United States General Accounting Office

GAO Report to the Chairman, Subcommittee

on International Economic Policy,

Export and Trade Promotion, Committee

on Foreign Relations, U.S. Senate

September 1998 DEVELOPING

COUNTRIES

Status of the Heavily

Indebted Poor

Countries Debt Relief

Initiative

GAO/NSIAD-98-229

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-280827 

September 30, 1998

The Honorable Chuck Hagel

Chairman, Subcommittee on International Economic

 Policy, Export and Trade Promotion

Committee on Foreign Relations

United States Senate

Dear Mr. Chairman:

This report responds to your request that we describe the implementation of the Heavily

Indebted Poor Countries Debt Initiative and assess the initiative’s potential to achieve its stated

goal.

We are sending copies of the report to the Secretaries of the Treasury and of State, the

President of the World Bank, the Managing Director of the International Monetary Fund, and

other interested parties. Copies will also be made available to others on request.

Please contact me at (202) 512-4128 if you or your staff have any questions concerning the

report. Major contributors to this report are listed in appendix VIII.

Sincerely yours,

Benjamin F. Nelson, Director

International Relations and Trade Issues
Executive Summary

Purpose In response to a call from the leaders of the major industrial nations for a

comprehensive approach to the debt problems of the poorest countries,

the World Bank and the International Monetary Fund (IMF)1

 proposed the

Heavily Indebted Poor Countries (HIPC) Debt Initiative in 1996. The

initiative reflects concerns of creditors, including the United States, that,

even after receiving debt relief through existing mechanisms, some poor

countries will have debt burdens that remain too large relative to their

ability to pay. The stated goal of the HIPC initiative is to bring countries’

debts to levels that are sustainable, meaning that in the future they can

make debt payments on time and without rescheduling. As a condition of

receiving debt relief, countries undertake economic and social reforms.

Expressing concern about whether the HIPC initiative could realistically be

expected to solve these poor countries’ debt problems and whether they

are likely to need further debt relief in the future, the Chairman of the

Subcommittee on International Economic Policy, Export and Trade

Promotion, Senate Committee on Foreign Relations, asked GAO to review

the HIPC initiative. As requested, this report (1) describes the

implementation of the HIPC initiative and (2) assesses the initiative’s

potential to achieve its stated goal. Because it is still relatively early in the

implementation of the HIPC initiative, this report presents a preliminary

assessment of its likely effects.

To conduct its assessment, GAO obtained access to World Bank and IMF

officials and information through the Department of the Treasury, and

through the staff of the U.S. members of these institutions’ Boards of

Executive Directors.2 GAO discussed the development and implementation

of the HIPC initiative with, and obtained data from, officials of U.S.

government agencies; other creditors, including France, Germany, the

United Kingdom, the Paris Club,3

 the African Development Bank, and the

Inter-American Development Bank; governments and private sector

1

The World Bank promotes economic growth and the development of market economies by providing

financing on reasonable terms to countries that have difficulty obtaining capital. The Bank is the

world’s single largest official source of investment capital for developing countries. The IMF promotes

international monetary cooperation and exchange rate stability and provides short-term lending to

member countries that experience balance-of-payments difficulties. For poor countries, the IMF also

provides medium-term (10-year) loans on concessional (below market interest rate) terms under its

Enhanced Structural Adjustment Facility (ESAF).

2

The Board of Executive Directors of the World Bank is responsible for policy decisions affecting the

Bank’s general operations and for the approval of all loans. The IMF’s Executive Board is the IMF’s

primary decisionmaking body. Each board comprises 24 executive directors who represent member

countries.

3

The Paris Club is an informal group of creditor countries that meets, as needed, to negotiate debt

rescheduling and relief efforts for public or publicly guaranteed loans. In addition to the 18 countries

that regularly participate in the Paris Club, other countries are invited to the negotiations on an ad hoc

basis if they hold a significant share of the debt being discussed.

Page 2 GAO/NSIAD-98-229 Developing Countries
Executive Summary

institutions in three HIPC recipient nations—Burkina Faso, Côte d’Ivoire,

and Uganda; U.N. organizations; and nongovernmental organizations (NGO)

in the United States and abroad. GAO analyzed data and internal reports on

the design and implementation of the HIPC initiative, as well as data on

prior debt relief and restructuring efforts. GAO conducted its assessment

based on the implementation of the HIPC initiative through August 1998.

Background Addressing the debt burdens of very poor countries, in the context of the

broad range of development needs they face, constitutes a substantial

challenge. The World Bank and the IMF have classified 40 countries as

heavily indebted poor countries.4

 Thirty-two of these countries are in

sub-Saharan Africa. (See app. I for a list of countries.) Eighty-three percent

of these countries are classified by the United Nations as being in its

lowest category of human development, based on life expectancy, literacy,

and per capita national income. Most receive substantial amounts of

development assistance from governments, multilateral organizations, and

NGOs. In 1994, foreign assistance represented about 16 percent of national

income, using a weighted average, for 36 of these countries for which data

is available. Some of the 40 countries, moreover, have recently emerged

from—or continue to be engaged in—conflict or civil unrest.

Since the early 1980s many poor countries have had increasing difficulty

servicing their debt. Despite several debt relief efforts, the total amount of

money owed to external creditors by the 40 countries increased from an

average of $122 billion for 1983-85 to $221 billion for 1993-95 (in 1997

dollars). For 1993-95, 73 percent of this debt was medium- and long-term

debt owed to official creditors (governments and multilateral financial

institutions). The remaining 27 percent was medium- and long-term debt

owed to commercial creditors and short-term debt such as trade financing.

Of the total debt, 45 percent was owed to governments (bilateral

creditors)5

 and 28 percent was owed to international financial institutions

(multilateral creditors). By the mid-1990s, much of this debt was not being

repaid. During 1993-95, for example, HIPC countries paid about 41 percent

4

In 1996, the World Bank classified 41 countries as heavily indebted poor countries. In 1998, the

number of countries was reduced to 40 because Nigeria was no longer given this classification.

5

According to the U.S. Treasury, as of August 1998, 31 heavily indebted poor countries owed the

United States approximately $6.8 billion in outstanding debt. (See app. II.)

Page 3 GAO/NSIAD-98-229 Developing Countries
Executive Summary

of their scheduled debt payments, with the remainder being rescheduled

or in arrears.6

Debt relief efforts since the 1980s have been undertaken primarily by

bilateral and commercial creditors. Some bilateral creditors have

individually forgiven debt owed by poor countries with, for example, the

United States forgiving about 37 percent of the debt owed to it by these

countries. More often, bilateral creditors have worked together to offer

debt relief on increasingly concessional terms, up to 67 percent of eligible

debt (Naples terms), through the Paris Club. Multilateral creditors have

generally not rescheduled or reduced debt owed them because of their

belief that forgiving or reducing debt would diminish assurances of

repayment on new lending and, in some cases, hurt their credit ratings.

The HIPC initiative is the first coordinated effort to include all creditors in

addressing poor countries’ debt problems. Participating creditors include

bilateral governments, the major multilateral creditors such as the World

Bank and the IMF, and over 20 other multilateral development institutions,

including the African Development Bank, the Inter-American Development

Bank, and the International Fund for Agricultural Development. (See app. 

III.)

The World Bank and the IMF made a preliminary determination that 20 of

the 40 countries might eventually receive relief based on the initiative’s

specific criteria concerning income, indebtedness, and reform efforts

underway. The World Bank and the IMF currently estimate that the HIPC

initiative will provide about $8.2 billion in debt relief in 1996 present value7

terms, for 20 countries. As of August 1998, the World Bank and the IMF had

made specific eligibility decisions for eight countries, with six

countries—Bolivia, Burkina Faso, Côte d’Ivoire, Guyana, Mozambique, and

Uganda—deemed eligible for relief under the HIPC initiative, and two

countries—Benin and Senegal—deemed ineligible because their debts are

considered sustainable. One country—Uganda—has completed the HIPC

initiative’s process.

6

If Sudan and Somalia, two of the countries with the largest amount of unpaid debt and that are not

part of the HIPC initiative’s current cost estimates, are not included, GAO estimates that the 38

remaining countries paid an average of 43 percent of their debt service owed during 1993-95.

7

The amount of debt can be reported in terms of nominal (face) value and present value, also termed

“net present value” in HIPC documents. Much of the debt of poor countries is contracted on

concessional terms. The present value of debt is a measure that takes into account the degree of

concessionality.

Page 4 GAO/NSIAD-98-229 Developing Countries
Executive Summary

The HIPC framework outlines a two-stage process, with each stage lasting

up to 3 years. During stage one, a country must implement IMF- and World

Bank-supported programs of economic reform, after which eligibility for

HIPC debt relief is assessed. At that time, the World Bank and the IMF

determine whether (1) existing debt relief mechanisms, such as those

offered by the Paris Club, are sufficient to bring a country’s debt to a point

considered sustainable or (2) the country requires additional relief. In

making this determination, they decide whether the ratio of a country’s

debt (in present value terms) to the value of its exports will be greater

than a target ratio set for that country.8

 According to the framework, the

target debt-to-export ratio is generally set between 200 and 250 percent.9

The lower the target level set for a particular country, the greater the

amount of debt relief required to reach the target. For example, lowering

the ratio of a particular country’s debt to its exports from 300 percent to

200 percent requires more debt relief than lowering it from 300 percent to

250 percent. The target set for each country is based on factors affecting

the vulnerability of the country’s economy, such as the percentage of

government revenue required for debt service and whether export

earnings are dependent on just a few commodities.

If the World Bank and IMF Boards determine that existing debt relief

mechanisms are insufficient to make debt levels sustainable and other

principal creditors agree, the debt reduction amounts are decided and the

country enters the second stage of the HIPC initiative. During this stage, the

country receives some debt relief from bilateral and commercial creditors

and financial support from multilateral institutions. The country must

agree to continue implementing economic reform programs supported by

the IMF and the World Bank and social reforms agreed to with the World

Bank. If the country has met the IMF and World Bank requirements, it

receives final debt relief under the HIPC initiative at the end of stage two.

Official creditors have agreed to share the amount of relief by providing

equal percentage reductions of debt owed them (after the full use of

existing debt relief mechanisms) and commercial creditors are expected

to provide relief comparable to bilateral creditors.

Establishing a comprehensive framework for debt relief required resolving

differences among creditors. Some creditors were concerned about the

8

In this report, discussions of debt-to-export ratios refer to the present value of debt, unless otherwise

noted.

9

Under certain conditions, for countries with very open economies and strong efforts to generate fiscal

revenues, the target may be based on the ratio of debt to government revenue. This fiscal indicator can

lead to debt-to-export targets below 200 percent.

Page 5 GAO/NSIAD-98-229 Developing Countries
Executive Summary

cost of providing debt relief and about the issue of “moral

hazard”—whether the prospect of debt relief would discourage countries

from undertaking needed reforms or from pursuing responsible borrowing

policies. Key issues negotiated in developing the HIPC initiative included

how sustainable debt burdens would be determined, the nature of required

reforms, whether debt stocks would be reduced, and how creditors would

share in providing relief. Setting a range of values for the primary indicator

of whether debts were sustainable, and announcing the framework would

be implemented flexibly, left many key decisions to be made in the

process of implementing the initiative. Also, some aspects of design, most

notably how the shares of debt relief would be divided among creditors,

were decided after the basic framework was announced. (See app. IV for

additional information on the framework.)

Results in Brief The HIPC initiative will help reduce participating poor countries’ debt

burdens, in some cases, substantially; however, many will remain

vulnerable to future debt problems even with sound economic policies.

The implementation of the HIPC initiative reflects compromise among the

major official creditors on issues such as countries’ eligibility and the total

amount of debt relief to be provided. In recognition of countries’ economic

vulnerabilities, creditors have generally agreed on relief amounts that are

at or close to the upper bounds of what the negotiated framework allows.

Nonetheless, in order to avoid further debt problems, countries receiving

debt relief through the HIPC initiative are assumed to maintain strong

economic performance and continue to receive large amounts of donor

assistance. In most cases this assistance includes balance-of-payments

support. The HIPC initiative projections assume that countries will maintain

sustainable debt levels in part through strong export growth. These export

growth assumptions may be optimistic for some countries. Since many

HIPC recipients rely upon a few commodities for their export earnings, they

are particularly vulnerable to economic events such as a decline in the

price or output of a primary export.

Principal Findings

Implementation of the

HIPC Initiative Has

Involved Extensive

Negotiation

The implementation of the HIPC initiative has involved significant

negotiation among the major creditors on issues such as a country’s

eligibility, the amount of debt relief to be provided, and the way in which

debt relief is to be shared among creditors. Creditors have generally

Page 6 GAO/NSIAD-98-229 Developing Countries
Executive Summary

agreed to provide relief at the upper end of what the negotiated

framework provides for five of the first six countries. The total estimated

amount of debt relief has increased in part due to creditors’ decisions as

they have implemented the HIPC initiative. The amount of relief could

further increase if, for example, countries that were not included in

previous estimates become eligible.

Compromise on Amount and

Timing of Debt Relief

Despite considerable debate on the amount and timing of debt relief to be

provided, the World Bank and IMF Boards, in conjunction with principal

creditors, have generally implemented the HIPC initiative to provide debt

relief at the upper bounds of the negotiated framework. This is specifically

evident in low debt-to-export targets—which increase the amount of debt

relief provided—and shortened second stages of the initiative’s

implementation—which provide debt relief sooner and can increase relief

amounts in some cases. For five of the first six countries, target

debt-to-export ratios have been set close to or below the lower end of the

target range—205 percent or lower.10 Countries have expressed different

views during the implementation of the HIPC initiative about the extent to

which debt-to-export ratios above the lower end of the target range should

be used, in part reflecting concerns about costs. The higher relief amounts

agreed to reflect concerns that these countries face significant economic

risks such as declines in the price or production of their primary exports.

Five of the first six countries approved for relief under the HIPC initiative

have been given a shortened second stage despite some countries’ belief

that the second stage of the HIPC initiative—the period between eligibility

and completion—should last 3 years. According to HIPC documents, this

shortened period reflects the strong reform records of the early qualifiers

(Bolivia, Burkina Faso, Guyana, Mozambique, and Uganda), which have

completed successive ESAF programs and World Bank programs and

received a Paris Club stock-of-debt operation11 on Naples terms. A shorter

period between the initiative’s decision point and the completion point

means that countries will receive final HIPC debt relief sooner and may get

more relief under certain conditions. In the case of Guyana, GAO estimated

that the decision to set the completion point in 1998 rather than the year

2000 (which would have been 3 years between the two stages) resulted in

10The fiscal indicator has led to debt-to-export ratios below 200 percent for two countries—Côte

d’Ivoire and Guyana.

11For the Paris Club, a stock-of-debt operation refers to the total refinancing of the outstanding balance

of a country’s eligible debt. The stock of eligible debt will be reduced and the remainder will be

rescheduled.

Page 7 GAO/NSIAD-98-229 Developing Countries
Executive Summary

a projected increase in the initiative’s assistance of about 68 percent, or

$103 million in present value terms.

Creditors’ Shares of Debt Relief Determining how creditors will share in providing debt relief has involved

significant negotiation since the September 1996 announcement of the HIPC

framework. After much negotiation, in July 1997 the creditors broadly

endorsed a proportional burden-sharing approach under which bilateral

and multilateral creditors are expected to provide debt relief in proportion

to their exposure after the use of traditional debt relief mechanisms,

including those offered by the Paris Club. Bilateral and multilateral

creditors are to provide equal percentage reductions on the remaining

debt owed to them, with Paris Club creditors agreeing to provide up to

80 percent relief on eligible debt.

The creditors each determine how they will provide the relief. Creditors

may provide relief through several means, such as rescheduling debt

payments at lower interest rates, buying back the debt, converting loans

into grants, reducing the debt, making debt service payments as they come

due, and/or lending new funds on concessional terms to be used to make

debt service payments. A creditor’s decision about how it will provide debt

relief to a particular recipient may be influenced by many factors, such as

the amount of outstanding debt and the impact of providing debt relief on

the creditor’s future budgets.

Multilateral creditors have said that they will not forgive debt outright

because to do so may endanger their preferred creditor status.12 They have

stated they intend to provide debt relief in ways that maintain their

preferred creditor status such as making countries’ debt payments for

them as they come due. Much of the debt relief provided by the World

Bank will be financed through a special HIPC Trust Fund. Relief through

the HIPC initiative is provided on debt owed to the International

Development Association (IDA), but the funding for the Trust Fund is

provided mainly from income of the International Bank for Reconstruction

and Development (IBRD).13 (See app. IV for additional information on the

sources of funding for the Trust Fund). The IBRD has contributed about

$750 million from its income to this Trust Fund to buy back or repay debt

12The preferred creditor status derives from the debtors’ traditional practice of servicing debt owed to

the World Bank and the IMF before servicing debt owed to other lenders. The articles of agreement

(charters) of these institutions do not address preferred creditor status or debt forgiveness.

13The World Bank has two organizations that lend to governments: the IDA lends to poor countries at

highly concessional rates, and the IBRD lends to middle-income countries at market rates.

Page 8 GAO/NSIAD-98-229 Developing Countries
Executive Summary

owed to IDA.

14 The IMF is participating in the HIPC initiative through special

ESAF grants that are deposited into an escrow account to meet debt service

payments owed to the IMF under a predetermined schedule. The IMF is

funding its contribution through its own trust fund financed from bilateral

(member) contributions and the ESAF reserve account.

Total Estimated Relief Amounts

Can Change

The actual amount of debt relief to be provided under the HIPC initiative

depends on creditors’ decisions during implementation as well as actions

taken by debtor countries to implement required reforms. Since reaching

agreement on the basic terms of the HIPC framework in September 1996,

creditors have made several changes that have contributed to an increase

in the estimated amount of relief from $5.6 billion to $8.2 billion (in 1996

present value terms). Much of the increase was due to a change calling for

exports to be calculated using an average of 3 years of data rather than 

1 year. This was done to provide a more stable measure of exports. In a

period of increasing exports, this change results in countries receiving

increased relief under the HIPC initiative. The change increased the total

estimated amount of HIPC debt relief by about $1 billion, according to HIPC

documents. About $600 million of the increase was due to a change in the

eligibility criteria that allowed at least two additional countries (Côte

d’Ivoire and Guyana) to qualify for the HIPC initiative. Advocates for the

expansion of the eligibility criteria were concerned that certain countries

with very open economies, and thus relatively low debt-to-export ratios,

were improperly characterized as having a sustainable debt burden under

the HIPC initiative. Much of the remaining increase in projected debt relief

was due to revisions to methodologies and country-specific analyses, most

significantly, increased estimates of the amount of the potential relief for

the Democratic Republic of Congo.

The amount of total HIPC debt relief could further increase if countries that

were not included in previous estimates, such as Liberia, Somalia, and

Sudan, establish the track records of reform needed to qualify for HIPC debt

relief. Including these countries would increase the total amount of relief

under the HIPC initiative, and debt relief for Sudan, in particular, could

increase the estimates greatly. The World Bank and the IMF made a

preliminary estimate that HIPC debt relief for Sudan could be about

$4.5 billion. Conversely, if countries included in the estimates do not

undertake required reforms and thus do not receive HIPC relief, the total

amount of relief could decrease.

14The World Bank’s Board of Executive Directors has recommended that an additional $100 million of

IBRD income be transferred to the HIPC Trust Fund.

