholds.
Instead, there may be fluctuations over time, and the objective of policies should be to ensure that theunderlying trend is downward.  This underscores th e need for all HIPCs to implement policy reforms
to diversify their export base, supported by appropriate external financing.  Given the HIPCs’ limited
repayment capacity, the latter will have to be on high ly concessional terms or in the form of grants.
For countries in the interim period, the enhanced HIPC Initiative provides for the possibility of
additional debt relief at the completion point in exceptional cases where exogenous factors havecaused fundamental changes in a country’s economic circumstances.  In the near term, to deal with
the cash-flow impact of the recent shocks, these countries could also benefit from increased interim
HIPC debt relief, as well as concessional loans and more grant financing from donors.  It is essential
that all HIPCs pursue prudent debt management policies as a means of achieving long-term debt
sustainability.
13. For the 26 countries that have reached their decision points under the enhanced HIPC
Initiative, debt relief worth US$25 billion in net present value (NPV) terms has been committed todate.  This amounts to about US$40 billion in nominal debt-service relief over time.  The debt stocks
for these countries taken as a whole will fall from a level of around US$62 billion in NPV terms to
US$27 billion after the full application of traditional relief mechanisms and assistance under the HIPC
Initiative, and to US$22 billion after bilateral debt relief beyond the HIPC Initiative committed by
several bilateral donors—an overall fall of nearly two-thirds.
                                                     
5 The recent global economic slowdown has had an impact on the external debt sustainability outlook
of the 24 heavily indebted poor countries that had r eached their decision points under the enhanced HIPC
Initiative.  Specifically, the recent global economic slowdown, coupled with a significant decline in manyprimary commodity prices, has weakened the HIPCs’ growth and export performance in the last two years and
led to a deterioration of their external debt indicat ors for many but not all of these countries. There are
considerable differences in the evolution of the debt indicators among the HIPCs, reflecting largely differences
in the implementation of economic reform programs and their different exposure to shocks. The impact of theseadverse developments on the debt sustainability outlook of the HIPCs will depend on a number of factorsincluding notably the adequacy of policy responses and of supporting resource transfers.WT/WGTDF/W/2
Page 10
14. Relief under the HIPC Initiative will enable governments to increase substantially resources
devoted to reducing poverty.  On average, the 26 decision point countries will spend on social sectors
in 2002–05 more than three times than what they plan to spend on debt service over the same period.
More specifically, this is projected to the be the case for 13 out of the 19 countries for which data are
available during the entire period 2002–05.  Of the remaining countries, all six will spend at least oneand a half times as much on social sectors as on debt service.  Although there is significant variability
among HIPCs regarding debt service and social expenditure, social spending increased from 38
percent to 48 percent of revenue, on average, between 1999 and 2001.  This reflects a significant re-
orientation of government expenditure, with spending  on social expenditures projected to rise from 6
percent of GDP in 1999 to 9 percent of GDP in 2002.  As a share in government revenue, social
spending would increase from 38 percent before HIPC relief to an average of 54 percent after HIPC
relief.
15. Of the four countries that have passed their completion points, two (Mozambique and
Tanzania) seem to be in a good position to maintain long-term debt sustainability. The picture for the
other two (Uganda and Bolivia) is more mixed, wi th Bolivia experiencing worrisome debt-service
ratios and Uganda facing very high debt indicators primarily as a result of sharply lower exports. The
external debt sustainability outlook for most of the 20 countries in the interim period has worsenedprimarily because of lower exports, but has not necessarily been seriously impaired. The NPV of debt-
to-exports ratios at the completion point are now projected to be above the 150 percent threshold in 8-
10 countries; deviations for six of these had already been anticipated at the time of the decision points,
although to a lesser degree.
