GAO

United States General Accounting Office

Report to Congressional Committees

June 2000 DEVELOPING 

COUNTRIES

Debt Relief Initiative 

for Poor Countries 

Faces Challenges

GAO/NSIAD-00-161

Page 1 GAO/NSIAD-00-161 Debt Relief Initiative

Contents

Letter 5

Executive Summary 8

Chapter 1

Introduction

24

Poor Countries’ Debt Burdens 25

Prior Debt Relief Efforts Did Not Significantly Lower Countries’ 

Debt Burdens 28

Enhanced HIPC Initiative 29

Objectives, Scope, and Methodology 38

Chapter 2

Unless Strong, 

Sustained Economic 

Growth Is Achieved, 

the Initiative Is Not 

Likely to Provide a 

Lasting Exit From Debt 

Problems

42

Enhanced HIPC Initiative Provides Significant Debt Relief 43

To Fund Additional Spending for Poverty Reduction, Countries 

Must Continue to Borrow 44

Ability to Repay Debt in the Future Hinges on the Assumption of 

Strong Economic Growth 49

Chapter 3

Linking Debt Relief and 

Poverty Reduction 

Creates Tension 

Between Quick Debt 

Relief and 

Comprehensive 

Strategies

57

Preparing Strategies Is Complicated and Resource Intensive 57

Country Ownership and Donor Support of the Strategy Can Be 

Difficult to Achieve 62

Differing Views on Whether to Directly Link Debt Relief to 

Poverty Reduction Strategies 66
Contents

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Chapter 4

Bilateral and 

Multilateral Creditors 

Face Financing 

Challenges

69

Large Bilateral Creditors Are Important to HIPC Success 70

Three of the Four Largest Multilateral Creditors Face Considerable 

Financing Gaps 81

Chapter 5

Conclusions

90

Appendixes Appendix I: Human Development Indicators for 38 Countries 92

Appendix II: Type of Debt Incurred by Poor Countries 95

Appendix III: Amount and Type of Debt Owed to the United 

States by 40 Heavily Indebted Poor Countries, 

End of 1998 98

Appendix IV: Multilateral Institutions Participating in the 

HIPC Debt Initiative 100

Appendix V: Conditions Eight Countries Are Expected to 

Meet to Reach HIPC Milestones 103

Appendix VI: Methodologies Used to Analyze the Debt 

Sustainability of Potential Recipients of HIPC 

Debt Relief 106

Appendix VII: Information on Selected Elements of Poverty 

Reduction Strategies 111

Appendix VIII: Civil Society Participation in Bolivia 123

Appendix IX: How the United States Budgets and Accounts 

for Debt Relief 128

Appendix X: Six Industrial Countries’ Methodologies for 

Budgeting and Accounting for Debt Relief 143

Appendix XI: Bilateral Contributors to the HIPC Trust Fund 166

Appendix XII: Comments From the Department of the 

Treasury 168

Appendix XIII: Comments From The International Monetary 

Fund 172
Contents

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Appendix XIV: Comments From the World Bank 177

Appendix XV: GAO Contact and Staff Acknowledgments 179

Tables Table 1: Status of Implementation of the HIPC Initiative, Countries 

Grouped by Milestone Reached, as of May 3, 2000 (Debt 

expressed in net present value terms unless otherwise noted) 33

Table 2: Estimated Debt Reduction for Seven Countries Under the 

HIPC Initiative 43

Table 3: Key Economic Indicators for Seven Countries (Projected 

and Historic, Using Nominal Dollar Values) 51

Table 4: Relationship Between a Decline in Export Earnings and 

Increases in Aid Flows - Tanzania 55

Table 5: Seven Industrialized Countries’ Participation in the 

Enhanced HIPC Initiative 72

Table 6: Financing Challenges Facing Major Multilateral Creditors 82

Table 7: Human Development Indicators of 38 Countries Potentially 

Eligible for Debt Relief Under the Enhanced HIPC 

Initiative, as of 1997 92

Table 8: Concessional Loans Offered by Four Major Multilateral 

Institutions 95

Table 9: Nonconcessional Loans Offered by Four Major Multilateral 

Institutions 96

Table 10: Multilateral Creditors’ Outstanding Claims (end of 1998) 

on 40 Heavily Indebted Poor Countries and Estimated 

Amount of Debt Relief Under the HIPC Initiative, as of 

the End of 1999 100

Table 11: Conditions Eight Countries Are Expected to Meet in 

Order to Reach HIPC Initiative Milestones (Monitored 

under World Bank- and IMF-supported programs) 103

Table 12: Status of Six Selected Countries’ Efforts to Define and 

Address Poverty 112

Table 13: Examples of Projects Prioritized by the Communities 

for the Annual Operating Plan for 1997 of the City of 

Punata, Agreed Upon in Assembly, December 12, 1996 118

Table 14: Country A’s Debt Reduction at 90 Percent 134

Table 15: Status of Bilateral Donor Pledges to the HIPC Trust 

Fund, as of May 31, 2000 166
Contents

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Figures Figure 1: Composition of External Debt for 40 Heavily Indebted

Poor Countries, 1995-97 (Nominal value, in billions of U.S. 

dollars) 26

Figure 2: Process for Implementing the Enhanced HIPC Initiative 30

Figure 3: Key Elements of the Poverty Reduction Strategy as 

Described in World Bank and IMF Documents 37

Figure 4: Tanzania’s Required Balance-of-Payments Financing 

With and Without HIPC-related Spending for Poverty 

Reduction, 2000/01-2017/18 46

Figure 5: Uganda’s Required Balance-of-Payments Financing With

and Without HIPC-related Spending for Poverty Reduction, 

2000/01-2014/15 48

Figure 6: Tanzania’s Total Debt With and Without Borrowing for 

Poverty Reduction, 2000/01-2017/18 50

Figure 7: Creditors’ Shares of HIPC Debt Relief 70

Figure 8: Districts in Uganda with Capacity-building Programs

Funded by Official Donors and Creditors (Shown by 

Shaded Areas) 120

Figure 9: Bolivia’s Process for Involving Civil Society in 

Developing the Poverty Reduction Strategy 124

Figure 10: Results Expected from Bolivia’s Process for 

Involving Civil Society in Developing the Poverty

Reduction Strategy 125

Figure 11: Illustration of U.S. Government International Debt 

Reduction Program Direct Modification - Subsidy

Cost Increase 138

Abbreviations

GDP Gross domestic product

HIPC Heavily indebted poor country

IMF International Monetary Fund

OECD Organization for Economic Cooperation and Development

OMB Office of Management and Budget

SDR Special Drawing Right
United States General Accounting Office

Washington, D.C. 20548

Page 5 GAO/NSIAD-00-161 Debt Relief Initiative

National Security and

International Affairs Division

B-285473 Letr

June 29, 2000

The Honorable James A. Leach

Chairman

The Honorable John J. LaFalce

Ranking Member

Committee on Banking and Financial Services

House of Representatives

The Honorable Spencer Bachus

Chairman

The Honorable Maxine Waters

Ranking Member

Subcommittee on Domestic and International 

 Monetary Policy

Committee on Banking and Financial Services

House of Representatives

This report responds to your request that we (1) assess whether the enhanced Heavily Indebted Poor 

Countries Initiative is likely to free up resources for poverty reduction and achieve the goal of debt 

sustainability, (2) describe the strategy to strengthen the link between debt relief and poverty 

reduction and how this strategy is to be implemented, and (3) describe the challenges creditors face 

in fully funding the enhanced initiative.

We are sending copies of the report to the Honorable Lawrence H. Summers, Secretary of the 

Treasury; the Honorable Madeleine K. Albright, Secretary of State; the Honorable James D. 

Wolfensohn, President of the World Bank; and the Honorable Horst Köhler, Managing Director of the 

International Monetary Fund; and other interested parties. Copies will also be made available to 

others on request.
B-285473

Page 6 GAO/NSIAD-00-161 Debt Relief Initiative

Please contact Harold J. Johnson, Associate Director, International Relations and Trade Issues, at 

(202) 512-4128 if you or your staff have any questions concerning the report. An additional GAO 

contact and staff acknowledgments are listed in appendix XV.

Henry L. Hinton, Jr.

Assistant Comptroller General
Page 7 GAO/NSIAD-00-161 Debt Relief Initiative
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Executive Summary

Purpose In 1996, the World Bank and the International Monetary Fund1

 agreed to 

undertake a comprehensive approach, called the Heavily Indebted Poor 

Countries Initiative, for providing debt relief to the poorest and most 

indebted countries in the world. In September 1999, in response to 

concerns about the continuing vulnerability of these countries, the World 

Bank and the Fund agreed to enhance this initiative.2

 The enhancements 

more than doubled the estimated amount of debt relief, from $12.5 billion 

for 29 countries to over $28 billion for 32 countries, and added the central 

goal of reducing poverty in the poorest countries.3

 Creditors expected to 

provide debt relief under the initiative include governments, the World 

Bank, the Fund, other international financial institutions, and commercial 

creditors. This debt relief is to (1) lower countries’ debt-service payments 

significantly, (2) free up resources that will be spent on poverty reduction, 

and (3) provide a lasting exit from debt problems. To qualify for debt relief, 

countries must undertake economic and social reforms. After receiving 

debt relief, it is assumed that countries will have a sustainable level of debt 

(reach “debt sustainability”), meaning they will be able to make their future 

debt payments on time using internal and external resources, and without 

the need for further debt relief. In order for countries to remain debt 

sustainable, the World Bank and the Fund assume that countries will 

achieve continuous, strong economic performance, supported by their 

effectively using their resources and donors continuing to provide 

assistance for 20 years or more following debt relief. Over the last 2 years, 

the U.S. Treasury has requested more than $1 billion from Congress to fund 

U.S. participation in the initiative, mostly to help finance the participation 

of some multilateral institutions.

1

The World Bank, supported by its 181 member governments, promotes economic growth 

and the development of market economies by providing financing on reasonable terms to 

countries that have difficulty obtaining capital. The Fund promotes international monetary 

cooperation and exchange rate stability and provides lending to member countries that 

experience balance-of-payments difficulties. For poor countries, the Fund also provides 

medium-term (10-year) loans on concessional (below market) terms. One hundred eightytwo governments are members of the Fund. 

2

For information on the original initiative, see Developing Countries: Status of the Heavily 

Indebted Poor Countries Debt Relief Initiative (GAO/NSIAD-98-229, Sept. 30, 1998).

3

The amount of debt relief is estimated using a “net present value” calculation that captures 

the concessional terms that underlie most of these countries’ loans. The face, or nominal, 

value of the debt for these countries is significantly greater than the net present value. 
Executive Summary

Page 9 GAO/NSIAD-00-161 Debt Relief Initiative

Recognizing that previous efforts did not resolve the debt problems of poor 

countries, the Chairmen and the Ranking Members of the House 

Committee on Banking and Financial Services and its Subcommittee on 

Domestic and International Monetary Policy asked GAO to review the 

enhanced initiative. In response, GAO (1) assessed whether the enhanced 

initiative is likely to free up resources for poverty reduction and achieve 

the goal of debt sustainability, (2) described the strategy to strengthen the 

link between debt relief and poverty reduction and how this strategy is to 

be implemented, and (3) described the challenges creditors face in fully 

funding the enhanced initiative.

Results in Brief The enhanced Heavily Indebted Poor Countries Initiative will provide 

significant debt relief to recipient countries, with the debt for six of the 

seven countries GAO analyzed projected to be reduced by one-third or 

more. However, given the continued fragility of these countries, the 

initiative is not likely to provide recipients with a lasting exit from their 

debt problems, unless they achieve strong, sustained economic growth. 

GAO’s analysis shows that the decline in debt service for the seven 

countries will only “free up” resources for additional poverty reduction if 

countries continue to borrow at the same level and concessional terms as 

in the years prior to their qualifying for debt relief.4

 This occurs because 

countries previously borrowed for several reasons including debt 

payments, and they will need to continue borrowing after receiving debt 

relief in order to meet their remaining debt payments and to increase 

spending on poverty reduction. Furthermore, in order for countries to 

service their debt after receiving debt relief, World Bank and Fund staffs 

assume that countries will achieve sustained, strong economic 

performance. For example, the World Bank and the Fund assume that 

export earnings will grow an annual average of over 9 percent for 20 years 

in four of the seven countries GAO analyzed. GAO’s analysis indicated that 

this assumption may be optimistic, since these countries rely on primary 

commodities, such as coffee, for much of their export revenue, and the 

prices of such commodities have fluctuated over time, with export earnings 

in fact declining in certain years. Failure to achieve the projected levels of 

4

Such borrowing will be on concessional loan terms, which include a grace period of about 

5 to 10 years and fees and charges of 2 percent or less. In concluding that all of these 

resources will be borrowed, GAO’s analysis has accounted for the amount of grants (money 

that does not have to be repaid) that donors are expected to provide and the recipients’ own 

revenue. 
Executive Summary

Page 10 GAO/NSIAD-00-161 Debt Relief Initiative

economic growth could lead, once again, to these countries having 

difficulty repaying their debt. 

Debt relief under the initiative is to be linked to recipient countries’ 

preparation of a comprehensive strategy focused on reducing poverty that 

integrates numerous policies, such as achieving rapid, sustainable growth 

and improving health care systems. However, linking debt relief and 

poverty reduction creates tension between quick debt relief and preparing 

such strategies. Preparing a comprehensive, “country owned” poverty 

reduction strategy can be complicated and resource intensive. In 1999, 

World Bank and Fund staffs estimated that it could take countries up to 

2 years to prepare such a strategy. However, Uganda, which the staffs 

consider at the forefront of these efforts, has been working on a strategy 

for about 5 years. Uganda has prepared a comprehensive strategy, but, 

according to the staffs, it still needs to provide additional estimates of the 

cost of poverty reduction programs and strengthen the links between 

expenditures and poverty indicators. Many actions are required to prepare 

and implement a poverty reduction strategy, including gaining the support 

of key stakeholders, such as political leaders with the power to affect 

change, and collecting and analyzing necessary data, such as data on the 

extent and major causes of poverty. However, weaknesses in countries’ 

ability to collect and analyze these data and other challenges may limit 

these efforts. According to officials from some nongovernmental 

organizations, such as Catholic Relief Services and Jubilee 2000, the desire 

to receive debt relief quickly may cause some countries to quickly prepare 

the strategies, which could diminish the strategies’ quality, or the level of 

civil society participation, at least in the short term. The World Bank, the 

Fund, and the U.S. Treasury said that these concerns are mitigated because 

some countries do not have to prepare a full poverty reduction strategy in 

order to qualify for debt relief, some countries will receive a significant 

share of their debt relief after they qualify for the initiative, and because 

debt relief can be an incentive for countries to prepare the strategies. 
Executive Summary

Page 11 GAO/NSIAD-00-161 Debt Relief Initiative

Financing the initiative has proven to be a challenge for many creditors, 

with some multilateral and smaller bilateral creditors reporting that they 

are facing difficulties in providing their full share of debt relief and need 

external funding. For example, some smaller bilateral creditors, such as 

Tanzania, are themselves potential debt relief recipients and may find it 

difficult to absorb the costs of forgiving other countries’ debts. For 

multilateral and smaller bilateral creditors, difficulties in financing their 

shares stem from legal, technical, and financial restrictions.5

 For instance, 

the African Development Bank has stated that it is unable to finance its 

share of debt relief under the initiative solely through its own resources 

and at the same time maintain an adequate level of reserves and its 

commitment to future concessional lending. Difficulties in fully financing 

the initiative could undermine the success of the initiative, since debt relief 

is supposed to be additional to the assistance that donors and creditors 

would otherwise provide to low-income countries. 

The uncertainties over whether the initiative provides a lasting exit from 

debt problems, the tension between quick debt relief and preparing poverty 

reduction strategies, and the difficulties in financing the initiative should 

not be seen, however, as a reason to abandon efforts to provide debt relief 

to eligible countries. Heavily indebted poor countries continue to carry 

unsustainable debt burdens that are unlikely to be lessened without debt 

relief, but participants and observers may need to have a more realistic 

expectation of what the initiative may ultimately achieve. 

Background The World Bank and the Fund have classified 40 countries as heavily 

indebted and poor.6 Thirty-two of these countries are in sub-Saharan Africa. 

5

Creditors’ shares of debt relief are determined using a “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 use of existing debt relief 

mechanisms. The World Bank and the Fund in collaboration with government authorities 

estimate the amount of debt relief the bilateral and multilateral creditors, as a group, are to 

provide a particular country.

6

In 1996, the World Bank and the Fund classified 41 countries as heavily indebted poor 

countries. This included, for analytical purposes, 32 countries with a 1993 gross national 

product per capita of $695 or less and 1993 present value of debt to exports higher than 

220 percent or present value of debt to gross national product higher than 80 percent. Also 

included were nine countries that received, or were eligible for, concessional debt 

rescheduling from bilateral creditors. In 1998, Nigeria no longer met the criteria, and Malawi 

was added. In 1999, the number of countries was reduced to 40 because Equatorial Guinea 

no longer met the criteria for “low income” or “heavily indebted.”
Executive Summary

Page 12 GAO/NSIAD-00-161 Debt Relief Initiative

The United Nations classified 27 of the 40 countries as being in its lowest 

category of human development, based on life expectancy, literacy, and per 

capita national income. (See app. I for a list of the human development 

indicators for 38 of 40 countries. Data were not available for Liberia and 

Somalia.) Most receive substantial amounts of development assistance 

from governments, multilateral organizations, and nongovernmental 

organizations. Some, such as Rwanda and Sierra Leone, are engaged in or 

have recently emerged from civil strife or external conflict.

The debt problems of many of these countries continue to be a concern for 

the international community. In 1996, in response to concerns that even 

after receiving debt relief from bilateral creditors through existing means 

some poor countries will have debt burdens that remain too large relative 

to their ability to pay, creditors agreed to the Heavily Indebted Poor 

Countries Initiative. The initiative—the first comprehensive effort to 

include bilateral and multilateral creditors—provided full debt relief to four 

countries. Nongovernmental organizations and some governments 

criticized this initiative as providing too little relief too slowly. In 

September 1999, the creditors agreed to provide increased debt relief more 

quickly to more eligible countries. They also called for a strong link 

between debt relief and poverty alleviation and said that debt relief should 

free resources for spending on priority poverty reduction areas. These 

changes were contingent on creditors providing sufficient financing so 

that, among other things, normal aid flows would not be reduced.

Under the enhanced initiative, the debt levels of eligible countries are 

expected to be lowered to a point that is considered sustainable; that is, 

countries will continue to be able to meet their future debt obligations on 

time without the need for further debt relief. The staffs of the World Bank 

and the Fund assume that this point (debt sustainability) is reached when 

the ratio of the net present value of a country’s debt level to its exports is 

150 percent or less. After calculating the amount of debt relief a country 

needs to reach this level, the staffs of the two institutions together with the 

recipient government project the factors supporting continued debt 

sustainability, including estimates of future debt levels, exports, income, 

tax revenue, and donor assistance for the 20-year projection period. The 

staffs assume that donor assistance will be an important source of external 

flows for these countries and may help finance any future gaps that 

countries experience in meeting their debt obligations. 

According to the World Bank and the Fund, for debt relief under the 

initiative to be effective, it must be integrated into a country’s overall 
Executive Summary

Page 13 GAO/NSIAD-00-161 Debt Relief Initiative

strategy for reducing poverty. The recipient country prepares the strategy. 

The World Bank, the Fund, and others may help. The strategy is to 

(1) address a broad array of policies, including those aimed at increasing 

economic growth and improving living conditions; (2) be developed with 

the participation of civil society and donors; and (3) reflect the country’s 

unique circumstances. The strategy is to be developed in an iterative 

process and updated about every 3 years. In recognition that the 

preparation of such comprehensive strategies could delay debt relief for 

countries that were progressing in their efforts to qualify under the original 

initiative and the calls for hastening the qualification for the enhanced 

initiative, the World Bank and the Fund agreed that countries could qualify 

for debt relief based on an “interim” poverty reduction strategy, a less 

detailed and relatively brief document.

Principal Findings

Unless Strong, Sustained 

Economic Growth Is 

Achieved, the Initiative Is 

Not Likely to Provide a 

Lasting Exit From Debt 

Problems

Enhanced Initiative Provides 

Significant Debt Relief 

The enhanced Heavily Indebted Poor Countries Initiative provides 

significant debt relief for all seven of the countries GAO analyzed: Bolivia, 

Honduras, Mauritania, Mozambique, Nicaragua, Tanzania, and Uganda.7

This analysis showed that the total amount of debt for these countries is 

projected to fall, following debt relief, by more than one-third in most cases 

and by one-half or more for five countries—Mauritania, Mozambique, 

Nicaragua, Tanzania, and Uganda. Furthermore, all seven countries’ 

scheduled debt service is also expected to fall considerably, with 

reductions ranging from more than a 12-percent drop for Honduras to more 

than 50 percent for Mozambique and Uganda.

7

GAO’s analysis focused on seven of the eight countries in which a debt sustainability 

analysis from the World Bank and the Fund was available to GAO to analyze. Due to the 

limitations of time, GAO was unable to review the final country, Guinea.
Executive Summary

Page 14 GAO/NSIAD-00-161 Debt Relief Initiative

To Fund Additional Spending for 

Poverty Reduction, Countries 

Must Continue to Borrow

GAO’s analysis shows that the seven countries’ debt levels will again rise 

following the receipt of debt relief under the initiative. This occurs because 

in order to have the funds that are expected to be spent on poverty 

reduction, these countries must continue to borrow—at the same level and 

concessional terms as in the years prior to qualifying for debt relief under 

the initiative—given each country’s projected amount of grants, loans, and 

revenue. Countries previously borrowed for several reasons, including debt 

payments, and they will need to continue borrowing after receiving debt 

relief in order to meet their remaining debt payments and to increase 

spending on poverty reduction. Thus, these countries cannot both increase 

their spending on poverty reduction and reduce their annual borrowing by 

the amount that their debt service was lowered.