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Executive Summary

The HIPC Initiative Will

Help Countries, but Many

Will Remain Vulnerable to

Future Debt Problems

The HIPC initiative will provide benefits to recipient countries; however,

many will remain vulnerable to future debt problems, even with sound

economic policies. In conjunction with existing debt relief mechanisms,

such as relief from Paris Club creditors, the HIPC initiative will reduce

countries’ debts by varying amounts, some substantially. Reductions in the

amount of recipient country resources that are used to pay debt service

will also vary and are difficult to determine due to prior arrears and the

use of donor resources in some cases to help make debt payments. The

limited evidence for the particular debt targets in the HIPC initiative

suggests that reducing debt-to-export ratios to near 200 percent is not

likely to provide countries with a “cushion” to protect against adverse

economic events. Strong export growth and substantial donor assistance

are important to the HIPC initiative’s projections of debt burdens being

sustainable. For some countries, those export growth projections may turn

out to be overly optimistic. If export earnings are lower than expected,

financial support from bilateral and multilateral donors is assumed to

increase. This assumption has been questioned by many parties, including

some governments and NGOs, given the budgetary pressures of major

donor countries. The HIPC initiative has also focused attention on the

limited capacity of recipients to manage their debt, with improvements in

debt management considered critical to avoiding future debt problems.

Determining the Significance of

the HIPC Initiative’s Debt Relief

Is Complex

The HIPC initiative will reduce the total amount of debt owed, in present

value terms, by varying amounts for the first six recipient countries. For

example, the present value of HIPC debt relief for these countries ranges

from 6 percent of debt for Côte d’Ivoire to 57 percent for Mozambique,

with the average reduction 22 percent. However, HIPC debt relief is only

one of several factors that contribute to estimated declines in recipient

countries’ debt burdens, as measured by debt-to-export ratios. GAO’s

analysis indicates that the amount of projected reduction in countries’

debt burdens attributable to the HIPC initiative’s relief and the amount

attributable to other factors varies greatly across the first six qualifiers for

the HIPC initiative. For example, GAO estimates that, for Uganda, 77 percent

of the reduction in the debt-to-export ratio between 1995 and April 1998

(Uganda’s completion point under the initiative) is due to export growth,

with 18 percent attributable to HIPC debt relief and 5 percent attributable to

a combination of other debt relief and changes in borrowing.15 In contrast,

15Data available from HIPC documents does not allow GAO to separate out changes in debt-to-export

ratios due to debt relief from mechanisms other than the HIPC initiative, such as unilateral debt

forgiveness, from changes due to borrowing (new borrowing net of payment of principal on existing

debt).

The analysis is sensitive to the initial year chosen. GAO chose 1995 as the base year for this analysis in

order to capture the effects of Naples terms on countries’ debt burdens.

Page 10 GAO/NSIAD-98-229 Developing Countries
Executive Summary

for Guyana, 56 percent of the reduction can be attributed to a combination

of other debt relief and changes in net borrowing, 22 percent is due to HIPC

relief, and 22 percent is due to export growth.

Determining how much countries’ actual debt service payments will be

reduced by HIPC relief is complicated by the fact that some have

experienced substantial arrears. For example, the HIPC initiative will

reduce Mozambique’s scheduled debt service payments by 42 percent from

the obligations that remain after Paris Club relief on Naples terms.

However, Mozambique was paying only about 30 percent of its debt

service originally due during 1995-98. According to IMF data, Mozambique’s

projected average annual debt service of $98.7 million during 2000-03 will

be about 13 percent less than its average annual debt service paid during

1995-98.

A further complexity in assessing the effect debt relief may have on a

country’s finances is that a substantial portion of the countries’ debt

service is financed through donor and creditor resources. This is most

clearly evident in the case of Uganda. Since 1995, bilateral donors have

provided funds directly to service Uganda’s multilateral debt, with

payments averaging $45 million per year in 1996 and 1997. HIPC debt relief

is expected to reduce Uganda’s annual debt service by about $30 million

per year but, according to Ugandan officials, they will need to continue to

receive $15 million per year in assistance from bilateral donors, in addition

to other aid flows the country was receiving, to remain in as strong a

position after HIPC relief as before. Ugandan officials told GAO they hoped

some of that assistance would be channeled into social sector aid, such as

education, although an IMF official noted that these funds were approved

by donor governments for debt relief and shifting them into other types of

aid may not be straightforward.

Evidence for Debt Relief

Targets Limited

The limited analytical evidence that is available for the debt targets used in

the HIPC initiative suggests that countries with debt-to-export ratios near

the bottom of the 200-250 percent range may still have debt burdens that

are unsustainable. World Bank and IMF officials cited two internal World

Bank studies as support for their debt-to-export targets, but GAO believes

that these studies may be of limited relevance for determining target levels

of debt for HIPC countries for two reasons. First, their analysis was based

primarily on middle-income countries rather than poor countries and,

second, they examined debt levels at which countries began to experience

debt servicing problems, not when they might emerge from such problems.

Other World Bank reports have suggested that debt-to-export ratios above

Page 11 GAO/NSIAD-98-229 Developing Countries
Executive Summary

200 percent indicate potential debt problems in poor countries, and a 1996

World Bank document notes that the debt-to-export threshold of

200 percent only indicates that at this level a country is likely to have

difficulty servicing its debt.

The export-based indicators have been criticized by some analysts as

narrow, in part because they do not directly consider the overall economic

capacity of a country or the particular level of demand for government

expenditures. The addition of fiscal, or government revenue, criteria for

determining debt sustainability under the HIPC initiative has done little to

satisfy critics. Only a few countries are considered likely to meet the fiscal

criteria. Moreover, the World Bank and the IMF have stated that the choice

of the debt target under the fiscal criteria, a 280-percent

debt-to-government revenue ratio, was somewhat arbitrary. World Bank

and IMF documents note that if this ratio were set much lower than

280 percent, the overall cost of the HIPC initiative would rise substantially.

Projections of Debt

Sustainability Assume Strong

Export Growth and Substantial

Aid Flows

The economic forecasts used in analyses for the initiative generally

assume a steady growth in export revenues for HIPC countries. This

assumption is an important element in the initiative’s expectation that

recipients will have a sustainable debt burden. Exports have grown for

most of the recipient countries in recent years. However, projections in

HIPC documents assume significantly greater export growth in the years

ahead. For example, the first six countries deemed eligible for HIPC debt

relief had annual average growth rates in exports of 4.5 percent between

1985 and 1995. HIPC documents project that in years after they receive

relief under the HIPC initiative, their annual export growth will average

7.8 percent, a 75-percent increase over the previous period.

Most of the countries that have been approved for debt relief under the

HIPC initiative are dependent on just a few primary commodities for a

majority of their export earnings. For this reason, their export earnings are

considered to be particularly vulnerable to adverse economic events. A

significant fall in the price or output of a country’s primary export could

bring the debt ratios to levels that once again exceed the HIPC initiative’s

target levels for debt sustainability. For example, about 66 percent of

Uganda’s export earnings in 1995 derived from one commodity, coffee,

whose world price was near a 10-year high. According to HIPC documents,

a 20-percent drop in the international price of coffee would raise Uganda’s

debt-to-export ratio by 30-40 percentage points. World Bank and IMF

officials have cited increases in Uganda’s export earnings (1995/96 and

1996/97) as evidence that the HIPC initiative’s assumptions of countries’

Page 12 GAO/NSIAD-98-229 Developing Countries
Executive Summary

increased exports are reasonable when countries undertake necessary

reforms. However, Uganda’s most recent export data (1997/98) underlines

concerns about the volatility of exports, with Uganda’s exports declining

about 23 percent. Poor weather conditions and the resulting decline in

coffee exports are cited as the reason for projected increases in Uganda’s

debt-to-export ratio from 1997/98 through 1999/2000.

A key element in the HIPC initiative’s projection of debt sustainability is

that countries receiving debt relief will continue to get substantial foreign

aid well into the future. This aid includes not only support for

development projects within countries, but also concessional financing,

including balance-of-payments support. For example, macroeconomic

projections done by World Bank and IMF staff at Uganda’s April 1998

completion point show that, with its HIPC debt relief of $347 million in

present value terms, Uganda will continue to require donor assistance to

meet its external debt and balance-of-payments needs until 2006.

Future donor flows to potential recipients depend, of course, on many

factors. However, the assumption that donor support to recipients will

continue at current levels and even increase under adverse conditions has

been questioned by some governments and NGOs, given that net

concessional lending from governments and multilateral institutions to

poor countries has declined since 1990. Officials from the U.S. Treasury,

other governments, and NGOs have raised questions about whether

governments will simultaneously provide debt relief, increased

concessional financing, and substantial contributions to replenish the

international financial institutions, particularly in light of their own budget

constraints.

Many Potential Recipients Have

Limited Debt Management

Capability

HIPC countries vary greatly in the degree to which they have the technical

and governance requirements for effective debt management. According to

the World Bank and the IMF, almost every country classified as a HIPC has

in recent years received a substantial amount of technical assistance

aimed at debt management. Most of this assistance has been concentrated

on information management—on improving accounting systems for

recording and tracking financial obligations. Two early qualifiers for the

HIPC initiative, Uganda and Bolivia, stand out as countries that have

relatively well-developed capabilities for tracking and managing debt.

Uganda, for example, has been using debt data management software

developed by the United Nations since the 1980s. However, the capacity of

some HIPC countries to accurately track their financial obligations is still

weak. This has resulted in situations where various agencies within a

Page 13 GAO/NSIAD-98-229 Developing Countries
Executive Summary

government engage in external borrowing with no central control over, or

even complete knowledge of, total debt amounts, according to officials

from countries GAO visited.

Even with a system of basic debt data management in place, analyzing

how debt and debt reduction can affect a country’s overall

macroeconomic situation poses a challenge most participants in the HIPC

initiative cannot meet, according to officials from the United Nations and

recipient governments. This is due both to a lack of accessible modeling

techniques and limited technical expertise. World Bank and IMF staff have

developed very complex software spreadsheets to conduct debt

sustainability analyses for countries potentially receiving debt relief under

the HIPC initiative. World Bank and IMF officials acknowledged early in the

HIPC initiative process the need for a uniform, documented standard for

simulating debt reduction exercises so that countries could participate

fully in analyzing their debt situations. The World Bank set as a priority the

development of such a model to be made available to interested countries.

However, as of August 1998, this software was not generally available for

countries’ use.

Recommendation GAO is making no recommendations in this report.

Agency Comments

and GAO’s Evaluation

The Department of the Treasury and the IMF provided written comments

on a draft of this report and the Department of State and the World Bank

provided oral comments. These organizations pointed out areas where,

although they did not disagree with the findings of the report, they

believed more discussion was needed about the overall economic

vulnerability of recipient countries and the role of various creditors in

prior debt relief efforts. GAO agrees that additional information may

enhance an understanding of issues related to HIPC, and has expanded its

discussion of these issues. In addition, the IMF stated that the initiative was

not intended to replace existing mechanisms, including the ESAF program,

for providing resources to these countries. Also, the World Bank stated

that the report’s conclusion that many countries will remain vulnerable to

debt problems could be viewed as an implicit recommendation for

increasing debt relief amounts.

GAO agrees that countries participating in the HIPC initiative have economic

situations that are vulnerable overall and that the initiative is just one of

many programs that provide support. Moreover, existing mechanisms such

Page 14 GAO/NSIAD-98-229 Developing Countries
Executive Summary

as ESAF and donor aid exist to support these countries in the case of

economic downturns. GAO’s analysis, however, shows that HIPC recipients

will generally continue to need balance-of-payments support to meet debt

servicing and other external financing obligations even under economic

assumptions that may prove optimistic. Thus, less favorable conditions

will require that these countries receive additional financing beyond that

projected. While GAO’s analysis concludes that recipient countries remain

vulnerable to debt problems, it is not recommending greater relief. Debt

relief under the initiative will benefit participants, but the recognition that

some countries may once again experience debt problems after receiving

HIPC relief highlights the limitations of the initiative and should prove

useful in future discussion among those responsible for policy decisions in

this area.

Additional information on agency comments, and GAO’s response, is

presented in the text of this report. Written comments from the

Department of the Treasury and the IMF are reprinted in appendixes VI and

VII. The Department of the Treasury, the Department of State, the IMF, and

the World Bank also provided technical comments and other suggestions

that have been incorporated in the report as appropriate.

Page 15 GAO/NSIAD-98-229 Developing Countries
Contents

Executive Summary 2

Chapter 1 

Introduction

20

Poor Countries’ Debt Burdens Have Grown 20

Poor Countries’ Debt Burdens Are a Concern 23

Prior Debt Relief Efforts Have Not Substantially Reduced Poor

Countries’ Overall Debt Levels

24

HIPC Initiative Expands on Prior Efforts 27

Objectives, Scope, and Methodology 32

Agency Comments and Our Evaluation 34

Chapter 2 

Implementation of the

HIPC Initiative

Reflects Compromise

35

Countries Deemed Eligible for Assistance Under the HIPC

Initiative

35

Relief Generally Provided at High End of HIPC Framework Limits 36

Determining Creditors’ Shares of Relief Amounts Has Involved

Extensive Negotiation

39

Creditors Provide Debt Relief in Different Ways 40

Estimated Amount of Relief Depends on Decisions Made by

Creditors and Debtors

43

Conclusion 45

Agency Comments and Our Evaluation 46

Chapter 3 

The HIPC Initiative

Will Help Countries,

but Many Will Remain

Vulnerable to Future

Debt Problems

47

Debt Relief From the HIPC Initiative Varies; Reduction in Debt

Service Paid Difficult to Determine

47

HIPC Recipients Will Need Strong Economic Performance and

Continued Economic Assistance

50

Debt Management Capability Is Limited Within Many Potential

HIPC Recipients

58

Conclusion 60

Agency Comments and Our Evaluation 61

Appendixes Appendix I: Characteristics of External Debt for 40 Heavily

Indebted Poor Countries

64

Appendix II: Estimated Debt Owed to the United States by 40

HIPCs

67

Appendix III: Multilateral Institutions Participating in the HIPC

Debt Initiative

69

Appendix IV: Design of the HIPC Initiative Framework 70

Page 16 GAO/NSIAD-98-229 Developing Countries
Contents

Appendix V: Factors Affecting Changes in Countries’

Debt-to-Export Ratios

79

Appendix VI: Comments From the Department of the Treasury 81

Appendix VII: Comments From the International Monetary Fund 84

Appendix VIII: Major Contributors to This Report 87

Tables Table 2.1: Status of First Eight Countries Under the HIPC

Initiative

36

Table 3.1: Measures of Proposed HIPC Initiative Debt Relief for

First Six Countries

48

Table 3.2: Annual Average Debt Service Payments for

Mozambique, 1995-2003

49

Table 3.3: Comparison of Historical and Projected Growth Rates

in Exports for Six Countries

53

Table 3.4: Measures of Export Vulnerability for Six HIPCs 54

Table I.1: External Debt and Debt-to-Export Ratios for 40 HIPCs 65

Table II.1: Type of Debt Owed to the United States by 40 HIPCs,

as of August 1998

67

Table III.1: Participating Multilateral Institutions 69

Table IV.1: Bilateral Donor Contributions to the HIPC Trust Fund,

as of August 10, 1998

76

Table IV.2: Creditors’ Mechanisms for Providing Debt Relief to

Uganda Under the HIPC Initiative

78

Table V.1: Changes in Six Countries’ Debt-to-Export Ratios Due

to Export Growth, Normal Debt Relief and Net New Borrowing,

and Relief Under the HIPC Initiative

80

Figures Figure 1.1: Composition of External Debt for 40 HIPCs, 1983-85

and 1993-95 Nominal value, in billions of 1997 dollars

21

Figure 1.2: Composition of Debt Service Paid by 40 HIPCs,

1983-85 and 1993-95 Nominal value, in billions of 1997 dollars

22

Figure 1.3: Process for Implementing the HIPC Initiative 29

Figure 3.1: World Price Trends for Coffee Beans, 1985-97 55

Figure 3.2: World Price Trends for Cocoa Beans, 1985-97 56

Page 17 GAO/NSIAD-98-229 Developing Countries
Contents

Abbreviations

DSA Debt sustainability analysis

ESAF Enhanced Structural Adjustment Facility

GDP gross domestic product

HIPC heavily indebted poor country

IBRD International Bank for Reconstruction and Development

IDA International Development Association

IMF International Monetary Fund

NGO nongovernmental organization

ODA official development assistance

UNCTAD U.N. Conference on Trade and Development

Page 18 GAO/NSIAD-98-229 Developing Countries
Page 19 GAO/NSIAD-98-229 Developing Countries
Chapter 1 

Introduction

The debt problems of many of the world’s heavily indebted lowest income

countries continue to be a challenge for the international community. Most

of these countries’ debt is owed to official creditors consisting of other

governments (bilateral) and international financial institutions

(multilateral). Despite debt relief efforts undertaken largely by bilateral

and commercial creditors since the 1980s, the overall debt burden of the

poor countries has increased. The debt burdens are of concern for two

reasons: they may hamper economic development in debtor countries and

they involve the lenders and debtors in a time-consuming pattern of

rescheduling debt, providing new loans, and supplying donor assistance.

To address the growing debt burden, in September 1996 governments

around the world agreed to the Heavily Indebted Poor Countries (HIPC)

Debt Initiative developed by the World Bank and the International

Monetary Fund (IMF).1

 The initiative was intended to build on existing debt

relief efforts and bring together all of a country’s creditors to provide debt

relief in conjunction with policy reforms to allow countries to exit from

the rescheduling process. Establishment of the HIPC initiative involved

resolution of differences among creditors concerning the need for

expanded debt relief.

Poor Countries’ Debt

Burdens Have Grown

Despite repeated efforts to relieve the debt burden of developing

countries, the total amount of money owed to external creditors by the 40

countries classified by the World Bank and the IMF as heavily indebted

poor countries2

 increased from an average of $122 billion for 1983-85 to

$221 billion for 1993-95 (nominal value, in 1997 dollars). (See app. I for a

list of countries.) Figure 1.1 shows the composition of this debt among

three categories of medium- and long-term debt, as well as short-term

debt.3

1

The World Bank promotes economic growth and the development of market economies by providing

financing on reasonable terms to countries that have difficulty obtaining capital. The Bank is the

world’s single largest official source of investment capital for developing countries. The IMF promotes

international monetary cooperation and exchange rate stability and provides short-term lending to

member countries that experience balance-of-payments difficulties. For poor countries, the IMF also

provides medium-term (10-year) loans on concessional (below market interest rate) terms under its

Enhanced Structural Adjustment Facility (ESAF).

2

In 1996, the World Bank classified 41 countries as heavily indebted poor countries. In 1998, the

number of countries was reduced to 40 because Nigeria was no longer included in this classification.

3

Short-term debt can be owed to either official or commercial creditors. It includes loans with

maturities of less than 1 year (often trade financing) and interest arrears. Although the percentage of

total debt that is short-term debt increased modestly between the two periods shown, its composition

shifted sharply. According to our analysis, interest arrears accounted for 19 percent of short-term debt

for 1983-85, and 66 percent for 1993-95.