16. For countries in the interim period, the enhanced HIPC Initiative allows some flexibility in
exceptional cases to top-up debt relief at the completion point to countries where exogenous  factors
have caused fundamental changes in their economic  circumstances. The enhanced HIPC Initiative
thus provides for the possibility of additional debt relief at the completion point. However, additional
HIPC relief is not meant to compensate for slippages in policy reform, nor can it be provided on an
ongoing basis to deal with future economic shocks. In the near term, to help countries deal with theimpact of the deterioration in the external environment, some countries may require additional donor
support, and increased interim relief may be helpful.
17. The provision of any additional debt relief at the completion point would increase the overall
costs of the HIPC Initiative. The financing implications of this will need to be explored in due course.
18. Virtually all HIPCs are heavily dependent on primary commodities for their export earnings
and government revenue, and as a result they will remain vulnerable to adverse exogenous
developments. In such circumstances, it would be unrealistic to expect external debt indicators to
follow a smooth monotonic downward trend after the HIPCs have reached their completion points or
that countries will always stay below the HIPC debt sustainability thresholds. Instead, there may be
fluctuations over time, and the objective of policies should be to ensure that the underlying trend is
downward.
19. The paper underscores the need for HIPCs to implement structural and policy reforms to
diversify their export base, supported by improved access for their exports to world markets and by
appropriate external financing. Given the HIPCs’ limited repayment capacity, the latter will have to
be on highly concessional terms and in the form of grants.
20. Under the existing HIPC framework, it is possible  to reassess the amount of debt relief at the
completion point in exceptional cases where severe exogenous shocks fundamentally change theHIPCs’ economic circumstances and pose prolonged debt sustainability problems for them. However,
HIPC relief is not intended to compensate for slippages in policy implementation, nor could it be
provided to deal with debt problems arising from poor governance and imprudent new borrowing.WT/WGTDF/W/2
Page 11
Under the existing operational modalities, the reassessment of the amount of HIPC relief committed at
the decision point would not be automatic, and each country’ s long-term debt outlook and the nature
of the exogenous shock faced will be considered on a case-by-case basis at the completion point. This
reassessment will take fully into account the impact of all debt relief already provided, including
additional debt relief beyond the HIPC Initiative announced by a number of official bilateral creditors.
21. For the countries beyond their completion points, over and above any topping up of relief, the
emphasis must be on achieving the right blend of growth-enhancing policy reforms and external
financial support from the donor community on appropriate terms. Adjustments may need to be
considered in the policy framework for poverty re duction and growth, in borrowing strategies, and in
overall debt management. For the objective of debt sustainability to be achieved, it is essential that
creditor countries help by providing financing that is consistent with these countries’ repayment
capacity and opening their markets further to HI PC exports. The appropriate blend between these
support options will depend upon the specific-country circumstances, including the devastating effects
of the HIV/AIDS epidemic in many HIPCs and th e constraints stemming from high domestic debt.
22. When facing unexpected adverse developments, HIPCs will have to decide on the appropriate
combination of policy adjustment and recourse to financing. Admittedly, adjustment policies, while