Ability to Repay Debt in the 

Future Hinges on the 

Assumption of Strong Economic 

Growth 

Countries’ ability to repay debt depends on the assumption that countries 

will achieve strong, sustained economic growth. One underpinning of this 

assumption is that countries will use their borrowed resources effectively. 

Some argue that borrowing may be in the best interest of each country 

because governments can spend the borrowed resources on priority areas, 

such as poverty reduction, rather than to pay creditors. However, this 

involves deficit financing, meaning that countries have to borrow in order 

to increase their current spending. The need for debt relief is due in part to 

previous lending programs that did not sufficiently increase recipients’ 

ability to pay their debt obligations. The initiative contains an implicit 

assumption that the process of preparing and implementing a poverty 

reduction strategy will result in a more effective and productive use of 

resources, leading to both economic growth and poverty reduction. 

However, such strategies are relatively new and untested. Failure to 

effectively use their resources could jeopardize countries’ future ability to 

repay debt.

Maintaining debt sustainability also depends on recipient countries’ 

achieving continuous, strong economic growth. Most recipient countries 

that GAO has analyzed are projected by World Bank and Fund staffs to 

have robust growth in export earnings, with the projected growth for four 

of these countries—Honduras, Nicaragua, Tanzania, and Uganda—

expected to average at least 9.1 percent a year over 20 years. The staffs also 

assume strong growth in gross domestic product and government revenue 

for most of the recipient countries that GAO has analyzed. The average 

annual growth (in nominal dollars) of these two factors was assumed to be 

greater than 6 percent in all cases and to exceed 9 percent for Honduras, 

Mozambique, Tanzania, and Uganda in one or both of those factors. Growth 

in exports, gross domestic product, and government revenue are presumed 
Executive Summary

Page 15 GAO/NSIAD-00-161 Debt Relief Initiative

to contribute considerably to these countries’ ability to meet their future 

debt obligations. Although such growth levels are generally consistent with 

the growth levels since 1990, sustaining such levels over a 20-year period 

may be difficult. For example, these countries rely on a small number of 

primary commodities, such as coffee, for a majority of their export 

earnings, and the prices of these commodities tend to fluctuate over time, 

with export earnings in fact declining in certain years. 

Shortfalls in these growth projections will lower the amount of revenue 

these countries will be able to contribute toward their future debt service 

or poverty reduction. If these countries are to remain debt sustainable, 

continue to alleviate poverty, and maintain growth, this shortfall could be 

made up through increased donor assistance.8

 Without such assistance, 

countries may no longer be debt sustainable and may require additional 

debt relief, or they may accumulate arrears. For example, if Tanzania’s 

actual average annual export growth is about 20 percent less than 

projected, if Tanzania will be unlikely to repay its debt obligations unless 

donor flows (both concessional loans and grants) increase by about 30 

percent. As a result, Tanzania’s debt -to-export ratio could more than 

double over what was originally forecast for the projection period.

Linking Debt Relief and 

Poverty Reduction Creates 

Tension Between Quick 

Debt Relief and 

Comprehensive Strategies

The initiative calls for countries to prepare a comprehensive, “country 

owned” poverty reduction strategy before completing the initiative. 

However, accomplishing this task poses many challenges.

Preparing Strategies Is 

Complicated and Resource 

Intensive

In 1999, World Bank and Fund staffs estimated that most countries should 

be able to prepare a poverty reduction strategy within 2 years. However, 

Uganda, which the staffs consider at the forefront of these efforts, has been 

8

The shortfall in export earnings is assumed to be made up through an increase in grants and 

concessional loans so that imports and domestic spending, including poverty reduction 

activities, remain the same as in the original projections. This additional concessional 

borrowing results in higher levels of debt and debt ratios, while preserving fairly robust 

economic growth levels and poverty reduction. If instead policymakers choose to adjust to 

these lower levels of export earnings by reducing imports, lowering domestic spending, 

raising tax revenue, or a combination of these approaches, they could avoid incurring such 

high debt ratios, although it would likely result in lower economic growth and lower 

expenditures on poverty reduction.
Executive Summary

Page 16 GAO/NSIAD-00-161 Debt Relief Initiative

working on a strategy for about 5 years. Uganda has prepared a 

comprehensive strategy, but according to the staffs, it still needs to provide 

additional estimates of the cost of poverty reduction programs and 

strengthen the links between expenditures and poverty indicators. Many 

actions are needed to reduce poverty, given the high incidence and 

numerous and diverse causes of poverty. These actions include rapid 

sustainable growth, sound macroeconomic policies, measures targeted at 

the specific causes of poverty, good governance, and active civil society 

participation. The coordination of so many activities is challenging and 

time consuming, but GAO found that for poor countries the preparation of 

a poverty strategy can tax already limited government resources. Preparing 

a strategy depends on collecting and analyzing an extensive amount of 

data, which take time, resources, and expertise. For example, countries are 

to collect and analyze data that describe the nature, extent, and major 

causes of poverty in ways that can be used later to monitor progress. In the 

four countries GAO visited—Bolivia, Nicaragua, Tanzania, and Uganda—

government officials, with technical and financial support from donors and 

others, were undertaking actions to improve their ability to gather and 

analyze data and monitor indicators. However, existing weaknesses in 

countries’ capacity may limit their effort to collect and analyze data. The 

World Bank and the Fund are strongly encouraging donors to increase their 

technical and financial support in this area. Furthermore, there is limited 

evidence showing which actions have the greatest impact for achieving 

poverty reduction goals. 

Country Ownership and Donor 

Support of the Strategy Can Be 

Difficult to Achieve

The effective preparation and implementation of the poverty reduction 

strategy requires countries to take ownership of the strategies, involve civil 

society, and receive donor support, according to the World Bank, the Fund, 

and some nongovernmental organizations. Nonetheless, there is a tension 

between the time needed to satisfy these requirements and the desire for 

quick debt relief. The World Bank and the Fund Executive Boards have said 

the strategies should reflect countries’ unique circumstances and 

capacities and therefore have not defined specific criteria for judging key 

aspects of the strategies. Although countries are to define their own 

strategies, the World Bank and the Fund Boards must endorse the 

strategies in order for countries to receive debt relief and future loans from 

the Bank and the Fund. Thus, recipient countries need to determine how 

they will (1) define or achieve ownership (that is, reflect the outcome of an 

open participatory process involving governments, civil society, and 

relevant international institutions and donors); (2) address challenges to 

effective civil society participation; and (3) ensure that the donors will 

align their funding with the priorities outlined in these strategies. Officials 
Executive Summary

Page 17 GAO/NSIAD-00-161 Debt Relief Initiative

from some donor governments, multilateral organizations, and 

nongovernmental organizations, such as Catholic Relief Services and 

Jubilee 2000, said they were concerned that countries’ desire to receive 

debt relief under the initiative as soon as possible could adversely affect 

the degree of countries’ ownership and the level, quality, and impact of civil 

society participation in the development of a poverty reduction strategy. 

Additionally, the strategy needs the support of key stakeholders such as 

political leaders. In a document on increasing participation, World Bank 

staff reported that attempts to bypass powerful stakeholders often resulted 

in their opposition, which usually compounded the problem of getting 

anything useful accomplished.9

 Absence of the full range of stakeholders, 

especially politicians with the power to affect change, limits effectiveness. 

The effectiveness of the strategies is also influenced by the extent to which 

donors agree with and are willing to align their contributions with the 

countries’ priorities. Field representatives of donors may support the 

concept of a recipient-led strategy but may not be able to reallocate their 

aid to fund the recipients’ priorities due to the earmarking of spending by 

their governments.

Differing Views on Whether to 

Directly Link Debt Relief to 

Poverty Reduction Strategies

Given the vulnerabilities and debt problems of poor countries, some 

creditor governments, the U.N. Secretary General, and nongovernmental 

organizations have urged creditors to quickly provide debt relief under the 

initiative. Some representatives said that delaying debt relief adversely 

impacts countries’ growth by diverting scarce resources from development 

needs to debt payments. They are also concerned that the conditions (such 

as some economic reforms) countries must meet in order to receive debt 

relief under the initiative will delay debt relief and, in some cases, hurt 

rather than help the country. However, the World Bank and the Fund argue 

that these concerns are mitigated because countries begin to receive 

significant debt relief when they qualify for the initiative and that 

conditions are needed to ensure that governments undertake reforms and 

use resources effectively. 

Because recipient countries will be highly dependent on concessional 

financing and will be monitored under World Bank- and Fund-supported 

programs for the foreseeable future, some nongovernmental organizations 

have said that debt relief under the initiative should not be linked directly 

to the preparation of poverty reduction strategies. They said they want to 

9

The World Bank Participation Sourcebook (Washington, D.C.: World Bank, 1996).
Executive Summary

Page 18 GAO/NSIAD-00-161 Debt Relief Initiative

ensure that the strategies are of high quality and the level of civil society 

participation is not compromised simply to meet the initiative’s time 

frames. Also, countries may have the incentive to quickly complete the 

initiative because debt relief only becomes irrevocable at that point. Prior 

to that, creditors may revoke debt relief due to recipients’ unsatisfactory 

performance. On the other hand, the World Bank, the Fund, and the U.S 

Treasury argue that these concerns are mitigated because some countries 

do not have to prepare a full poverty reduction strategy in order to qualify 

for debt relief, and countries will begin receiving debt relief after they 

qualify for the initiative. World Bank and Fund staffs estimated that for four 

countries—Mauritania, Mozambique, Tanzania, and Uganda—the reduction 

in debt service expected during the interim period is at least 70 percent of 

the debt service reduction expected with full debt relief. Moreover, the 

World Bank and the Fund see the receipt of debt relief under the initiative 

as a catalyst that should motivate countries to undertake difficult reforms 

and begin preparing the poverty reduction strategies. According to World 

Bank and Fund staffs, creditors agreed in 1999 to increase the amount of 

debt relief if the link between debt relief and poverty reduction were 

strengthened and thus may resist weakening this link.

Bilateral and Multilateral 

Creditors Face Financing 

Challenges

As a group, bilateral and multilateral creditors are expected to provide 

roughly equal shares of debt relief under the initiative that is estimated to 

total over $28 billion (in net present value terms);10 however, many 

creditors, especially the multilateral and smaller bilateral creditors, report 

that they are having difficulty identifying their share of the necessary 

financing from their own resources due to budgetary and other constraints. 

For example, an underlying premise of the initiative is that debt relief is 

supposed to be additional to the assistance that donors and creditors 

would otherwise provide to low-income countries. Difficulties in financing 

the initiative could delay debt relief and ultimately undermine the success 

of the initiative. 

Bilateral Creditors Are Important 

to Success of the Initiative 

Although bilateral creditors are expected to provide about $13 billion (in 

net present value terms) of debt relief under the initiative, the estimated 

cost of providing this relief varies among creditors, and some report that 

they have not secured the full financing to fund their obligations. GAO’s 

10Of the $28 billion, multilateral creditors are expected to provide about $14 billion, bilateral 

creditors to provide about $13.2 billion, and commercial creditors to provide about 

$0.8 billion.
Executive Summary

Page 19 GAO/NSIAD-00-161 Debt Relief Initiative

review of the seven leading industrial countries11 indicates that providing 

debt relief results in additional budget costs for each country. However, the 

impact on their budgets in providing debt relief varies based on five key 

factors: the amount of outstanding loans, the method used to value loans, 

the method used to budget for debt relief, the options used to provide debt 

relief, and the constraints imposed by certain legal requirements. GAO’s 

analysis indicates that, for four of the seven leading industrial countries 

(France, Germany, Italy, and Japan), the budgetary cost of providing debt 

relief is close to the face, or nominal, value of the debt. For the other 

countries, including the United States, the budgetary cost of debt relief is 

less than the face value of the debt because the value of the debt has been 

discounted, or reduced, in recognition of the risk that these loans may not 

be repaid. For example, according to U.S. Treasury officials, the budgetary 

cost to the United States is about $346 million (in net present value terms) 

to forgive about $3.8 billion in debt (in nominal terms) owed by 

22 countries under the enhanced initiative. In addition to funding the direct 

costs of debt relief, large bilateral creditors are also expected to provide 

continued aid flows and contribute to help multilateral and smaller 

bilateral creditors meet their share of debt relief under the initiative. 

Bilateral creditors have pledged over $2.5 billion to assist multilateral 

creditors. 

11These seven countries are Canada, France, Germany, Italy, Japan, the United Kingdom, and 

the United States. They are expected to provide about 50 percent of the debt relief 

anticipated from bilateral creditors.
Executive Summary

Page 20 GAO/NSIAD-00-161 Debt Relief Initiative

Three of the Four Largest 

Multilateral Creditors Face 

Considerable Financing Gaps

Although most multilateral institutions have expressed support for the 

overall goal of the initiative, many have yet to overcome serious difficulties 

in being able to provide their full share (about $14 billion in net present 

value terms) of debt relief. Collectively, the four major multilateral 

institutions—the World Bank, the International Monetary Fund, the African 

Development Bank, and the Inter-American Development Bank—are 

expected to provide about $12 billion (net present value terms) in debt 

relief. Of these four institutions, all but the Fund have large financing gaps 

that they are working to fill from internal and external sources.12 Creditors’ 

difficulties in financing their shares stem from legal, technical, and 

financial restrictions. For example, the African Development Bank has 

stated that it is unable to finance its share of debt relief solely through its 

own resources and at the same time maintain an adequate level of reserves 

and its commitment to future concessional lending. Also, some smaller 

multilateral institutions have raised the concern that providing debt relief 

under the initiative threatens their financial integrity. 

Observations The Heavily Indebted Poor Countries Initiative represents a step forward in 

the international community’s efforts to relieve poor countries of their 

heavy debt burdens, and it does so by seeking to include all creditors and 

providing significant debt relief to recipient countries. Elements of the 

current initiative—especially its goals and financing—have required and 

continue to require much negotiation among the various creditors and 

recipients; however, unless strong, sustained economic growth is achieved, 

the initiative will not likely provide recipient countries with a lasting exit 

from their debt problems. Furthermore, as long as the initiative links debt 

relief to poverty reduction strategies, the tension between quick debt relief 

and comprehensive country-owned strategies is likely to continue. These 

issues should not be seen, however, as a reason to abandon efforts to 

provide debt relief to eligible countries. Heavily indebted poor countries 

continue to carry unsustainable debt burdens that are unlikely to be 

lessened without debt relief, but participants and observers may need to 

have a more realistic expectation of what the initiative may ultimately 

achieve. 

12According to the Fund, full financing will be realized if the members provide the resources 

they pledged and the U.S. Congress grants the Fund the authority to use the full earnings 

from the investment of profits from off-market gold sales. Therefore, unlike the other major 

multilateral creditors, the Fund has a clearly identified means for closing its remaining 

financing gap.
Executive Summary

Page 21 GAO/NSIAD-00-161 Debt Relief Initiative

Agency Comments and 

GAO’s Evaluation

GAO received written comments on this report from the Department of the 

Treasury, the International Monetary Fund, and the World Bank. These 

comments and GAO’s evaluation of them are reprinted in appendixes XIIXIV. The organizations also separately provided technical comments that 

GAO discussed with relevant officials and included in the text of the report, 

where appropriate. 

The Treasury stated that it agrees with the report’s main conclusions, 

including that there is tension between the objective to provide debt relief 

quickly and the need to develop quality poverty reduction strategies. The 

Treasury said that in its view, there is no degree of debt reduction that can 

by itself provide a definitive exit from debt problems and ensure adequate 

growth in these countries. The Treasury stated the report provides useful 

information and raises pertinent questions that will continue to be 

considered as implementation moves forward on this important initiative.

Both the Treasury and the Fund commented on the fact that future 

borrowing will occur at below market loan terms. The Treasury stated that 

GAO’s report is misleading when it argues that the initiative does not free 

up resources for increased spending for poverty reduction because GAO 

implies that the interest rates at which these countries borrow are 

unsustainable. Similarly, the Fund said that the report does not emphasize 

sufficiently that the borrowing to increase spending on poverty reduction is 

at rates that are substantially below market and that a larger share of aid is 

now in the form of grants, which do not have to be paid back. GAO 

disagrees with the Treasury’s and the Fund’s characterizations. GAO’s 

analysis assumed, consistent with Fund and World Bank assumptions, that 

future borrowing would be at the same level and below market terms as in 

the years just prior to qualifying for debt relief. GAO’s analysis of countries’ 

future debt burdens also incorporates the level of grants and lending 

projected by World Bank and Fund staffs. 

The Treasury and the Fund also commented that if countries experience 

lower growth in exports than projected and debt sustainability is 

threatened, it would be reasonable to expect that adjustments would be 

made in countries’ borrowing and expenditure plans. This implies that 

good debt management practices will be utilized. GAO agrees with this 

point. However, GAO notes that although efforts are being undertaken to 

improve debt management, there has not been a history of strong 

management in this area. Moreover, GAO believes that if policymakers 

adjust to the lower levels of export earnings by reducing imports, lowering 
Executive Summary

Page 22 GAO/NSIAD-00-161 Debt Relief Initiative

domestic spending, raising tax revenue, or using a combination of these 

approaches, this would likely result in lower economic growth and lower 

expenditures on poverty reduction.

The World Bank said the report provides much useful information and 

underscores important aspects of the Heavily Indebted Poor Countries 

Initiative that the partners will be able to take into account as they move 

forward with the initiative’s implementation. The Bank strongly agreed 

with the need for countries to pursue prudent debt management policies 

and for lenders to follow responsible lending policies, if debt problems are 

to be avoided over the long term. Otherwise, the benefits of the initiative 

could be eroded, as GAO’s report indicates. According to the World Bank, a 

durable exit from unsustainable debt remains a central objective of the 

initiative.
Page 23 GAO/NSIAD-00-161 Debt Relief Initiative
Page 24 GAO/NSIAD-00-161 Debt Relief Initiative

Chapter 1

Introduction Chapte1r

The debt problems of many of the world’s heavily indebted poor countries 

continue to be a concern for the international community. Most of these 

countries’ debt is owed to official creditors consisting of other 

governments (bilateral) and international financial institutions 

(multilateral). In 1996, the World Bank and the International Monetary 

Fund (IMF)1

 launched the Heavily Indebted Poor Countries (HIPC) 

Initiative.2

 The initiative—the first comprehensive effort to include all 

creditors in addressing poor countries’ debt problems—responded to 

concerns that even after receiving bilateral debt relief through existing 

means, some poor countries would still have debt burdens that remain too 

large relative to their ability to pay. While recognizing that this first 

initiative was a positive step forward, nongovernmental organizations, U.N. 

organizations, and some borrower governments criticized the initiative as 

providing too little relief too slowly. In response to these concerns and the 

likelihood that changes to the initiative would be discussed by leaders from 

industrialized countries, in February 1999 the World Bank and the IMF 

launched a broad review of the HIPC Initiative that included suggestions 

from the public, governments, nongovernmental organizations, and 

international organizations. In April 1999, the Interim and Development 

Committees endorsed efforts to provide increased debt relief under the 

initiative and to strengthen the link between debt relief and poverty 

1

The World Bank, supported by its 181 member governments, 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 Poverty Reduction and Growth Facility, the successor to its Enhanced 

Structural Adjustment Facility. One hundred eighty-two governments are members of the 

IMF. 

The Development Committee, which is composed of 24 members who are usually ministers 

of finance or development, advises the World Bank’s and IMF’s Boards of Governors. The 

International Monetary and Financial Committee of the IMF (formerly the Interim 

Committee) is an advisory body made up of IMF governors or government ministers. The 

World Bank and the IMF operate under the authority of the Boards of Governors, the highest 

decision-making authorities. General operations of the World Bank and the IMF are 

delegated to smaller groups of representatives, the Boards of Executive Directors, who are 

responsible for making policy decisions and approving loans. Each Board comprises 

24 Executive Directors who are appointed or elected by one or more member countries.

2

For more information on the original HIPC Initiative, see Developing Countries: Status of 

the Heavily Indebted Poor Countries Debt Relief Initiative (GAO/NSIAD-98-229, Sept. 30, 

1998).
Chapter 1

Introduction

Page 25 GAO/NSIAD-00-161 Debt Relief Initiative

reduction. The committees stated that the debt relief should provide a clear 

exit from unsustainable debt burdens, meaning that recipients will be able 

to make their debt payments on time and without the need for future debt 

relief. In June 1999, the leaders of the seven major industrialized countries 

(Canada, France, Germany, Italy, Japan, the United Kingdom, and the 

United States) plus Russia called for an enhanced HIPC Initiative that 

would provide increased debt relief more quickly to more countries. 

However, the leaders reiterated the need for conditions to ensure that 

governments undertake reforms and use resources effectively. They said 

that to receive debt relief, countries must demonstrate a commitment to 

reform and poverty alleviation. They called for a strong link between debt 

relief and poverty alleviation and said that debt relief should free resources 

for spending on priority poverty reduction areas. In September 1999, the 

World Bank and the IMF endorsed these changes to the HIPC Initiative, 

subject to the availability of adequate financing. 

Poor Countries’ Debt 

Burdens

The World Bank and the IMF have classified 40 countries as potentially 

eligible for HIPC debt relief.3 Thirty-two of these countries are in

sub-Saharan Africa. The United Nations classified 27 of the 40 countries as 

being in its lowest category of human development, based on life 

expectancy, literacy, and annual per capita national income. (See app. I for 

a list of countries, their per capita income, and their human development 

indicators. These data are available for 38 of the 40 potential HIPC 

recipients. Data were not available for Liberia and Somalia.) Most receive 

substantial amounts of development assistance from governments, 

multilateral organizations, and nongovernmental organizations. Some, such 

as Rwanda and Sierra Leone, are engaged in or have recently emerged from 

civil strife or external conflict.

The total external debt of the 40 countries was over $200 billion in nominal, 

or face value, terms, as of the end of 1997. As shown in figure 1, most of this 

3

In 1996, the World Bank and the IMF classified 41 countries as heavily indebted poor 

countries. This included, for analytical purposes, 32 countries with a 1993 gross national 

product per capita of $695 or less and 1993 net present value of debt to exports higher than 

220 percent or net present value of debt to gross national product higher than 80 percent. 