Page 20 GAO/NSIAD-98-229 Developing Countries
Chapter 1 

Introduction

Figure 1.1: Composition of External Debt for 40 HIPCs, 1983-85 and 1993-95 Nominal Value, in Billions of 1997 Dollars

$47

$32

$30

$13

38%

26%

25%

11%

$122 billion

1983-85 average

$100

$61

$29

$31

45%

28%

13%

14%

$221 billion

1993-95 average

Bilateral Multilateral Commercial Short-term

$13 11%

Source: GAO calculations based on World Bank data.

Although total external debt increased substantially between these

periods, the amount of medium- and long-term debt owed to private

financial institutions (commercial creditors) decreased. Because these

countries are seen as high credit risks, they have had limited access to

private sector financing. For 1993-95, 73 percent of total external debt was

medium- and long-term debt owed to official creditors, with the majority

of that amount owed to bilateral creditors. The remaining 27 percent was

medium- and long-term debt owed to commercial creditors and short-term

debt such as trade financing. Of the total debt, 45 percent was owed to

governments (bilateral creditors) and 28 percent was owed to

international financial institutions (multilateral creditors). According to

the U.S. Treasury, as of August 1998, 31 of the 40 countries had

outstanding debt of approximately $6.8 billion to the United States. (See

app. II for the amount owed by each country.)

Page 21 GAO/NSIAD-98-229 Developing Countries
Chapter 1 

Introduction

By the mid-1990s, much of the debt owed by the 40 countries was not

being paid. According to the World Bank, heavily indebted poor countries

made roughly 50 percent of their scheduled debt payments during 1994.

We estimated that, during 1993-95, HIPC countries paid about 41 percent of

their debt service owed.4

 Although the largest share of the debt during the

later period was owed to bilateral creditors, a majority of the debt service

paid was to multilateral institutions, due to these institutions’ requirement

that countries fully service their debt before receiving new lending.

Significantly, the share of long- and medium-term debt service paid to

multilateral creditors increased from 29 percent to 52 percent of the total,

while the share paid to commercial creditors decreased from 44 percent to

22 percent. (See fig. 1.2.)

Figure 1.2: Composition of Debt Service Paid by 40 HIPCs, 1983-85 and 1993-95 Nominal Value, in Billions of 1997 Dollars

$1.6

$2.6

$3.9

$0.8

18%

29%

44%

9%

$9.0 billion

1983-85 average

$1.8

$4.4

$1.8

$0.4

21%

52%

22%

5%

$8.4 billion

1993-95 average

Bilateral Multilateral Commercial Short-term

$1.6 18%

$4.4 52%

$0.4 5%

Source: GAO calculations based on World Bank data.

4

If Sudan and Somalia, two of the countries with the largest amount of unpaid debt and that are not

part of the HIPC initiative’s current cost estimates, are not included, we estimate that the 38 remaining

countries paid an average of 43 percent of their debt service owed during 1993-95.

Page 22 GAO/NSIAD-98-229 Developing Countries
Chapter 1 

Introduction

Poor Countries’ Debt

Burdens Are a

Concern

Addressing the debt burdens of very poor countries, in the context of the

broad range of development needs they face, constitutes a substantial

challenge. Thirty-two of the 40 countries classified by the World Bank and

the IMF as heavily indebted poor countries are in sub-Saharan Africa.

Eighty-three percent of these countries are classified by the United

Nations as being in its lowest category of human development, based on

life expectancy, literacy, and per capita national income. Most receive

substantial amounts of development assistance from governments,

multilateral organizations, and nongovernmental organizations (NGO). We

estimated that in 1994 foreign assistance represented about 16 percent of

national income, using a weighted average, for 36 of these countries for

which data is available. Some of the 40 countries, moreover, have recently

emerged from—or continue to be engaged in—conflict or civil unrest.

Although countries may incur external debt as part of their development

strategy, development experts, including officials from the World Bank,

the United Nations, and NGOs, have cited several reasons why debt burdens

of some poor countries are a concern. Some development experts believe

that debt levels above a certain threshold amount relative to a country’s

economic capacity may, in and of themselves, limit economic growth. This

has been termed the “debt overhang effect.” This effect reflects the view

that if a country has substantial debt obligations, the debt will discourage

current investment in the debtor country, due to a concern that future

income may be highly taxed to pay debt. Other experts question whether

debt overhang constitutes a serious obstacle to investment in HIPC

countries, in light of additional impediments to investment, such as weak

financial institutions and inadequate physical infrastructure, these

countries face. Nonetheless, many experts agree that high debt payments

constitute a drain on a country’s budget, potentially lowering the amount

of money available for health and education spending and, for many

countries, requiring further loans or grants. For the poorest countries, this

can mean an increasing percentage of new aid will go to service existing

debt rather than to aid in development. Finally, rescheduling and financing

debt payments have been time-consuming for both creditors and debtors.

For example, according to Department of State data, potential recipients

Page 23 GAO/NSIAD-98-229 Developing Countries
Chapter 1 

Introduction

of HIPC debt relief have concluded about 100 debt negotiations with the

Paris Club5

 over the last 10 years.6

Prior Debt Relief

Efforts Have Not

Substantially Reduced

Poor Countries’

Overall Debt Levels

Debt relief efforts since the 1980s have been undertaken primarily by

bilateral and commercial creditors. However, these prior efforts have not

resulted in a substantial reduction in the overall debt owed by poor

countries. Some efforts aimed at poor countries have actually increased

debt levels by, for example, converting interest payment arrears into new

debt. Other mechanisms have left the debt of poor countries largely

unaffected, notably the Baker and Brady plans7

 of the 1980s. These plans

focused on resolving the commercial debt problems of middle-income

countries by essentially providing funds for countries to buy back part of

their commercial bank debt.

Two instruments have been used to reduce the commercial bank debt of

some heavily indebted poor countries. Sixteen countries have received

$11.8 billion of debt reduction since 1989, although about one third of this

reduction has been for one country, Côte d’Ivoire. These instruments are

the Debt Reduction Facility8

 of the International Development Association

(IDA), the part of the World Bank that lends to poor countries on highly

concessional terms, and, more recently, officially supported debt and debt

service reduction programs (Brady operations). According to World Bank

data, through the Debt Reduction Facility, 16 countries had retired about

$4.2 billion of principal and interest arrears owed to commercial banks, as

5

The Paris Club is an informal group of creditor countries that meets, as needed, to negotiate debt

rescheduling and relief efforts for public or publicly guaranteed loans. In addition to the 18 countries

that regularly participate in the Paris Club, other countries are invited to the negotiations on an ad hoc

basis if they hold a significant share of the debt being discussed.

6

Each Paris Club rescheduling requires numerous meetings and work to prepare for the negotiations.

Also, after concluding an agreement at the Paris Club, the debtor country must then negotiate a

separate agreement with each creditor.

7

The Baker plan, initiated by then-U.S. Treasury Secretary James A. Baker III and announced at the

meeting of the World Bank and the IMF in October 1985, was the first concerted international effort to

address the commercial bank debt owed by developing countries. The Baker plan emphasized policy

reform and increased finance. It achieved limited success because commercial banks and official

lenders were unwilling to supply sufficient new funding. The Brady plan, launched in March 1989 by

then-U.S. Treasury Secretary Nicholas F. Brady, was the first comprehensive program that went

beyond restructuring of debt to offer reduction of debt. It offered commercial banks a menu of

options, including new money and debt buybacks, that would reduce their outstanding loans to

developing countries. Creditors, including multilateral institutions, were to lend funds to help finance

the buybacks. Since the inception of the plan, nearly one-half of the total commercial bank debt of

developing countries, primarily middle-income countries, has been rescheduled.

8

The Debt Reduction Facility, established in 1989, is financed through (1) contributions from donor

countries and (2) earnings from operations of the International Bank for Reconstruction and

Development (IBRD), the part of the World Bank that lends to middle-income countries at market

rates.

Page 24 GAO/NSIAD-98-229 Developing Countries
Chapter 1 

Introduction

of December 1997. In May 1997, Côte d’Ivoire also received debt reduction

through the second mechanism, when Côte d’Ivoire reached an agreement

with commercial creditors that resulted in debt reduction of $4.1 billion.

The restructuring agreement helped Côte d’Ivoire to clear unpaid interest

owed to commercial creditors and ensure that commercial creditors

would provide relief at least comparable to that offered by official

creditors.

Bilateral creditors have forgiven some debt and renegotiated debt

payments by lowering interest rates or extending due dates. Some bilateral

creditors have individually forgiven debt owed by poor countries, but

these amounts have not been large relative to the total bilateral debt owed.

For example, between 1990 and 1997, the United States forgave

$2.3 billion, or 37 percent, of the $6.1 billion of debt we estimate was owed

by the 40 HIPC countries as of the end of fiscal year 1989. According to an

Organization for Economic Cooperation and Development report, since

1989 France has forgiven over $10 billion in official development

assistance (ODA) debt owed by countries in sub-Saharan Africa. According

to the German government, Germany has forgiven or pledged to forgive

about $5 billion in ODA debt owed by poor countries. More often, bilateral

creditors have worked together to offer debt relief to poor countries by

rescheduling debt payments on concessional terms or reducing debt

through the Paris Club. To qualify for Paris Club relief, countries must be

in imminent default9

 and reach an agreement with the IMF on a reform

program. The Paris Club conditions its debt relief on countries’

implementation of economic and structural reforms under IMF-supported

lending programs, such as the ESAF.

10 Disbursement of relief is then

conditioned on satisfactory implementation of the reform program,

generally lasting 3 years.

9

According to the State Department, “imminent default” is defined as a situation evidenced by the

probability that, without debt relief, a country will be unable to meet its scheduled external

obligations. A state of imminent default is determined by the Paris Club in close consultation with the

IMF and is necessary before the Paris Club will agree to reschedule or reduce a country’s debt.

10ESAF gives highly concessional loans for balance-of-payments support, that is, to help countries

cover their trade deficit or service their debt. Specific ESAF programs of economic adjustment and

reform reflect individual country circumstances. According to the IMF, they are intended to raise

domestic savings rates; secure macroeconomic stability; liberalize and open economies to foreign

trade; reduce government intervention and promote well-functioning markets; reorient government

spending and restructure revenues; and mobilize external resources by, in part, reducing debt burdens.

Page 25 GAO/NSIAD-98-229 Developing Countries
Chapter 1 

Introduction

Since 1988, the Paris Club has treated debt11 owed by poor countries on

increasingly concessional terms. In many cases these efforts did not

significantly reduce debt but instead mainly focused on helping countries

meet debt payments within the short term by altering payment due dates

or interest rates, rather than on forgiving debt. Some debtors sought

repeated rescheduling. In 1988, the Paris Club became the first group of

creditors to offer countries the option of reducing the amount of debt.

Under the most recent terms of the Paris Club adopted in 1994, called

“Naples terms,” countries could receive up to a 67-percent reduction in

eligible debt under a stock-of-debt operation.12 Naples terms broadened

the range of eligible debt, elaborated procedures for reducing a country’s

debt, allowed for a reduction in the amount of debt owed, and were

intended to allow the countries to stop rescheduling debt in the future.

Multilateral creditors generally have not rescheduled or reduced debt

owed them because of their belief that forgiving or reducing debt would

diminish assurances of repayment on new lending. Multilateral

development banks were also concerned that forgiving debt would hurt

their credit ratings. Instead, multilateral creditors have relied on increased

concessional lending and relief from bilateral creditors to enable countries

to continue servicing their multilateral debt.13 Since the 1990s, there has

been growing recognition that some poor countries were having increasing

difficulty servicing their multilateral debt. For example, during a Paris

Club restructuring of Uganda’s debt in the mid-1990s, some creditors

concluded that debt relief from bilateral creditors would not sufficiently

ease the country’s debt burden because most of Uganda’s debt was owed

to multilateral creditors. Moreover, creditors and others were concerned

that a greater percentage of new lending was being used to service existing

debt rather than for development purposes. These recognitions

contributed to the industrialized nations’ call for a new approach to

11The Paris Club generally limits the debt that is eligible to be rescheduled to nonconcessional debt,

such as loans to support exports from the lending country and loans that were incurred before an

agreed-upon cutoff date. The Paris Club generally has not reduced concessional debt, such as ODA

debt, or recently incurred nonconcessional debt because a majority of countries have already granted

extensive reduction of ODA debt. The Paris Club requires members to reschedule any remaining ODA

debt.

12For the Paris Club, a stock-of-debt operation refers to the total refinancing of the outstanding balance

of a country’s eligible debt. The stock of eligible debt will be reduced, and the remainder will be

rescheduled.

13One mechanism to deal with multilateral debt—the Fifth Dimension Program—provided funding

from IDA to enable some poor countries to pay interest on debt owed to the IBRD; it was not intended

to address debt owed to IDA. In the past 10 years, the program has disbursed more than $1.5 billion to

help 20 countries make interest payments on some of their debt owed to the IBRD.

Page 26 GAO/NSIAD-98-229 Developing Countries
Chapter 1 

Introduction

address the debt of heavily indebted poor countries, including that owed

to multilateral creditors.

HIPC Initiative

Expands on Prior

Efforts

The HIPC initiative is the first coordinated effort to include all creditors,

most notably the multilaterals, in addressing the debt problems of heavily

indebted poor countries. Participating creditors include bilateral

governments; the major multilateral creditors such as the World Bank and

the IMF; and over 20 other multilateral development institutions, including

the African Development Bank, the Inter-American Development Bank,

and the International Fund for Agricultural Development. (See app. III.)

According to the World Bank, over the past 2 years the Boards of the

World Bank and the IMF have met about 30 times each, and about 

25 multilateral development banks have been meeting every 6 months

under the chairmanship of the World Bank to coordinate the

implementation of the HIPC initiative.

In 1996, the World Bank and the IMF made a preliminary determination

regarding which of the 40 countries might eventually receive relief based

on the HIPC initiative’s specific criteria concerning income, indebtedness,

and reform, and identified 20 countries as potential recipients. As of

August 1998, the World Bank and the IMF estimated that the creditors

would provide debt relief through the initiative to 20 countries, worth

about $8.2 billion in 1996 present value14 terms. Specific eligibility

decisions have been made for eight countries, with six countries deemed

eligible for relief under the HIPC initiative. One country—Uganda—has

completed the process.

The HIPC initiative builds on prior debt relief efforts, most notably those of

the Paris Club. The HIPC initiative’s goal is to bring countries’ debts to

levels that are considered sustainable, meaning the countries can make

debt payments without incurring loan arrears or requiring debt

rescheduling. The basic HIPC framework establishes eligibility criteria

based on a country’s per capita income, indebtedness, and track record of

reform. As shown in figure 1.3, implementation of the initiative involves

14The amount of debt can be reported in terms of nominal (face) value and present value, also termed

“net present value” in HIPC documents. For the heavily indebted poor countries, the nominal value of

the external debt is not a good measure of their debt burdens because a significant part of the debt is

contracted on concessional terms. The present value of debt is a measure that takes into account the

degree of concessionality. It is defined as the sum of all future debt-service obligations (interest and

principal) on existing debt, discounted at the market interest rate. Whenever the interest rate on a loan

is lower than the market rate, the resulting present value of debt is lower than its face value, with the

difference reflecting the grant portion. According to World Bank data, the present value of external

debt at the end of 1995 for 40 HIPC countries was $171 billion compared with a nominal value of

external debt of $215 billion.

Page 27 GAO/NSIAD-98-229 Developing Countries
Chapter 1 

Introduction

two stages. Each stage can last 3 years and can be shortened in some

cases.

Page 28 GAO/NSIAD-98-229 Developing Countries
Chapter 1 

Introduction

Figure 1.3: Process for Implementing the HIPC Initiative

First stage

Bilateral and commercial creditors

provide debt relief on current terms.

Multilateral institutions continue to

provide support in World Bank and

IMF programs.

Debtor country establishes first 3-year

track record of good performance.

Decision point

World Bank, IMF, and debtor country

analyze the country's debt situation to

determine whether the country will be

eligible for HIPC debt relief.

Country not eligible to participate

Debt burden deemed sustainable after

debt relief to full extent of current 

mechanisms provided by bilateral and

commercial creditors.

Country exits the rescheduling process

with a sustainable debt level without

needing relief under the HIPC initiative.

Country eligible to participate

Debt burden deemed unsustainable 

after debt relief to full extent of current

mechanisms.

Bank and IMF staffs jointly recommend

targets for the completion point and

estimate amount of assistance required

by creditors.

Country is borderline

Uncertain whether debt sustainablity

would be achieved at the completion

point with relief provided under current

mechanisms.

Second stage

Bilateral and commercial creditors 

provide some relief.

Donors and multilaterals provide

enhanced financial support.

Country establishes second track

record of good performance under

World Bank and IMF programs. 

Second stage

Country requests and receives debt 

flow rescheduling under current 

terms from bilateral and commercial 

creditors.

Multilaterals may provide some 

special relief.

Completion point

Creditors deliver unconditional, final

relief that achieves targets.

Bilateral and multilateral creditors 

provide an equal percentage of debt

reduction, up to the bilateral cap of 80

percent relief on eligible debt.

Completion point

If the outcome is better than or as

projected, country receives relief from

bilateral and commercial creditors on

current terms.

If the outcome is worse than projected,

the country could receive additional

relief under the HIPC initiative.

Sources: World Bank and IMF.

Page 29 GAO/NSIAD-98-229 Developing Countries
Chapter 1 

Introduction

Eligibility for HIPC debt relief is assessed at the end of stage one, following

the successful completion of World Bank- and IMF-supported programs. At

this point (termed the decision point), the Boards of Executive Directors

of the World Bank and the IMF15 determine whether (1) existing debt relief

mechanisms are sufficient to bring a country’s debt to a point considered

sustainable or (2) the country requires additional debt relief. The

determination of whether debt is sustainable is based mainly on a World

Bank and IMF assessment of whether the projected ratio of a country’s debt

(in present value terms) to the value of its exports will be greater than a

target value that is set within the range of 200-250 percent.16 Lowering the

target level increases the amount of debt relief required to reach the

target. For example, lowering the ratio of a country’s debt to its exports

from 300 percent to 200 percent requires more debt relief than lowering it

from 300 percent to 250 percent. The target level is based on factors

affecting the vulnerability of the country’s economy, such as the

percentage of government revenue required for debt service and whether

export earnings are generated by a few commodities. Under certain

conditions, for countries with very open economies and strong efforts to

generate fiscal revenues, the target may be based on the ratio of debt to

government revenue. This fiscal indicator can allow debt-to-export targets

below 200 percent.

If the Boards determine that existing debt relief mechanisms are

insufficient to make debt levels sustainable and other principal creditors

agree, the country enters the second stage of the HIPC initiative. During this

stage, the country receives some debt relief from bilateral and commercial

creditors and financial support from multilateral institutions. Paris Club

creditors have agreed to provide relief up to 80 percent of debt service

during the second stage. Multilateral creditors may also provide relief as

part of their total commitment under the HIPC initiative during this second

stage. The country must agree to continue implementing economic reform

programs supported by the IMF and the World Bank and social reforms

agreed to with the World Bank. If countries are judged to have met the

requirements of these programs, they receive the remaining relief at the

end of this stage, called the completion point.

15The Board of Executive Directors of the World Bank is responsible for policy decisions affecting the

Bank’s general operations and for the approval of all loans. Five of the 24 executive directors are

appointed by the 5 member governments having the largest number of shares (France, Germany,

Japan, the United Kingdom, and the United States). The other executive directors are elected by and

represent countries grouped into self-formed constituencies. The IMF’s Executive Board is the IMF’s

primary decisionmaking body, which comprises 24 executive directors who represent IMF member

countries.