beneficial in the long run, may adversely affect certain segments of the society in the short run.However, avoiding adjustment in most cases is neither feasible nor desirable. The resources for
financing the impact of all external shocks in many HIPCs are simply not available and delaying
adjustment may indeed prolong the negative effects of an external shock and impair the ability of the
HIPCs to face future shocks instead of reducing external vulnerabilities.WT/WGTDF/W/2
Page 12
Table 1.  Enhanced HIPC Initiative: Committed Debt Relief and Outlook, Status as of March 2002
(In millions of U.S. dollars, in NPV terms in the year of the decision point)
Reduction in NPV Terms Nominal Debt Service Relief
Original
HIPC
InitiativeEnhanced
HIPC
InitiativeTotalOriginal
HIPC
InitiativeEnhanced
HIPC
InitiativeTotal Date of Approval
Countries that have reached their Completion Points (4)
Total 2,511 3,842 6,353 5,110 6,200 11,310
Bolivia 448 854 1,302 760 1,300 2,060 Jun-01
Mozambique 1,716 306 2,022 3,700 600 4,300 Sep-01Tanzania … 2,026 2,026 0 3,000 3,000 Nov-01Uganda 347 656 1,003 650 1,300 1,950 May-00
Countries that have reached their Decision Points (22)
Total 606 17,642 18,248 1,060 28,120 29,180
Benin 0 265 265 0 460 460 Jul-00
Burkina Faso 229 169 398 400 300 700 Jul-00Cameroon 0 1,260 1,260 0 2,000 2,000 Oct-00Chad 0 170 170 0 260 260 May-01Ethiopia 0 1,275 1,275 0 1,930 1,930 Nov-01The Gambia 0 67 67 0 90 90 Dec-00Ghana … 2,186 2,186 0 3,700 3,700 Feb-02Guinea 0 545 545 0 800 800 Dec-00
Guinea-Bissau 0 416 416 0 790 790 Dec-00
Guyana 256 329 585 440 590 1,030 Nov-00Honduras 0 556 556 0 900 900 Jul-00Madagascar 0 814 814 0 1,500 1,500 Dec-00Malawi 0 643 643 0 1,000 1,000 Dec-00Mali 121 401 522 220 650 870 Sep-00Mauritania 0 622 622 0 1,100 1,100 Feb-00Nicaragua 0 3,267 3,267 0 4,500 4,500 Dec-00Niger 0 521 521 0 900 900 Dec-00Rwanda 0 452 452 0 800 800 Dec-00São Tomé and Príncipe 0 97 97 0 200 200 Dec-00Senegal 0 488 488 0 850 850 Jun-00
Sierra Leone 0 600 600 0 950 950 Mar-02
Zambia 0 2,499 2,499 0 3,850 3,850 Dec-00
Countries still to be considered (12)
 Côte d’Ivoire 345 … 345 800 … 800 Mar-98 1/
 Burundi … … … … … …
 Central African Republic … … … … … …
 Comoros … … … … … … Congo, Dem. Rep. of … … … … … … Congo, Rep. of … … … … … … Lao P.D.R. … … … … … … Liberia … … … … … … Myanmar … … … … … … Somalia … … … … … … Sudan … … … … … … Togo … … … … … …
Memorandum item:
  Debt relief committed 3,462 21,484 24,946 6,970 34,320 41,290
    under original and enhanced frameworks 2/
Sources:  HIPC Initiative country documents; World Bank and IMF staff estimates.
1/  Approved debt relief under the original framework.
2/  Countries that have reached their decision points under the enhanced HIPC framework through late March 2002 and Côte d'Ivoi re, which
had reached the decision point under the original framework earlier.WT/WGTDF/W/2
Page 13
Table 2.  Progress Status of Countries Under the Enhanced HIPC Initiative
as of late March, 2002
Completion
Points Reached
(4) Decision Points Reached (22)Decision Point
not yet Reached (12)Sustainable
Cases (4)
   Bolivia   Benin  Guinea-Bissau  Nicaragua   Burundi Liberia       Angola
   Mozambique   Burkina Faso  Guyana  Níger   Central African Rep. Myanmar       Kenya
   Tanzania   Cameroon  Honduras Rwanda  Comoros Somalia       Vietnam
   Uganda   Chad  Madagascar  São Tomé and Príncipe   Congo, Dem. Rep. Sudan       Yemen   1/
  Ethiopia  Malawi  Senegal   Congo, Rep. of Togo
  The Gambia  Mali  Sierra Leone   Cote d'Ivoire
  Ghana  Mauritania  Zambia   Lao P.D.R.
  Guinea
Sources:  HIPC documents; and IMF and World Bank staff estimates.
1/  Yemen reached its decision point in June 2000. Its debt sustainability analysis indicated that the country has a sustainabl e debt burden
after the application of traditional debt relief mechanisms (See SM/00/138 and IDA/SecM2000-359, June 28, 2000). The Paris Club
provided a stock-of-debt operation on Naples terms in July 2001.