Also included were nine countries that received, or were eligible for, concessional debt 

rescheduling from bilateral creditors. In 1998, Nigeria no longer met the criteria, and Malawi 

was added. In 1999, the number of countries was reduced to 40 because Equatorial Guinea 

no longer met the criteria for “low income” or “heavily indebted.”
Chapter 1

Introduction

Page 26 GAO/NSIAD-00-161 Debt Relief Initiative

debt is owed to official creditors; that is, governments and multilateral 

institutions. 

Figure 1: Composition of External Debt for 40 Heavily Indebted Poor Countries, 

1995-97 (Nominal value, in billions of U.S. dollars)

Note: Total debt includes short-, medium-, and long-term debt. 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. 

Source: GAO analysis based on World Bank data.

About $93 billion, or 44 percent, was medium- and long-term debt owed to 

bilateral (government) creditors, and about $65 billion, or 30 percent, was 

owed to multilateral creditors. Poor countries incur two major types of 

debt: concessional (below market interest rates) and nonconcessional 

(market-based interest rates). (See app. II for information on the types of 

debt incurred by poor countries and app. III for information on the amount 

and type of debt that potential HIPC recipients owe to the United States.)
Chapter 1

Introduction

Page 27 GAO/NSIAD-00-161 Debt Relief Initiative

Causes of Poor Countries’ 

Debt Problems 

According to a 1999 IMF staff paper, the debt problems of poor countries 

originated in borrower countries’ weak macroeconomic policies and debt 

management, adverse trade shocks, and official creditors’ willingness to 

take risks unacceptable to private lenders.4

 During the 1970s and 1980s, 

many low-income countries experienced a sharp increase in their external 

borrowing. Most of these countries had limited access to private finance 

and were more often borrowing directly from other governments or their 

export credit agencies, or through private loans that export credit agencies 

guaranteed would be repaid.5

 This lending was primarily on 

nonconcessional terms. The 1999 IMF staff paper stated that this lending 

was, by definition, a highly risky business, with a real possibility that 

eventually much of the debt would not be repaid. This paper further stated 

that creditor governments lent this money in order to increase their 

domestic exports and the associated benefits of protecting or creating 

domestic employment, as well as to strengthen diplomatic relations with 

the borrower countries. According to a 1997 IMF staff paper, the 

commodity boom of the 1970s may have done more harm than good by 

contributing to optimistic export growth projections on the part of 

developing countries, encouraging them to overborrow.6

 Much of the 

lending was not used effectively, and the debt continued to grow, according 

to the 1999 staff paper.

In addition to the willingness of official creditors to lend and the debtors to 

borrow, several other factors contributed to borrower countries’ debt 

burdens. These included adverse shocks in the terms of trade (that is, the 

prices of their exports fell or the prices of their imports increased); a lack 

of sustained economic reform by governments; weak debt management 

practices; and political factors, such as war and social strife. The World 

Bank reported that, by the early 1980s, interest payments became an 

increasing burden for indebted countries, and the share of new borrowing 

used for debt payments increased sharply. According to the 1999 IMF staff 

4

Christina Daseking and Robert Powell, From Toronto Terms to the HIPC Initiative: A Brief 

History of Debt Relief for Low Income Countries, IMF Working Paper 99/142 (Washington, 

D.C.: IMF, 1999).

5

According to the 1999 IMF staff paper, the role of the export credit agencies has largely 

been to support domestic exports by providing loans to developing countries in the context 

of the unwillingness of the private sector to accept certain risks, especially political risks 

arising from uncertain conditions in borrower countries. 

6

Abdelhak Senhadji, Sources of Debt Accumulation in a Small Open Economy, IMF Working 

Paper 97/146 (Washington, D.C.: IMF, 1997).
Chapter 1

Introduction

Page 28 GAO/NSIAD-00-161 Debt Relief Initiative

paper, by this time, many low-income countries had been brought to the 

point of collapse by years of economic mismanagement.

According to a 1998 IMF staff paper, by the mid-1980s, the bulk of new loan 

financing to low-income countries was concessional financing from the 

multilaterals, particularly in countries where debt-service problems arose 

and private creditors no longer viewed these countries as creditworthy.7

According to an academic study, the consequence of the switch from 

nonconcessional to concessional financing was a dramatic rise in the share 

of debt and debt service owed to the multilateral development banks.8

Although the lending by the multilateral institutions became increasingly 

concessional during the 1980s, according to the 1998 IMF staff paper, in 

some cases such lending was inconsistent with these countries’ 

debt-servicing capacity, particularly for countries that already faced very 

high debt levels.

Prior Debt Relief 

Efforts Did Not 

Significantly Lower 

Countries’ Debt 

Burdens

Much of the debt owed by the heavily indebted poor countries cannot be 

fully paid using their own resources and is either paid through the support 

of donors or not paid at all. This has been true since the 1980s. Debt relief 

efforts since that time have been undertaken primarily by bilateral and 

commercial creditors. Multilateral creditors had 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 rating. Although bilateral creditors 

have reduced debt individually, they most commonly have worked together 

to offer debt relief on increasingly concessional terms through the Paris 

Club, an informal group of creditors that meets, as needed, to negotiate 

debt rescheduling and relief efforts for public or publicly guaranteed loans.

In September 1996, in response to concerns that, even after receiving debt 

relief through these efforts, some poor countries will still have debt 

burdens that remain too large relative to their ability to pay, the World Bank 

and the IMF launched the HIPC Initiative. The initiative was the first 

comprehensive effort to include all creditors in addressing poor countries’ 

7

Ray Brooks et al., External Debt Histories of Ten Low-Income Developing Countries: 

Lessons from Their Experience, IMF Working Paper 98/72 (Washington, D.C.: IMF, 1998).

8

Percy S. Mistry, Resolving Africa’s Multilateral Debt Problem (The Hague, the Netherlands: 

The Forum on Debt and Development, 1996).
Chapter 1

Introduction

Page 29 GAO/NSIAD-00-161 Debt Relief Initiative

debt problems. Participating creditors include governments; major 

multilateral creditors such as the World Bank, the IMF, and the African 

Development Bank; commercial creditors; and over 20 other multilateral 

organizations, including the International Fund for Agricultural 

Development. (See app. IV for a list of participating multilateral 

organizations.) Under the original initiative, seven countries qualified for 

debt relief, and four of these countries—Bolivia, Guyana, Mozambique, and 

Uganda—received full debt relief, as of May 1, 2000. However, while 

acknowledging that this first initiative was a positive step forward, 

nongovernmental organizations, U.N. organizations, some borrower 

governments, and some creditor governments criticized the original HIPC 

Initiative as providing too little relief too slowly. In response to these 

concerns and the likelihood that changes to the initiative would be 

discussed by leaders from industrialized countries, in February 1999 the 

World Bank and the IMF launched a broad review of the HIPC Initiative 

that included suggestions from the public, governments, nongovernmental 

organizations, and international organizations. In April 1999, the Interim 

and Development Committees endorsed efforts to provide increased debt 

relief under the initiative and to strengthen the link between debt relief and 

poverty reduction. The committees stated that the debt relief should 

provide a clear exit from unsustainable debt burdens.

Enhanced HIPC 

Initiative

In September 1999, the Interim and Development Committees approved 

changes to the HIPC Initiative that are to provide faster, broader, and 

deeper debt relief with the central goal of reducing poverty in the poorest 

countries in the world. The committees stressed the need to ensure that 

debt relief will result in poverty reduction while recognizing that debt relief 

is only one part of a larger effort to reduce poverty. HIPC debt relief, 

together with forgiveness of debts arising from official development 

assistance, is to lower countries’ debt-service burdens significantly and 

free resources for priority social spending. The committees endorsed the 

proposals, subject to the availability of financing. Like the original 

initiative, the enhanced initiative is to be implemented in two stages. (See 

fig. 2.)
Chapter 1

Introduction

Page 30 GAO/NSIAD-00-161 Debt Relief Initiative

Figure 2: Process for Implementing the Enhanced HIPC Initiative

Sources: World Bank and IMF documents.
Chapter 1

Introduction

Page 31 GAO/NSIAD-00-161 Debt Relief Initiative

• During stage one, a country must carry out economic and social reforms 

under World Bank- and IMF-supported programs, after which eligibility 

for HIPC debt relief is assessed. At that time, called the “decision point,” 

the World Bank and IMF Executive Boards determine whether 

(1) existing debt relief mechanisms9

 are sufficient to lower a country’s 

debt to a point they consider sustainable or (2) the country requires 

additional relief. In making this determination, they decide whether the 

ratio of a country’s debt (in net present value terms) to the value of its 

exports is more than 150 percent.10 If existing means are not enough to 

make debt levels sustainable and creditors are willing to support HIPC 

debt relief with pledges of financing, the country is considered eligible 

to enter the second stage of the initiative. At this time, the World Bank 

and IMF staffs together with recipient governments calculate the 

amount of debt relief creditors are to provide when countries complete 

this stage. 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 means. During this stage, the country 

receives some debt relief from the Paris Club, the World Bank, the IMF, 

and possibly other multilateral creditors. The World Bank, the IMF, and 

the recipient country agree on the specific actions to be taken or 

indicators to be monitored under World Bank and IMF programs that 

the countries are expected to meet in order to complete the initiative. 

9

Existing, or current, mechanisms refer to debt relief offered prior to the HIPC Initiative, 

including the terms offered by the Paris Club and other bilateral and commercial creditors. 

Under “Naples terms” (the terms that existed just prior to the initiative), countries could 

receive up to a 67-percent reduction in eligible debt under a stock-of-debt operation. This 

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. The 

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. This date corresponds to the first time that a 

country requests debt rescheduling/relief from the Paris Club. For many potential HIPC 

recipients, this date occurred in the 1980s and thus eligible debt was contracted before this 

time.

10Under certain conditions, for countries with economies very open to international trade 

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

(in net present value terms) to government revenue. The target ratio is now 250 percent, 

down from 280 percent under the original initiative. The eligibility thresholds were also 

reduced from 40 percent to 30 percent for exports to gross domestic product and from 20 

percent to 15 percent for government revenue to gross domestic product. Much of the debt 

of poor countries is contracted on concessional terms. The net present value of debt is a 

measure that takes into account the degree of concessionality.
Chapter 1

Introduction

Page 32 GAO/NSIAD-00-161 Debt Relief Initiative

• During the second stage, the country receives some debt relief, 

implements economic and social reforms agreed to with the World Bank 

and the IMF, and adopts and implements a strategy to reduce poverty. 

Once the country implements the reforms, it receives irrevocable debt 

relief. For a country to reach the completion point, the World Bank and 

IMF Executive Boards must determine that the country has met the 

specific actions that they agreed to at the decision point. As such, the 

completion point is to be based on countries’ outcomes rather than the 

length of their track records, as was done under the original initiative. At 

the completion point, bilateral and multilateral creditors commit to 

provide an equal percentage of debt reduction.

In 1999, World Bank and IMF staffs estimated that 36 of the 40 countries 

might eventually receive relief based on the initiative’s specific criteria 

concerning income, indebtedness, and reform efforts.11 The reforms are to 

help ensure that debt relief is put to effective use. In 1999, World Bank and 

IMF staffs estimated that the enhanced HIPC Initiative could provide about 

$28 billion in debt relief (1999 net present value terms) to 32 countries.12

Table 1 shows that, as of May 2000, specific eligibility decisions had been 

made for five countries—Bolivia, Mauritania, Mozambique, Tanzania, and 

Uganda—under the enhanced initiative. 

11The four countries not expected to qualify were Angola, Kenya, Vietnam, and Yemen.

12These estimates do not include relief for Ghana, which indicated that it may not request 

HIPC debt relief, and for Liberia, Somalia, and Sudan because of the relatively poor data and 

uncertainty regarding the treatment of their large arrears. For Ghana, the estimated amount 

of debt relief was about $1 billion in net present value terms. Adding Liberia, Somalia, and 

Sudan increases the estimated amount of relief to about $36 billion in net present value 

terms.
Chapter 1

Introduction

Page 33 GAO/NSIAD-00-161 Debt Relief Initiative

Table 1: Status of Implementation of the HIPC Initiative, Countries Grouped by Milestone Reached, as of May 3, 2000 (Debt 

expressed in net present value terms unless otherwise noted)

Millions of U.S. dollars

Amount of debt reliefa

Country

Decision 

point

Completion 

point

Debt-toexport

target (in

percent) Total Bilateral Multilateral IMF World Bank

Reduction

in debtb (in

percent)

Estimated

total debt

service

relief

(nominal,

millions of

U.S.

dollars)

Decision point reached under enhanced initiative

Bolivia $1,302 $425 $876 $84 $194 30 $2,060

Original Sept. 

1997

Sept. 1998 225 448 157 291 29 53

Enhanced Feb. 2000 Floating 150 854 268 585 55 141

Mauritania Feb. 2000 Floating 137c 622 261 361 47 100 50 1,200

Mozambique 1,970 1,235 736 141 434 72 4,300

Original Apr. 1998 June 1999 200 1,716 1,076 641 125 381

Enhanced Apr. 2000 Floating 150 254 159 95 16 53

Tanzania Apr. 2000 Floating 150 2,026 1,006 1,020 120 695 54 3,000

Uganda 1,003 183 820 160 517 40 1,950

Original Apr. 1997 Apr. 1998 202 347 73 274 69 160

Enhanced Feb. 2000 May 2000 150 656 110 546 91 357

Completion point reached under original initiative

Guyana Dec. 

1997

May 1999 107c 256 91 165 35 27 24 410

Decision point reached under original initiative

Burkina 

Faso

Sept. 

1997

Apr. 2000d 205 115 21 94 10 44 14 200

Côte d’Ivoire Mar. 1998 Mar. 2001d 141c 345 163 182 23 91 6e 800

Mali Sept. 

1998

Spring 

2000d

200 128 37 90 14 44 10 250

Total assistance provided/committed $7,767 $3,422 $4,344 $634f $2,146 $14,170

Preliminary HIPC document issuedg

Ethiopia - - 200 $636 $225 $411 $22 $214 $23 $1,300

Guinea - - 150 638 256 383 37 173 34 1,148

GuineaBissau- - 200 300 148 153 8 73 73 600

Honduras - - 137c 569 208 361 18 85 18 1,024
Chapter 1

Introduction

Page 34 GAO/NSIAD-00-161 Debt Relief Initiative

a

Assistance levels are at countries’ respective decision or completion points, as applicable.

b

In percent of the net present value of debt at decision or completion point (as applicable), after the full 

use of traditional debt relief mechanisms.

c

Eligible under fiscal/openness criteria; figures provided show the ratios of debt-to-exports that 

correspond to the targeted debt-to-revenue ratio. For Guyana and Côte d’Ivoire, a 280 percent debt 

(net present value)-to-revenue ratio was targeted at the completion point; for Honduras and Mauritania, 

a 250 percent ratio was targeted at the decision point.

d

Completion points projected at the decision points.

e

Nonreschedulable debt to non-Paris Club official bilateral creditors and the London Club of 

commercial creditors, which was already subject to a highly concessional restructuring, is excluded 

from the net present value of debt at the completion point in the calculation of this ratio.

f

Equivalent to Special Drawing Rights (the international reserve asset created by the IMF) of 374 

million at a Special Drawing Right exchange rate to U.S. dollars of 0.744.

g

Figures are based on preliminary assessments at the time of the issuance of the preliminary HIPC 

document and are subject to change. Assistance levels for Ethiopia and Guinea-Bissau were based on 

the original initiative and applied at the completion point. For Guinea, Honduras, and Nicaragua, 

targets are based on the enhanced initiative, and assistance levels are at the decision point.

h

Deemed to have a sustainable level of debt.

Sources: IMF and World Bank.

Three of these countries—Bolivia, Mozambique, and Uganda—completed 

the first HIPC Initiative. (See app. V for information on the specific 

conditions that eight countries are expected to meet in order to reach their 

HIPC decision and completion points.)

Government Actions 

Needed 

According to World Bank and IMF staffs and the former Managing Director 

of the IMF, to be effective, an enhanced HIPC Initiative needs to be 

supported by actions of both borrower and creditor countries, including 

the following:

Nicaragua - - 150 2,507 1,416 1,091 32 188 66 5,000

No assistance required under original initiative − eligibility to be reassessed under enhanced initiativeh

Benin July 1997

Senegal Apr. 1998

(Continued From Previous Page)

Millions of U.S. dollars

Amount of debt reliefa

Country

Decision 

point

Completion 

point

Debt-toexport

target (in

percent) Total Bilateral Multilateral IMF World Bank

Reduction

in debtb (in

percent)

Estimated

total debt

service

relief

(nominal,

millions of

U.S.

dollars)
Chapter 1

Introduction

Page 35 GAO/NSIAD-00-161 Debt Relief Initiative

The major bilateral donors must be willing and able to (1) finance 

traditional debt relief measures (Paris Club) and HIPC debt relief, 

continued aid flows (especially grants), and multilateral concessional 

lending facilities; (2) reduce trade restrictions on the exports of

low-income countries—which are mainly primary commodities such as 

raw materials and agricultural products;13 and restrain governmentguaranteed commercial export credit lending to recipients, with no such 

loans for military purposes.

The Managing Director also urged bilateral donors to contribute funds to 

enable some multilateral and smaller bilateral creditors to provide debt 

relief under the initiative.

The recipient, or borrower, countries must be willing and able to 

• maintain a stable macroeconomic environment as called for under 

IMF-supported programs and

• implement reforms that promote growth, sustainable development, and 

poverty reduction—including lower military spending and higher social 

spending; these include reforms outlined under World Bank- and 

IMF-supported programs.

13In February 2000, the then-Managing Director of the IMF emphasized the importance of 

increased exports for poor countries’ economic growth by stating that “[T]he fact is that the 

international community is giving with one hand, but is taking away with the other. 

Governments have made the far-reaching decision—in the framework of the Bretton Woods 

institutions—to reduce by about one-half the debt of 35 or 40 heavily indebted poor 

countries through our HIPC Initiative. But those same governments have failed—in the 

framework of WTO [the World Trade Organization]—to launch a trade round, or even to 

take the very modest step of eliminating trade barriers to the exports of the poorest 

countries, especially HIPCs. And it is the latter measure that has the greater long-term 

potential, through its effects on export-led growth and income generation, for lifting the 

poor out of poverty. This failure, unless quickly reversed, would make a mockery of a 

decision on debt that is, otherwise, of historic dimensions.”
Chapter 1

Introduction

Page 36 GAO/NSIAD-00-161 Debt Relief Initiative

According to World Bank and IMF staffs, in the future, more disciplined 

lending and borrowing practices, greater provision of grant financing 

within a multiyear framework, and the development of country-owned 

poverty reduction strategies hold out the prospect for increasing the 

effectiveness of external assistance—including debt relief—within a more 

coherent framework for achieving poverty reduction in low-income 

countries.14

Comprehensive Strategies 

Link Debt Relief to Poverty 

Reduction 

According to the World Bank and the IMF, for HIPC debt relief to be 

effective, it must be integrated into a country’s overall strategy for reducing 

poverty, called a “poverty reduction strategy paper.” The recipient country 

prepares the strategy in a participatory process involving civil society and 

donors. The World Bank, the IMF, and others are available to help. The 

strategy is to be developed in an iterative process and updated about every 

3 years to reflect experience gained in implementing the strategy. The 

World Bank and the IMF have not outlined a “blueprint” for the poverty 

reduction strategy because they want the strategy to be country owned. In 

general, as shown in figure 3, the strategy is to describe the

• extent, nature, and causes of poverty; 

• key obstacles to reducing poverty; 

• long-term poverty reduction goals and outcomes; 

• policies and reforms for achieving these goals and their expected costs; 

• way the strategy is integrated into the country’s macroeconomic 

framework;

• intermediate indicators that will measure progress toward achieving 

long-term goals; 

• process for involving civil society and others; and 

• participatory process for assessing progress. 

14According to the World Bank and the IMF, to be effective and meet the expectations 

underlying the poverty reduction strategy approach, the strategies must be genuinely 

country owned and reflect the outcome of an open participatory process involving 

governments, civil society, and relevant international institutions and donors. See Poverty 

Reduction Strategy Papers—Status and Next Steps (Washington, D.C.: IMF and World Bank, 

Nov. 1999). “Civil society” refers to the nongovernmental segment of society and includes 

churches, community groups, trade unions, business associations, and organizations that 

advocate for specific causes, such as human rights and environmental protection.
Chapter 1

Introduction

Page 37 GAO/NSIAD-00-161 Debt Relief Initiative

Figure 3: Key Elements of the Poverty Reduction Strategy as Described in World Bank and IMF Documents

Source: GAO analysis of World Bank and IMF documents.
Chapter 1

Introduction

Page 38 GAO/NSIAD-00-161 Debt Relief Initiative

The strategy is to (1) address a broad array of policies, including those 

aimed at increasing economic growth and improving living conditions, 

(2) be developed with the participation of civil society and donors, and 

(3) reflect the country’s unique circumstances. The causes of poverty are 

multifaceted and include limited access to social services, limited access to 

markets for selling goods, and restrictions on the ownership of property. 

Thus, efforts to reduce poverty are long term; complex; and cover a wide 

range of activities, including increased economic growth, higher 

immunization rates, improved water quality, and better roads. The HIPC 

Initiative may contribute to the financing of the strategy, such as spending 

on health and education programs, as well as monitor progress in 

implementing the strategy. This strategy is to provide the basis for all future 

World Bank and IMF concessional lending to low-income countries. World 

Bank and IMF staffs estimated that, for most countries, it could take up to 

2 years to develop an initial poverty reduction strategy. 

In recognition that the preparation of such comprehensive strategies could 

delay debt relief for countries that were progressing in their efforts to 

qualify under the original initiative and that the committees called for 

hastening the qualification for the HIPC Initiative, the World Bank and IMF 

Boards agreed that some countries could qualify for their decision points, 

and the start of debt relief, on the basis of “interim” poverty reduction 

strategies. The interim strategies could be less detailed and relatively brief, 

but would need to be followed by comprehensive and completed poverty 

reduction strategies prior to the completion point. During the year 2000, 

28 countries are expected to prepare an interim strategy.