16In this report, discussions of debt-to-export ratios refer to the present value of debt, unless otherwise

noted.

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Official creditors have agreed to share the costs of HIPC relief by providing

equal percentage reductions of debt owed them after the full use of

existing debt relief mechanisms, including those offered by the Paris Club.

Paris Club creditors have said they will limit relief to up to 80 percent of a

country’s eligible debt. In exceptional cases, they may negotiate expanded

terms. Commercial creditors are expected to provide relief comparable to

bilateral creditors. Creditors will each decide how they will provide their

share of debt relief to specific countries and which debt will be eligible for

relief. Creditors may choose to provide relief through various means, such

as rescheduling debt payments at lower interest rates, making debt service

payments for countries as they come due, converting loans into grants,

reducing debt, and/or lending new funds on concessional terms to be used

to make debt service payments. The international financial institutions

have said that even under the HIPC initiative they will not forgive debt

outright because to do so may endanger their preferred creditor status.17

Instead, they will use other means. (The HIPC framework is described in

more detail in app. IV.)

Establishing a comprehensive framework for debt relief required resolving

fundamental differences among creditors. For example, prior to 1995, both

the World Bank and the IMF maintained that extraordinary debt relief

mechanisms, including debt relief by multilateral creditors, were not

necessary except for a handful of countries. Some creditors were

concerned about the cost of providing debt relief and about the issue of

“moral hazard”—that the prospect of debt relief would discourage

countries from undertaking needed reforms and maintaining or

strengthening responsible borrowing policies. In June 1995, the leaders of

the Group of Seven countries18 called for the IMF and the World Bank to

develop a comprehensive approach to assist heavily indebted poor

countries with multilateral debt burdens. Shortly thereafter, a World Bank

task force report called for a facility to pay multilateral debt service for a

select group of countries. The World Bank and the IMF prepared

subsequent analyses, and NGOs worked to influence the terms of the

evolving framework.

17The preferred creditor status derives from the debtors’ traditional practice of servicing debt owed to

the World Bank and the IMF before servicing debt owed to other lenders. The articles of agreement

(charters) of these institutions do not specifically address preferred creditor status or debt

forgiveness.

18The Group of Seven consists of seven major industrialized countries that consult on general

economic and financial matters. The seven countries are Canada, France, Germany, Italy, Japan, the

United Kingdom, and the United States.

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Key issues being negotiated during the design process of the HIPC initiative

included how unsustainable debt burdens would be determined (with

implications for eligibility and relief amounts), the type and length of

reforms, whether debt stocks would be reduced, and how creditors would

share in providing debt relief. The resulting September 1996 framework

reflects creditors’ compromise views. However, the use of a range of

values of the primary debt sustainability indicator, as well as the

announced intention to implement the framework flexibly, left many key

decisions to be made during implementation of the initiative. And some

aspects of design, most notably how the shares of debt relief would be

divided among creditors, had not yet been decided.

The introduction of the HIPC initiative has prompted suggestions for

alternative approaches to address the debt burdens of poor countries.

Alternatives include fairly straightforward modifications to the HIPC

initiative, such as increasing levels of relief, expanding eligibility, and

accelerating implementation. Some suggestions call for more fundamental

modifications of the HIPC framework and even question the basic structure

of the HIPC initiative. Our report does not address the viability of different

alternatives or compare them to the HIPC initiative. According to creditors,

debtors, and NGOs, negotiating the design of the HIPC initiative has been a

very challenging process, and there is a reluctance to significantly modify

the HIPC framework.

Objectives, Scope,

and Methodology

The Chairman of the Subcommittee on International Economic Policy,

Export and Trade Promotion, Senate Committee on Foreign Relations,

asked us to review the HIPC initiative. Specifically, we focused our review

on (1) the implementation of the HIPC initiative and (2) the initiative’s

potential to achieve its stated goal. This goal is to reduce select poor

countries’ debt to sustainable levels; that is, to allow certain poor

countries to pay their international debts on time and without further

rescheduling.

To describe the implementation of the HIPC initiative, we met with and

obtained information from government officials of the United States, HIPC

recipient countries, and other creditor countries; and officials from

multilateral organizations and NGOs. We met with officials at the

Department of State, the U.S. Agency for International Development, the

Department of the Treasury, the World Bank, and the IMF. As an agency of

the United States, we have no direct authority to review the operations of

multilateral institutions. However, we obtained access to World Bank and

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IMF officials and information through the staffs of the U.S. members of

their Boards of Executive Directors. We also obtained information from

and interviewed officials of other creditor organizations, such as the Paris

Club secretariat, the African Development Bank, and the Inter-American

Development Bank.

To obtain the views of other creditor nations on the implementation of the

HIPC initiative, we met with officials from France, Germany, and the United

Kingdom, including their representatives to the World Bank and the IMF

and officials from their finance ministries, development ministries, and

other government organizations. We met with and obtained data on debt

and development from representatives of the Organization for Economic

Cooperation and Development; and U.N. organizations, including the U.N.

Development Program, the U.N. Conference on Trade and Development

(UNCTAD), and the U.N. Children’s Fund. We also met with and obtained

information from academic experts and NGOs, including Oxfam, the

European Network on Debt and Development, Debt Relief International,

Jubilee 2000, the Center of Concern, the Catholic Fund for Overseas

Development, and the Heritage Foundation.

To obtain information from recipient countries about the implementation

of the HIPC initiative, we interviewed officials in Burkina Faso, Côte

d’Ivoire, and Uganda. We selected recipient countries likely to represent a

range of experiences under the HIPC initiative. Within the recipient

countries we visited, we discussed concerns about the HIPC initiative with

officials of relevant government bodies (for example, the prime minister’s

office and the ministries of finance, trade, and planning), World Bank and

IMF field staff, U.S. embassy and aid officials, local representatives of other

donor countries and the European Union, business representatives, and

local academics.

To assess the initiative’s potential to achieve its stated goal, we met with

officials from the U.S. government, other creditor governments, recipient

governments, multilateral organizations, and nongovernmental

organizations. We examined analytical papers and studies of debt issues

from the World Bank and the IMF. Based on information from these studies

as well as other sources, we conducted analyses of the HIPC initiative’s

economic underpinnings and issues that arose during implementation.

Within the recipient countries we visited (Burkina Faso, Côte d’Ivoire, and

Uganda), we discussed concerns about the HIPC initiative with officials of

relevant national and local government bodies (for example, the prime

minister’s office and the ministries of finance, trade, and agriculture),

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World Bank and IMF field staff, U.S. embassy and aid officials, local

representatives of other donor countries and the European Union,

nongovernmental organizations, business representatives, and local

academics.

We performed our review from July 1997 to August 1998 in accordance

with generally accepted government auditing standards.

Agency Comments

and Our Evaluation

The Department of the Treasury and the Department of State commented

that the report should provide greater context concerning the extent of

prior debt relief efforts, particularly the efforts of bilateral creditors

through both the Paris Club process, and unilaterally. We have expanded

the report’s discussion of the debt relief efforts of bilateral creditors.

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The implementation of the HIPC initiative has involved significant

negotiation among the major creditors on issues such as the eligibility of a

country, the amount of relief to be provided, and the way in which relief is

to be shared among creditors. As of August 1998, the Boards of the World

Bank and the IMF had determined that six countries are eligible for

assistance under the HIPC initiative and have agreed upon the amount and

timing of relief for these countries. For five of these six countries, the

Boards agreed to provide relief at the upper end of what the negotiated

framework allows. Bilateral and multilateral creditors have agreed to

share the debt relief by providing an equal percentage reduction of the

debt owed them (after the full use of existing debt relief mechanisms) and

to individually determine how they will provide the relief. The total

amount of relief to be provided depends on creditors’ decisions as they

implement the HIPC initiative, such as the number of countries deemed

eligible, as well as debtors’ actions to establish the necessary track record

of reform. Since implementation began, creditors have made some

modifications to the HIPC framework that have expanded eligibility and

contributed to increased estimates of relief. The amount of HIPC debt relief

could increase further if, for example, countries that were not included in

previous estimates become eligible. Conversely, if countries included in

the estimates do not undertake required reforms and thus do not receive

relief under the HIPC initiative, the amount of relief provided could

decrease.

Countries Deemed

Eligible for Assistance

Under the HIPC

Initiative

As of August 1998, the Boards of the World Bank and the IMF had

determined that six countries (Bolivia, Burkina Faso, Côte d’Ivoire,

Guyana, Mozambique, and Uganda) were eligible for assistance under the

HIPC initiative and had agreed upon the amount and timing of debt relief

for these countries.1

 (See table 2.1.) One country—Uganda—has

completed the process. Projected relief for the six countries represents

about $3 billion, or about 36 percent of the total projected HIPC debt relief

of $8.2 billion (in 1996 present value terms), as of August 1998.

For two additional countries—Benin and Senegal—the Boards of the

World Bank and the IMF determined that debt relief from bilateral creditors

on Naples terms would be sufficient to bring their debt to sustainable

levels. Thus, they were not deemed eligible for relief through the HIPC

initiative.

1

The Boards have held preliminary discussions on the eligibility of Mali and Guinea-Bissau. According

to the World Bank and the IMF, Mali is expected to reach its decision point in September 1998, and

Guinea-Bissau will need to be reassessed after the end of the recent conflict.

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Table 2.1: Status of First Eight

Countries Under the HIPC Initiative

Country Decision point

Completion

point

Debt-to-export

target ratio

(in percent)

Completion point reached and final assistance provided

Uganda Apr. 1997 Apr. 1998 202; actual 196

Decision point reached and assistance committed by World Bank and IMF

Bolivia Sept. 1997 Sept. 1998 225

Burkina Faso Sept. 1997 Apr. 2000 205

Guyana Dec. 1997 Dec. 1998a 107b

Côte d’Ivoire Mar. 1998 Mar. 2001 141b

Mozambique Apr. 1998 mid-1999 200

Debt judged sustainablec

Benin July 1997

Senegal Apr. 1998

Totals/ranges

8 1-3 years 107-225

aGuyana’s completion point is likely to be delayed until early 1999 due, according to an IMF

official, to an increased fiscal deficit that delayed Guyana’s new ESAF and subsequent review by

the IMF Board.

bEligible under fiscal criteria of debt-to-government revenue; present value of debt-to-export

target chosen to meet present value of debt-to-revenue target of 280 percent.

cCountries whose debt burdens are deemed sustainable will receive a Paris Club stock-of-debt

operation on Naples terms but are not eligible for additional assistance under the HIPC initiative.

Benin received Naples terms from the Paris Club creditors in October 1996. Senegal received

Naples terms from the Paris Club in June 1998. The World Bank and IMF Boards do not consider

the Paris Club’s operations up to and including Naples terms as part of the assistance provided

under the HIPC initiative. As such, the costs for these operations are not included in the total

estimated costs of the HIPC initiative. Paris Club relief above Naples terms is included in the HIPC

initiative cost estimates.

Sources: World Bank and IMF.

Relief Generally

Provided at High End

of HIPC Framework

Limits

Despite considerable debate on the amount and timing of debt relief to be

provided, the World Bank and IMF Boards, in conjunction with principal

creditors, have generally implemented the HIPC initiative to provide debt

relief at the upper bounds of the negotiated framework. According to HIPC

initiative documents, this is in response to the vulnerabilities facing

recipient countries. This is specifically evident in lower end debt-to-export

targets, which increase the amount of relief provided. In recognition of

countries’ track records of reforms, the Boards have also generally

shortened the second stage of the HIPC initiative, which provides debt relief

sooner and can increase relief amounts in some cases. For five of the six

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countries deemed eligible to date, the expected debt relief amount is at or

near the upper levels agreed to under the HIPC framework (Bolivia has a

debt-to-export target of 225 percent). Nonetheless, in several cases, the

cost of providing debt relief under the HIPC initiative has been a factor in

determining the amount of debt relief to be provided.

Lower End of Target

Ratios

For five of the six countries for which target debt-to-export levels have

been set, the target debt-to-export ratios are near or below the lower end

of the 200-250 percent range under the HIPC framework. Two countries

have been deemed eligible with debt-to-export ratios substantially below

200 percent (Côte d’Ivoire and Guyana), based on fiscal criteria that

compare debt to government revenue rather than exports. The highest

debt-to-export ratio set to date is 225 percent for Bolivia.

Some creditor countries have stated that the target should normally be at

or near the bottom of the range; others have maintained that the full range

should be used. The United States supports a target of 200 percent or

lower. According to HIPC documents, for the countries deemed eligible to

date, the lower ratios reflect concern about countries’ significant

economic vulnerabilities, such as dependence on a small number of

exports and the resulting potential for volatility in export earnings. World

Bank and IMF staff expect country-specific targets to be clustered more

toward the bottom half of the 200-250 percent range. In the case of

Burkina Faso, some countries argued for a lower ratio because of the

uncertainty of the economic projections, particularly of future export

prices. Other countries supported a higher range, noting that worker

remittances2

 were large in Burkina Faso and provided a cushion against

possible risks.

For some countries deemed eligible, such as Bolivia and Uganda, the

potential cost of debt relief appears to have influenced their target ratios.

In the case of Bolivia, while countries ultimately agreed to a target

debt-to-export ratio of 225 percent, several supported a target of

200 percent while others supported a target in, or possibly above, the

upper end of the 215-235 percent range. The target agreed

to—225 percent—reflects, in part, concern about staying within the Paris

Club’s limit on the amount of debt the Paris Club will reduce as well as the

decision to limit the cost that Bolivia’s largest multilateral creditor, the

Inter-American Development Bank, might incur in providing HIPC debt

relief. The target set for Bolivia also reflects that the country is one of the

2

“Worker remittances” refer to wages earned in another country and sent back to the home country.

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least vulnerable of the potential HIPC recipients. The target debt-to-export

ratio of 202 percent set for Uganda reflects, in part, the decision to stay

within the Paris Club’s limit and within the terms of the burden-sharing

arrangement multilateral and bilateral creditors had agreed to.

Shortened Second Stage As previously mentioned, implementation of the HIPC initiative involves

two stages, each of which generally lasts 3 years. The Boards have

shortened the length of the second stage for five of the six countries for

which completion dates have been set (Bolivia, Burkina Faso, Guyana,

Mozambique, and Uganda); four of these countries (Bolivia, Guyana,

Mozambique, and Uganda) were given about a 1-year period. The actual

length of the second stage could be longer if, for example, countries do not

satisfactorily complete the required reforms. Countries’ views have

differed significantly regarding the appropriate length of the track record

of reform required for gaining HIPC debt relief. Some countries—such as

the United States and Germany—have generally stressed that a longer time

frame is important for ensuring a country’s commitment to critical reforms

but have agreed to shortened second stages in some cases. Others, such as

the United Kingdom, have stated that an overall reform period of 6 years is

generally too long; they have supported efforts to give some recipients

credit for their track records by reducing the length of the second stage.

According to HIPC documents, the five countries with shortened periods

are among the strongest performers of the potential HIPC debt relief

recipients, and the shortened period reflects these countries’ past track

records of good policy performance, including completion of successive

ESAF and World Bank programs, and receipt of Naples terms from the Paris

Club. Nonetheless, members of the Boards have debated the length of the

second stage for these countries. There was considerable discussion about

whether Uganda should have a second stage at all. According to HIPC

documents, the remaining countries will likely require a 3-year period

between the two stages—the decision point and the completion point.

A shorter period between the decision point and the completion point

means that countries will receive final HIPC debt relief sooner and may get

more relief under certain conditions. In the case of Guyana, the decision to

set the completion point in 1998 rather than the year 2000 (which would

have been 3 years between the two stages) resulted in a projected increase

in HIPC assistance of about 68 percent, or $103 million in present value

terms.

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Determining

Creditors’ Shares of

Relief Amounts Has

Involved Extensive

Negotiation

Significant negotiations have occurred on the question of how creditors

will share the amount of debt relief to be provided through the HIPC

initiative. When the HIPC initiative was announced in September 1996,

creditors had not agreed on their shares of HIPC assistance, but Paris Club

creditors had agreed to reduce up to 80 percent of the remaining eligible

debt. The World Bank and the IMF had proposed an approach under which

bilateral creditors would give debt relief up to 90 percent of eligible debt

to a country first, with multilateral creditors providing the remainder

required for the country to reach debt sustainability. Multilateral creditors

sought to limit the type and amount of debt reduction they would provide

because they were concerned that it would endanger their financial

integrity and preferred creditor status.

Bilateral creditors rejected the approach proposed by the multilaterals.

The Paris Club creditors committed to provide relief up to 80 percent of

the eligible debt countries owed them, and stated that, in exceptional

cases, they may negotiate terms that expand the amount of relief they are

to provide. They stated that multilateral creditors should contribute

simultaneously with the bilateral creditors and provide a greater share of

the total HIPC relief because (1) bilateral creditors had already provided

debt relief and (2) servicing multilateral debt was a key part of poor

countries’ debt burdens. Furthermore, according to a U.S. government

official’s summary of the Paris Club’s position, the preferred creditor

status is essentially a political judgment; it does not imply that the

multilateral creditors should not provide debt relief. Nonetheless, one of

the tenets of the HIPC initiative is to ensure the preferred creditor status of

multilateral creditors.

After much negotiation, in July 1997 creditors endorsed a broad

burden-sharing arrangement, termed the “proportional approach,” under

which bilateral and multilateral creditors would provide debt relief

together and provide equal percentage reductions of debt owed them after

the full application of existing debt relief mechanisms, including Naples

terms. Using the proportional burden-sharing approach, World Bank and

IMF staff determine how much debt relief the bilateral and multilateral

creditors, as a group, are to provide a particular country. Within the Paris

Club, bilateral creditors determine how much of this amount they will

individually provide. The World Bank and the IMF determine the share of

the debt relief each multilateral creditor is to provide, based on the share

of debt owed to them by the recipient.

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Applying the proportional burden-sharing approach continues to involve

negotiation among the creditors when they determine the specific relief

amount for each recipient. Although creditors agreed to provide the same

percentage of debt reduction, the dollar amounts of this relief will vary by

creditor because creditors are owed different amounts of debt. For

example, in the case of Burkina Faso, bilateral and multilateral creditors

agreed to provide debt relief valued at about 14 percent of what they are

owed. For bilateral creditors, this amounted to about $21 million in debt

relief. For multilateral creditors, the same percentage reduction amounted

to about $94 million.

In some cases, poor countries’ debt levels are so high that the

burden-sharing terms agreed to under the HIPC framework will not provide

enough relief to reach the target debt-to-export ratio. This was, for

example, the case for Mozambique. To reach the 200-percent target

debt-to-export ratio, under the terms of the HIPC initiative burden-sharing

approach, bilateral creditors were to provide $916 million in debt relief to

Mozambique. To provide this relief, bilateral creditors would have to

exceed the cap they had agreed to—that they would provide relief

equivalent to up to 80 percent of eligible debt. The 80-percent reduction of

debt would have provided only $553 million in debt relief. To address the

$363 million shortfall, bilateral creditors agreed to provide exceptional

amounts of relief beyond those terms, which has been termed “deep

relief.” However, even after Paris Club creditors agreed to extend their

terms and provide relief equivalent to 86 percent of eligible debt, a

financing gap of $116 million remained. Individual bilateral creditors and

donors as well as the World Bank and the IMF subsequently agreed to use

various mechanisms, such as increasing the amount of debt relief or

contributing funds, to finance the remaining gap. The agreement for

Mozambique entailed significant negotiations among creditors because of

the amount of relief needed to bring the debt-to-export ratio to the target

level of 200 percent—Mozambique alone represents approximately half of

the debt relief promised thus far.