Table 3.  HIPC Initiative: Estimates of Potential Costs by Creditor Group
(34 countries) 
   
 September 2001 March 2002 March 2002  March 2002
 Costing Exercise Costing Exercise Costing Exercise Share of
 2000 NPV Terms 1/ 2000 NPV Terms 1/ 2/ 2001 NPV Terms 2/ 3/ Total Costs
(In billions of U.S. dollars) (In percent)
Total costs 33.2 34.4 36.4 100.0
 
Bilateral and
   commercial creditors 17.1 17.8 18.8 51.7
   Paris Club 12.8 13.3 14.1 38.6
   Other official bilateral 2.8 3.0 3.2 8.8
   Commercial 1.5 1.4 1.5 4.2
 
Multilateral creditors 16.1 16.6 17.6 48.3
World Bank 7.4 7.6 8.1 22.2
     Of which :  IDA 6.7 7.0 7.4 20.3
    of which:   IBRD 0.8 0.7 0.8 2.2
 
   IMF 2.5 2.6 2.7 7.5
   AfDB/AfDF 2.6 2.9 3.0 8.4
   IaDB 1.1 1.1 1.2 3.3
   Other 2.4 2.4 2.6 6.8
Memorandum item:    
  Total costs including
     Liberia, Somalia, and
     Sudan 41.6 42.7 45.3 124.2
Sources: HIPC Initiative country documents; and Fund and Bank staff estimates.
 
1/ All HIPCs, excluding Liberia, Somalia, Sudan, Angola, Kenya, Lao P.D.R., Vietnam, and Yemen (see Annex I).
2/ Reflects updated DSAs for Democratic Republic of Congo, Côte d’Ivoire, Ethiopia, Ghana, and Sierra Leone.
3/ The cost figures in 2001 NPV terms are derived from the figures in 2000 NPV terms compounded by a factor o f
6 percent.WT/WGTDF/W/2
Page 14
Reform of the International Financial Architecture:
An Overview of the Fund's Work
I. INTRODUCTION
1. It’s a pleasure to be here today to talk about international financial architecture.
2. I will first outline for you the major reforms undertaken by the Fund and its members to
enhance the stability and integration of the international financial system, in response to the crises in
the 1990s and the calls for change from the international financial community.
3. I will then focus my comments mostly on the Fund and Bank’s work on standards and codes
which the international community sees as a “ critical pillar ” in the international financial architecture.
I think this of all of the initiatives may be of greatest interest to you. In my view, the Fund/Bankreports on standards and codes are in some ways similar to the WTO’s Trade Policy Review
Mechanism (TRPM): it is intended to provide enhanced transparency and third party assessment with
the objectives of promoting trade and investment —which are a prerequisite for growth. Moreover,
while standards and codes are different from the WTO’s Financial Sector Agreement (which is a
multilateral legally binding agreement), there are some similarities: the FSA seeks to harmonize ruleson trade in financial services while standards seek to harmonize domestic practices. The standards and
codes initiative focuses on how to set good practices which are internationally agreed, yet which take
into account different country characteristics and capacities.
4. As you know, the new international financial architecture has its roots in the financial crises
that shook emerging market economies in the 1990s. In response, the international communitylaunched a series of initiatives—referred to collectively as the new international architecture—to
strengthen the operation of the global financial system and the Fund and its members’ crisis
prevention capacity.  The major building blocks encompass transparency and accountability,  the
strengthening of financial systems, strengthened ex ternal vulnerability analysis at the national and
system levels, international standards and codes. Other elements of our crises prevention work includea deeper focus on exchange rate and capital account issues, and the Fund’s Contingent Credit Lines
(CCL).
6 Of course , as we will never be 100 percent successful in preventing crises, crisis resolution
and private sector involvement remain an important and still challenging issue on our agenda.
A. BUILDING BLOCKS OF THE INTERNATIONAL FINANCIAL ARCHITECTURE
1. Transparency
5. The Fund has been assisting member countries’ efforts to improve their transparency and has
also taken significant steps to improve its own transparency. The crises in the 1990s made apparentthe importance of transparency in policy making and implementation; and also for a less volatile
financial system based on better differentiation of risk.