The poverty reduction strategy is to establish a framework that all creditors 

and donors can use to guide their activities. Ideally, according to the World 

Bank and IMF staffs, all donors and multilateral development institutions 

will support countries by contributing to the poverty reduction strategy’s 

design and consultative processes, identifying their specific participation, 

and making up-front commitments regarding their participation. Some 

countries have noted that donors may need to consider new patterns of 

assistance consistent with poverty reduction priorities, such as 

longer−term support aligned with the long-term horizon of the strategies.

Objectives, Scope, and 

Methodology

The Chairman and the Ranking Member of the House Committee on 

Banking and Financial Services, as well as the Chairman and the Ranking 

Member of the Committee’s Subcommittee on Domestic and International 

Monetary Policy, asked us to conduct a review of the enhanced HIPC 
Chapter 1

Introduction

Page 39 GAO/NSIAD-00-161 Debt Relief Initiative

Initiative. In response, we (1) assessed whether the enhanced initiative is 

likely to free up resources for poverty reduction and achieve the goal of 

debt sustainability, (2) described the strategy to strengthen the link 

between debt relief and poverty reduction and how this strategy is to be 

implemented, and (3) described the challenges creditors face in fully 

funding the enhanced initiative.

For our first objective, we examined the World Bank’s and the Fund’s debt 

sustainability analyses of Bolivia, Honduras, Mauritania, Mozambique, 

Nicaragua, Tanzania, and Uganda. Our analysis focused on seven of the 

eight countries in which a debt sustainability analysis from the World Bank 

and the IMF was available to us to analyze. Due to the limitations of time, 

we were unable to review the final country, Guinea. In our analysis, we 

examined the basis for the IMF and World Bank projections for key 

economic variables including debt stock, gross domestic product (GDP), 

government revenue, donor assistance, and exports from 1999 through 

2018. We supplemented this work with data from the IMF (International 

Financial Statistics), the World Bank (Global Development Finance), the 

Organization for Economic Cooperation and Development (OECD), and 

the United Nations. We held meetings with IMF and World Bank officials to 

review the underlying methodology of the debt sustainability analyses and 

to clarify areas of ambiguity. (See app. VI for a technical description of the 

economic methodologies used in this report.)

We met with officials from the U.S. Treasury and nongovernmental 

organizations in the United States, and officials from the host government, 

donor organizations, and nongovernmental organizations in four recipient 

countries—Bolivia, Nicaragua, Tanzania, and Uganda—to discuss their 

understanding of “freed-up resources” and how this was applied under the 

HIPC Initiative. We also discussed with government officials in the four 

recipient countries their expectations of the impact of HIPC debt relief on 

their budgets and their ability to increase spending on priority poverty 

areas.

For our second objective, we met with and obtained information on the 

strategy for strengthening the link between debt relief and poverty 

reduction and on how this strategy is being implemented from government 

officials of the United States, HIPC recipient countries, and other creditor 

countries; and officials from multilateral organizations and 

nongovernmental organizations. We met with and obtained documents 

discussing the strategy and countries’ efforts to reduce poverty from 

officials at the U.S. Department of the Treasury, the Department of State, 
Chapter 1

Introduction

Page 40 GAO/NSIAD-00-161 Debt Relief Initiative

the U.S. Agency for International Development, the United Nations, the 

World Bank, the IMF, and the Inter-American Development Bank. 

We also met with and/or reviewed documents from nongovernmental 

organizations, including churches, in the United States and abroad, such as 

ActionAid, Action for Development, AIDS Support Organization, ANGOZA 

(umbrella organization for nongovernmental organizations on Zanzibar in 

Tanzania), Bread for the World, Bretton Woods Project, Catholic Relief 

Services, Center of Concern, Christian Aid, Civil Coordinator for the 

Emergency and Reconstruction, Cooperative for Assistance and Relief 

Everywhere, Debt Relief International, Development Group for Alternative 

Policies, Episcopal Church, European Network on Debt and Development, 

50 Years is Enough, Foundation for International Community Assistance, 

Grupo Propositivo de Cabildeo, Heritage Foundation, Inti Raymi 

Foundation, Jubilee 2000, Women Against AIDS in Kilimanjaro, MaaSae 

Girls Lutheran Secondary School, National Council of the Churches of 

Christ in the USA/Church World Service, Overseas Development Institute, 

Oxfam, Presbyterian Church, St. Anne Kkonge School, TACOSODE 

(umbrella organization for nongovernmental organizations in Tanzania), 

Tanzania Association of Nongovernmental Organizations, Tanzania 

Coalition on Debt and Development, Tanzania Ecumenical Dialogue Group, 

Tanzania Social Economic Trust, Tanzania Educational Network, Uganda 

Debt Network, Uganda Microfinance Union, Ugandan Women’s Efforts to 

Save Orphans, Ugandan Women’s Finance Trust, United States Catholic 

Conference, and World Vision.

To obtain information from recipient countries about the implementation 

of the HIPC Initiative, we interviewed government and other officials in 

Bolivia, Nicaragua, Tanzania, and Uganda. We selected recipient countries 

likely to represent a range of experiences under the HIPC Initiative and at 

different stages of the process. Within the recipient countries, we discussed 

efforts to reduce poverty, including the preparation of their poverty 

reduction strategies, with officials of relevant government bodies (such as 

HIPC implementation units and/or the ministries of finance, planning, 

health, and education); World Bank and IMF field staff; U.S. embassy and 

U.S. Agency for International Development officials; local representatives 

of other donor countries, the European Union, and the U.N. Development 

Program; local academics; and nongovernmental organizations, including 

those previously listed. We reviewed relevant documents on efforts to 

reduce poverty from these organizations. 
Page 41 GAO/NSIAD-00-161 Debt Relief Initiative

To determine the challenges faced by creditors in fully funding the 

initiative, we focused primarily on the seven major industrialized countries 

(Canada, France, Germany, Italy, Japan, the United Kingdom, and the 

United States) and four major multilateral institutions (the African 

Development Bank, the Inter-American Development Bank, the 

International Monetary Fund, and the World Bank). These countries and 

financial institutions account for the majority of the outstanding claims 

against the heavily indebted poor countries and thus are expected to 

provide most of the debt relief under the HIPC Initiative. Specifically, we 

spoke to officials from these seven countries and reviewed and analyzed 

information to determine the extent of their financial exposure to the 

heavily indebted poor countries; the types of accounting, budgetary, and 

legal constraints they face in providing debt relief; and their estimated total 

costs to provide HIPC debt relief. Our analysis of foreign legal constraints 

is based largely, but not entirely, on interviews and other secondary 

sources.

To describe the challenges facing the four major multilateral institutions, 

we interviewed senior officials and reviewed documents from each 

organization. Specifically, we focused on the identified financing and the 

funding needed to provide each institution’s estimated share of debt relief, 

as well as the budgetary and administrative constraints each institution 

faces in identifying additional internal resources. We did not independently 

verify the amount of internal resources each institution reports as available 

to fund its share of HIPC debt relief.

We performed our review from August 1999 through April 2000 in 

accordance with generally accepted government accounting standards. 
Page 42 GAO/NSIAD-00-161 Debt Relief Initiative

Chapter 2

Unless Strong, Sustained Economic Growth Is 

Achieved, the Initiative Is Not Likely to 

Provide a Lasting Exit From Debt Problems Chapte2r

The enhanced Heavily Indebted Poor Countries Initiative will provide 

significant debt relief to recipient countries, with the debt for six of the 

seven countries we analyzed projected to be reduced by one-third or more. 

However, given the continued fragility of these countries, the initiative is 

not likely to provide recipients with a lasting exit from their debt problems, 

unless they achieve strong, sustained economic growth. Our analysis of the 

World Bank, IMF, and host country projections contained within the HIPC 

documents1

 shows that the decline in debt service for the seven countries 

will only “free up” resources for additional poverty reduction if countries 

continue to borrow at the same level and concessional terms as in the years 

prior to their qualifying for debt relief.2

 As such, recipients’ debt levels will 

rise faster than they would without borrowing for increased spending on 

poverty reduction. Although such borrowing would increase each country’s 

future debt levels, it would be appropriate if the money contributes to 

economic growth. However, the need for debt relief is due in part to 

previous lending activities that did not sufficiently increase recipients’ 

economic capacity, enabling them to pay their debt obligations. In order for 

countries to remain debt sustainable, World Bank and Fund staffs assume 

that countries will achieve sustained, strong economic performance, 

supported by countries effectively using their resources and donors 

continuing to provide assistance for 20 years or more following debt relief. 

Our analysis found that the assumption of sustained, strong economic 

growth might be optimistic since these countries rely on primary 

commodities, such as coffee, for much of their export revenue, and the 

prices of such commodities have fluctuated over time, with export earnings 

in fact declining in certain years. Failure to achieve the projected levels of 

economic growth could lead, once again, to these countries having 

difficulty repaying their debt. 

1

These projections are referred to within HIPC documents as the “debt sustainability 

analysis.”

2

Such borrowing will be on what are considered concessional loan terms, which include a 

grace period of about 5 to 10 years and fees and charges of 2 percent or less. In concluding 

that all of these resources will be borrowed, GAO’s analysis has accounted for the amount of 

grants (money that does not have to be repaid) that donors are expected to provide and the 

recipients’ own revenue.
Chapter 2

Unless Strong, Sustained Economic Growth 

Is Achieved, the Initiative Is Not Likely to 

Provide a Lasting Exit From Debt Problems

Page 43 GAO/NSIAD-00-161 Debt Relief Initiative

Enhanced HIPC 

Initiative Provides 

Significant Debt Relief 

The enhanced HIPC Initiative provides significant debt relief for all seven 

of the countries we have analyzed, as shown in table 2. 

Table 2: Estimated Debt Reduction for Seven Countries Under the HIPC Initiative

Note: “Debt” refers to the total amount of debt that a country owes at a given point in time. “Debt 

service” refers to the periodic payments countries make to repay their debt.

a

Percentage reduction in debt stock (in net present value terms) due to HIPC debt relief is calculated 

as the ratio of HIPC debt relief (in net present value terms) to the initial debt total (in net present value 

terms), either at the completion point or at the decision point (whichever is applicable), after traditional 

debt relief and before HIPC debt relief is delivered. 

b

Percent change in scheduled debt service (in net present value terms) before HIPC, but after 

traditional forms of debt relief, over the projection period (2000-2018), compared to estimated 

scheduled debt service (in net present value terms) after enhanced HIPC Initiative relief, over the 

same projection period.

c

Comparison of the annual average amount of debt service paid during 1995-97 with the average 

amount of debt service scheduled, 2001-2003, following HIPC relief.

d

Includes debt relief under both the first and enhanced HIPC Initiatives.

e

Information based on preliminary HIPC documents.

Source: GAO analysis of IMF and World Bank data.

Country

Debt reductiona

 (in percent, net

present value)

Reduction in scheduled debt

serviceb

 (in percent)

Reduction in actual debt

servicec (in percent)

Boliviad 38.3 24.9 37.5

Hondurase 18.1 12.2 45.6

Mauritania 50.0 36.1 36.2

Mozambiqued 72.1 63.7 60.5

Nicaraguae 64.0 44.6 55.6

Tanzania 53.8 32.8 30.7

Ugandad 52.1 54.4 62.0
Chapter 2

Unless Strong, Sustained Economic Growth 

Is Achieved, the Initiative Is Not Likely to 

Provide a Lasting Exit From Debt Problems

Page 44 GAO/NSIAD-00-161 Debt Relief Initiative

According to our analysis of HIPC documents, after the provision of HIPC 

debt relief, the total amount of debt for these countries is projected to fall 

by more than one-third in all but one country and by one-half or more for 

five countries—Mauritania, Mozambique, Nicaragua, Tanzania, and 

Uganda. Furthermore, all countries’ scheduled debt service is also 

projected to fall considerably, with reductions ranging from 12 percent in 

the case of Honduras to more than 63 percent for Mozambique. In five of 

the seven countries, the drop in scheduled debt service was one-third or 

more. In many cases, recipient countries could not fully service their debt 

in the years prior to receiving HIPC debt relief, accumulating arrears or 

rescheduling debt payments as a result. For that reason, a comparison of 

actual debt service paid pre-HIPC with the scheduled debt service to be 

paid post-HIPC provides a more meaningful indicator of the impact of debt 

relief on the amount of debt service countries actually pay. In all but one 

country, the reduction in actual debt service paid by recipients is projected 

to be at least one-third and more than one-half for three of the seven 

countries whose HIPC documents we have analyzed. These substantial 

reductions in actual debt service paid are much larger than those in the 

original HIPC Initiative.3

To Fund Additional 

Spending for Poverty 

Reduction, Countries 

Must Continue to 

Borrow

According to our analysis, all seven countries’ net present value debt levels 

will rise following the receipt of debt relief, in part because countries 

would need to continue borrowing concessionally—at the same level as the 

years prior to qualifying for debt relief—in order to free up the resources 

that are expected to be spent on additional poverty reduction activities. 

This occurs because countries borrowed prior to debt relief for several 

reasons, including debt payments, and they will need to continue 

borrowing after receiving debt relief in order to meet their remaining debt 

payments and to increase spending on poverty reduction. Thus, countries 

cannot both increase their spending on poverty reduction and reduce their 

annual borrowing by the amount that their debt service was lowered. If

3

See Developing Countries: Status of the Heavily Indebted Poor Countries Debt Relief 

Initiative. For example, as we reported, although Mozambique’s debt stock was projected to 

fall by as much as half, the effect of this reduction on its actual debt service was expected to 

be less than 15 percent.
Chapter 2

Unless Strong, Sustained Economic Growth 

Is Achieved, the Initiative Is Not Likely to 

Provide a Lasting Exit From Debt Problems

Page 45 GAO/NSIAD-00-161 Debt Relief Initiative

donors were to increase the amount of grant assistance they give recipients 

over what is currently projected, countries would need to borrow less.4

For example, in the case of Tanzania, the HIPC documents we have 

analyzed indicate that debt relief is expected to lower Tanzania’s debt 

service requirements by approximately $100 million per year in the initial 

years of the initiative (see fig. 4). This is represented by the gap between 

lines A and B, during the first 5 years of the initiative. 

4

In June 1999, the leaders of the seven leading industrial countries and Russia said they will 

strive gradually to increase the volume of official development assistance and to put special 

emphasis on countries best positioned to use it effectively. To ease future debt burdens and 

facilitate sustainable development, they agreed to increase the share of grant-based 

financing in the assistance they provide to the least-developed countries.
Chapter 2

Unless Strong, Sustained Economic Growth 

Is Achieved, the Initiative Is Not Likely to 

Provide a Lasting Exit From Debt Problems

Page 46 GAO/NSIAD-00-161 Debt Relief Initiative

Figure 4: Tanzania’s Required Balance-of-Payments Financing With and Without HIPC-related Spending for Poverty Reduction, 

2000/01-2017/18

Note 1: A country’s balance of payments summarizes its financial dealings with the outside world. 

Note 2: Line A represents Tanzania’s required external financing needs, after subtracting out its export 

earnings, loans, and grants for project assistance, and private transfers and capital inflows. Line B 

represents the level of external financing (with the same subtractions as line A) if there are no 

additional spending and borrowing for HIPC-related poverty reduction activities and the additional 

financial cost savings derived from not borrowing the HIPC debt service relief. Line A is also equivalent 

to Tanzania’s external financing needs without HIPC assistance.

Source: GAO analysis of World Bank and IMF documents.

However, any increase in spending on poverty reduction would need to be 

funded by borrowing all or part of this $100 million. IMF and World Bank 

staff projections assume that Tanzania and other HIPC recipients will 

borrow all of this money to increase spending on HIPC-related poverty 

reduction. Borrowing all of these resources would result in Tanzania’s 

maintaining a post-HIPC need for financing (to meet its external 

requirements such as the remaining foreign debt service and trade deficits) 

that is identical to the need that existed prior to HIPC debt relief (line A). In 

other words, Tanzania’s pre- and post-HIPC financing profile would be 

unchanged if it were to borrow all of the $100 million for spending on 

poverty reduction. If instead the decision were made that Tanzania would 

not borrow these resources for spending on HIPC-related poverty 
Chapter 2

Unless Strong, Sustained Economic Growth 

Is Achieved, the Initiative Is Not Likely to 

Provide a Lasting Exit From Debt Problems

Page 47 GAO/NSIAD-00-161 Debt Relief Initiative

reduction, its post-HIPC external financing requirements would be 

substantially lower. This situation is represented by line B of figure 4.5

Even without borrowing the $100 million per year, Tanzania is projected to 

continue to need a substantial amount of concessional donor financing to 

cover its remaining external debt obligations.6

 This is represented by the 

area below line B in figure 4. Thus, although Tanzania would be considered 

debt sustainable following HIPC relief, it would not be “externally viable” 

because it would continue to require some external balance-of-payments 

assistance to close its financing gap.7

 Achieving external viability is 

considered important because it indicates that the country is no longer 

dependent on concessional financing to meet its debt obligations. 

According to the IMF, a country is “externally viable” if it is able to pay its 

external obligations with its own resources (tax revenues, external account 

surpluses, and nonconcessional borrowing), without recourse to donor 

assistance. Without such assistance, Tanzania and the other HIPC 

recipients will not have sufficient resources to continue to meet their debt 

payments in the future. If, after receiving HIPC debt relief, all seven 

countries fully borrow the “freed-up” resources, they all will need donor 

assistance to continue to help pay their debt obligations. 

In the case of Uganda, as shown in figure 5, if the decision is made not to 

borrow the amount of resources (equivalent to debt relief) for spending on 

poverty reduction, based on our analysis of the projections contained in 

Uganda’s HIPC documents, Uganda would become externally viable within 

5 years of receiving the enhanced HIPC debt relief and is projected to 

remain externally viable for the remainder of the projection period. 

5

Since new borrowing is assumed to be concessional, with a 10-year grace period on 

principal repayment, the savings in financing requirements increase more rapidly after the 

time period covered by the World Bank and IMF staffs’ debt sustainability analysis.

6

Our analysis of the World Bank’s and the IMF’s projections have already accounted for the 

resources that the recipient country is expected to provide on its own behalf toward its 

external obligations. See appendix VI for a description of the assumptions used in our 

analysis.

7

Such financing is considered “exceptional financing” by the IMF. The original goal of the 

IMF’s program for low-income countries was to allow countries to end their need for such 

financing within 3 years of getting assistance. IMF staff said that in the mid-1990s this 

objective was modified to encourage low-income countries receiving their assistance to 

move toward external viability over time.
Chapter 2

Unless Strong, Sustained Economic Growth 

Is Achieved, the Initiative Is Not Likely to 

Provide a Lasting Exit From Debt Problems

Page 48 GAO/NSIAD-00-161 Debt Relief Initiative

Figure 5: Uganda’s Required Balance-of-Payments Financing With and Without HIPC-related Spending for Poverty Reduction, 

2000/01-2014/15

Source: GAO analysis of World Bank and IMF documents.

External viability is represented by the point in which the lower line 

crosses the zero axis and remains below it. In contrast, the decision to 

borrow these resources for poverty reduction results in Uganda never 

achieving external viability over the projection period. This is represented 

by the top line, which is above the zero axis over the entire period. This 

means that Uganda will remain dependent on donor assistance to help 

meet its external debt obligations for the foreseeable future.
Chapter 2

Unless Strong, Sustained Economic Growth 

Is Achieved, the Initiative Is Not Likely to 

Provide a Lasting Exit From Debt Problems

Page 49 GAO/NSIAD-00-161 Debt Relief Initiative

Ability to Repay Debt 

in the Future Hinges on 

the Assumption of 

Strong Economic 

Growth

Effective Use of Resources According to projections by World Bank and IMF staffs, countries maintain 

debt sustainability by keeping their future borrowing in line with the 

growth in their capacity to repay. One underpinning of these projections is 

that countries will use their borrowed resources effectively. Although the 

borrowing previously described would increase future debt levels, it would 

be appropriate if the borrowed money is spent effectively and contributes 

to economic growth. The initiative contains an implicit assumption that the 

process of preparing and implementing a poverty reduction strategy will 

result in a more effective and productive use of resources, leading to both 

economic growth and poverty reduction. However, such strategies are 

relatively new and untested. 

Some argue that such borrowing may be in the best interest of each 

country, because governments are to spend the borrowed resources to 

reduce poverty rather than to pay creditors. However, this situation would 

involve deficit financing, meaning that countries have to borrow in order to 

increase their current spending. The more resources that countries borrow 

for poverty reduction, the greater the poverty reduction presumably would 

be, but also the greater the future debt levels would be. In the case of 

Tanzania, its total debt stock is projected to steadily rise in the period 

following debt relief whether it borrows these resources or not; however, 

the rise is even greater if it borrows these additional resources (see fig. 6). 
Chapter 2

Unless Strong, Sustained Economic Growth 

Is Achieved, the Initiative Is Not Likely to 

Provide a Lasting Exit From Debt Problems

Page 50 GAO/NSIAD-00-161 Debt Relief Initiative

Figure 6: Tanzania’s Total Debt With and Without Borrowing for Poverty Reduction, 2000/01-2017/18

Legend

NPV = net present value

Note: Debt in net present value terms.

Source: GAO analysis of World Bank and IMF documents.

Our analysis of the projections in Tanzania’s HIPC documents indicate that 

Tanzania’s total debt will rise because Tanzania is assumed to have 

significant requirements for borrowing after debt relief, to use for 

development purposes and for its remaining external financing needs. 

However, the decision to borrow these resources will add considerably to 

its total debt, with the total debt levels approximately $900 million higher 

(in net present value terms) at the end of the projection period than if 

Tanzania chooses not to borrow these resources. This gap will continue to 

widen in the years following the end of the 20-year projection period, if 

these trends continue.