Creditors Provide

Debt Relief in

Different Ways

Creditors each determine how they will provide their share of the relief.

Creditors may choose to provide relief through several means, such as

rescheduling debt payments at lower interest rates, buying back the debt,

making debt service payments as they come due, converting loans into

grants, reducing the debt, and/or lending new funds on concessional terms

to make debt service payments. A creditor’s decision about how it will

provide debt relief to a particular recipient may be influenced by many

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factors, such as the amount of outstanding debt, the impact of providing

debt relief on the creditor’s future budgets, the financial policies governing

the creditor institution, and the needs of the recipient country.

Multilateral creditors have said that they will not forgive debt outright;

rather, they intend to provide debt relief in ways that maintain their

preferred creditor status. According to the World Bank and the IMF, most

of the multilateral development banks have obtained the institutional

approval to participate in the HIPC initiative and defined the means they

will use to provide relief, such as buying back debt or paying debt service

through the HIPC Trust Fund or similar self-administered trust funds,

rescheduling current payments or arrears on concessional terms, and

refinancing on grant terms. The World Bank’s participation in the HIPC

initiative is to be funded solely from the Bank’s own resources. Debt relief

provided by the World Bank under the HIPC initiative is taking place

primarily through contributions to the HIPC Trust Fund from IBRD income.

The Trust Fund provides relief on debt owed to IDA, either through buying

back some of its concessional debt or providing an unconditional

commitment to pay debt service owed to IDA as it becomes due. Some of

this relief may be advanced during the second stage when the World Bank

could provide part of its lending program in the form of IDA grants instead

of IDA credits, which are funded through general IDA resources.3

 The IBRD

has contributed about $750 million from its income to the HIPC Trust Fund

to buy back or repay debt owed to IDA. The executive directors have

recommended the approval of another transfer of $100 million from IBRD

income to the Trust Fund. The HIPC Trust Fund has been specifically set up

to keep the IDA and IBRD aspects of the World Bank’s operation at arm’s

length.4

3

Most HIPC recipients are projected to continue receiving high levels of assistance from IDA. Thus, the

present value of these countries’ debt to IDA will continue to rise during and after participation in the

HIPC initiative. To mitigate the rise in the present value of debt to IDA during the period between the

decision and the completion points, the World Bank will provide a portion of normal credits as grants

on a selective basis. By providing grants in place of normal IDA credits, the present value of debt owed

to IDA is reduced. Because IDA credits have roughly a 70-percent grant element, replacing those

credits with grants reduces the present value of the country’s future debt service by an amount equal

to about 30 percent of the grant. This reduction in present value also would count as part of the World

Bank’s contribution toward HIPC relief, provided that the grants are fully disbursed prior to the

completion point. Therefore, where IDA operations in qualifying countries have a financing package

consisting of a grant portion and a credit portion, the grant portion would be disbursed first. The

portion of IDA assistance represented by grants would vary based on the countries’ projected

debt-to-export ratios—higher ratios mean higher proportions of grants.

4

While IDA does not incur a cost for providing HIPC debt relief since it is still getting fully repaid by

the HIPC Trust Fund and borrowers, the level of IBRD resources available for alternative uses may be

affected. These resources may not, for example, be available for lowering the interest rates charged to

middle-income borrowers. The IBRD also transfers resources to IDA separate from the HIPC Trust

Fund. Between fiscal years 1995 and 1998, these transfers averaged $380 million annually.

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The HIPC Trust Fund also receives contributions from other participating

multilateral development banks and bilateral creditors that are to be used

primarily to help other multilateral development banks, such as the

African Development Bank, to finance their share of HIPC debt relief.5

 The

multilateral development banks have stressed that the means used to

provide debt relief through the Trust Fund should accommodate

constraints specific to these institutions, such as policies against debt

restructuring or forgiveness. As of August 10, 1998, 16 governments had

made pledges or contributions to the HIPC Trust Fund totaling about

$204 million. Also, nine countries proposed additional contributions

totaling $92 million to relieve multilateral debt through reallocation of

their excess resources in the World Bank’s Interest Subsidy Fund, which

was set up in 1975 with donor contributions to subsidize the interest rates

on IBRD loans to the poorest IBRD borrowers. (See app. IV for a list of

contributors to the HIPC Trust Fund.)

The IMF is participating in the HIPC initiative through special ESAF grants at

the completion point that are deposited into an escrow account to meet

debt service payments owed to the IMF under a predetermined schedule.

The IMF is funding its contribution through its own trust fund financed

from bilateral (member) contributions and the ESAF reserve account. To

finance these grants, several countries have contributed or made

investments for the benefit of the ESAF-HIPC Trust totaling approximately

$46.5 million, as of June 1998. In May 1998, the IMF transferred about

$54.5 million to the ESAF-HIPC Trust for fiscal year 1998 and expects to

make a similar payment on a quarterly basis to the ESAF-HIPC Trust for

fiscal year 1999. The IMF Board has authorized the transfer of up to an

additional $332.5 million from the ESAF Trust Reserve Account to meet the

IMF’s commitments under the HIPC initiative.

Although all creditors will forgo future revenue to provide debt relief,

bilateral creditors use different methods to budget for the cost of debt

relief. Some creditors, including the United States, adjust for the

probability of debtor countries not fully repaying their debt in the

budgeting process. The United States has a complex methodology of

estimating the market value of outstanding debt owed to it. For U.S.

budgetary purposes, the cost of debt relief reflects the difference between

the estimated market value of the loan before reduction compared to the

value afterwards. Other creditors value the loan at face value at the time of

5

Since donors’ contributions to the HIPC Trust Fund will finance some of the relief provided on debt

owed to the African Development Bank, the actual cost to the African Development Bank of providing

HIPC debt relief is lower than the amount of relief granted to HIPC recipients on the debt they owe to

the African Development Bank.

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initial approval. Thus, providing debt relief means they must budget for the

face value of the debt when the debt is relieved.

Estimated Amount of

Relief Depends on

Decisions Made by

Creditors and Debtors

Estimates of the amount of relief to be given to countries under the HIPC

initiative will continue to be influenced by decisions creditors make as the

HIPC initiative is implemented as well as actions taken by debtor countries

to establish the necessary track records of reform. The $8.2 billion

estimate (in 1996 present value terms) depends on decisions, such as how

many recipient countries participate in the HIPC initiative, what

debt-to-export targets are established, what amount of time participants

have to establish their qualifications for HIPC debt relief, and countries’

economic conditions. Therefore, the actual amount of relief to be provided

under the HIPC initiative may be higher or lower than estimated. For

example, the actual relief provided could be lower if fewer countries

participate than anticipated or if target debt-to-export ratios are set higher

than the 200 percent assumed in the projections. On the other hand,

slower than projected growth in a country’s exports could substantially

increase the amount of relief provided by the HIPC initiative. World Bank

and IMF staff estimated that weaker export growth (2 percentage points

lower annually for each country from 1995 onward) could increase the

amount of relief provided under the HIPC initiative by about $1 billion in

1996 present value terms.

The amount of relief provided also could increase if more countries

become eligible. For example, since implementation of the HIPC initiative

began, the Boards have agreed to modifications to the HIPC framework that

have increased the number of countries eligible to receive relief and may

raise the amount of relief for other countries. The changes contributed to

increases in the projected amount of relief from $5.6 billion in June 1996 to

$8.2 billion in August 1998 in 1996 present value terms.6

 According to HIPC

documents, these changes reflect the desire of some countries to make the

plan more inclusive, concerns about the quality of available data on

worker remittances, and updated information. A World Bank official said

modifications to the HIPC framework respond directly to concerns of

debtor countries and help to mitigate the countries’ vulnerabilities. Some

6

These estimates include only debt relief that is additional as a result of the HIPC initiative. They do

not include the bilateral debt relief provided to debtor countries as a result of Paris Club reduction on

Naples, or previous, terms and comparable reductions by other creditors. In addition, these estimates

do not include relief provided by all commercial creditors. Although commercial creditors are

expected to provide relief under the HIPC initiative, for the countries deemed eligible to date, only two

have had significant commercial debt (Côte d’Ivoire and Uganda). The commercial debt relief of these

two countries was provided prior to their HIPC decision points and thus is not considered HIPC

assistance or included in the estimate of HIPC relief provided.

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countries have expressed concern about increased costs and cautioned

that eligibility decisions should not be made before the financial

implications of the agreed-to modifications are assessed. For example,

expanding the eligibility criteria to specifically take into account

government spending (fiscal criteria) allowed countries such as Côte

d’Ivoire and Guyana to become eligible for the HIPC initiative and raised

projected HIPC relief by about $600 million in present value terms.

Advocates for the expansion of the eligibility criteria were concerned that

certain countries with very open economies, and thus relatively low

debt-to-export ratios, were improperly characterized as having a

sustainable debt burden under the HIPC initiative. According to a World

Bank official, the fiscal criteria reflect the Boards’ desire to maintain the

original framework while allowing some flexibility in addressing the debt

problems of very open economies. Moreover, the fiscal criteria may

increase further the number of countries eligible for assistance.

Additionally, changes to country-specific analyses and an increase in the

potential assistance offered by the HIPC initiative for post-conflict

countries, particularly the Democratic Republic of Congo (formerly Zaire),

contributed about $1 billion to increased estimates of HIPC debt relief.

According to HIPC documents, the increase for the Democratic Republic of

Congo is based primarily on new projections that include slower growth in

the volume of mineral exports and lower world prices as well as increased

debt due to a buildup of late interest and arrears. The World Bank and the

IMF caution that any estimates for post-conflict countries are subject to

significant change.

Changes made in 1997 in the way the amount of exports is calculated also

have increased the projected amount of HIPC relief. The first change

involved agreement that exports would be calculated using an average of 

3 years of data, rather than 1 year as assumed in the first cost estimates of

the HIPC framework. According to HIPC documents, this change was a

compromise between the desire to obtain a recent actual measure for a

country’s export capacity and the desire to smooth out export fluctuations

by providing a longer-term base. While this change in methodology may

seem like a small refinement, it increased the total estimated amount of

HIPC debt relief by about $1 billion, according to HIPC documents.

A second change involved the evaluation of worker remittances. These

were originally intended to be added to exports but are no longer included

due to limited data quality and availability.7

 When worker remittances are

7

When worker remittances make a significant contribution to a country’s debt-servicing capacity they

will be considered in vulnerability analyses.

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not included, the estimated amount of export earnings available for

servicing the debt is lowered. Thus, the exclusion of worker remittances

increases a country’s debt-to-export ratio. The resulting higher ratio

allowed at least one country—Burkina Faso—to become eligible and

increased projected relief by about $130 million, according to the World

Bank and the IMF.

The amount of HIPC debt relief provided will also be influenced by the

actions taken by debtor countries to establish the necessary track record

of reform. If countries included in the estimates do not undertake required

reforms and thus do not receive HIPC relief, the amount of relief could

decrease. On the other hand, the total projected amount of debt relief

could increase if countries that were not included in the estimates—such

as Liberia, Somalia, and Sudan—establish the necessary track records of

reform and become eligible for relief through the HIPC initiative. At the end

of 1996, in present value terms, Sudan had $15.6 billion of outstanding

debt—one of the highest debt levels among potential HIPC recipients.

According to preliminary estimates from the World Bank and the IMF, if

Sudan qualifies for HIPC debt relief, reducing its debt-to-export ratio to 

200 percent would require about $4.5 billion in HIPC debt relief. Providing

debt relief to Sudan through the HIPC initiative could, thus, significantly

increase the cost of the initiative relative to current estimates.

Undertaking the steps necessary to qualify some countries—such as

Liberia, Somalia, and Sudan—for the HIPC initiative will involve significant

efforts and resources because they have not established the necessary

3-year track record of reform. Further, some of these countries have

significant unpaid debt, including debt owed to official creditors. For

example, clearing unpaid debt for Sudan, which had arrears of about

$6 billion as of year-end 1996, will involve significant financial resources.

The IMF reported that Sudan made scheduled payments to the IMF in 1997

and has begun to reduce its arrears to the IMF but has increased its unpaid

debt owed to other external creditors.

Conclusion In agreeing to the HIPC initiative, the IMF and the World Bank Boards

established a broad framework for debt relief but left many of the specifics

regarding the extent of that relief and how it would be carried out still to

be determined. Different creditor country perspectives on matters ranging

from burden sharing to required reform track records have required

extensive negotiation during the implementation phase. For the first six

countries to qualify for relief, the Boards have decided on relief amounts

at the upper end of the framework as agreed to, and with shortened

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reform periods for five countries. The extent to which those decisions

establish a precedent for future relief remains to be seen, especially with

respect to reform periods, since the early qualifiers have relatively strong

reform records. The costs of debt relief have influenced design and

implementation decisions. The amount of relief that will be provided

through the HIPC initiative is not yet known and is dependent on eligibility,

timing, and relief amount decisions still to be made.

Agency Comments

and Our Evaluation

The World Bank commented that substantial effort was put forth by

creditors in the design and implementation of the HIPC initiative and that

an expanded discussion of how the initiative is being financed would be

useful. We agree and have expanded our discussion of these issues,

including how the HIPC Trust Fund is being financed, and included a listing

of the multilateral institutions providing relief through the HIPC initiative

(see app. III).

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Problems

The HIPC initiative will provide benefits to recipient countries; however,

many will remain vulnerable to future debt problems, even with sound

economic policies. In conjunction with existing debt relief mechanisms,

such as relief from Paris Club creditors, the HIPC initiative will reduce

countries’ debts by varying amounts, some substantially. Reductions in the

amount of recipient country resources that are used for debt service will

also vary and are difficult to determine due to prior arrears and the use of

donor resources in some cases to help make debt payments. The limited

evidence for the particular debt targets in the HIPC initiative suggests that

reducing debt-to-export ratios to near 200 percent is not likely to provide

countries with a “cushion” to protect against adverse economic events.

Strong export growth and substantial donor assistance are important to

the HIPC initiative’s projections of sustainable debt burdens. For some

countries, those export growth projections may turn out to be overly

optimistic. If export earnings are lower than expected, financial support

from bilateral and multilateral donors is assumed to increase. This

assumption has been questioned given the budgetary pressures of major

donor countries. The HIPC initiative has also focused attention on the

limited capacity of some countries to manage their debt. Improvements in

debt management are considered necessary for them to avoid future debt

problems.

Debt Relief From the

HIPC Initiative Varies;

Reduction in Debt

Service Paid Difficult

to Determine

The HIPC initiative will reduce the total amount of debt owed, in present

value terms, by varying amounts for the first six recipient countries. This is

because their initial debt and export levels vary widely. The present value

of debt relief for these countries due to the HIPC initiative ranges from a

low of 6 percent of debt for Côte d’Ivoire to a high of 57 percent for

Mozambique, with the average reduction 22 percent for the first six

participants.1

 (See table 3.1.)

1

Characterizing the percent reduction of the value of the debt owed under the HIPC initiative is

complicated by the use of the concept of present value and the different means through which

creditors provide debt relief. For example, nominal debt relief as presented in table 3.1 is calculated as

the reduction in future nominal debt service.

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Table 3.1: Measures of Proposed HIPC Initiative Debt Relief for First Six Countries

Country

Debt-to-export

target ratio

(percent)

Debt relief

(present value, in

millions)

Debt relief

(nominal, in

millions)

Percent reduction

in present value

of debt

Average percent

reduction in debt

service over first 

4 years

Bolivia 225 $448 $600 13 13.5

Burkina Faso 205 115 200 14 10.5

Côte d’Ivoire 141 345 800 6 3.2

Guyana 107 253 500 25 26.9

Mozambique 200 1,442 2,900 57 42.1

Uganda 202 (actual 196) 347 650 19 24.7

Sources: HIPC documents and our analysis.

Our analysis indicates that the amount of projected reduction in countries’

debt burdens since 1995 attributable to the HIPC initiative relief—as

measured by the debt-to-export ratio—and the amount attributable to

other factors vary greatly across the first six HIPC qualifiers.2

 For example,

we estimated that, for Uganda, 77 percent of the reduction in this ratio

between 1995 and April 1998 (Uganda’s completion point under the HIPC

initiative) is due to export growth, with 18 percent attributable to the HIPC

initiative debt relief and 5 percent attributable to a combination of other

debt relief and net borrowing.3

 In contrast, for Côte d’Ivoire, 58 percent of

the reduction can be attributed to other debt relief and net borrowing

combined, 39 percent to export growth, and 3 percent to the HIPC initiative.4

 (See app. V for information on the determinants of debt reduction for the

first six countries.)

The HIPC initiative is expected to reduce debt service obligations by

varying amounts for the countries for which preliminary projections are

available, although the reduction in how much countries will actually pay

to service their debt is difficult to determine. Table 3.1 shows estimated

reductions in debt service owed by HIPC recipients, based on HIPC

2

This analysis is sensitive to the initial year chosen. 1995 is chosen as the base year for this analysis in

order to capture the effects of Naples terms on countries’ debt burdens.

3

Data available from HIPC documents does not allow us to separate out changes in debt-to-export

ratios due to debt relief under prior mechanisms, such as Naples terms, from changes due to net

borrowing (new borrowing net of payment of principal on existing debt).

4

In the case of Côte d’Ivoire, the 6 percent reduction in debt due to HIPC relief represents a reduction

in the present value of debt, whereas the 3 percent represents the HIPC initiative’s share of the total

reduction over the period indicated in the debt-to-export ratio.

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documents and our analysis.5 The effective reduction from the HIPC

initiative on the debt service actually paid by participants is hard to gauge

for several reasons. First, some countries experienced substantial arrears

in servicing their debt prior to receiving debt relief. The IMF has estimated

how Mozambique’s debt service payments will be affected by debt relief.6

The scheduled annual debt service payments are expected to be

dramatically reduced by the combination of the HIPC initiative and existing

Paris Club (Naples terms) debt relief. The HIPC initiative itself will reduce

scheduled debt service payments in 2000-03 by 42 percent (from

$170.5 million to $98.7 million per year) from the obligations remaining

after the Paris Club relief. (See table 3.2.)

Table 3.2: Annual Average Debt Service Payments for Mozambique, 1995-2003

2000-03 (scheduled debt service)

1995-98

Dollars in millions

Without debt relief

After Paris Club

(Naples terms) relief

After Paris Club

(Naples terms)

and HIPC relief

Scheduled

debt service

Actual

debt service

$486 $170.5 $98.7 $375.3 $113.2

Source: IMF data.

However, Mozambique was paying only about 30 percent of its scheduled

annual debt service in 1995-98 ($113.2 million of $375.3 million). Thus, the

projection is that the scheduled debt service payment of $98.7 million in

2000-03 will only be about 13 percent less than the annual debt service of

$113.2 million Mozambique was actually paying in 1995-98, prior to relief.

A second complexity in assessing the effect of debt relief on a country’s

finances is that a substantial portion of the debt service paid by these

countries is financed through donor and creditor resources. Thus, it is very

difficult to determine how a reduction in debt service owed—or even debt

service paid—by HIPC recipients will affect the net flow of resources to a

recipient country, and we were generally unable to make that

determination. This is most clearly evident in Uganda’s recent experience.