6. Under its transparency policy, the Fund encourages the publication of documents, while
taking into account the specific circumstances of each country, including those relating to different
institutional and political contexts. One of the im portant and ongoing concerns of our members has
been to preserve the candour of consultation discussions and reporting to the Board. Fun members and
                                                     
6 The CCL is a precautionary facility designed to assist member countries with strong economic
policies and sound financial systems that are seeking to resist contagion from disturbances in global capital
markets, and hence a tool for crisis preventionWT/WGTDF/W/2
Page 15
staff are increasingly acknowledging the benefits of transparency as evident from the following:  as of
end March 2002,
• for Fund lending, virtually all documents outlining the authorities’ policy intentions are published.
In addition, Executive Board views on Fund-supported programs are published. To provide acontext for members’ programs, now over half of  staff reports for use of Fund resources (UFR)
are released.
• For IMF surveillance, the increase in the publication of information has been as dramatic.  The
release of Board views through publication of Public Information Notices (PINs) after Executive
Board surveillance discussions is now the norm. More than half of Fund members publish Article
IV staff reports. Mission concluding statements  and in addition, Reports on the Observance of
Standards and Codes (ROSCs) and  Financial System Stability Assessments (FSSAs) are
published providing in-depth information on countries’ institutional capacity and financial sector
soundness.
• Staff papers discussing key policy issues (such as reviews of conditionality and the poverty
reduction and growth facility, standards and codes and transparency) are now published in most
cases (21 of 26 such papers discussed in 2001 were published). The summaries of Executive
Board discussions of these papers are published for about half of these. In addition, the Fund has
engaged in a dialogue with the public on some key policy issues. In June 2001, the Fund’s workprogram statement was published for the first time. Finally, the work program and issues papers
of the Independent Evaluation Office (established in July 2001 to provide objective and
independent evaluation of issues related to the Fund) are published.
7. I referenced the balance that needs to be stru ck between transparency and the Fund’s role as
confidential advisor. In the review of tran sparency in May 2002 the Board will examining
implementation of the transparency and publications policies focusing on this important topic and will
also consider next steps.
2. Strengthening Financial Systems
8. The Fund has intensified its focus on financial issues at both the national and international
level in bilateral and multilateral surveillance:
• The Financial Sector Assessment Program, launched in collaboration with the World Bank
provides comprehensive analysis of members’ financial sectors. As of end 2001, 25 FSAPs had
been completed, with an additional 40 countries committed to participate in the program. FSAPs
are contributing to our thinking on the appropriate sequencing and pace for financial sector and
capital account liberalization. They could make a contribution in assessing members' readiness tobenefit from opening of financial sector services The design and implementation of prudential
standards---one of the core standards assessed under the FSAP—is pertinent in this regard. Our
Executive Board will review the experience with the FSAP in June 2002.
• The Fund has extended its financial sector work to include offshore financial sectors. This
involves voluntary assessments of OFCs at three possible levels of intensity. A progress report on
this initiative was posted on the Fund’s website this month.
• The Fund and the Bank are working to enhance their contributions to global efforts to fight money
laundering. Work has advanced with the FA TF on a methodology for an anti-money laundering
standard and on how assessments would be undertaken consistent with the Fund’s uniform,
voluntary and cooperative approach to standards assessments. A progress report to theWT/WGTDF/W/2
Page 16
International Monetary and Financial Committee for the Spring 2002 meetings has been prepared
and will be published.
• As part of its commitment to being a center of excellence for work on financial market issues, the
Fund has created a new International Capital Markets department which began operation in
August 2001. The first Global Financial Stability Report was discussed by the Fund Board andpublished on our external website.