Although the loans for poverty reduction are expected to have 

concessional terms, poor countries have had difficulties in repaying their 

loans in the past, as evidenced by the accumulation of arrears, debt 

reschedulings, and other prior debt relief efforts. As discussed later, the 

ability to repay these loans in the future depends on these countries 

achieving sustained, strong economic performance, supported by their 
Chapter 2

Unless Strong, Sustained Economic Growth 

Is Achieved, the Initiative Is Not Likely to 

Provide a Lasting Exit From Debt Problems

Page 51 GAO/NSIAD-00-161 Debt Relief Initiative

effectively using their resources and donors continuing to provide 

assistance for 20 years or more following debt relief. The need for debt 

relief is due in part to previous lending programs that did not sufficiently 

increase recipients’ ability to pay their debt obligations. The enhanced 

HIPC Initiative contains an implicit assumption that the process of 

preparing and implementing a poverty reduction strategy will result in a 

more effective and productive use of resources, leading to both economic 

growth and poverty reduction. However, the preparation of such strategies 

is relatively new, and there is little evidence as of yet to support this 

assumption. Failure to effectively use these resources could jeopardize 

countries’ future ability to pay.

Economic Growth As mentioned previously, according to projections by World Bank and IMF 

staffs, maintaining debt sustainability depends on recipient countries’ 

achieving sustained, strong economic performance. Most recipient 

countries that we have analyzed are projected by World Bank and IMF 

staffs to have robust growth in export earnings, with the projected growth 

in U.S. dollar terms for four of these countries expected to average at least 

9.1 percent a year over 20 years. (See table 3.)

Table 3: Key Economic Indicators for Seven Countries (Projected and Historic, Using Nominal Dollar Values)

In percent

Country

Projected

growth in

export

earningsa

Historic growth

in export

earningsb

Projected gross

domestic

product

growtha

Historic gross

national

product

growthb,c

Projected

government

revenue growtha

Historic

government

revenue growthd

Bolivia 7.5 7.3 7.0 7.5 7.4 15.8

Honduras 9.3 12.4 8.4 7.0 9.9 7.3

Mauritania 5.4 0.6 6.9 0.3 6.2 3.9

Mozambique 8.5 9.0 9.2 4.3 12.3 N/A

Nicaragua 9.1 15.6 7.6 7.4 7.8 13.1

Tanzania 9.2 17.4 8.1 8.2 9.3 7.6

Uganda 9.5 26.0e 9.8 10.7 11.0 20.0
Chapter 2

Unless Strong, Sustained Economic Growth 

Is Achieved, the Initiative Is Not Likely to 

Provide a Lasting Exit From Debt Problems

Page 52 GAO/NSIAD-00-161 Debt Relief Initiative

Legend

N/A = Not available

Note: Real growth rates could not be calculated for the projection period because the country debt 

sustainability analysis documents do not include price deflators. Annual amounts are reported in 

nominal dollars. Growth rates are calculated in U.S. dollar terms.

a

As calculated from each country’s debt sustainability analysis.

b

In nominal U.S. dollar terms as reported in the World Bank’s Global Development Finance data, 

1990-97.

c

Global Development Finance reports gross national product but not gross domestic product.

d

IMF’s International Financial Statistics Yearbook 1999 and World Bank’s Global Development 

Finance.

e

Does not include information from 1998 and 1999, in which export earnings significantly declined.

Sources: GAO analysis of IMF and World Bank data.

The assumption of strong, sustained growth in export earnings is important 

for the projection of continued debt sustainability, since the income from 

exports is presumed to contribute considerably to these countries’ ability 

to meet their external obligations. Although these levels of export growth 

are consistent with the experience of these countries in the recent past,8

 as 

we discussed in our previous report,9

 these countries tend to rely on a small 

number of primary commodities for a majority of their export earnings. 

The prices of such commodities tend to fluctuate, and in the case of 

Uganda in 1998 and 1999, the large fall in the price of coffee resulted in a 

decline in its export earnings in those 2 years, following a period of 

substantial export growth in the early and mid-1990s. As a result, Uganda’s 

debt-to-export ratio rose considerably, despite Uganda’s having received a 

reduction in debt under the first HIPC Initiative. Due to continued 

weakness in Uganda’s export sector, in April 2000 the World Bank and the 

IMF reduced the projected growth of Uganda’s export revenues for 

2001-2003 by more than 16 percent from what was projected in January 

2000. 

8

An examination of the average annual growth rates of export earnings and gross national 

product of these seven countries for the period prior to debt relief (1978-97) shows a 

substantially lower level of growth for both factors. All of the export growth values are 

below 6 percent, and all of the gross national product growth values (nominal U.S. dollars) 

are below 8 percent, with two of those growth levels negative over the 20-year period.

9

See Developing Countries: Status of the Heavily Indebted Poor Countries Debt Relief 

Initiative.
Chapter 2

Unless Strong, Sustained Economic Growth 

Is Achieved, the Initiative Is Not Likely to 

Provide a Lasting Exit From Debt Problems

Page 53 GAO/NSIAD-00-161 Debt Relief Initiative

The World Bank and IMF staffs also assume strong growth in GDP and 

government revenue for most of the recipient countries that we have 

analyzed. A criticism by some nongovernmental organizations and 

academics of the first HIPC Initiative, including the external evaluators of 

the Enhanced Structural Adjustment Facility, was that it focused too 

heavily on exports as a proxy for a country’s ability to pay its external 

obligations. Rapid growth in exports does not always translate into more 

resources for the government to use to pay its obligations.10 The new 

initiative has placed a greater level of attention on the recipient economy’s 

ability to generate its own resources, as measured by GDP and government 

revenue. Robust increases in both factors are also considered important 

contributors to a country’s ability to remain debt sustainable. Based on our 

analysis of HIPC documents, the projected average annual growth (in 

nominal dollars) of GDP and government revenue is greater than 6 percent 

for all seven countries and exceeds 9 percent in several instances (see 

table 3). Although these projected growth levels are generally consistent 

with the growth levels of the recent past, sustaining such levels over a 

20-year period may be difficult. For example, Uganda recently had to lower 

its GDP growth projection for the year 2000 because of a drought and 

continued weakness in coffee prices.

Donor Assistance According to our analysis of World Bank and IMF staff projections of donor 

assistance (both project and program aid), such assistance is expected to 

be at levels generally comparable to the assistance provided in the recent 

past.11 Continued donor assistance is necessary for countries to remain 

debt sustainable, since recipient countries will continue to rely on donor 

assistance to meet their future debt payments, separate from the resources 

they need for development purposes. Although the assumption that donor 

10In the case of Tanzania, its export revenues are expected to rise rapidly over the next 

several years due to the recent exploitation of its gold resources. However, given the capitalintensive nature of the industry, the government of Tanzania will realize very little revenue 

from these increased exports for a considerable period. In order to attract investment in this 

sector, the government of Tanzania agreed to receive relatively low revenue while foreign 

investors are recouping their investment costs.

11According to our review of the debt sustainability analyses’ projections of donor 

assistance for HIPC recipients, such assistance is expected to be on the low side of the 

donor assistance provided between 1990 and 1997 for five countries (Bolivia, Mauritania, 

Mozambique, Nicaragua, and Uganda), and in the middle and high range for Honduras and 

Tanzania, respectively. These projections do not assume IMF lending beyond the current 

program. Inclusion of IMF resources would raise the projected debt levels for the recipient 

countries.
Chapter 2

Unless Strong, Sustained Economic Growth 

Is Achieved, the Initiative Is Not Likely to 

Provide a Lasting Exit From Debt Problems

Page 54 GAO/NSIAD-00-161 Debt Relief Initiative

assistance will be at levels generally consistent with the past seems 

reasonable, the full amount of donor assistance that is required for 

continued debt sustainability might be optimistic. First, if the key economic 

factors of recipient countries do not grow as quickly as projected, their 

need for donor resources will likely increase in order to counter this 

shortfall. Otherwise, countries may not be able to meet their future debt 

payments. This is discussed in greater detail later in the report. Second, 

considering the substantial amount of donor resources required for the full 

financing of the initiative (as discussed in ch. 4), maintaining existing levels 

of assistance may be difficult, because the large bilateral donors will also 

be expected to provide a substantial amount of new funding to support the 

participation of the multilateral institutions and smaller bilateral creditors. 

If these additional resources for the multilaterals and smaller bilateral 

creditors (including other developing countries) are not forthcoming, then 

the future aid from these sources may be compromised, which could lower 

the amount of total donor resources provided to the HIPC recipients.

Relationship Between 

Economic Growth and 

Donor Assistance

As discussed, the enhanced HIPC Initiative assumes strong economic 

growth projections for most countries that receive debt relief. Shortfalls in 

these growth projections will lower the amount of revenue these countries 

will be able to contribute toward their future debt service. If these 

countries are to remain debt sustainable, this shortfall will need to be made 

up through increased donor assistance or other means of adjustment. 

Without such adjustment, countries will no longer be debt sustainable, 

requiring additional debt relief, or accumulation of arrears. For illustrative 

purposes, we analyze the effect of a shortfall in projected export earnings 

that is made up through an increase in grants and concessional loans so 

that imports and domestic spending, including poverty reduction activities, 

remain the same as in the original HIPC projections. We consider this to be 

a reasonable assumption because, although this additional concessional 

borrowing results in higher levels of debt and debt ratios, it will preserve 

fairly robust economic growth levels and poverty reduction for the 

recipient country. If instead, policymakers choose to adjust to these lower 

levels of export earnings by reducing imports, lowering domestic spending, 

raising tax revenue, or using a combination of these approaches, they could 

avoid incurring debt ratios that will rise as much, although this choice 

would likely result in lower economic growth and lower expenditures on 

poverty reduction. The relationship between a decline in export growth 

and an increase in donor assistance for Tanzania is highlighted in table 4.
Chapter 2

Unless Strong, Sustained Economic Growth 

Is Achieved, the Initiative Is Not Likely to 

Provide a Lasting Exit From Debt Problems

Page 55 GAO/NSIAD-00-161 Debt Relief Initiative

Table 4: Relationship Between a Decline in Export Earnings and Increases in Aid Flows − Tanzania

Note: Assistance is in millions of 1999 net present value dollars, and debt is in millions of 2017/18 net 

present value dollars. 

a

The “base case” refers to the data contained in the projections made by the IMF and the World Bank.

Source: GAO analysis of IMF and World Bank data.

According to Tanzania’s debt sustainability analysis, its export earnings are 

projected to grow by 9.2 percent a year on average for 19 years, after 

receiving debt relief. At the end of that projection period, its debt-to-export 

ratio (in net present value terms) will be about 137 percent, and donors 

were assumed to have provided almost $20 billion in assistance. However, 

if the growth in Tanzania’s export earnings were to be 1 percentage point 

lower over this period (to an average increase of 8.2 percent a year), donor 

assistance would have to grow by almost 16 percent over the period, or an 

additional $3.1 billion, for Tanzania to maintain debt sustainability. As 

shown in table 4, the impact of this assistance on Tanzania’s future debt 

levels is substantial, reaching a debt-to-export ratio of 200 percent by the 

end of the projection period. 

The additional assistance may be provided as concessional loans or a 

combination of concessional loans and grants. The left side of the table 

assumes that the new assistance is provided using the relative proportions 

between loans and grants, assumed within Tanzania’s base case. The right 

side of table 4 assumes that the additional assistance would be all 

concessional lending. The assumption of all lending may be more realistic. 

For example, in response to a decline in export earnings during 1998, 

Uganda increased its borrowing, mainly from multilateral institutions, to 

avoid a financing gap in its balance of payments. In both cases, Tanzania’s 

In millions of U.S. dollars

New assistance − loans and grants New assistance − loans only

Assistance

Debt/export in

2017/18 (percent) Debt Assistance

Debt/export in

2017/18 (percent) Debt

Base casea $19,767 137 $7,333 $19,767 137 $7,333

With 1 

percentage 

point export 

decrease

 22,864 200 9,365 23,013 236 11,013

With 2 

percentage 

point export 

decrease

25,648 280 11,178 25,935 358 14,298
Chapter 2

Unless Strong, Sustained Economic Growth 

Is Achieved, the Initiative Is Not Likely to 

Provide a Lasting Exit From Debt Problems

Page 56 GAO/NSIAD-00-161 Debt Relief Initiative

total debt ratios will rise, with the increase 36 percentage points greater 

when the assistance is assumed to be all lending. 

The impact of a 2-percentage point decrease in export earnings (to an 

average increase of 7.2 percent a year) is even more substantial. Under 

such a scenario, donors will be expected to provide about $5.9 billion in 

additional assistance to Tanzania. Under the assumption that the additional 

assistance would be a mix of loans and grants, Tanzania’s debt-to-export 

ratio is projected to more than double over the base case projection. If the 

additional assistance were to be all loans, this ratio would be more than 

2.6 times greater than the base case and would be at a level that would 

exceed Tanzania’s debt-to-export ratio (324) prior to receiving HIPC 

assistance.
Page 57 GAO/NSIAD-00-161 Debt Relief Initiative

Chapter 3

Linking Debt Relief and Poverty Reduction 

Creates Tension Between Quick Debt Relief 

and Comprehensive Strategies Chapte3r

In order to receive full debt relief under the enhanced HIPC Initiative, 

countries are expected to prepare comprehensive strategies for reducing 

poverty; however, the preparation of these strategies is time consuming, 

with their success dependent on countries reaching widespread agreement 

on sensitive and complex issues. Nongovernmental organizations and some 

donor governments raised the concern that, in order to receive debt relief 

quickly, countries may “shortcut the quality” of their strategies and limit the 

extent of participation, especially from the civil society of the country. To 

counter these concerns, some recipients and nongovernmental 

organizations have suggested separating the link between the timing of 

debt relief and the preparation of these strategies, recognizing that 

recipient countries are likely to be monitored under World Bank and IMF 

programs for many years. However, the World Bank, the IMF, and the U.S. 

Treasury argue that these concerns are mitigated because some countries 

do not have to prepare a full poverty reduction strategy in order to qualify 

for debt relief, and countries will receive a significant amount of interim 

debt relief after they qualify for the initiative.

Preparing Strategies Is 

Complicated and 

Resource Intensive

We found that preparing a comprehensive, “country-owned” poverty 

reduction strategy poses many challenges for recipient countries, 

particularly when preparing them within the relatively short time frames of 

the initiative. Preparing the poverty reduction strategy is costly and time 

consuming because it (1) addresses numerous social and economic 

policies, (2) is to show the impact of government programs on poverty, and 

(3) depends on collecting and analyzing an extensive amount of data. In 

September 1999, the World Bank reported that no country had fully and 

systematically applied a strategy focused on achieving poverty outcomes. 

In May 2000, a Bank official said that such a strategy is untested. World 

Bank and IMF staffs guidance says that most countries should be able to 

prepare a poverty reduction strategy within 2 years. However, although 

Uganda is considered by the staffs to be at the forefront of these efforts and 

has prepared a comprehensive strategy and progress report, it has been 

working on a strategy for about 5 years. Moreover, according to the staffs, 

to prepare a full poverty reduction strategy in line with their guidance, 

Uganda needs to provide additional estimates of the cost of poverty 

reduction programs and strengthen the links between expenditures on 

poverty reduction and indicators of poverty.
Chapter 3

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Creates Tension Between Quick Debt Relief 

and Comprehensive Strategies

Page 58 GAO/NSIAD-00-161 Debt Relief Initiative

Numerous, Diverse Actions 

Needed to Address Poverty

Tackling the numerous and complex factors that cause poverty is difficult 

because it involves many economic and social policies. We found that 

coordinating all of these policies is particularly challenging within short 

time frames. Poverty is complex and defined broadly because of the 

following:

• Poverty stems from many social and economic problems such as weak 

economic growth, low education levels, limited access to health 

services, limited property rights that restrict the ability of the poor to 

gain physical and financial assets, and social exclusion. 

• Poverty affects a significant number of people. According to their 

interim poverty reduction strategies, 50 percent or more of the 

populations of Bolivia, Tanzania, and Mozambique are estimated to live 

below each country’s poverty line. 

• Poverty varies based on factors such as gender, geographic area, and 

indigenous group and thus reflects inequality in economic opportunity 

and income distribution. According to the interim poverty reduction 

strategies from three countries—Bolivia, Mozambique, and Uganda—

poverty levels were higher in rural areas than in urban areas and higher 

among women than men.1

• Poverty is influenced by factors that may be connected and mutually 

reinforcing. For example, Uganda’s participatory poverty assessment 

describes the following cycle of poverty: Poor health leads to decreased 

household income due to spending on health care and reduced 

productivity due to the inability to work. This in turn leads to lower food 

availability, poor nutrition, further poor health, low income and 

productivity, and worsening poverty. Also, some factors, such as theft 

and other forms of insecurity, may be both a cause and a result of 

poverty.

According to World Bank and IMF documents, such as progress reports 

and Executive Board minutes, a multifaceted approach is needed to reduce 

poverty, given the high incidence and the numerous and diverse causes of 

poverty. According to these documents, reducing poverty requires the 

following: 

1

In 1998, the United Nations reported that poverty in Bolivia is primarily rural and 

concentrated in indigenous groups. In rural areas, 94 percent of the households live in 

poverty, in comparison to about 51 percent of the households in urban areas. In addition, in 

1999, the U.S. Agency for International Development reported that 88 percent of the poor in 

Bolivia are indigenous peoples. 
Chapter 3

Linking Debt Relief and Poverty Reduction 

Creates Tension Between Quick Debt Relief 

and Comprehensive Strategies

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• Rapid, sustainable growth that includes the poor. According to the U.N. 

Economic Commission for Africa, for sub-Saharan Africa to cut poverty 

in half by 2015, average (real) annual GDP growth of at least 8 percent is 

required.2

• Actions targeted at the specific causes of poverty. The interim strategies 

developed by five countries (Bolivia, Mauritania, Mozambique, 

Tanzania, and Uganda) for use in HIPC decision-making address 

numerous economic and social actions that are intended to generate 

growth and contribute to poverty reduction. The coordination of so 

many activities and the preparation of the poverty strategies can tax 

already limited government resources. For example, in Tanzania, donor 

officials told us that preparing such a comprehensive strategy along 

with other documents required by donors has involved numerous key 

government officials who also have many other concurrent 

responsibilities.3

• Good governance. According to World Bank and IMF documents, good 

governance requires responsive, transparent (open), and accountable 

institutions as well as sound management of public resources. However, 

many poor countries have weak, inefficient, and sometimes corrupt 

institutions that resist reform. Redressing these problems continues to 

involve reforms to reduce corruption and improve countries’ judicial 

systems, revenue collection, and financial management. 

• Active civil society participation. World Bank and IMF staffs, 

nongovernmental organizations such as Oxfam and World Vision, the 

U.N. Development Program, and some governments see the 

participation of civil society, especially the poor, as a way to identify the 

needs of the poor and monitor government activities. However, this 

participation also presents operational challenges, such as determining 

who will represent civil society, that take time to resolve.

2

The Economic Commission for Africa and Africa: Accelerating a Continent’s Development

(Addis Ababa, Ethiopia: U.N. Economic Commission for Africa, May 1999).

3

For example, in addition to preparing the poverty reduction strategy, the government of 

Tanzania helps to prepare documents for internal planning purposes and donors, such as 

public expenditure reviews; strategies for bilateral and multilateral assistance programs and 

projects; and sector-specific strategies focused on health, education, civil service reform, 

and other areas. 
Chapter 3

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Creates Tension Between Quick Debt Relief 

and Comprehensive Strategies

Page 60 GAO/NSIAD-00-161 Debt Relief Initiative

Showing the Impact of 

Government Actions on 

Poverty Is Difficult

The World Bank and IMF staffs’ guidance calls on recipients to describe in 

their poverty reduction strategies how their public actions will affect 

poverty goals, but the impacts are not clearly established in many areas 

either by the donors or the recipients nor are they described in the 

guidance. While such connections are considered key elements of the 

poverty reduction strategy, World Bank and IMF staffs recognize there are 

wide disparities in the cost-effectiveness of government expenditures for 

poverty reduction efforts in developing countries. In addition, World Bank 

and IMF staffs have reported that there are little country-specific data 

demonstrating how rapidly the indicators for some key social sectors can 

be expected to change. Furthermore, there is limited evidence showing 

which actions have the greatest impact for achieving poverty reduction 

goals. Determining which activities to prioritize and the expected time 

frames for reducing specific causes of poverty can thus take a considerable 

amount of dialogue and analysis. 

 A 1999 IMF staff study found that there is little empirical evidence to show 

that public spending alone improves health and education indicators, or 

outcomes.4

 However, this study showed that the allocation of spending 

within the subsectors of health and education could successfully 

contribute to positive outcomes. For example, shifting spending toward 

primary and secondary education improves enrollment and retention rates 

through grade 4. Furthermore, shifting health spending toward primary 

care has a favorable effect on infant and child mortality rates.

4

Sanjeev Gupta, et al., “Does Higher Government Spending Buy Better Results in Education 

and Health Care?” IMF Working Paper 99/21 (Washington, D.C.: IMF, Feb. 1999).
Chapter 3

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Creates Tension Between Quick Debt Relief 

and Comprehensive Strategies

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Strategies Depend on Data According to the World Bank and IMF staffs’ guidance, preparing credible 

poverty reduction strategies depends on collecting and analyzing data; 

however, this takes time, resources, and expertise. For example, a poverty 

assessment relies on collecting and analyzing an extensive amount of data 

to describe the nature, extent, and major causes of poverty in ways that can 

be used later to monitor progress. World Bank and IMF staffs consider 

success in this first step as essential to ensure the development of an 

effective poverty reduction strategy. However, such an exercise takes 

resources and expertise, and weaknesses in poor countries’ capacity to 

collect and analyze data may limit this effort. In 1999, the World Bank 

reported that, in Mozambique, it took 2 years after the national household 

surveys to get results and that lags of this nature are not uncommon.5

 In 

September 1999, the IMF’s Executive Board noted that the poor quality of 

data on social spending and indicators has inhibited the design and 

implementation of effective social programs.6

 The Board saw an urgent 

need for country authorities to identify weaknesses in data and data 

collection and to make data improvements in collaboration with the World 

Bank, other international agencies, and civil society. The World Bank and 

the IMF are strongly encouraging donors to increase their technical and 

financial support in this area. In November 1999, a group of developing 

countries and donor agencies said that global efforts to fight poverty and 

promote better lives for millions of the world’s poor would be more 

effective if developing countries had better statistics and that the HIPC 

Initiative was hastening the need for good quality statistical information.7

They said that too often, outdated, missing, or unreliable information led to 

badly informed decisions, which waste resources and incur high financial 

and human costs. They agreed to launch a strategy to ensure adequate 

funding and support for national statistical systems. 