5

HIPC documents provide projections for average annual debt service reductions due to HIPC

initiative relief for Guyana, Mozambique, and Uganda. For Bolivia, we assumed that HIPC debt relief

will be provided to both smooth out and reduce the debt service-to-export ratio to 20 percent, as

indicated in HIPC documents. For the two remaining countries (Burkina Faso and Côte d’Ivoire), we

estimated this value, assuming relief under the HIPC initiative is spread evenly over 20 years. The

reductions in annual debt service are generally similar to the estimated reductions in the present value

of debt.

6

In response to criticism that HIPC initiative debt relief would not actually reduce the amount of debt

service Mozambique was paying, the IMF publicly issued the information used in our report.

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In 1995, Uganda established a Multilateral Debt Facility through which

bilateral donors, primarily Denmark, the Netherlands, Norway, and

Sweden, channeled resources directly to pay Uganda’s multilateral debt

service. Payments to this facility averaged $45 million per year in 1996 and

1997. In contrast, HIPC initiative debt relief is reducing Uganda’s annual

debt service burden by an average of around $30 million per year.

(Because the relief is being “front loaded” at Uganda’s request,7

 debt

service in the first 5 years will be reduced by about $39 million annually

and by about $20 million annually in subsequent years.) According to

Ugandan officials, they would need to continue to receive $15 million per

year in assistance from these bilateral donors, in addition to other aid

flows that were being received, to be in as strong a position after the HIPC

initiative relief as before. This assumes that the Facility would continue to

be funded at the same level. Ugandan officials told us that they hoped

some of the future assistance would be channeled into social sector aid,

such as education, although an IMF official noted that these funds were

approved by donor governments for debt relief and shifting them into

other types of aid may not be straightforward.

HIPC Recipients Will

Need Strong

Economic

Performance and

Continued Economic

Assistance

Countries receiving debt relief through the HIPC initiative will need to

maintain strong economic performance and, in most cases, continue to

receive large amounts of donor assistance in order to service their debt.

The limited analytical evidence that exists for the debt targets used in the

HIPC initiative suggests that countries with debt-to-export ratios near the

bottom of the 200-250 percent range may still have unsustainable debt

burdens. The HIPC initiative’s projections assume that, after completing the

HIPC initiative, countries will maintain sustainable debt levels in part

through strong export growth. In addition, for most countries, substantial

donor assistance is expected to continue, including balance-of-payments

support. Finally, the HIPC initiative analysis assumes that, if adverse

economic events do occur, such as a significant decrease in the price of a

key commodity, the countries’ needs for financing will be met with

increased donor assistance.

Limited Analytical Basis

for Debt Reduction Targets

There is no strong analytical evidence supporting the decision concerning

the HIPC initiative’s target range of the debt-to-export ratio. The World

Bank and the IMF have provided limited support for the conclusion that

debt at the 200-percent debt-to-export ratio was sustainable, and no

7

“Frontloading” debt relief means that countries use more of their debt relief to service their debt in

the short term rather than to buy back their debt in later years. Countries request frontloading if, for

example, they have large debt payments due in the short term.

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analysis to support ratios in the upper end of the target range

(250 percent). World Bank reports have suggested that debt-to-export

ratios above 200 percent indicate potential debt problems in poor

countries, and a 1996 World Bank document noted that a debt-to-export

threshold of 200 percent indicates that at this level a country is likely to

have difficulty servicing its debt.

World Bank and IMF officials cite two internal World Bank studies as

support for their stated debt-to-export ratios.8

 We believe these studies

have limited relevance for determining the HIPC initiative’s target ratios for

two reasons. First, their analysis was based primarily on middle-income

countries and, second, they examined debt levels at which countries began

to experience debt servicing problems, not when they might emerge from

such problems. One study, done in 1990, analyzed 1980-87 data on 111

countries to determine at what level of debt relative to exports countries

began to experience problems servicing their debt. The study found that

countries that did not experience debt servicing problems generally had

debt-to-export ratios below 200 percent. However, 30 percent of the

countries that did experience debt service problems had debt-to-export

ratios below 200 percent throughout the period. The second study, dated

in 1996, examined approaches for predicting when countries would have

problems with debt service. It concluded, based on examining Mexico’s

ability to service debt at the height of its 1984-89 debt crisis, that a

debt-to-export ratio above 198 percent could yield debt servicing

problems.

Debt-to-export ratios at or slightly above 200 percent are in the upper part

of the range the World Bank uses to classify countries as moderately

indebted.9

 Our analysis shows that a number of countries classified as

moderately indebted have subsequently experienced debt servicing

problems. Of the 11 countries classified by the World Bank in 1991 as

8

John Underwood, “The Sustainability of International Debt,” Draft (Washington, D.C.: World Bank,

Mar. 1990). This study used a present value measure of debt levels, using broad assumptions about the

degree of concessionality of the outstanding amount of nominal (face value) debt. Also, Daniel Cohen,

“The Sustainability of African Debt,” Policy Research Working Paper 1621 (Washington, D.C.: World

Bank, Aug. 1996). The analysis used a debt-to-gross domestic product (GDP) measure, which was then

converted to a debt-to-export ratio. A description of the two studies is publicly available in Stijn

Claessens et al., “Analytical Aspects of the Debt Problems of Heavily Indebted Poor Countries,” in 

Z. Aqbal and R. Kanbur, External Finance for Low-Income Countries (Washington, D.C.: IMF, 1997).

9

The World Bank currently uses the ratio of the present value of debt to exports, along with the ratio of

the present value of debt to gross national product, in classifying countries as severely, moderately, or

less indebted. In 1991, the World Bank used nominal, not present value, debt-to-export ratios in making

these classifications, along with three other indicators. The range of debt-to-export ratios used for

moderately indebted countries was 165-275 percent, which the Bank has indicated is equivalent to a

present value of debt to exports of 132-220 percent, under its assumptions about average

concessionality of debt.

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moderately indebted low-income countries, four (Benin, Central African

Republic, Mali, and Togo) have subsequently had their debt rescheduled

through the Paris Club.

In addition to the concerns over the particular levels of the debt

sustainability indicators under the HIPC initiative, there is a concern that

the indicators are narrow. A particular concern is that the focus on

export-based indicators does not directly consider the overall economic

capacity of a country or the particular level of demand for government

expenditures. For example, critics have argued that the export-based

indicators do not reflect the extent to which governments’ social spending

needs vary across potential recipient countries. A related concern is that

since export revenues generally accrue to the private sector, they are not

necessarily indicative of resources available to these governments. A

recent study commissioned by the IMF to evaluate its ESAF programs cited

the above concerns in suggesting that, in general, a more appropriate

measure of a country’s debt burden would be the ratio of debt to its

overall national income.

The addition of fiscal, or government spending, criteria for determining

debt sustainability has done little to satisfy critics. To qualify for debt

relief under the HIPC initiative’s fiscal criteria requires that three conditions

be met: a country’s present value of debt-to-government revenue ratio

must exceed 280 percent, a country’s exports-to-GDP ratio must exceed

40 percent, and a country’s government revenues-to-GDP ratio must exceed

20 percent. These conditions are likely to be met by just a few countries.

The World Bank and the IMF have not provided any economic justification

for these particular levels. They have stated that the 280 percent

debt-to-government revenue ratio is somewhat arbitrary. The HIPC initiative

documents note that if this ratio were set much lower than 280 percent,

the overall cost of the HIPC initiative would rise substantially.

Some debt experts have questioned the statement in HIPC documents that

the HIPC initiative debt relief will reduce countries’ debts to a point that

will significantly diminish any debt overhang effect. Whether debt

overhang constitutes a serious obstacle to investment in HIPC countries has

been debated during the HIPC initiative’s implementation, with some

officials and analysts doubting its significance and others continuing to

cite reduction of debt overhang as a primary benefit of the HIPC initiative.

Several analysts maintain that high debt levels do deter investment in HIPC

countries but some also question whether the levels of debt reduction

under the initiative will significantly reduce that effect. Some experts have

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observed that the way debt burdens are measured under the HIPC

initiative—in present value terms—may not correspond to investors’

perceptions about how high a country’s debt burden is. Although present

value is a useful way of comparing different debt burdens when the degree

of concessionality of the debt varies widely, investors are more likely to

look at debt in nominal terms, according to one debt expert. He noted that,

beyond the creditors, the concept of present value is not widely

understood. Since the present value of concessional debt is generally

lower than its nominal value, countries will generally be left with debts

that are higher in nominal than in present value terms.

Projections of

Sustainability Assume

Strong Export Growth and

Substantial Aid Flows

The economic projections in HIPC initiative analyses generally assume a

steady growth in export revenues for HIPC countries. This assumption is an

important element in the initiative’s expectation that HIPC recipients will

have a sustainable debt burden. As exports grow, the indicators of

indebtedness steadily improve, for a given level of debt. Exports have

grown for most of the HIPC recipient countries in recent years. However,

projections in HIPC documents assume significantly greater export growth

in the years ahead. The first six countries deemed eligible for debt relief

under the HIPC initiative had annual average growth rates in exports of

4.5 percent between 1985 and 1995. (See table 3.3.)

Table 3.3: Comparison of Historical

and Projected Growth Rates in Exports

for Six Countries

In percent

Country

Annual average

growth rate,

1985-1995a

Projected growth

rate, after

completion pointb

Increase (or

decrease) in

projected growth

rates, compared to

historical growth

rates

Bolivia 3.2 7.6 134

Burkina Faso 5.5 9.4 69

Côte d’Ivoire 2.5 7.4 200

Guyana 9.2 5.8 –37

Mozambique 6.1 8.5 39

Uganda 0.3 8.2 2,800

Average 4.5 7.8 75

aExports are 3-year averages.

bProjection period represents an average of 18 years after each country’s completion point.

Sources: Our analysis of World Bank data and HIPC documents.

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HIPC documents project that in years after they receive relief under the

initiative, these same countries will achieve an average annual growth in

exports of 7.8 percent, a 75-percent increase over the previous period.

Most of the countries that have been approved for relief under the HIPC

initiative are dependent on a few primary commodities for a majority of

their export earnings. (See table 3.4.)

Table 3.4: Measures of Export

Vulnerability for Six HIPCs Percent share of exports, 1995

Country Main product Three main products

Uganda 66 72

Bolivia 12 32

Burkina Faso 39 55

Côte d’Ivoire 31 49

Mozambique 16 22

Guyana 21 50

Average, 24 HIPCsa 34 51

aHIPC documents include vulnerability analyses for 24 countries, known as the “reference group,”

potentially eligible for debt relief under the HIPC initiative.

Source: HIPC documents.

For this reason, their export earnings are considered to be particularly

vulnerable to adverse economic events. For example, a significant fall in

the price or output of a country’s primary export could bring the debt

ratios to levels that once again exceed the HIPC initiative’s target levels for

debt sustainability. In the case of Uganda, approximately 66 percent of its

export earnings in 1995 derived from one commodity, coffee, whose world

price was near a 10-year high. According to HIPC documents, a 20-percent

drop in the international price of coffee would raise Uganda’s

debt-to-export ratio by 30-40 percentage points. (Figures 3.1 and 3.2

illustrate the historical volatility of the world prices of coffee beans and

also of cocoa beans, which are the main export commodity of Côte

d’Ivoire.) Moreover, Uganda’s recent experience illustrates the sensitivity

of export earnings to variation in the amount produced. World Bank and

IMF officials have cited increases in Uganda’s export earnings (1995/96 and

1996/97) as evidence that the HIPC initiative’s assumptions of countries’

increased exports are reasonable when countries undertake necessary

reforms. However, Uganda’s most recent export data (1997/98) underlines

concerns about the volatility of exports, with Uganda’s exports projected

to decline about 23 percent. Poor weather conditions in 1997/98 and the

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resulting decline in coffee exports are cited in HIPC documents as the

reason for projected increases in Uganda’s debt-to-export ratio in 1997/98

through 1999/2000.

Figure 3.1: World Price Trends for Coffee Beans, 1985-97

1985 1987 1989 1991 1993 1995 1997

50

100

150

200

250

300

Price index (1990 = 100)

Source: DRI-McGraw Hill data.

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Figure 3.2: World Price Trends for Cocoa Beans, 1985-97

1985 1987 1989 1991 1993 1995 1997

80

100

120

140

160

180

200

Price index (1990 = 100)

Source: DRI-McGraw Hill data.

Similarly, a single commodity, cotton, accounts for 46 percent of Mali’s

exports, and its top three commodities account for 76 percent. According

to HIPC documents, any one of three events would put Mali’s debt ratios at

unsustainable levels through the projection period (2017). These events

include (1) a drought similar to that experienced by Mali in 1972-75 and

1983-85, (2) a 15-percent decline in gold prices, or (3) a 20-percent decline

in cotton prices. In the case of Burkina Faso, an important element in its

projected increase in exports is a steady 10-percent growth in gold

exports. However, a recent sharp decline in the price of gold has

substantially reduced investment in this sector and, according to a World

Bank official, created considerable doubt regarding the likelihood that

Burkina Faso will achieve the projected increases in gold production.

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A key element in the HIPC initiative’s projection of debt sustainability is

that countries receiving debt relief will continue to get substantial foreign

aid well into the future. This expected assistance includes not just aid to

support development projects within countries but also concessional

financing, including balance-of-payments support. For example,

macroeconomic projections done by the World Bank and IMF staff at

Uganda’s April 1998 completion point show that, with its HIPC initiative

debt relief of $347 million in present value terms, Uganda will continue to

require donor assistance to meet its external debt and

balance-of-payments needs until 2006. The inclusion of

balance-of-payment support by donors within the HIPC initiative

complicates the definition of debt sustainability and the establishment of a

proper target level, since any level of debt could be considered

“sustainable,” given a sufficient amount of donor support.

According to World Bank officials, if a HIPC recipient country that is

adhering to agreed-on reforms experiences circumstances that result in

debt servicing problems, increased donor flows to that country will be

forthcoming. A World Bank official cited commitments by some

governments, for example, to provide the assistance Uganda needs in

order to meet debt servicing obligations after the HIPC initiative relief,

provided reforms continue. Future donor flows to potential HIPC recipients

depend, of course, on many factors. However, the assumption that donor

support of HIPC recipients will continue at current levels and will, under

adverse conditions, increase has been questioned, given that net

concessional flows from governments and multilateral institutions to poor

countries have declined since 1990. Moreover, the World Bank observed in

1998 that the future prospects for official concessional financing

worldwide are bleak due to fiscal pressures in Europe and Japan, the

largest donor by volume, and to continued public concern over spending

on foreign aid in the United States. Additionally, officials from the U.S.

Treasury, other governments, and NGOs have raised questions about

whether governments will simultaneously provide debt relief, increased

concessional financing, and substantial contributions to replenish the

international financial institutions, particularly in light of their own budget

constraints. Officials we spoke to from other governments, including

France and Germany, noted that creditors are likely to continue financially

supporting countries, but the amounts are uncertain due to costs and

fiscal pressures.

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Debt Management

Capability Is Limited

Within Many Potential

HIPC Recipients

The HIPC initiative has focused international attention on the limited debt

management capacity of many poor countries. This limitation is a potential

hindrance to their ability to emerge from their debt problems and avoid

future unsustainable debt levels. Many HIPC participants and debt experts

have noted that assistance with debt management has been a significant

benefit of the initiative, although some have expressed frustration that the

pace of improvement is slow. HIPC countries vary greatly in the quality of

their capabilities for tracking and managing debt. Few HIPC countries have

the capacity to analyze debt in a broader economic context, according to

developing country experts, which limits their ability to participate fully in

the analysis of their debt relief requirements under the initiative and to

avoid future debt problems. Even for countries with basic debt

management systems in place, analyzing how debt and debt reduction can

affect their overall macroeconomic situations poses a major challenge.

Debt Data Management According to the World Bank and the IMF, in recent years almost every

country classified as a HIPC has received a substantial amount of technical

assistance intended to improve its ability to manage debt. Most of this

assistance has been concentrated on information management—on

improving accounting systems for recording and tracking financial

obligations. These efforts have resulted in significant improvements in

many HIPC countries. They have been largely organized by UNCTAD and the

Commonwealth Secretariat,10 both of which have developed and installed

debt management software and provided extensive training. In addition,

these countries have received significant support from several bilateral

donors.

However, countries that are candidates for debt relief under the HIPC

initiative vary greatly in the degree to which they have in place the

technical and governance requirements for effective debt management.

Two early qualifiers for the initiative, Uganda and Bolivia, stand out as

countries that have relatively well-developed capabilities for tracking and

managing debt. Uganda, for example, has been using the UNCTAD debt data

management software since 1985 and operating it independently since

1993. This capability constituted a major challenge for the country,

according to government officials, due in part to destruction from 

2 decades of civil war that included the burning of the Treasury building.

In addition to increasing technical capacity, Uganda moved on the

constitutional front, in 1994 giving its parliament all powers to contract

10The Commonwealth Secretariat implements many programs of the Commonwealth, a voluntary

association of 53 developed and developing nations who work together on a variety of global issues.

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new debt. Similarly, according to government officials, Burkina Faso

established a centralized committee that would have to approve any new

government borrowing.

The capacity of some HIPC countries to accurately track their financial

obligations is still weak, however. Many African countries, especially, lack

the capacity to maintain accurate loan records and track the timing and

amount of debt servicing obligations. This can result in situations where

various agencies within a government engage in external borrowing with

no central control over, or even complete knowledge of, total debt

amounts, according to officials from countries we visited. For some HIPC

countries, initial examination of debt data has revealed inconsistencies,

according to an official from UNCTAD. In some countries, the division

between different agencies of institutional responsibilities for debt

management and the inability to retain skilled staff have created problems.

Due in part to concern about countries’ ability to manage their debt, under

IMF-supported programs, ceilings are to be negotiated on countries’ new

borrowing on nonconcessional terms. According to an IMF official, for

heavily indebted poor countries, the ceiling is generally understood to be a

low amount. Following receipt of debt relief through the HIPC initiative,

Uganda has agreed to limit its nonconcessional borrowing to $10 million

annually for the next several years.

Burkina Faso and Côte d’Ivoire are two HIPC countries that are in the

earlier stages of receiving assistance with debt management. At the

beginning of the HIPC initiative process, the government of Burkina Faso

was unable to project the effect of new debt on future debt service. The

government asked a private consultant for assistance in understanding and

qualifying for the HIPC initiative. Now, with the support of the Swiss

government, Burkina Faso is in the process of implementing the UNCTAD

debt management system. However, according to donor and recipient

officials, improvements in debt management in Burkina Faso are moving

very slowly. The country needs to develop up-to-date and accurate debt

data, install computer equipment and software to replace the manual

records currently being used, and train staff to manage the financial

management system before the country can move much further. In Côte

d’Ivoire, manual records are generally still used due to budgetary

constraints, and the government has yet to receive significant outside

assistance on debt management. UNCTAD recently completed a needs

assessment, and expectations are that Côte d’Ivoire will have the UNCTAD

system by January 1999. In addition to computer hardware and software,

training and other related technical support are needed.