3. External Vulnerability Assessment
9. I noted that we have strengthened our vulnerability assessment at the national and
international levels. This has involved the development of better analytical tools and also bringing
together our specialized and country expertise. Ou r external vulnerability analysis the Fund draws
systematically on a number of independent inputs:
• The World Economic Outlook
• Assessment of the global financial system
• Early warning system models
• A country’s financing requirements including its reserve adequacy
• Market information and contagion risks
• Financial sector vulnerability assessments
• And our country expertise.
10. In particular, we are now focusing on foreign exchange exposures in the public, financial, and
corporate sectors and are helping our members to improve the availability of critical data forvulnerability assessment. In this regard, our Board will discuss data provision to the Fund for
surveillance and strengthened vulnerability assessment in May 2002.
B. A
N OVERVIEW OF STANDARDS AND CODES
11. The standards initiative focuses on the devel opment and implementation of internationally
agreed standards and codes to promote strong institutional underpinnings for a stable international
financial system .This work is not just for emerging market  countries. The recent dramatic unfolding
of shortfalls in corporate governance in industrialized countries underscores the universal relevance ofstandards and codes.  The New Partnership for the Development of Africa (NEPAD) has placed great
weight to adhering to international standards in the conduct of policy.
12. The Fund, in partnership with the World Bank, has contributed to the development of
standards; has undertaken monitoring and assessment of standards; has disseminated information on
standards; and has encouraged their implementation, including through the provision of focused andtargeted technical assistance, and in accordance with countries’ circumstances and priorities.  The
IMF has recognized 11 areas and associated standards as useful for the operational work of the Fund
and the World Bank. The areas include data dissemination, monetary and financial policy
transparency; fiscal transparency; banking superv ision; securities; insurance; payments systems;
corporate governance; accounting; auditing; and insolvency and creditor rights.  In addition, as Inoted, we are working with the Financial Action Task Force with the objective of agreeing on a global
standard on Anti-Money Laundering which could be added to this list of standards.
13. Standards promote good practices and have been developed after much consultation with
international organizations and our member countries. Some standards such as the data dissemination
standards are tailored for specific groups of countr ies: for instance, the Special data dissemination
standard targets countries with access or near access to international financial markets; while theWT/WGTDF/W/2
Page 17
General Data Dissemination Standards focus on the buiidlig of statistical capacity for developing
countries. The code of fiscal transparency is a standard of good rather than best practices. These
Fund-led standards have been developed with the broad participation of member countries and other
international organizations.
14. With regard to standard assessments, the IMF and World Bank produce Reports on the
Observance of Standards and Codes (ROSCs).  ROSCs summarize the extent to which countries
observe certain internationally recognized standards and are produced in the form of modules.
Participation by Fund members is voluntary and the modular approach allows countries to take up
assessments most relevant to them.  The Fund's appr oach is to encourage countries to focus on areas
which are priorities for them and to progress as quickly as possible in those areas.
15. ROSCS are used to help sharpen policy discussions with national authorities; by rating
agencies in their assessments; and in the privat e sector for risk assessment. Short updates are
produced regularly and new reports are produced every few years.
C. TRADE AND STANDARDS AND CODES
16. The adoption of internationally recognized standards of good practices in key areas of
economic and financial policy contributes to improved transparency, accountability, credibility of
policy, and the robustness and effective functioning of markets. In turn, these create an enablingenvironment conducive for investment (and the flow of capital) and spur trade, both in goods and
services. Internationally accepted standards also contribute to an effective and undistorted market
framework for financial sector participants. The prospect of significant liberalization of international
trade in financial and accounting services, for example, is probably limited in the absence of a
comprehensive, internationally-agreed framework of principles for the regulation.. The WTO, among
others, recognizes this important aspect of the work on standards and codes, stating at the Singapore
Ministerial that “[we] encourage the successful completion of international standards in the
accountancy sector by IFAC, IASC, and IOSCO”.
7  Let me now provide you with information on how
the response by members and markets to the standards initiative..
D. RESPONSE BY MEMBERS AND MARKETS
Response by members
• We have seen a shift in perceptions among our members of the importance of international
standards. This is reflected in the growing intere st in volunteering for these assessments from a
wide range of advanced, developing, em erging market, and transition economies.