5

Building Poverty Reduction Strategies in Developing Countries (Washington, D.C.: World 

Bank, Sept. 1999).

6

Concluding Remarks by the Chairman—Review of Social Issues and Policies in 

IMF-supported Programs; HIPC Initiative-Strengthening the Link between Debt Relief and 

Poverty Reduction; and Transforming the Enhanced Structural Adjustment Facility

(Washington, D.C.: IMF, Sept. 1999).

7

The strategy, called the “Partnerships in Statistics for Development in the 21st Century,” is 

designed to improve the statistics in poor countries and initiate programs to improve the 

statistical capacity of countries that qualify for HIPC debt relief by the end of the year 2000. 

See IMF, OECD, UN and World Bank Experts Call for Better Statistics to Fight Poverty, IMF 

Press Release 99/55 (Washington, D.C.: IMF, Nov. 19, 1999).
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In the four countries we visited—Bolivia, Nicaragua, Tanzania, and 

Uganda—government officials, with technical and financial support from 

donors and others, were undertaking actions to improve their capacity to 

gather and analyze data and monitor indicators. Uganda—which is 

considered ahead of most countries in this effort—is trying to gather 

information directly from the poor to develop a broader set of indicators to 

define poverty, such as physical and social isolation and powerlessness, in 

all of its 45 districts. Thus far, with donor technical and financial support, 

Uganda has collected data from nine districts. Tanzania is currently 

planning to undertake a household budget and labor force survey−the 

survey is estimated to cost $1.5 million and take approximately 1 year.

Country Ownership 

and Donor Support of 

the Strategy Can Be 

Difficult to Achieve

Having countries take ownership of the strategies with the support of 

donors is considered by the World Bank, the IMF, and nongovernmental 

organizations such as Oxfam to be critical to the effective preparation and 

implementation of the poverty reduction strategy; however, there is a 

tension between the time needed to build country ownership and to 

prepare a poverty reduction strategy within the initiative’s deadlines. 

Moreover, operational issues take time to resolve. For example, it is not 

clear how to define or achieve ownership at the country level, to define the 

amount and nature of civil society participation, or to ensure that the 

donors will align their funding with the priorities outlined in these 

strategies. The point at which “ownership” is achieved is not clearly 

defined because it reflects country- and context-specific circumstances and 

can be built slowly over time through an iterative process of increasing 

levels of participation. Although the World Bank and the IMF expect civil 

society participation in developing the strategies, they have not set criteria 

for determining a sufficient or effective level and quality of civil society 

participation. They want the strategies to be owned by the countries and 

therefore want each country to determine a sufficient level of participation. 

Nonetheless, officials from some donor governments, multilateral 

organizations, and nongovernmental organizations told us they were 

concerned that countries’ desire to receive debt relief as soon as possible 

could affect the level, quality, and impact of civil society participation. 

Several representatives from nongovernmental organizations such as 

Catholic Relief Services and Jubilee 2000 told us that they want meaningful, 

widespread civil society participation but are concerned that this could 

delay debt relief. 
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and Comprehensive Strategies

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While difficult to measure, participation is increasingly seen as important 

for greater effectiveness. According to a World Bank staff paper, the 

absence of sufficient “commitment” in many of the projects the Bank 

finances occurs because stakeholders (including civil society) do not 

understand fully the commitment they are being asked to make.8

 If 

stakeholders who must implement and sustain the project do not fully 

understand what is expected of them, little will be accomplished. 

Moreover, the paper reported that attempts to bypass powerful 

stakeholders, such as political leaders, often resulted in opposition from 

them; this opposition usually compounded the problem of getting anything 

useful accomplished. For example, the paper stated that the main reason 

for not making more progress in resolving problems in project 

implementation in Mozambique was the failure to engage the ministers (the 

political level) in the participatory process. Absence of the full range of 

stakeholders, especially politicians with the power to affect change, limits 

effectiveness.

Challenges to Effective Civil 

Society Participation

The World Bank sourcebook defines participation as “a process through 

which stakeholders influence and share control over development 

initiatives and the decisions and resources which affect them.” 

Stakeholders include those directly affected by the project or strategy, such 

as the poor, as well as those who are indirectly affected, such as the 

borrower governments at the national and local level, nongovernmental 

organizations, private sector organizations, and donors. However, we found 

that countries face challenges in determining which groups should 

represent civil society. This can be especially difficult in countries that lack 

a democratic or representative tradition and thus have few existing means 

for getting citizen or nongovernmental organizations’ input or for electing 

representatives. These concerns are magnified when the process is to 

involve the poor or groups that have traditionally been excluded, such as 

women and indigenous populations. There is also concern that government 

officials will not support a participatory process if it is perceived as diluting 

their power, alienating influential constituencies, or done simply to get 

HIPC debt relief. 

8

The World Bank Participation Sourcebook (Washington, D.C.: World Bank, 1996).
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If these issues are overcome and civil society representatives are to 

participate in developing the poverty reduction strategy, a process for 

getting their input within the initiative’s time frames must be established. 

According to the World Bank staff paper, some of the poorest people live in 

countries characterized by weak governments and civil strife. Others also 

said that in order to involve the poor, representatives and governments 

must overcome deficiencies in communication and high illiteracy rates.9

Furthermore, to involve the poor who live in rural and outlying areas, 

representatives must also overcome poor roads. Moreover, efforts must be 

made to educate civil society and their representatives about important 

issues and build their organizational and financial capacity to participate. 

In Tanzania, nongovernmental organizations historically delivered services 

by, for example, funding schools or health clinics. They are now beginning 

to focus on advocacy and have organized themselves into working groups 

that study specific issues related to poverty and provide input to the 

government. 

Determining the Level of 

Civil Society Participation

It is also challenging and potentially controversial to determine a sufficient 

and effective level of participation by civil society in the process. For 

example, in 1997 the government of Bolivia conducted a “national 

dialogue” to involve civil society in its effort to build support for its new 

economic and social priorities. Although government officials said they 

considered that effort to have been quite worthwhile, some 

nongovernmental organizations and donors that we talked with disagreed. 

They told us the dialogue consisted of a 1-day meeting in which the 

government selected whom to invite, involved little regional participation, 

gave little advance notice regarding the agenda to the invitees, provided 

little background information, and used the meeting to present its views. 

One nongovernmental organization representative characterized this effort 

as having been more a “regional monologue than a national dialogue.” In 

1998, the United Nations reported that, according to a recent survey, 

70 percent of Bolivians felt that their opinions did not count at all in the 

political system’s decision-making process.10 Additionally, according to the 

9

World Bank staff estimated that a thorough process of participatory consultation, such as 

that conducted for a participatory country assistance strategy or poverty assessment, could 

cost between $50,000 and $500,000. 

10UNDP: Country Cooperation Frameworks and Related Matters − First Country 

Cooperation Framework for Bolivia (1998-2002) (New York: U.N. Development Program, 

DP/CCF/BOL/1, Feb. 2, 1998).
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Bolivian government and nongovernmental organizations, there was little 

follow-up after the national dialogue to ensure that actions were 

undertaken. In light of this experience, the public met with some suspicion 

the government’s plans for a new dialogue as part of the HIPC Initiative. To 

overcome the previous criticisms and involve civil society in preparing its 

poverty reduction strategy, the government is convening a second national 

dialogue that is to involve more participants and regions, provide extensive 

background papers prepared by the government and others, and establish a 

mechanism to follow up on commitments made during the dialogue. The 

process is to culminate in a poverty reduction strategy. (See app. VIII for 

additional information on Bolivia’s national dialogue.)

Consultation Versus 

Consensus

Consulting with civil society increases civil society’s awareness of 

government strategies, can change resource allocations, and can alert the 

government to the priorities of the poor; however, it does not guarantee 

consensus. According to World Bank and IMF staffs, the results of Uganda’s 

consultation with the poor had a direct effect on budget allocations. In 

response to the high priority placed by poor communities on the 

availability of safe water, the government has significantly shifted its 

spending toward improving water quality. Uganda’s consultation with the 

poor also brought to the government’s attention factors related to poverty 

that the government previously had not considered, such as the poor’s 

physical and social isolation, sense of powerlessness, and concerns 

regarding security. However, reasonable people can disagree on the best 

use of the resources for reducing poverty, given their individual 

circumstances. Thus, the evidence is not clear as to what extent 

consultation increases country ownership of, or widespread agreement on, 

the strategy. The involvement of civil society in the process does not ensure 

that (1) consensus on priorities can be reached quickly, easily, or at all; or 

(2) that the government will accept civil society’s views. Stakeholders have 

different levels of power and conflicting priorities; how these are resolved 

affects how people view the strategy. Given the countries’ high levels of 

poverty, we believe that civil society, government, and donors can probably 

reach agreement on broad poverty reduction goals such as improved 

health, education, and economic growth. However, the challenge will be 

reaching agreement on how to allocate the limited available resources 

among these goals, all of which have large financing requirements. For 

example, to reduce rural poverty, some may advocate funding agricultural 

extension services, whereas others may wish to increase spending on 

education or health care. The challenge of reaching agreement on resource 
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allocations is further complicated by the disparities in income levels and 

living conditions that exist between regions and sectors of society. 

The effectiveness of the strategies is also influenced by the extent to which 

donors agree with and are willing to align their contributions with the 

countries’ priorities. Field representatives of donors may support the 

concept of a recipient-led strategy but may not be able to reallocate their 

aid to fund the recipients’ priorities due to the earmarking of spending by 

their governments. While some donors may expect that resources from 

debt relief will be spent mainly on certain social needs such as health and 

education, recipients may prioritize their efforts to reduce poverty 

differently. Considerations about the best use of limited resources become 

even more complicated when several needs are equally pressing, such as 

reducing the high incidence of child mortality or improving poor water 

quality. 

Differing Views on 

Whether to Directly 

Link Debt Relief to 

Poverty Reduction 

Strategies

Given the vulnerabilities and debt problems of poor countries, some 

creditor governments, the U.N. Secretary General, and nongovernmental 

organizations have urged creditors to quickly provide debt relief under the 

initiative. In September 1999, the Development and Interim Committees of 

the World Bank and the IMF urged the speedy implementation of the 

enhanced initiative so that as many countries as possible could qualify for 

assistance under the initiative by the end of the year 2000.11 Some U.N. 

organizations and nongovernmental organizations stress that delaying debt 

relief adversely impacts countries’ growth by diverting scarce resources 

from development needs to debt payments. Some assert that, with debt 

payments absorbing a large share of budgetary and foreign exchange 

resources, poor governments have turned to foreign donors, which further 

prolongs debt problems. They are also concerned that the conditions 

countries must meet in order to receive debt relief under the initiative may 

delay the receipt of debt relief and, in some cases, may hurt rather than 

help the country. However, the World Bank and the IMF argue that these 

concerns are mitigated because countries begin to receive a significant 

amount of debt relief when they qualify for the initiative (and before they 

prepare a full poverty reduction strategy) and that conditions are needed to 

ensure that governments undertake reforms and use resources effectively.

11In December 1999, the staffs of the World Bank and the IMF estimated that 22 countries 

could have their eligibility assessed by the end of the second quarter of the year 2000.
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Officials from nongovernmental organizations, donor governments, and 

multilateral organizations have also raised the concern that countries’ 

efforts to receive debt relief quickly may decrease the quality of the poverty 

reduction strategy as well as the level, quality, and type of civil society 

participation. However, World Bank and IMF staffs project that the 

preparation of a strategy should take up to 2 years, which for most 

countries is within the initiative’s time frames.12 They also note that the 

strategies are to last beyond the HIPC Initiative and to be reviewed and 

improved upon as more experience is gained in implementing these 

strategies. The World Bank and the IMF Executive Boards have said the 

strategies should be developed and owned by the countries—to increase 

the likelihood that the strategy will be implemented—and reflect countries’ 

unique circumstances and capacities. Thus, the Boards have not defined 

specific criteria for judging key aspects of the strategies, such as a 

sufficient level or type of civil society participation. This has created some 

confusion about what recipients must do to receive debt relief. Given the 

high priority that recipient governments place on debt relief and future 

loans, they want to make sure that strategies meet the Boards’ evolving 

expectations. To help communicate and meet the Boards’ expectations, 

World Bank and IMF staffs and others are helping the recipients prepare 

the strategies.

Because recipient countries will be highly dependent on concessional 

financing and monitored under World Bank- and IMF-supported programs 

for the foreseeable future, officials from some nongovernmental 

organizations have said that HIPC debt relief should not be conditioned on 

the preparation of poverty reduction strategies and/or compliance with 

IMF programs. They seek to ensure that the quality of the strategies and the 

level of civil society participation will not be compromised in order to meet 

the initiative’s time frames. Also, countries may have the incentive to 

quickly reach their completion point because debt relief only becomes 

irrevocable at that point. Prior to that, creditors may revoke debt relief due 

to recipients’ unsatisfactory performance. On the other hand, the World 

Bank, the IMF, and the U.S. Treasury argue that these concerns are 

mitigated because some countries do not have to prepare a full poverty 

reduction strategy in order to qualify for debt relief and countries will 

receive interim debt relief after they qualify for the initiative. World Bank 

and IMF staffs estimated that for four countries—Mauritania, Mozambique, 

12Poverty Reduction Strategy Papers: Operational Issues (Washington, D.C.: IMF and World 

Bank, Dec. 1999).
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Tanzania, and Uganda—the reduction in debt service expected during the 

interim period is at least 70 percent of the debt service reduction expected 

with full debt relief.13 Also, the staffs said that poverty reduction strategies 

are to be updated every 3 years and, thus, weaknesses in a country’s initial 

poverty reduction strategy—such as limited civil society participation—

could be addressed in subsequent iterations. According to World Bank and 

IMF staffs, creditors agreed in 1999 to increase the amount of HIPC debt 

relief if the link between debt relief and poverty reduction were 

strengthened and thus may resist weakening this link. Moreover, the World 

Bank and the IMF see the receipt of debt relief as a catalyst that should 

motivate countries to undertake difficult reforms and begin preparing the 

poverty reduction strategies.

13According to World Bank and IMF staffs, Bolivia is not expected to receive interim relief 

under the enhanced initiative.
Page 69 GAO/NSIAD-00-161 Debt Relief Initiative

Chapter 4

Bilateral and Multilateral Creditors Face 

Financing Challenges Chapte4r

As a group, bilateral and multilateral creditors are expected to provide 

roughly equal shares of HIPC debt relief that is estimated to total over 

$28 billion1

 (in net present value terms); however, many creditors, 

especially the multilateral and smaller bilateral creditors, have said they 

are having difficulty securing their share of the necessary financing. For 

example, an underlying premise of the initiative is that debt relief is 

supposed to be additional to the assistance that donors and creditors 

would otherwise provide to low-income countries. Difficulties in financing 

the initiative could delay debt relief and ultimately undermine the success 

of the initiative.2

Although bilateral creditors are expected to provide about $13 billion (net 

present value terms) of HIPC debt relief, the estimated cost of providing 

this relief varies between creditors, and some have not secured the full 

financing to fund their obligations. Our review indicates that, for four of the 

seven leading industrial countries (France, Germany, Italy, and Japan), the 

estimated cost of providing debt relief is close to the face value of the debt. 

For Canada, the United Kingdom, and the United States, the estimated cost 

of debt relief is less than the face value of the debt because these countries 

have already budgeted/provisioned for the probability of nonrepayment of 

the loan. For example, it is expected to cost the United States about

$346 million (in net present value terms) to forgive about $3.8 billion (in 

nominal terms) in debt owed by 22 potentially eligible countries under the 

enhanced HIPC Initiative. In addition to funding the costs of debt relief, 

large bilateral creditors also face challenges in providing continued aid 

flows and in contributing to help multilateral and smaller bilateral creditors 

meet their share of HIPC debt relief. Bilateral creditors have pledged over 

$2.5 billion to assist multilateral creditors.

Although most multilateral institutions have expressed support for the 

overall goal of the HIPC Initiative, many have yet to overcome difficulties 

in being able to provide their full share (about $14 billion) of debt relief. 

These difficulties stem from legal, technical, and financial restrictions that 

have made it problematic to obtain the needed financing from internal and 

1

Of the $28 billion, multilateral creditors are expected to provide about $14 billion, bilateral 

creditors to provide about $13.2 billion, and commercial creditors to provide about 

$0.8 billion.

2

A 1999 working paper of the International Monetary Fund, “From Toronto Terms to the 

HIPC Initiative: A Brief History of Debt Relief for Low-Income Countries,” estimates that 

debt relief initiatives since 1988 have cost creditors at least $30 billion.
Chapter 4

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external sources. Of the four major multilateral institutions—the World 

Bank, the IMF, the African Development Bank Group, and the 

Inter-American Development Bank—all but the IMF have large financing 

gaps that they are working to fill from internal and external sources. Some 

smaller multilateral institutions have raised the concern that providing debt 

relief under the initiative threatens their financial integrity. 

Large Bilateral 

Creditors Are 

Important to HIPC 

Success 

The success of the enhanced HIPC Initiative hinges on significant bilateral 

support. Bilateral creditors are expected to provide about 47 percent 

($13.2 billion in net present value terms) of the HIPC debt relief, with about 

87 percent of the bilateral total anticipated from a group of key bilateral 

creditors, known as the Paris Club.3

 (See fig. 7.)

Figure 7: Creditors’ Shares of HIPC Debt Relief

Sources: Data from the U. S. Treasury, the IMF, and the World Bank.

3

The Paris Club meets, on an as-needed basis, to negotiate debt relief on sovereign debt. 

Over the past 12 years, the Paris Club has undertaken actions to reduce or cancel public 

debt owed to them by heavily indebted poor countries. Prior to 1988, the Paris Club 

generally engaged in rescheduling, but not reducing, debt. This solved immediate 

debt-servicing crises but offered no permanent relief. 
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The Group of Seven countries’ (Canada, France, Germany, Italy, Japan, 

United Kingdom, and the United States) share of the bilateral total is 

estimated at roughly $6.5 billion in net present value terms. Our review 

focused primarily on these seven leading industrialized countries. Our 

review of these countries indicates that providing debt relief will result in 

budgetary costs for each country.4

 The impact on their budgets in providing 

debt relief varies based on several key factors: the amount of outstanding 

loans, the method used to value loans, the method used to budget for debt 

relief, the options used to provide debt relief, and the constraints imposed 

by certain legal requirements. (See apps. IX and X for a detailed discussion 

on these factors for the seven leading industrialized countries.) Table 5 

provides information that specifically relates to the enhanced HIPC 

Initiative as well as general information regarding the Group of Seven 

countries’ treatment of debt relief. All members of the Group of Seven 

countries have indicated that they will provide debt relief beyond the 

enhanced HIPC terms. In addition, according to the IMF, Australia, 

Belgium, Netherlands, Norway, Spain, and Switzerland have also 

announced that they would be willing to provide debt relief beyond the 

enhanced HIPC terms.

4

According to an Italian Treasury official, the costs of debt relief will have a direct impact on 

implementing agencies’ budgets and an indirect impact on the national budget. 
Chapter 4

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Table 5: Seven Industrialized Countries’ Participation in the Enhanced HIPC Initiative

Dollars in millions 

France Japan Germany United States Italy

United 

Kingdom Canada

Total nominal 

claims — 40 

countries

$13,033 $11,200 $6,586 $6,210 $4,311 $3,092 $771

HIPC debt as 

a percent of 

G-7 GDP (40 

HIPCs) 

0.9% 0.3% 0.3% 0.08% 0.4% 0.2% 0.1%

Percentage 

and type of 

debt relief; 

debt relief in 

addition to 

enhanced 

HIPC

100% non-ODA; 

pre-cutoff date 

debt; debt stock 

reduction − 90% 

at completion 

point and 10% 

over time.

100% all ODA

100% nonODA; pre-cut -

off date debt; 

type of relief 

is to be 

decided. 

100% all ODA

100% nonODA; precutoff date 

debt; debt 

stock reduction 

at completion 

point. 

100% all ODA

100% non-ODA; 

pre-and post 

cutoff date 

debts; debt 

stock reduction 

at completion 

point. 

100% all ODA

100% nonODA; precutoff date 

debt;debt 

stock 

reduction at 

completion 

point.

100% all ODA

100% non-ODA; 

pre-and post 

cutoff date 

debts; debt 

stock reduction 

− 90% at 

completion point 

and 10% over 

time. 

ODA debt has 

been written off

100% non-ODA; 

pre-and 

post-cutoff date 

debts; debt 

stock reduction 

at completion 

point.

ODA debt has 

been written off

Total 

estimated 

cost of debt 

relief

$8,000 Nominal $8,000 

Nominal

$5,689 

Nominal

$3,771 Nominal 

$346 NPV

$3,000 

Nominal

$2,720 Nominal $665 NPV

Method for 

valuing loans 

and loan 

guarantees

Loans are 

valued at face 

value.

Loans are 

valued at face 

value.

Loans are 

valued at face 

value.

Loans are 

discounted 

based on 

country credit 

ratings. 

Loans are 

valued at face 

value.

Non-ODA loans 

are discounted 

based on 

probability of 

default.

ODA loans were 

valued at zero 

for HIPCs. 

Non-ODA loans 

are discounted 

based on 

country credit 

ratings. 

ODA loans were 

valued at zero 

for HIPCs. 

Debt relief 

impact on 

national 

budget; 

national debt

Has a direct 

impact on 

national budget; 

no impact on 

national debt.