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Analyzing the Economic

Impacts of Debt Poses a

Major Challenge for HIPC

Recipients

Even with a system of basic debt data management in place, analyzing

how debt and debt reduction can affect a country’s overall

macroeconomic situation poses a challenge most HIPC participants cannot

meet, according to officials from the United Nations and recipient

governments. This is due both to a lack of accessible modeling techniques

and limited technical expertise. World Bank and IMF staff have developed

very complex and nonuniform spreadsheets to conduct debt sustainability

analyses for countries potentially receiving debt relief under the HIPC

initiative. World Bank and IMF officials acknowledged early in the HIPC

initiative process that the absence of a uniform, documented standard for

simulating debt reduction exercises would make it difficult for countries

to participate fully in analyzing their debt situations. The World Bank set

as a priority the development of such a model to be made available to

interested countries. According to World Bank and IMF documents, this

software was to be designed to be easily linked to the debt data

management software put in place by UNCTAD and the Commonwealth

Secretariat. However, as of August 1998, this software was not generally

available for countries’ use. According to officials at UNCTAD, restructuring

and downsizing at the World Bank has resulted in loss of the expertise

needed to complete the software and make it available. According to a

Bank official, versions of the software are being tested in some countries.11

Other efforts to assist countries in developing the capacity to

independently formulate their own debt strategy and debt sustainability

analysis include the program undertaken by Debt Relief International, an

NGO based in London, with funding from the governments of Austria,

Denmark, Sweden, and Switzerland. The program also intends to help

governments maximize their ownership and leadership of debt reduction

and to demonstrate to the donor and creditor community a high level of

debt management. The program is thus driven by recipient countries’

requests for it. According to Debt Relief International, it has received

requests for assistance from 16 heavily indebted poor countries. The

capacity and will to closely monitor future borrowing after completing the

HIPC initiative is critical to avoiding further debt problems, according to

debt experts and some recipient country officials.

Conclusion Despite receiving relief through the HIPC initiative and implementing strong

economic policies, many recipient countries will remain vulnerable to

11A consulting firm in Washington, D.C., has recently developed computer software programs to assist

policy makers in analyzing alternative debt strategies. An official from Debt Relief International told us

that the IMF and some HIPC countries are using these programs.

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future debt problems. Although the HIPC initiative has focused attention on

the debt problems of poor countries and is substantially reducing the debt

burdens of some, an expectation that all recipient countries that follow

sound economic policies will avoid future debt problems is unrealistic.

Projections that debt burdens are sustainable for HIPC recipients assume

that economic conditions for these countries remain favorable and donors

remain committed to assisting these countries in meeting their

development goals and debt obligations. These assumptions may prove to

be optimistic given the cyclical nature of many of these countries’ major

exports and recent declines in donor assistance. Furthermore, the

expectation that recipient countries will effectively track existing debt and

ensure that new debt is affordable may also prove optimistic in some

cases.

Agency Comments

and Our Evaluation

The organizations commenting on our report emphasized that recipients of

debt relief through the HIPC initiative are and will remain vulnerable to

economic difficulties. The IMF stated in particular that the ESAF program, as

well as other donor support, could be used to help recipients facing

economic shocks. Our analysis points out, however, that these countries

will generally depend on support from the IMF and other donors to service

their debt and cover other external financing needs, even under the HIPC

initiative’s assumption of favorable economic conditions. Their overall

economic vulnerabilities suggest that some are likely to need increased

levels of such external financing, even after debt relief.

The World Bank stated that the HIPC initiative recognizes the vulnerability

of recipient countries, and this is reflected in the initiative’s choice of debt

relief targets near 200 percent. The World Bank also stated that the

report’s conclusion that many countries remain vulnerable to debt

problems could be viewed as an implicit recommendation for increasing

relief amounts. Our assessment that countries remain vulnerable to future

debt problems is based on our analysis of the relief targets used in the HIPC

initiative, the high concentration of these countries’ exports, and the

reliance of these countries on donor flows for continued debt support,

separate from their development needs. While our analysis concludes that

countries remain vulnerable to future debt problems, we are not

recommending greater relief. We recognize that debt relief under the

initiative will benefit participants, but conclude that some recipient

countries may once again experience debt problems. This assessment

highlights the limitations of the initiative and should prove useful in future

discussion among those responsible for policy decision in this area.

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In addition, the World Bank said that the initiative’s export projections

derive from estimates made by the World Bank, the IMF, and the recipient

country and are higher than the historical average due to the positive

effect of sustained policy reform. Our conclusion that the initiative’s

export projections are optimistic is based on analysis of countries’

historical export growth rates and the concentration of these countries’

exports. The cyclical nature of the prices of some of the primary export

commodities of HIPC recipient countries is not accounted for in the

underlying analyses of the initiative. Although sustained policy reform

could improve these countries’ export prospects, changes in commodity

prices and outputs can be outside the influence of individual countries.

Our report provides an example of this when poor weather conditions

resulted in declining coffee exports and increases in Uganda’s

debt-to-export ratio in 1997 and 1998.

Page 62 GAO/NSIAD-98-229 Developing Countries
Page 63 GAO/NSIAD-98-229 Developing Countries
Appendix I 

Characteristics of External Debt for 40

Heavily Indebted Poor Countries

Table I.1 shows for each of the 40 countries classified by the World Bank

and International Monetary Fund (IMF) as a heavily indebted poor country

(HIPC), the country’s total external debt, the percentage of total external

debt owed to various creditors, and the ratio of total debt (in present value

terms) to exports, as of the end of 1995. The countries are classified based

on whether they are included in the World Bank and IMF staffs’ estimate of

total relief to be provided under the HIPC Debt Initiative of $8.2 billion, as

of August 1998. The Boards of Executive Directors of the World Bank and

the IMF have made decisions concerning eight countries (Benin, Bolivia,

Burkina Faso, Côte d’Ivoire, Guyana, Mozambique, Senegal, and Uganda).

The remaining countries may move to another category if, for example,

their economic conditions change or more information becomes available.

Countries classified as having sustainable debt burdens (17) may receive

debt relief under existing mechanisms, but they currently are not deemed

to need debt relief under the HIPC initiative. Countries classified as having

unsustainable debt burdens (20) are considered potential recipients for

debt relief under the HIPC initiative. The three remaining

countries—Liberia, Somalia, and Sudan—are not included in HIPC initiative

estimates.

Page 64 GAO/NSIAD-98-229 Developing Countries
Appendix I 

Characteristics of External Debt for 40

Heavily Indebted Poor Countries

Table I.1: External Debt and Debt-To-Export Ratios for 40 HIPCs

Composition (in percent)a

Nominal external debt (end 1995)

Country

Total (billions of

U.S. dollars) Bilateral Multilateral Commercial Short-termb

Present value of total

debt to exports (end

1995, in percent)c

Sustainable-17 $93.1 49.9 23.7 15.3 11.1 318d

Angola 11.5 18.4 1.7 63.0 17.0 333

Benin 1.6 39.4 57.4 0.3 2.9 201

Cameroon 9.4 58.5 18.5 11.9 11.1 317

Central African

Republic 0.9 21.2 70.9 1.8 6.1 252

Chad 0.9 19.2 78.4 0.2 2.2 199

Congo 6.0 55.3 12.0 15.3 17.5 464

Equatorial

Guinea 0.3 38.1 41.1 5.7 15.2 313

Ghana 5.9 19.7 61.8 7.7 10.7 270

Guinea 3.2 44.0 48.1 2.5 5.3 294

Honduras 4.6 32.5 49.5 9.8 8.2 260

Kenya 7.4 31.1 44.5 15.8 8.6 206

Lao People’s

Democratic

Republic 2.2 67.8 31.6 0.2 0.5 188

Senegal 3.8 32.4 57.4 3.3 6.9 173

Sierra Leonee 1.2 44.3 47.7 0.3 7.6 514

Togo 1.5 35.3 55.5 3.6 5.7 356

Vietnam 26.5 82.1 2.6 3.4 11.9 441

Yemen,

Republic of 6.2 40.8 20.6 27.7 11.0 276

Unsustainable20 99.3 42.5 35.8 9.4 12.4 529d

Bolivia 5.3 34.2 54.0 5.9 5.8 343

Burkina Faso 1.3 11.6 83.6 0.4 4.5 227

Burundi 1.2 14.4 84.2 0.1 1.2 459

Congo,

Democratic

Republic off 13.1 48.4 21.8 6.7 23.1 807

Côte d’Ivoire 19.0 28.1 22.8 28.2 20.9 445

Ethiopia 5.2 42.0 46.7 7.7 3.6 541

Guinea-Bissau 0.9 38.5 56.8 0.3 4.4 1,235

Guyana 2.1 51.4 38.5 2.9 7.2 268

Madagascar 4.3 44.8 40.9 1.8 12.5 493

Mali 3.1 47.3 50.0 0.1 2.6 392

(continued)

Page 65 GAO/NSIAD-98-229 Developing Countries
Appendix I 

Characteristics of External Debt for 40

Heavily Indebted Poor Countries

Composition (in percent)a

Nominal external debt (end 1995)

Country

Total (billions of

U.S. dollars) Bilateral Multilateral Commercial Short-termb

Present value of total

debt to exports (end

1995, in percent)c

Mauritania 2.5 51.4 40.9 0.3 7.5 365

Mozambique 5.8 67.2 26.2 1.8 4.9 1,059

Myanmarg 5.8 63.8 23.1 6.4 6.8 453

Nicaragua 9.3 59.0 16.5 10.4 14.1 1,654

Niger 1.6 31.1 56.4 8.2 4.4 369

Rwanda 1.0 13.6 83.0 0.2 3.3 345

Sao Tomé and

Príncipe 0.3 28.3 66.0 0 5.6 1,224

Tanzania 7.3 38.8 41.8 5.6 13.7 540

Uganda 3.6 21.6 73.5 2.4 2.6 456

Zambia 6.9 39.9 50.0 2.53 7.6 417

Other-3 22.4 33.1 21.6 11.6 33.8 1,589d

Liberiah,i 2.1 23.5 37.1 9.8 29.6 294

Somaliai,j 2.7 42.5 35.6 1.4 20.6 1,702

Sudank 17.6 32.8 17.6 13.4 36.3 3,339

Total, 40 HIPCs $214.9 44.7 29.1 12.2 14.0 438

aA group’s total type of debt as a percentage of the group’s total debt; that is, the group’s total

bilateral debt as a percentage of the group’s total debt. Percentages may not total 100 due to

rounding.

bAccording to our analysis, $20.3 billion, or approximately 67 percent, of the $30.2 billion in

short-term debt is unpaid interest arrears.

cExports are a 3-year average (1993-1995) and exclude worker remittances.

dThe group’s total present value of debt to total exports.

eSierra Leone was initially not expected to require assistance under the HIPC initiative, when

assessed prior to the conflict. The World Bank and the IMF note that it appears likely that Sierra

Leone’s export base has deteriorated, but they do not yet have sufficient information to assess

whether Sierra Leone would require HIPC assistance.

f

Formerly Zaire.

gExports for Myanmar are the average for 1993 and 1994.

hExports from Liberia are based on estimates reported for 1995 in The World Factbook, 1997

published by the Central Intelligence Agency.

i

Insufficient information.

j

Exports from Somalia are based on estimates reported for 1994 in The World Factbook, 1997.

k

No allowance is made for the possible participation of Sudan in HIPC.

Sources: Our analysis, World Bank and IMF data.

Page 66 GAO/NSIAD-98-229 Developing Countries
Appendix II 

Estimated Debt Owed to the United States

by 40 HIPCs

According to estimates prepared by the U.S. Treasury, as of August 1998,

31 of the 40 HIPCs identified by the World Bank and the IMF owed

outstanding debt to the United States totaling approximately $6.8 billion.

(See table II.1.) The figures include outstanding principal and interest

arrears. The Treasury’s estimates are based on debt figures as of year-end

1995. In calculating the estimates shown in table II.1, the Treasury

assumed that concessional and nonconcessional debt grew by 7 percent

and 3 percent per year, respectively, as a rough proxy for increased

arrears and/or net new lending. This debt is broken down into three

categories: concessional, nonconcessional, and guarantees.

Table II.1: Type of Debt Owed to the United States by 40 HIPCs, as of August 1998

Dollars in millions

Country Concessional Non-concessional Guarantees Total

Angola $8.9 $9.6 $13.5 $32.0

Benin 0 0 0 0

Bolivia 6.1 10.9 0.5 17.5

Burkina Faso 0 0 0 0

Burundi 0 0 0 0

Cameroon 0 62.4 6.1 68.5

Central African Republic 0 10.9 0 10.9

Chad 0 0 0 0

Congo 31.1 14.9 0 46.0

Congo, Democratic Republic ofa 436.2 1,937.8 8.7 2,382.7

Côte d’Ivoire 88.2 243.7 42.7 374.6

Equatorial Guinea 0 0 0 0

Ethiopia 85.5 2.6 0 88.1

Ghana 0 83.5 355.8 439.3

Guinea 113.9 11.1 0 125.0

Guinea-Bissau 0 0 0 0

Guyana 11.0 10.3 0 21.3

Honduras 0 75.8 71.9 147.7

Kenya 39.1 108.9 57.1 205.1

Lao People’s Democratic Republic 0 0 0 0

Liberia 200.2 63.2 0 263.4

Madagascar 0 41.4 0 41.4

Mali 4.1 0 0 4.1

Mauritania 0 6.6 0 6.6

Mozambique 0 65.6 0 65.6

Myanmar 7.5 0 0 7.5

(continued)

Page 67 GAO/NSIAD-98-229 Developing Countries
Appendix II 

Estimated Debt Owed to the United States

by 40 HIPCs

Dollars in millions

Country Concessional Non-concessional Guarantees Total

Nicaragua 22.4 82.3 2.2 106.9

Niger 0 16.2 0 16.2

Rwanda 0 0 2.3 2.3

Sao Tomé and Príncipe 0 0 0 0

Senegal 5.4 20.5 0 25.9

Sierra Leone 66.1 16.4 0 82.5

Somalia 178.8 190.4 0 369.2

Sudan 447.3 566.5 0 1,013.8

Tanzania 0 37.0 0 37.0

Togo 0 0 0 0

Uganda 0 1.6 3.6 5.2

Vietnam 265.5 0 0 265.5

Yemen, Republic of 106.6 0 10.2 116.8

Zambia 166.3 197.2 0 363.5

Total $2,290.2 $3,887.3 $574.6 $6,752.1

Percent of total 33.9 57.6 8.5

aFormerly Zaire.

Source: U.S. Treasury.

Page 68 GAO/NSIAD-98-229 Developing Countries
Appendix III 

Multilateral Institutions Participating in the

HIPC Debt Initiative

Table III.1 lists the 25 multilateral institutions that have agreed to provide

debt relief under the HIPC Debt Initiative.

Table III.1: Participating Multilateral Institutions

Multilateral institution Location

African Development Bank/African Development Fund Abidjan, Côte d’Ivoire

Arab Bank for Economic Development in Africa Khartoum, Sudan

Arab Fund for Economic and Social Development Safat, Kuwait

Arab Monetary Fund Abu Dhabi, United Arab Emirates

Asian Development Bank Manila, Philippines

Banque Centrale des Etats d’Afrique de l’Ouest (Central Bank of the West African States) Dakar, Senegal

Caribbean Development Bank St. Michael, Barbados

Caricom Multilateral Clearing Facilities Port of Spain, Trinidad

Central American Bank for Economic Integration Tegucigalpa, Honduras

Conseil de l’Entente (Council of the Entente) Abidjan, Côte d’Ivoire

Corporación Andina de Fomento (Andean multilateral development bank) Caracas, Venezuela

East Africa Development Bank Kampala, Uganda

Eastern and Southern African Trade and Development Bank Nairobi, Kenya

Economic Community of West African States, Fund for Cooperation Compensation and

Development Lomé, Togo

European Union, European Investment Bank Brussels, Belgium; Luxembourg

Fund for the Financial Development of the River Plate Basin Santa Cruz de la Sierra, Bolivia

Inter-American Development Bank Washington, D.C., United States

International Fund for Agricultural Development Rome, Italy

International Monetary Fund Washington, D.C., United States

Islamic Development Bank Jeddah, Saudi Arabia

Nordic Development Fund and Nordic Investment Bank Helsinki, Finland

Organisation Arabe des Pays Exportateurs de Pétrole 

(Arab Organization of Petroleum Exporting Countries)

Kuwait City, Kuwait

Organization of Petroleum Exporting Countries, Fund for International Development Vienna, Austria

West African Development Bank Lomé, Togo

World Bank Washington, D.C., United States

Sources: World Bank and IMF.

Page 69 GAO/NSIAD-98-229 Developing Countries
Appendix IV 

Design of the HIPC Initiative Framework

The HIPC framework combines debt relief with recipients’ continued

economic and social reforms. The framework was structured to be flexible

and applied on a case-by-case basis to address a country’s particular debt

problems. The framework is essentially implemented in two stages, each

of which generally lasts 3 years. The first stage leads to the decision point

(determination of a country’s eligibility to participate in the HIPC initiative),

and the second stage culminates with the completion point (determination

that a country has fulfilled the conditions necessary to receive full debt

relief). The key elements discussed during these stages are the recipient’s

debt situation, the performance expected of the recipient in the second

stage, and the participation by all relevant creditors. The timing of the

decision point tends to coincide with the timetable of the country’s

potential eligibility for a stock-of-debt operation on Naples terms1

 from the

Paris Club.

Decision Point At the decision point, the Boards of Executive Directors of the World Bank

and the IMF determine whether a country is eligible to participate in the

HIPC initiative. World Bank and IMF staff prepare a summary document for

each potential candidate that (1) outlines the country’s situation with

respect to the HIPC initiative’s eligibility criteria, (2) proposes target

debt-to-export ratios and key performance criteria for the country to

achieve at the completion point, and (3) estimates the amount of

assistance to be provided by creditors.

The eligibility criteria address a country’s track record of reform, income,

and indebtedness. As stated in the HIPC framework, a country is considered

to have demonstrated a good track record of reform if it has completed a

3-year IMF- and World Bank-supported program of macroeconomic reform

and structural adjustment and has a good payments record to creditors. A

factor that would help a country to be considered as reaching its decision

point is if it has negotiated a Paris Club stock-of-debt operation on Naples

terms. The Boards of the World Bank and the IMF make judgments about

whether this track record has been established for each country. In

making this determination, issues such as whether a country has gone off

track during the first 3-year period are considered. To help countries begin

establishing the necessary track record, the Boards have encouraged all

countries that hope to receive assistance under the HIPC initiative to start

IMF- and World Bank-supported programs.

1

Under a Naples terms stock-of-debt operation, eligible countries may receive up to a 67 percent

reduction in eligible debt, in present value terms.

Page 70 GAO/NSIAD-98-229 Developing Countries
Appendix IV 

Design of the HIPC Initiative Framework

Regarding the criteria of income and indebtedness, the 40 countries that

potentially qualify for assistance under the framework are those that are

eligible for IMF assistance through the Enhanced Structural Adjustment

Facility (ESAF) and World Bank assistance from the International

Development Association (IDA) only—the part of the World Bank that

lends to poor countries on highly concessional terms—and face an

unsustainable debt situation even after the full application of current debt

relief mechanisms. These mechanisms include a stock-of-debt operation

from the Paris Club on Naples terms involving a 67-percent reduction of

eligible debt in present value terms and comparable action from other

bilateral and commercial creditors. To assess a country’s debt situation,

staff from the World Bank, the IMF, and the debtor country prepare a debt

sustainability analysis (DSA). The DSA makes certain projections of specific

key economic information, such as a country’s balance of payments over a

20-year period. Under the HIPC initiative, the sustainability of a country’s

debt is assessed using the following indicators:

• The ratio of the present value of debt to exports; the present value

debt-to-export ratio should be expected to fall within a range of

200-250 percent, or below, by the completion point.