• By end-March 2002, 221 ROSCs had been completed for 73 countries, and 162 of these had been
published along with the authorities’ views on th e assessments provided. Of the total ROSCs, 93
were undertaken by developing countries, and more than half of these have been published.
• We have received positive feedback from developing country authorities that ROSCs, and the
prioritized recommendations that they contain, have been useful for designing programs of
economic reform, strengthening institutions, and serving as the framework for requesting
technical assistance.
• Our work suggests that improving observan ce of standards has tangible benefits  for all
countries , not just emerging market countries . In general, we have found that countries with
                                                     
7 World Trade Organization, Singapore Minister ial Declaration Adopted on 13 December 1996. The
IFAC is the International Federation of Accountants. Note that the IASC is now the IASB.WT/WGTDF/W/2
Page 18
strong institutional underpinnings (including shareholder and creditor rights) have more
developed financial systems, allocate capital more efficiently, and are less prone to crisis.
Transparency in policy is associated with bett er fiscal management and lower inflation. Let me
illustrate:
− Mozambique’s fiscal ROSC helped clarify the agenda for reform, precipitating significant
technical assistance and improving transparency.
− In Uganda, an innovative approach to transparency has led to significant improvement in
school funding.
− Tunisia and South Africa responded positively to the recommendations in ROSCs and were
able to improve credit ratings and lower cost of borrowing by improving their observance to
internationally agreed standards.
Response of markets
17. The markets are also responding to these initiatives/. Surveys and our meetings with
participants show that ROSCs are increasingly being used as an input into risk assessment and
investment decisions. Staff have been informed about –though have not assessed—several  private
sector standards initiatives: these include the e-Standards Forum, which is subscription-based, andprovides summaries of each country's compliance with standards,  based solely on information
already in the public domain. Standard and Poor’s rating agency is undertaking assessments of firms'
adherence to corporate governance standards. PriceWaterhouseCoopers (PWC), the international
accounting firm, has produced an "opacity index"—an indicator which intends to measure opacity and
its costs, based on some standards-related dimensions.
18. In February, one of the largest pension funds in the U.S. (the California Public Employees
Retirement System, CalPERS) announced that it was using measures of transparency, corporate
governance, and financial regulation (including ROSCs) among its criteria for determining the
countries in which it will invest.
E. C
ONCERNS WITH STANDARDS AND CODES
19. The Fund and the World Bank have sought to address concerns initially raised by some Fund
members including the perception of a “one size fits all” approach to standards development and less
than universal participation in the development of standards.
20. First, the governance structure of the Fund—as you know we have 183 members countries—
and the process we have set up for modifying standards means that there is broad countryparticipation in this initiative.
21. In addition, , we have held seminars—for example, at a high level conference on standards
held in March 2001— and engaged in an ambitious outreach program to the public and private sectors
in Asia, Latin America, Europe, the Middle East and Africa aimed at consideration of next steps for
this initiative. The Fund and Bank have also redoubled efforts to identify technical assistance needs
and coordinate with others—including the multilateral development banks—in coordinating the
provision of technical assistance. Periodic reviews of the standards initiative by the Fund Board—thenext in July 2002—also provide a mechanism for considering the direction of this work.
22. Research is being undertaken at the Fund on the relationship between implementation of
standards and macroeconomic development . Our prel iminary results suggest that there are signs that
investors are starting to differentiate among borrowing countries more clearly than before, reflected inWT/WGTDF/W/2
Page 19
the greater dispersion of spreads on emerging market debt and less contagion in response to credit
events. reports.
23. Finally, the Fund and its members are working together to develop creative means of better
involving all countries in the standards and codes in itiative. Peer review of standards implementation
and informal fora at which members can exchange their experiences with undertaking ROSCs aresome of the measures being considered.
24. The results of all of these efforts will hopefully help to increase ownership and commitment
across the Fund membership.
__________