Has a direct 

impact on 

national 

budget with 

regard to ODA 

grants.

Has a direct 

impact on 

national 

budget; no 

direct impact 

on national 

debt.

Has a direct 

impact on 

national budget; 

indirectly 

impacts national 

debt.

Has an 

indirect 

impact on 

national 

budget and 

national debt. 

Has a direct 

impact on 

national budget; 

indirectly 

impacts national 

debt.

Has a direct 

impact on 

national budget; 

no impact on 

national debt. 
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Page 73 GAO/NSIAD-00-161 Debt Relief Initiative

Legend

ECGD = Export Credits Guarantee Department

G-7 = Group of Seven industrialized countries

NPV = Net present value

ODA = Official development assistance

Note: GDP as of 1998 and 1999 in millions of U.S. dollars. World Development Indicators database, 

July 1, 1999 and Standard & Poor’s DRI electronic database, May 8, 2000.

Sources:

France: French Treasury data as of December 31, 1998.

Japan: Japan Ministry of Finance data as of December 31, 1998.

Germany: German Treasury data as of January 31, 2000. 

United States: U.S. Treasury data as of December 31, 1998. 

United Kingdom: United Kingdom Treasury data as of December 31, 1999.

Italy: Italian Treasury data as of December 31, 1999.

Canada: Canadian Treasury data as of March 31, 1999. 

Outstanding Loans The amount of outstanding loans influences the cost of debt relief. Table 5 

shows that, in nominal terms, the exposure of the Group of Seven countries 

to the 40 potential HIPC recipients ranges from $771 million for Canada to 

about $13 billion for France. The Group of Seven countries’ total 

outstanding loans to the 40 heavily indebted poor countries represents 

about 50 percent of the total bilateral exposure in nominal terms.5

 The U.S.’ 

exposure is about $6 billion, or about 6 percent of bilateral exposure. 

Legal 

constraints

Parliament’s 

approval is 

required for 

Paris Club and 

bilateral debt 

relief. A budget 

ceiling is set by 

parliament.

Parliament’s 

approval is 

required when 

bilateral debt 

rescheduling 

and grant 

provision for 

debt relief 

agreement is 

concluded.

Parliament’s 

approval is 

required for 

bilateral debt 

relief.

Congress’ 

approval is 

required for 

Paris Club and 

bilateral debt 

relief.

Parliament’s 

approval is 

required for 

change in 

Paris Club 

option and for 

bilateral debt 

relief. 

Cabinet 

approval is 

required for 

bilateral debt 

relief. ECGD is 

restricted in the 

amount of debt 

relief it can 

provide. 

Parliament’s 

approval is 

required for 

bilateral debt 

relief. 

(Continued From Previous Page)

Dollars in millions 

France Japan Germany United States Italy

United 

Kingdom Canada

5

As of the end of 1998, total nominal outstanding debt of the HIPC countries was about 

$213 billion. The bilateral exposure is approximately 50 percent.
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Some Group of Seven countries are more exposed than others because 

some countries, such as the United Kingdom and Canada,6

 wrote off all of 

their official development assistance debt to the heavily indebted poor 

countries and now extend new official development assistance in the form 

of grants.7

 Other countries, such as France and Germany, wrote off a large 

part of the official development assistance debt they were owed.

Method Used to Value Loans The costs of debt relief are influenced by the methods countries use to 

value their loans. Our review indicates that the Group of Seven countries 

use different accounting methods to value their direct loans and loan 

guarantees.

• Four of the seven countries (France, Germany, Italy, and Japan) value 

their loans at face value. Under this method, no provision is made for 

the nonrepayment of loans. Thus, the cost of HIPC debt relief for these 

countries can be as much as the full face value of the debt being 

relieved.

• The three remaining countries (Canada, the United Kingdom, and the 

United States) apply risk-based discounting methods (based on country 

credit rating) that lower the value of the loans below their face value. 

These methods budget for the likelihood that a portion of the loan may 

not be repaid. Different types of loans, such as concessional official 

development assistance and non-concessional loans, are sometimes 

valued differently. Two countries (the United Kingdom and Canada) 

budget fully for concessional official development assistance loans. In 

other words, their official development assistance loans were valued at 

zero at the time of disbursement, meaning they did not expect to be 

repaid, and therefore relief entails no additional budgetary cost. In the 

case of the United States, official development assistance loans are 

assumed to have a 30-percent grant element. This means that, in 

determining the cost of debt reduction, the official development 

assistance loans’ face value is reduced by the grant element.

6

Canada has written off all official development assistance loans to the HIPC countries 

except for Myanmar (Burma). The official development loan to Myanmar was fully budgeted 

at the time of disbursement and would not result in additional impact on Canada’s budget to 

participate in the HIPC Initiative.

7

Other countries that have written off all or nearly all official development assistance loans 

to potential HIPC recipients include Denmark, the Netherlands, Norway, Sweden, and 

Switzerland.
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Method Used to Budget for 

Debt Relief

The cost of debt relief is also influenced by the accounting and budgeting 

rules that individual governments apply, as shown in table 5. 

• For the United States, the cost of providing debt relief is the difference 

between the net present expected value of the loan before debt relief is 

provided and the net present expected value of the loan after debt relief. 

For the countries eligible for HIPC debt relief, this means that the 

current estimated cost of debt relief is much less than the face value of 

the debt. Since the United States had already recognized the cost of 

lending to these countries, the current costs to the United States to 

forgive 100 percent of pre- and post-cutoff date debt8

 is estimated at 

about $346 million in net present value terms, although the nominal 

value of these loans is about $3.8 billion. Thus, under this approach, the 

estimated budgetary cost to the United States is about 9 cents on 

average per $1 of outstanding debt. 

• For France and Japan, the cost of debt relief is equal to the face value of 

the debt that is being canceled. For example, since France and Japan 

had carried their loans at face value, it is expected to cost each country 

a total of about $8 billion to provide debt relief, or $1 per each dollar of 

outstanding debt.

• For Germany, the cost of debt relief is defined in terms of the revenue 

forgone due to nonrepayment of a direct loan or additional spending 

needed to compensate the export credit agencies for loan guarantees 

made by the government. The maximum budgetary impact is about 

90 percent of the face value of the commercial credits that are 

guaranteed by the government.9

• For Italy, the government’s cost of debt relief is not necessarily 

100 percent of the debt that is forgiven. Debt relief has a direct impact 

on the implementing federal agencies’ budgets in the amount of the debt 

that is forgiven and an indirect impact on the national budget. The 

Italian Treasury is not required to reimburse its federal agencies 

immediately at the time of debt cancellation nor is it required to provide 

8

“Pre-cutoff date debt” refers to debt taken on by a debtor country before its first visit to the 

Paris Club, while “post-cutoff date debt” refers to debt taken on by the debtor after the first 

visit. Forgiveness of post-cutoff date debt stems from the U.S. administration’s goal to offer 

relief beyond the terms called for in the enhanced HIPC Initiative. Implementation of this 

goal is subject to Congressional authorization and appropriation.

9

Under the enhanced HIPC Initiative, Parliament has granted authority to the government to 

incur the cost of the 10-percent commercial loan portion that is generally borne by 

exporters.
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100 percent debt relief. It restores the funds when the agencies are in 

need of the money. 

• Both the United Kingdom and Canada have already written off their 

official development assistance loans to potential HIPC recipients. At 

the time of cancellation, most of the forgiveness had no impact on their 

budgets, since the loans were fully budgeted for at the time of 

disbursement. An exception was those official development assistance 

loans in which borrowers were expected to repay part of the interest. In 

contrast, the cancellation of non-official development assistance debt 

will result in budgetary outlays for these two countries to cover the 

costs of export credit guarantees.

Options for Debt Relief Additionally, the options that creditors choose, through the Paris Club 

framework, to provide debt relief can affect the budgetary impact. In 

recognizing the legal and budgetary constraints of creditors, the options 

enable creditors to spread their costs over time. The two main options that 

creditors choose for the treatment of non-official development assistance 

debt are debt reduction (a cancellation in the stock of eligible debt) and 

debt-service reduction (a reduction in interest rate). In the case of the 

enhanced HIPC Initiative, most of the Group of Seven countries have 

chosen to cancel the stock of eligible debt. The stock of debt will be 

irrevocably reduced by bilateral and multilateral creditors when countries 

reach their completion points.10 Although official development assistance 

debts are not generally treated in the Paris Club, forgiveness of this debt 

will be largely linked to the treatment of non-official development 

assistance debt.11

10Interim relief, or flow rescheduling, will be provided at the decision point. A flow 

rescheduling in the Paris Club involves the creditor agreeing to delay receipt of payments 

falling due during an agreed period, and to reschedule such amounts for eventual repayment 

over the medium and long term. In the case of the enhanced HIPC Initiative, most of the 

debt stock is expected to be written off at the completion point.

11At their summit in Cologne, Germany, in June 1999, the Group of Seven countries called on 

all bilateral creditors to forgive all official development debt of qualifying countries and said 

that new official development assistance should preferably be extended in the form of 

grants.
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Under the enhanced HIPC Initiative, France12 and the United Kingdom13 are 

expected to write off 90 percent of the recipients’ stock of debt at the 

completion points and to spread the remaining portion over time. The 

largest impact on France’s budget will occur at each country’s completion 

point, and the United Kingdom’s Export Credits Guarantee Department has 

already provisioned for the Paris Club agreed upon portion of the debt 

relief that will be provided. It is anticipated that Japan will reschedule its 

official development assistance loans over 40 years and provide grant aid to 

recipients when their payments fall due.14 Under its approach, Japan will 

require budgetary resources gradually over time, with the cost of debt relief 

spread over 4 decades. On the other hand, Italy and Germany have decided 

to write off the recipients’ stock of debt at the time the countries reach 

their completion points and become entitled to irrevocable debt relief. 

While the United States and Canada are expected to write off their loans at 

countries’ completion points, the impact on the U.S. budget, based on the 

Office of Management and Budget’s rules, will occur at countries’ decision 

points, and Canada has already realized the budgetary impact. 

12For France, the bilateral portion of the debt relief, the part beyond the Paris Club 

agreement, will impact the budget annually as maturities fall due after full HIPC treatment 

at completion points.

13The United Kingdom’s Treasury will fund the bilateral portion (10 percent) of the debt 

cancellation over a 23-year period.

14Official development assistance loans represent about 90 percent of Japan’s outstanding 

loans to the heavily indebted poor countries. The Japanese government has not yet chosen 

an option for the treatment of its non-official development assistance loans. 
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Legal Constraints Finally, six of the seven major industrial countries (except for the United 

Kingdom) need legislative authorization to provide debt relief or forgive 

debt.15 For example, the U.S. Congress must authorize debt relief and 

appropriate funds in advance to cover the costs.16 While the U.S. 

administration has said it would like to forgive all of the eligible debt HIPC 

recipients owed to the United States, Congress has not authorized this 

action. Congress has appropriated about one-third ($110 million) of the 

estimated $346 million needed to forgive this debt. Some major Paris Club 

members, such as Canada and Germany, have indicated that they will 

provide more debt relief than called for under the enhanced HIPC Initiative 

and have requested and obtained the legislative authority to do so.17

Non-Paris Club Creditors It is not yet clear to what extent non-Paris Club creditors18 and commercial 

creditors are willing and able to provide debt relief under the enhanced 

HIPC Initiative. Debtor countries, based on a Paris Club agreement, are 

required to seek comparable terms with their non-Paris Club creditors. 

However, in the past many debtor countries have found it extremely 

difficult to mobilize non-Paris Club creditor governments to provide debt 

relief on comparable terms with the Paris Club. While the IMF, the World 

Bank, and the debtor countries have been making efforts to ensure full 

participation and burden sharing since the original HIPC Initiative, so far 

only a few HIPC recipient countries have secured comparable treatment 

15Two countries require legislative authorization to grant Paris Club agreed relief—the 

United States and France. In addition, only the United Kingdom does not need legislative 

authorization to grant bilateral debt relief, which is based on agreements reached outside of 

the Paris Club.

16For six of the Group of Seven countries, the loan valuation and budgetary treatment of 

debt forgiveness are covered in their respective accounting and budgetary rules. For the 

United States, the accounting and budgetary treatment of direct loans, guarantees, and debt 

forgiveness are covered in the Statement of Federal Financial Accounting Standards 

Number 2 and the Office of Management and Budget’s Circular Number A-11, which are 

based on the Federal Credit Reform Act of 1990. France’s budgetary treatment of debt relief 

is based on rules emanating from the Maastricht Treaty, which created the European Union.

17Not all creditors that have announced their intention to provide debt relief beyond the 

enhanced HIPC terms have obtained legislative or cabinet authority to do so. 

18Non-Paris Club creditors are governments that generally do not participate in regular Paris 

Club meetings to negotiate debt relief on government debt. However, the HIPC Initiative, as 

endorsed by the Boards of the World Bank and the IMF, stresses the full participation of all 

creditors in providing debt relief. Non-Paris Club creditors, in certain instances, may have a 

considerable amount of debt owed by potential HIPC recipients.
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from non-Paris Club creditors. At its spring 2000 meeting, the International 

Monetary and Financial Committee of the IMF reaffirmed the importance 

of the principle of full participation in the HIPC Initiative by all creditors. In 

this respect, it called on all bilateral creditors to play their part while 

recognizing the need for flexibility in exceptional cases.

The majority of the debts owed to non-Paris Club creditors have been 

outstanding for many years and have typically not been rescheduled or 

repaid over the years. As such, the value of these claims reflects the 

accumulation of interest arrears and late interest charges. If comparable 

treatment were provided by non-Paris Club creditors, this would result in 

significant costs to these creditors since they would have to first provide 

relief under Naples terms,19 which have already been offered through the 

Paris Club. While non-Paris Club creditors constitute, on average, only 

about one-fourth of all bilateral debt, some non-Paris Club creditors have 

claims outstanding to a large number of potential HIPC recipients. For 

example, China is exposed to 17 potential recipients with claims totaling 

over $1 billion, and Libya has exposure to 12 potential recipients with 

claims totaling over $1 billion as well. 

In addition, some small non-Paris Club bilateral creditors are significantly 

exposed to one or more recipients and may face particularly difficult issues 

in providing their share of HIPC debt relief. For example, forgiveness of 

debt could result in balance-of-payments problems for creditors such as 

Costa Rica and Guatemala, which have loans outstanding to Nicaragua, a 

potential HIPC recipient. The debt owed by Nicaragua to these countries is 

recorded as part of their balance-of-payments reserves and thus will result 

in a reduction in these reserves, perhaps necessitating an IMF program to 

make up the shortfall. Assistance from other bilateral creditors is being 

sought to avoid this eventuality. 

Further, most of the potential HIPC recipients are African countries that 

also owe debt to their neighboring countries, which may also find it 

difficult to absorb the costs of debt forgiveness. For example, Tanzania, 

which is a HIPC recipient, is also a creditor with exposure to Uganda. 

According to the IMF, given the difficulties debtor countries are 

encountering in obtaining such agreements, efforts by all sides will need to 

be intensified in order to reach more satisfactory outcomes. Larger 

19Through the Paris Club, “Naples terms” offer indebted countries up to a 67-percent 

reduction in the net present value of specific parts of their bilateral debt.
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bilateral creditors may be asked to contribute financing to help non-Paris 

Club bilateral creditors and, as will be discussed in the next section, to help 

multilateral creditors provide their share of debt relief.

Commercial creditors have already provided debt relief for a number of 

countries before the HIPC Initiative. This relief was usually in the form of 

commercial bank debt reduction operations or debt buyback operations 

financed with the support of the International Development Association 

Debt Reduction Facility and bilateral donors.20 Partly due to these 

initiatives and the low level of access to financing from commercial 

creditors by potential HIPC recipients, commercial debt constitutes only 

about 8 percent of the total net present value of claims on these countries. 

Those commercial debts that have already been subject to restructuring 

agreements are typically being serviced. Commercial creditors are 

expected to provide about $800 million, or 3 percent, in debt relief under 

the enhanced HIPC Initiative.

Aid Flows Expected to 

Continue

As previously discussed, for HIPC recipients to maintain a sustainable level 

of debt they must continue to receive financial assistance from donors. In 

June 1999, the leading industrial countries said they will strive to gradually 

increase the volume of official development assistance and to put special 

emphasis on countries best positioned to use it effectively. To ease future 

debt burdens and facilitate sustainable development, they agreed to 

increase the share of grant-based financing in the official development 

assistance they provide to the least-developed countries.

Between 1992 and 1997, total official development assistance from 

Development Assistance Committee member countries of the Organization 

for Economic Cooperation and Development21 to developing countries and 

multilateral institutions fell steadily from 0.33 percent of their combined

20The 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. 

21The Organization for Economic Cooperation and Development provides member 

governments with a forum in which to discuss economic and social policies. The 

Development Assistance Committee consists of 23 industrialized countries.
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gross national products to a record low of 0.22 percent.22 Official 

development assistance from the Group of Seven industrialized countries 

fell by 29 percent in real terms between 1992 and 1997. According to a 

recent OECD report,23 there was a small increase in aid flows to developing 

countries from donors in 1998.24 However, the increase reflected temporary 

factors and did not signal a reversal of the declining trend in aid flows 

during the 1990s. According to the report, much of the increase was due in 

part to the timing of contributions to multilateral agencies and to other 

factors such as the Asian crisis. Some of the rise in aid flows, however, 

reflects the commitment by some countries such as the United Kingdom 

and New Zealand to increase their aid flows. Of the Group of Seven 

countries, only the United Kingdom and Canada have indicated that they 

will increase their official development assistance budgets.25 The United 

Kingdom has pledged to increase its official development assistance budget 

by 28 percent in real terms over 3 years, and Canada has recently 

announced small increases for the next 2 years. 

Three of the Four 

Largest Multilateral 

Creditors Face 

Considerable 

Financing Gaps

As shown in table 6, three of the four largest multilateral creditors—the 

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

and the World Bank—face considerable financing gaps. The financing gaps 

of these institutions stem in part from their goal of maintaining sufficient 

resources to continue their existing lending levels, some of which, they 

state, cannot be generated through internal sources. The IMF has identified 

the means to provide its full share of HIPC debt relief and awaits the 

fulfillment of government pledges and approval to use the full amount of 

investment income on the profits from off-market gold sales.

22The United Nations has advocated that donor countries set a target level of aid equal to 

0.7 percent of their gross national products. In 1998, only the Netherlands, Denmark, 

Norway, and Sweden reached or surpassed the U. N. target.

23Development Co-operation Report 1999 (Paris: OECD, 1999).

24The increase was a measure of the net official development assistance from countries that 

are members of the Development Assistance Committee.

25According to OECD officials, Greece and Sweden also plan to increase their official 

development assistance budgets over the next 2 years.
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Table 6: Financing Challenges Facing Major Multilateral Creditors

Legend

IBRD = International Bank for Reconstruction and Development

IDA = International Development Association

PRGF = Poverty Reduction and Growth Facility

SCA-2 = Special Contingency Account-2

Note: Estimates exclude debt relief for Ghana, Liberia, Somalia, and Sudan. 

a

Donors have pledged about $2.5 billion to the HIPC Trust Fund to provide support for debt relief to be 

undertaken by multilateral creditors (excludes contributions specifically for the World Bank and the 

IMF). This includes 734 million euros from the European Union and $600 million from the United 

States.

b

Estimate does not include debt relief of $200 million under the original HIPC Initiative.

Sources: GAO analysis of World Bank, IMF, African Development Bank Group, and Inter-American 

Development Bank data. 

1999 U.S. dollars, net present value

Institution

Estimated amount of 

HIPC debt relief Identified financing Potential financing sources

World Bank $6.3 billion of which

 5.7 billion − IDA

 0.6 billion − IBRD

for 32 countries

$2.1 billion For IDA shortfall:

• IBRD net income

• Donor funding provided for debt relief in the 

context of subsequent IDA replenishments

• Donor contributions to the World Bank 

component of the HIPC Trust Funda

For IBRD shortfall:

• IDA resources

• Donor contributions to the World Bank 

component of the HIPC Trust Fund

IMF $2.3 billion − HIPC

$3.5 billion − PRGF-HIPC 

Trust

for 32 countries

PRGF-HIPC Trust:

Earnings on the investment 

of profits from off-market 

gold sales

• SCA-2 contributions

• Nonreimbursement of 

General Resources 

Account for 

administration costs

• Member contributions

Authorization to use the remaining 5/14 of the 

earnings on the investment of profits from offmarket gold sales

Member contributions

African Development 

Bank Group 

$2.2 billion

for 29 countries

$320 million from internal 

sources ($263 million left)

$83 million in pledges 

with HIPC Trust Fund

Contributions to HIPC Trust Fund

Additional internal resources of $50 million

Inter-American 

Development Bank 

$900 millionb

for 4 countries

$180 million from internal 

sources

According to a staff proposal:

External sources − 40 percent

Internal sources − 60 percent
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To help multilateral creditors provide their share of debt relief under the 

initiative, the World Bank established and administers the HIPC Trust 

Fund. The Trust Fund receives contributions from 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 Group, to finance their share of HIPC debt relief after 

they have fully utilized other sources of financing. The Trust Fund has also 

received funding from the International Bank for Reconstruction and 

Development net income transfers and contributions from a number of 

bilateral donors specifically to support World Bank debt relief. The 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 May 2000, 

22 governments had made pledges or contributions to the Trust Fund 

totaling about $2.5 billion. (See app. XI for a list of contributors to the HIPC 

Trust Fund.)

World Bank The World Bank—the largest multilateral creditor—is expected to provide 

$6.3 billion (in net present value terms) in enhanced HIPC debt relief for 

32 countries. The bulk of this relief ($5.7 billion) is for the credits made by 

the International Development Association, which provides concessional 

financing to its poorest member countries. The remaining $600 million in 

debt relief will be for loans made by the International Bank for 

Reconstruction and Development (which provides market-based loans to 

its member countries) to Cameroon, Côte d’Ivoire, and Honduras. As of 

May 15, 2000, the World Bank had identified about $2.1 billion (in net 

present value terms) —the majority of which is International Bank for 

Reconstruction and Development net income—that could be used to fund 

debt relief. 