• The ratio of debt service to exports; the debt service-to-export ratio should

be expected to fall within a range of 20-25 percent, or below, by the

completion point.

• Under some circumstances, for countries with very open economies and

strong efforts to generate fiscal revenues, the ratio of the debt, in present

value terms, to government revenue. The World Bank and IMF Boards

added these indicators to the framework in 1997 to reflect their concern

that countries with heavy debt burdens but large export sectors may

receive less assistance than countries with similar debt burdens but less

open economies. For countries meeting openness and fiscal thresholds,2

the present value debt-to-export target will be at a level that achieves a

280 percent ratio of the present value of debt to revenue at the completion

point.

According to HIPC documents and World Bank and IMF officials, when

evaluating a country’s debt burden, additional factors that can affect how

vulnerable a country’s economy is are also taken into account. These

factors include the amount of external debt service relative to the

government budget, the country’s dependence on a single or a small

number of commodity exports, the amount of hard currency reserves, and

2

These are an export-to-GDP ratio of at least 40 percent and a minimum threshold of fiscal revenue in

relation to GDP of 20 percent.

Page 71 GAO/NSIAD-98-229 Developing Countries
Appendix IV 

Design of the HIPC Initiative Framework

other relevant factors. The DSA assumes the recipient country will continue

to follow sound economic and financial policies such as macroeconomic

stability, deeper structural reforms, and health and education programs.

Based on the results of the DSA, a country’s debt situation is classified in

one of three ways.

• Debt is considered sustainable after a country receives debt relief on

traditional terms from bilateral and commercial creditors. The country is

not eligible for assistance under the HIPC initiative but may receive a

stock-of-debt operation from the Paris Club.

• Debt is considered unsustainable after the full application of traditional

debt relief mechanisms. The country enters into the HIPC initiative’s second

3-year phase. During this phase, the international community (1) continues

to provide exceptional support,3

 as the country proceeds with agreed-upon

reforms, including up to an 80 percent reduction on eligible debt service

from the Paris Club; and (2) commits to provide additional relief at the end

of the second phase—the completion point—needed to achieve

sustainability, if the country continues its sound performance. At the

completion point, the combination of the country’s reform effort and

creditors’ debt relief is expected to reduce debt to sustainable levels.

• Debt is considered borderline after the full application of debt relief on

traditional terms; that is, there is reasonable doubt about whether current

terms would achieve debt sustainability. The recipient country has two

options: (1) receive Paris Club stock-of-debt operation on Naples terms

and exit from the rescheduling process or (2) defer Paris Club

stock-of-debt operation for 3 years and thus leave open the possibility of

receiving assistance under the HIPC initiative. Recipients are assured of

additional action at the completion point if then needed to achieve debt

sustainability.

Countries whose debt burdens are deemed to be either unsustainable or

borderline may receive assistance under the terms of the HIPC framework.

They receive assistance during the second stage and final assistance at the

completion point. In order to receive the debt relief at the end of the

program, the recipients must meet performance criteria agreed to at the

decision point and implemented under IMF- and World Bank-supported

programs. The criteria center on (1) macroeconomic indicators, such as

budget deficits and inflation rates; (2) progress on key structural reforms

affecting trade, financial, and enterprise sectors, and public expenditure

3

Exceptional support, such as the ESAF, allows a country to meet its external obligations without

experiencing arrears, debt rescheduling, or debt cancellation.

Page 72 GAO/NSIAD-98-229 Developing Countries
Appendix IV 

Design of the HIPC Initiative Framework

management; and (3) social reforms such as improving basic health care

and education and reducing poverty levels. The conditions established

under the HIPC initiative are part of the conditions negotiated under World

Bank- and IMF- supported programs. The IMF monitors a country’s

macroeconomic developments, and the World Bank monitors social

reforms.

Completion Point At the completion point, World Bank and IMF staff assess countries’

performance and use updated information on the economy to prepare a

new DSA and calculate new debt ratios. According to the HIPC framework,

the Boards have discretion in determining whether conditions have been

met and whether recipients are entitled to debt relief. World Bank and IMF

officials noted that the Boards need flexibility if countries undertake

positive actions but fall short of numerical targets.

If countries do not meet the economic targets or if they do not sufficiently

implement the reforms agreed to at the decision point, the Boards could

decide to delay or terminate the assistance under the HIPC initiative. In the

case of significant delays, enhanced assistance would end, and the country

would restart the decision point process. In the case of delays that did not

have a significant adverse impact on the original program objectives, the

completion point could be moved further out into the future.

If there is no significant delay in the implementation of the reform

program and if the debt-to-export ratio falls into the range established at

the decision point,4

 creditors provide the relief promised at the decision

point. Debt relief provided at the completion point is to be unconditional,

thereby effectively removing that portion of debt owed to creditors from

the country’s books. As discussed later, creditors provide debt relief

through various means, such as rescheduling debt payments, reducing the

debt, and/or lending new funds on concessional terms to meet future debt

service payments.

4

If the actual ratio is higher than the projected ratios, the creditors will review the actions needed to

achieve debt sustainability. Conversely, if the ratio is lower than projected due primarily to factors

beyond the country’s control (that is, higher world commodity prices) then creditors’ support could be

reduced, consistent with achieving the lower end of the original debt-to-export target range. If the

lower ratio is due to a country’s strong performance, then creditors would implement their initial

commitments. If the actual present value debt-to-export ratio is within a 10-percentage point range of

the target (higher or lower) then no adjustment to creditor commitments is made.

Page 73 GAO/NSIAD-98-229 Developing Countries
Appendix IV 

Design of the HIPC Initiative Framework

Means for Providing

Debt Relief

Creditors have agreed that they will each choose how they will provide

debt relief to specific countries and which debt will be eligible for relief.

Creditors provide relief through several means, such as rescheduling debt

payments at lower interest rates, buying back the debt, converting loans

into grants, reducing the debt, making debt service payments as they come

due, and/or lending new funds on concessional terms to meet future debt

service payments. Because debt and debt relief are evaluated under the

HIPC initiative using the concept of present value, debt relief is considered

to take place when interest rates on current debt are reduced or when

scheduled debt service payments for concessional loans are moved further

into the future, even if the nominal, or face value, of the debt owed is not

reduced.

In July 1997, creditors broadly endorsed a burden-sharing formula, termed

the “proportional approach,” under which bilateral and multilateral

creditors would provide an equal percentage reduction of the remaining

debt owed to them after the full use of existing debt relief mechanisms,

including Naples terms. In calculating the amount of relief to be provided

by the creditors, World Bank and IMF staff first determine the total amount

of relief needed to lower the recipient’s debt-to-export ratio to the target

level. Staff then determine the percentage reduction bilateral and

multilateral creditors would provide as a group to reach the relief amount.

This percentage reduction must meet the bilateral creditors’ limitation that

they will not provide debt relief beyond 80 percent of eligible debt unless

specifically negotiated for exceptional circumstances. Applying the

proportional approach continues to involve negotiation among the

creditors when they determine the specific relief amount for each

recipient. Although creditors agreed to provide the same percentage of

debt reduction, the dollar amounts of this relief will vary by creditor

because creditors are owed different amounts of debt. For example, in the

case of Burkina Faso, bilateral and multilateral creditors agreed to provide

debt relief valued at about 14 percent of what they are owed. For bilateral

creditors, this amounted to about $21 million in debt relief. For

multilateral creditors, the same percentage reduction amounted to about

$94 million.

Multilateral creditors intend to provide assistance by either buying back

debt, paying debt as it comes due, rescheduling debt, or refinancing on

grant terms. The World Bank’s participation in the HIPC initiative is to be

funded solely from the Bank’s own resources. Debt relief provided by the

World Bank under the HIPC initiative is taking place primarily through

contributions to the HIPC Trust Fund from International Bank for

Page 74 GAO/NSIAD-98-229 Developing Countries
Appendix IV 

Design of the HIPC Initiative Framework

Reconstruction and Development (IBRD) income. The Trust Fund provides

relief on debt owed to IDA, either through buying back some of its

concessional debt or providing an unconditional commitment to pay debt

service owed to IDA as it becomes due. Some of this relief may be

advanced during the second stage when the World Bank could provide

part of its lending program in the form of IDA grants instead of IDA credits,

which are funded through general IDA resources.5

 The IBRD has contributed

about $750 million from its income to the HIPC Trust Fund to buy back or

repay debt owed to IDA. The executive directors have recommended the

approval of another transfer of $100 million from IBRD income to the Trust

Fund. The HIPC Trust Fund has been specifically set up to keep the IDA and

IBRD aspects of the World Bank’s operation at arm’s length.

The HIPC Trust Fund also receives contributions from other participating

multilateral development banks and bilateral creditors that are to be used

primarily to assist other multilateral development banks, such as the

African Development Bank. As of August 10, 1998, 16 governments had

made pledges or contributions to the Trust Fund totaling about

$204 million. Also, nine countries proposed contributions totaling about

$92 million to relieve multilateral debt through reallocation of their excess

resources in the Bank’s Interest Subsidy Fund, which was set up in 1975

with donor contributions to subsidize the interest rates on IBRD loans to

the poorest IBRD borrowers. (See table IV.1.)

5

Most HIPC recipients are projected to continue receiving high levels of assistance from IDA. Thus, the

present value of these countries’ debt to IDA will continue to rise during and after participation in the

HIPC initiative. To mitigate the rise in the present value of debt to IDA during the period between the

decision and the completion points, the World Bank will provide a portion of normal credits as grants

on a selective basis. By providing grants in place of normal IDA credits, the present value of debt owed

to IDA is reduced. Because IDA credits have roughly a 70-percent grant element, replacing those

credits with grants reduces the present value of the country’s future debt service by an amount equal

to about 30 percent of the grant. This reduction in present value also would count as part of the World

Bank’s contribution toward HIPC relief, provided that the grants are fully disbursed prior to the

completion point. Therefore, where IDA operations in qualifying countries have a financing package

consisting of a grant portion and a credit portion, the grant portion would be disbursed first. The

portion of IDA assistance represented by grants would vary based on the countries’ projected

debt-to-export ratios—higher ratios mean higher proportions of grants.

Page 75 GAO/NSIAD-98-229 Developing Countries
Appendix IV 

Design of the HIPC Initiative Framework

Table IV.1: Bilateral Donor

Contributions to the HIPC Trust Fund,

as of August 10, 1998

Dollars in millions

Country Amount

Contributions paid in $139.6

Canada 5.6

Denmark 22.0

Greece 1.0

Japan 10.0

Luxembourg 0.5

Netherlands 38.0

Norway 26.0

Sweden 12.0

Switzerland 14.0

United Kingdom 10.5

Additional contributions pledged for 1998a $64.0

Belgium 8.0

Finland 12.0

Italy To be determined

Portugal 15.0

Spain 15.0

Switzerland 14.0

Proposed contributions through reallocation of Interest

Subsidy Fund resources $92.3

Australia 5.3

Belgium 3.7

Canada 22.0

Denmark 3.3

France 20.7

Luxembourg 0.1

Netherlands 22.8

Norway 4.4

United Kingdom up to 10.0

Total $295.9

aIndonesia announced in fall 1997 that it would contribute $10 million.

Sources: World Bank and IMF.

The multilateral development banks have stressed that the means used to

provide debt relief through the Trust Fund should accommodate

constraints specific to these institutions, such as policies against debt

Page 76 GAO/NSIAD-98-229 Developing Countries
Appendix IV 

Design of the HIPC Initiative Framework

restructuring or forgiveness. The IMF is participating in the HIPC initiative

through special ESAF grants at the completion point that are deposited into

an escrow account to meet debt service payments owed to the IMF under a

predetermined schedule. The IMF is funding its contribution through its

own trust fund financed from bilateral (member) contributions and the

ESAF reserve account. To finance these grants, several countries have

contributed or made investments for the benefit of the ESAF-HIPC Trust

totaling approximately $46.6 million, as of June 1998. In May 1998, the IMF

transferred about $54.5 million to the ESAF-HIPC Trust for fiscal year 1998

and expects to make a similar payment on a quarterly basis to the

ESAF-HIPC Trust for fiscal year 1999. The IMF Board has authorized the

transfer of up to an additional $332.5 million from the ESAF Trust Reserve

Account to meet the IMF’s commitments under the HIPC initiative.

Creditors may provide relief at any time during the HIPC initiative process.

At the decision point, bilateral and commercial creditors are assumed to

provide debt relief on Naples terms (involving a stock-of-debt operation up

to a 67-percent reduction in present value terms) to all debtors. This is not

counted as part of the relief provided through the HIPC initiative. After the

decision point, bilateral and commercial creditors provide flow

rescheduling on enhanced terms (up to a total of an 80-percent reduction

in present value terms) between the decision and completion points and

may vary the type or timing of their debt relief to meet a particular

recipient country’s needs. For example, for Bolivia and Uganda, both the

World Bank and the IMF intend to frontload the debt service relief because

Bolivia has substantial payment obligations early on and because Uganda

had a shortfall in export earnings due to unfavorable weather conditions.

Creditors may also provide a portion of their assistance before the

completion point. Such “interim relief” is considered part of the creditor’s

total share of assistance.

The case of Uganda illustrates how creditors may use various means to

provide debt relief under the initiative to a single country. Our analysis

shows that creditors will use five different debt relief mechanisms but rely

primarily on paying debt service and buying back debt. (See table IV.2.)

Page 77 GAO/NSIAD-98-229 Developing Countries
Appendix IV 

Design of the HIPC Initiative Framework

Table IV.2: Creditors’ Mechanisms for

Providing Debt Relief to Uganda Under

the HIPC Initiative

Mechanism

Present value of

debt relief (millions

of 1997 dollars) Percent of total

Debt service payment $127 36.4

Debt buyback 117 33.5

Debt reduction 73 20.9

Grants 24 6.9

Concessional rescheduling 8 2.3

Total $349a 100.0

aDuring the final debt reconciliation process, claims of two African-based multilateral creditors

amounting to $8 million in present value terms were discovered. Their assistance under the HIPC

initiative would be about $1.6 million in present value terms.

Sources: World Bank and IMF data.

Page 78 GAO/NSIAD-98-229 Developing Countries
Appendix V 

Factors Affecting Changes in Countries’

Debt-to-Export Ratios

Several factors may cause a country’s debt-to-export ratio to change. As

shown in table V.1, for the first six countries deemed eligible to receive

debt relief under the HIPC initiative the net declines in their debt-to-export

ratios from 1995 to their completion points are due to four factors: (1) net

borrowing that tends to increase the ratio; (2) assumed increase in exports

that tends to decrease the ratio since exports are assumed to be growing;

(3) normal debt relief mechanisms, including Paris Club Naples terms and

comparable actions by other bilateral and commercial creditors; and

(4) relief under the HIPC initiative. Table V.1 presents estimates of how

much of the reduction in the debt-to-export ratios for the six countries is

attributable to these respective factors. (Data available from HIPC

documents does not allow separation of the effect on debt-to-export ratios

of debt relief through existing mechanisms from the effect of net new

borrowing.) The debt-to-export ratios for 1995 are based on World

Bank-reported data. These ratios at the completion point are based on HIPC

documents’ projections of exports and net borrowing; debt relief

commitments or actions by some bilateral, multilateral, and commercial

creditors; and uncommitted but anticipated debt relief from other

creditors.1

1

Uganda is the only country for which actual export values are used in calculating the completion

point debt-to-export ratios. According to HIPC documents, although contacted by Ugandan

government authorities, a number of non-Paris Club bilateral creditors have not yet agreed to provide

the levels of debt relief assumed in these computations.

Page 79 GAO/NSIAD-98-229 Developing Countries
Appendix V 

Factors Affecting Changes in Countries’

Debt-to-Export Ratios

Table V.1: Changes in Six Countries’ Debt-to-Export Ratios Due to Export Growth, Normal Debt Relief and Net New

Borrowing, and Relief Under the HIPC Initiative

Completion point

Debt-to-export ratio, present valuea

Amount of reduction and percentage

share of total (in parenthesis) due to

Country 1995b

Projection

after normal

debt relief HIPC target

Amount of

reduction

between 1995

and HIPC target

Growth in

exports

Normal relief

and net

borrowing

HIPC

relief

Ugandac

456

249

actual 243

202

actual 196 260 200 (77) 13 (5) 47 (18)

Bolivia 317d 259 225 92 41 (45) 17 (18) 34 (37)

Burkina Faso 227 238 205 22 48 (221) –59 (–272) 33 (151)

Côte d’Ivoiree 353f 147 141g 212 82 (39) 123 (58) 6 (3)

Mozambique 1,059 466 200 859 189 (22) 405 (47) 266 (31)

Guyana 268 143 107g 161 35 (22) 90 (56) 36 (22)

aRatio of present value of debt to 3-year average of exports. Completion point ratios use

projected data as of the year prior to the completion point. Exports exclude worker remittances.

b1995 is selected as the base year because the figure for present value of debt for that year does

not incorporate any Naples terms debt reduction.

cUganda is the only country for which actual export values are used in calculating the completion

point ratios.

dFor Bolivia, the present value of medium- and long-term debt for 1995.

eAll figures for Côte d’Ivoire refer to debt owed to official creditors.

f

For 1996.

gTarget ratio of present value of debt to exports chosen to meet fiscal criteria for present value of

debt-to-revenue target of 280 percent.

Sources: Our analysis of HIPC documents and World Bank data.

Page 80 GAO/NSIAD-98-229 Developing Countries
Appendix VI 

Comments From the Department of the

Treasury

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

See pp. 24-26 and 34.

Page 81 GAO/NSIAD-98-229 Developing Countries
Appendix VI 

Comments From the Department of the

Treasury

See pp. 61-62.

See comment 1.

Page 82 GAO/NSIAD-98-229 Developing Countries
Appendix VI 

Comments From the Department of the

Treasury

The following is GAO’s comment on the Department of the Treasury’s letter

dated September 18, 1998.

GAO Comment 1. We agree that debtor activities are an important determinant of the

speed in which the HIPC initiative progresses. Chapter 1 discusses the

requirement that countries must first establish a track record of reform

before qualifying for relief under the initiative. As discussed in chapter 2,

the projected amount of relief does not include estimates for Liberia,

Somalia, and Sudan since these countries have yet to establish the

necessary track records of reform.

Page 83 GAO/NSIAD-98-229 Developing Countries
Appendix VII 

Comments From the International Monetary

Fund

Page 84 GAO/NSIAD-98-229 Developing Countries
Appendix VII 

Comments From the International Monetary

Fund

See pp. 61-62.

Page 85 GAO/NSIAD-98-229 Developing Countries
Appendix VII 

Comments From the International Monetary

Fund

Page 86 GAO/NSIAD-98-229 Developing Countries
Appendix VIII 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Harold J. Johnson

Celia Thomas

Thomas Melito

Bruce Kutnick

Cheryl Goodman

Claude Adrien

Rona Mendelsohn

Office of the General

Counsel, Washington,

D.C.

Mark Speight

Denver Field Office Patricia Foley Hinnen

(711288) Page 87 GAO/NSIAD-98-229 Developing Countries
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