The World Bank is exploring several options for fully financing its share of 

debt relief, including donor contributions to the World Bank component of 

the HIPC Trust Fund, resources provided by donors for World Bank debt 

relief in the context of International Development Association 

replenishments.26 Additional transfers from the International Bank for 

Reconstruction and Development represent another potential source of 

26“Replenishments” refer to when donors contribute to the International Development 

Association. Such replenishments normally occur every 3 years, with the next 

replenishment expected to take effect in 2002.
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financing. According to the World Bank, its component of the HIPC Trust 

Fund will not have sufficient resources to fully fund debt relief when it 

needs to commit to providing this relief. As such, the World Bank will 

provide debt relief to these countries by forgiving a portion of future 

International Development Association debt service obligations as they fall 

due (instead of canceling its share of each country’s debt at the completion 

point). The International Development Association will be reimbursed by 

the Trust Fund on a “pay as you go” basis annually, subject to the 

availability of resources to do so. The World Bank currently projects that 

its component of the HIPC Trust Fund will have enough resources to 

reimburse the International Development Association for the costs of debt 

relief through 2005. Beyond that point, additional funding will be needed to 

reimburse the International Development Association—roughly

$500 million per year. According to the World Bank, any shortfalls in such 

funding would correspondingly reduce the International Development 

Association’s lending capacity. 

Also, additional funding will be needed in the short term to cover the costs 

of debt relief provided on International Bank for Reconstruction and 

Development debt. According to the World Bank, such debt will not be 

written off for financial integrity reasons.27 In addition, resources in the 

Trust Fund that came from International Bank for Reconstruction and 

Development net income cannot be used to finance International Bank for 

Reconstruction and Development debt relief because this would result in 

the Bank paying itself. Thus, the World Bank is seeking funding from other 

sources. Several donors have already committed $10 million to the World 

Bank component of the HIPC Trust Fund to support debt relief to be 

undertaken by the World Bank and, according to the World Bank, other 

donors have indicated their intent to provide contributions for this 

purpose. To the extent that donor resources are not available when the 

debt relief is to be provided, the International Development Association 

will provide this relief primarily in the form of refinancing through new 

27The World Bank does not consider the $3.6 billion available to the International Bank for 

Reconstruction and Development as a loan loss provision eligible to be used for HIPC debt 

relief. This is because the International Bank for Reconstruction and Development has not 

reserved resources specifically to provide HIPC debt relief. It determines the size of the loan 

loss provision based on the probability of lost revenue to the institution and the individual 

risks of each country with an outstanding International Bank for Reconstruction and 

Development loan. According to the financial statements of the International Bank for 

Reconstruction and Development, as of March 2000 the loan loss provision represents about 

3 percent of loans outstanding of $119.1 billion. The loan loss provision has never been 

utilized in International Bank for Reconstruction and Development history.
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grants and credits.28 The World Bank intends to seek donor reimbursement 

for any such costs during the next replenishment discussions of the 

International Development Association.

The International Monetary 

Fund

The IMF has identified financing to meet most of its share of HIPC debt 

relief ($2.3 billion in net present value terms) from internal resources—

including the earnings on the investment of profits from off-market gold 

sales—and contributions from its members. According to the IMF, full 

financing will be realized if the members provide the resources they 

pledged and the U.S. Congress authorizes the U.S. Executive Director at the 

IMF to approve the use by the IMF of all of the earnings on the investment 

of profits from off-market gold sales. Therefore, unlike the other major 

multilateral creditors, the IMF has a clearly identified means for closing its 

remaining financing gap.

The internal resources provided by the IMF to fund debt relief comes from 

two sources: (1) non-reimbursement of fees that the Poverty Reduction and 

Growth Facility normally owes to the IMF’s General Resources Account for 

administration of the facility, which is worth approximately $65 million a 

year from 1999 to 2004;29 and (2) the investment income on the profits from 

off-market gold sales of up to 14 million ounces. These transactions are 

considered “off-market” because the gold never enters the commercial 

market. In November 1999, the U.S. Congress authorized the U.S. Executive 

Director of the IMF to support the IMF’s off-market sale of up to 14-million 

troy ounces of gold and to use 9/14 of the earnings on the investment of 

28In discussions with World Bank officials, they said that these transactions should not be 

considered “round tripping” of the same resources since (1) the decision to have the two 

institutions aid each other’s participation in debt relief was made in different years, with the 

International Development Association assisting the International Bank for Reconstruction 

and Development since 1988 under the Fifth Dimension program, while the International 

Bank for Reconstruction and Development has assisted the International Development 

Association in providing debt relief since 1996 under the HIPC Initiative and (2) the 

International Bank for Reconstruction and Development resources that will be used to 

provide debt relief on International Development Association credits are kept separately in 

the HIPC Trust Fund. Upon debt forgiveness by the International Development Association 

on the pay-as-you-go basis, the International Development Association will be reimbursed 

by the Trust Fund as long as there are sufficient funds available in the Trust Fund. 

29The General Resources Account is used for most transactions between member countries 

and the IMF. These transactions include the receipt of quota subscriptions, purchases and 

repurchases, and the repayment of principal to the IMF’s lenders. The assets held in this 

account include members’ currencies, the IMF’s own holdings of special drawing rights, and 

gold. 
Chapter 4

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profits from off-market gold sales to be used solely for debt relief under the 

HIPC Initiative. From December 14, 1999, through April 5, 2000, the IMF 

had revalued about 12.9-million troy ounces of gold through seven 

off-market transactions with Brazil and Mexico.30 With the seventh 

transaction, the IMF declared its gold transactions for poor country debt 

relief completed. The profits from these off-market sales are in the IMF 

Poverty Reduction and Growth Facility-HIPC Trust earning interest. 

However, the interest on the last 5/14 of the profits from the revalued gold 

are not available to the IMF for debt relief until Congress authorizes the 

U.S. Executive Director at the IMF to support the IMF’s use of these funds. 

According to the IMF, if it cannot use all of these earnings, it will 

experience a financing shortfall beginning in early 2001.

The IMF has pledges worth $1.4 billion (net present value terms) from 

bilateral sources to help finance the IMF’s share of HIPC debt relief and 

resources to the IMF’s Poverty Reduction and Growth Facility. The U.S. 

Congress authorized the use of the U.S. share of a special contingent, or 

reserve, account (SCA-2) at the IMF, worth about $440 million for debt 

relief.31 This contribution by the United States is the largest bilateral 

contribution towards the IMF’s debt relief. In addition to the United States, 

many other countries also pledged resources from their share of the SCA-2 

account, with other countries having pledged direct bilateral contributions 

to the Poverty Reduction and Growth Facility-HIPC Trust. If all of these 

pledges are fulfilled, the IMF will have received contributions from 93 of its 

182 members.

30The transactions were accomplished by agreement between the IMF and the two 

countries. For example, at the time that Mexico had a large repayment to the IMF due, it 

agreed to purchase a portion of the IMF’s gold at the prevailing commercial price. The value 

of the gold purchased was exactly equal to its loan repayment. Mexico then repaid its loan 

with this newly purchased gold. Thus, the total gold stock of the IMF remained unchanged, 

but the portion of the gold represented by the transaction was revalued from the Special 

Drawing Right rate (approximately $47 per ounce) to the market rate (approximately 

$282 per ounce).

31The Special Contingent Account-2 (SCA-2) was established in 1990 to provide the IMF with 

additional liquidity as a safeguard against the risk of loss arising from currency purchases 

made in connection with 11 countries that experienced severe debt problems in the 1980s. 

This account was formally terminated in 1999 when its purpose was deemed no longer 

necessary. When it was terminated, the account contained about $1.4 billion. According to 

U.S. law, the U.S. contribution can only be used to fund debt relief and not to contribute to 

the Poverty Reduction and Growth Facility.
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The African Development 

Bank Group

The African Development Bank Group—the third largest multilateral 

creditor in the initiative—is expected to provide debt relief of $2.2 billion 

(in net present value terms) to 29 countries. It has identified $320 million 

from its own resources for this purpose, and the institution is considering 

contributing an additional $50 million of its own resources, in response to a 

call from the international community to increase its funding efforts. Of 

this $370 million in potential internal resources, about $313 million remains 

after accounting for debt relief provided to Uganda and Mozambique under 

the initial HIPC Initiative. In addition to these internal resources, the 

African Development Bank Group has approximately $83 million in 

donor-provided resources through the World Bank’s HIPC Trust Fund. After 

accounting for these resources, the African Development Bank Group has a 

substantial financing shortfall remaining.

The African Development Bank Group expects that donor contributions 

will finance its remaining obligation under the initiative. Thus far, the 

European Union has pledged 670 million euros32 that would help finance 

the African Development Bank Group’s share. However, according to the 

African Development Bank Group, the European Union has made this 

contribution contingent upon fair burdensharing by other donors, most 

notably the United States. The African Development Bank Group projects 

that without further donor assistance, currently available resources will be 

exhausted in the year 2000. As of May 1, 2000, the African Development 

Bank Group had not formally committed to participate in the enhanced 

HIPC Initiative. According to a proposal for the African Development Bank 

Group’s participation in the enhanced HIPC Initiative considered at an 

informal Board meeting in May 2000, the institution cannot commit to 

providing adequate debt relief unless adequate resources are identified. 

According to the African Development Bank Group, entering into debt 

relief commitments without sufficient funds could put the institution at risk 

by undermining its financial integrity and could potentially jeopardize 

future development assistance. 

The Inter-American 

Development Bank

The Inter-American Development Bank—the fourth largest multilateral 

creditor in the initiative—is projected to provide about $900 million (in net 

present value terms) of additional debt relief for four countries—Bolivia, 

Guyana, Honduras, and Nicaragua. About 75 percent of the Inter-American 

32As of May 30, 2000, 1 euro was equal to about $0.93.
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Development Bank relief is for two countries, Bolivia and Nicaragua. As of 

May 12, 2000, the institution had not decided on the method for financing 

and delivering debt relief, but a staff paper outlined a possible approach. 

Under this approach, external resources would fund approximately 

40 percent of the institution’s total relief, with the remainder provided 

through internal resources. The institution has thus far identified 

$180 million in internal resources, but the external resources have yet to be 

secured. The staff paper cautioned that the impact of using so much of its 

internal resources to provide debt relief could result in a shortfall in new 

concessional lending starting after 2008. According to the staff paper, in the 

absence of a replenishment, this shortfall could result in the institution 

having no concessional resources available for lending for four consecutive 

years, 2009-2012.

Some Smaller Multilaterals 

Face Substantial Funding 

Challenges

In addition to the four major multilateral institutions, there are 23 smaller 

multilateral institutions that are expected to participate in the financing of 

the HIPC Initiative (see app. IV). These institutions cover a diverse set of 

countries across much of the world. However, these institutions generally 

share the characteristic of having a relatively small number of client 

countries in their portfolios (certainly in comparison to the four major 

multilateral institutions), and therefore their exposure to HIPC recipients 

can represent a significant portion of their outstanding loan balances. For 

example, the Central American Bank for Economic Integration lends to 

only five countries, with its lending to Nicaragua and Honduras (both of 

which are potential HIPC recipients) representing about 50 percent of its 

total equity. Although the Central American Bank for Economic Integration 

has raised approximately $230 million through its own resources, the total 

cost of its participation in the initiative is estimated to be $495 million (in 

net present value terms). According to the Central American Bank for 

Economic Integration, providing that much debt relief from internal 

sources will reduce its equity by almost half, having a large, negative effect 

on the financial integrity of the institution. The Bank is soliciting support 

from the donor community to assist in its participation in the HIPC 

Initiative.

At the meeting of 17 multilateral institutions in April 2000, only 8 reported 

that the decision-making bodies of these institutions had confirmed their 

participation in the enhanced initiative. Institutions, such as the East 

African Development Bank and the Corporación Andina de Fomento

(Andean Development Corporation) told us that they support the initiative 
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but cannot afford to participate. They are also looking for support from the 

donor community to assist them. 
Page 90 GAO/NSIAD-00-161 Debt Relief Initiative

Chapter 5

Conclusions Chapte5r

The HIPC Initiative represents a step forward in the international 

community’s efforts to relieve poor countries of their heavy debt burdens, 

and it does so by seeking to include all creditors and providing significant 

debt relief to recipient countries. Elements of the current initiative—

especially its goals and financing—have required and continue to require 

much negotiation among the various creditors and recipients; however, 

unless strong, sustained economic growth is achieved, the initiative will not 

likely provide recipient countries with a lasting exit from their debt 

problems. This should not be seen, however, as a reason to abandon efforts 

to provide debt relief to eligible countries. Heavily indebted poor countries 

continue to carry unsustainable debt burdens that are unlikely to be 

lessened without debt relief, but participants and observers may need to 

have a more realistic expectation of what the initiative may ultimately 

achieve. 

Although countries that receive full debt relief under the enhanced HIPC 

Initiative are likely to have their debt reduced significantly, our analysis 

shows that the decline in debt service will only “free up” resources for 

poverty reduction if the recipients borrow these resources. As such, 

recipients’ debt levels will rise faster than they would without borrowing 

for increased spending on poverty reduction. In order for countries to 

remain debt sustainable, the World Bank and the IMF assume that 

countries will achieve continuous, strong economic performance, 

supported by their effectively using their resources and by donors 

continuing to provide assistance for 20 years or more following debt relief. 

Deviations from these assumptions may jeopardize a country’s ability to 

pay its future loan obligations. For example, if actual growth in export 

earnings is lower than projected, countries may not be able to pay their 

debt obligations unless donor flows (loans and grants) increase. However, 

any additional borrowing will increase these countries’ total debt levels 

over what was originally forecast following debt relief. 

Under the initiative, there is a tension between quick debt relief and 

comprehensive poverty reduction strategies, with concerns raised that 

recipients’ desire for quick debt relief may adversely affect the quality of 

their strategies and the level of civil society participation. As long as the 

initiative links debt relief to poverty reduction strategies, this tension is 

likely to continue. To counter these concerns, some have called for delinking the timing of debt relief and the preparation of these strategies. 

However, others argue that debt relief under the initiative is a catalyst that 

should motivate countries to begin preparing their strategies for reducing 

poverty and that concerns are mitigated by the provision of significant 
Chapter 5

Conclusions

Page 91 GAO/NSIAD-00-161 Debt Relief Initiative

interim relief. Moreover, the call for strengthening the link between debt 

relief and poverty reduction was part of the political compromise that gave 

rise to the enhanced initiative in 1999 and was motivated by concern over 

recipient countries’ continuing economic vulnerability. 

Many creditors, especially the multilateral and smaller bilateral creditors, 

report they are having difficulty securing their share of the necessary 

financing. In addition to funding the direct costs of debt relief, large 

bilateral creditors also face challenges in providing continued aid flows and 

in contributing to help multilateral and smaller bilateral creditors meet 

their share of HIPC debt relief. Such difficulties could undermine the 

success of the initiative, since debt relief is supposed to be additional to the 

assistance that donors and creditors would otherwise provide to

low-income countries. Despite the challenges in implementing and 

financing the initiative, poor countries continue to carry unsustainable debt 

burdens that are unlikely to be lessened without debt relief.
Page 92 GAO/NSIAD-00-161 Debt Relief Initiative

Appendix I

Human Development Indicators for Apendxies

38 Countries ApendxiI

Table 7 in this appendix shows the human development indicators 

measured and reported by the United Nations Development Program for 

38 of the 40 countries that may be eligible to receive debt relief under the 

enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Data were not 

available for Liberia and Somalia. The indicators include life expectancy, 

adult literacy, school enrollment, and gross national product (GNP) per 

capita. The human development index (shown in the last column of the 

table) measures the overall achievements in a country in three basic 

dimensions of human development—longevity, knowledge, and standard of 

living. It is measured by life expectancy, educational attainment (adult 

literacy and combined primary, secondary, and tertiary enrollment), and 

adjusted income. A higher index indicates a higher level of human 

development. Using this index, 174 countries were then ranked from 1 to 

174, with 1 indicating the highest level of human development and 

174 indicating the lowest. The rank for each country is shown in the first 

column of table 7. The human poverty index concentrates on deprivations 

in three essential elements of human life already reflected in the human 

development index. It shows the percentage of a country’s population 

living in poverty as defined in note “a” to the table. 

The data for the United States, the aggregate data for the countries 

classified as medium development and low development, and the aggregate 

data for the world are given at the end of the table to provide points of 

comparison.

Table 7: Human Development Indicators of 38 Countries Potentially Eligible for Debt Relief Under the Enhanced HIPC Initiative, 

as of 1997

Rank 

(human 

development 

index) Country

Life

expectancy

(in years)

Adult

literacy rate

(in percent)

School

enrollment

ratio

(in percent)

GNP per

capita (in

U.S. dollars)

Human

poverty

index

(in percent)a

Human

development

index value

Countries classified as 

medium human development

66.6 75.9 64 $1,280 25.3 0.66

99 Guyana 64.4 98.1 64 800 10.2 0.70

110 Vietnam 67.4 91.9 62 310 28.7 0.66

112 Bolivia 61.4 83.6 70 970 21.1 0.65

114 Honduras 69.4 70.7 58 740 24.8 0.64

121 Nicaragua 67.9 63.4 63 410 28.1 0.62

123 Sâo Tomé and Principe 64 75 57b 290 N/A 0.61

128 Myanmar 60.1 83.6 55 N/A 32.3 0.58
Page 93 GAO/NSIAD-00-161 Debt Relief Initiative

133 Ghana 60 66.4 42 $390 36.2 0.54

134 Cameroon 54.7 71.7 43 620 38.1 0.54

135 Congo 48.6 76.9 68 670 32.3 0.53

136 Kenya 52 79.3 50 340 28.2 0.52

Countries classified as low 

human development

50.6 48.5 39 274 44.9 0.42

140 Lao People’s Dem. Rep. 53.2 58.6 55 400 38.9 0.49

141 Congo, Dem. Rep. of the 50.8 77d 39 110 N/A 0.48

142 Sudan 55 53.3 34 290 36.8 0.48

143 Togo 48.8 53.2 61 340 38.4 0.47

147 Madagascar 57.5 47e 39 250 N/A 0.45

148 Yemen 58 42.5 49 270 49.2 0.45

149 Mauritania 53.5 38.4 41 440 47.5 0.45

151 Zambia 40.1 75.1 49 370 38.4 0.43

153 Senegal 52.3 34.6 35 540 49.6 0.43

154 Côte d’Ivoire 46.7 42.6 40 710 46.8 0.42

155 Benin 53.4 33.9 42 380 50.9 0.42

156 Tanzania, U. Rep. of 47.9 71.6 33 210 29.8 0.42

158 Uganda 39.6 64 40 330 40.6 0.40

159 Malawi 39.3 57.7e 75 210 42.2 0.40

160 Angola 46.5 45 27 260 N/A 0.40

161 Guinea 46.5 37.9 28 550 50.5 0.40

162 Chad 47.2 50.3 29 230 52.1 0.39

164 Rwanda 40.5 63 43 210 N/A 0.38c

165 Central African Republic 44.9 42.4 26 320 53.6 0.38

166 Mali 53.3 35.5 25 260 52.8 0.38

168 Guinea-Bissau 45 33.6 34 230 51.8 0.34

169 Mozambique 45.2 40.5 25 140 49.5 0.34

170 Burundi 42.4 44.6 23 140 46.1 0.32

171 Burkina Faso 44.4 20.7 20 250 59.3 0.30

172 Ethiopia 43.3 35.4 24 110 55.8 0.30

173 Niger 48.5 14.3 15 200 65.5 0.30

174 Sierra Leone 37.2 33.3 30f 160 57.7 0.25

3 United States 76.7 99b 94 $29,080 N/A 0.93

World 66.7 78 63 $5,257 N/A 0.71

(Continued From Previous Page)

Rank 

(human 

development 

index) Country

Life

expectancy

(in years)

Adult

literacy rate

(in percent)

School

enrollment

ratio

(in percent)

GNP per

capita (in

U.S. dollars)

Human

poverty

index

(in percent)a

Human

development

index value
Page 94 GAO/NSIAD-00-161 Debt Relief Initiative

Legend

N/A = Not available

a

The human poverty index is calculated using the following measures of deprivation. For developing 

countries, deprivation in longevity is represented by the percentage of people not expected to survive 

to age 40; deprivation in knowledge is represented by the percentage of adults who are illiterate; and 

deprivation in living standard is represented by a composite of three variables—the percentage of 

people without access to safe water, the percentage of people without access to health services, and 

the percentage of moderately and severely underweight children under 5 years old.

b

U.N. Human Development Report Office estimate.

c

United Nations Children’s Fund, The State of the World’s Children 1999 (New York: Oxford University 

Press, 1999).

d

Data cited refer to a year or period other than that specified in the column heading, differ from the 

standard definition, or refer to only part of the country. U.N. Human Development Report Office 

estimate based on national sources. United Nations Children’s Fund, The State of the World’s Children 

1998. (New York: Oxford University Press, 1998).

e

Data cited refer to a year or period other than that specified in the column heading, differ from the 

standard definition, or refer to only part of the country. U.N. Human Development Report Office 

estimate based on national sources.

f

United Nations Educational, Scientific and Cultural Organization, Correspondence on Gross 

Enrollment Ratios, Nov. 1997.

Source: United Nations Development Program, Human Development Report, 1999 (New York: United 

Nations).
Page 95 GAO/NSIAD-00-161 Debt Relief Initiative

Appendix II

Type of Debt Incurred by Poor Countries ApendxiI

Poor countries incur two major types of debt—concessional and 

nonconcessional. Concessional debt has below market interest rates, 

whereas nonconcessional debt has market-based rates. 

Types of Concessional 

Debt Incurred by Poor 

Countries

Official development assistance, or official aid, can be a grant or a loan 

with at least a 25-percent grant element, for the promotion of economic 

development or basic human needs. The loan portion is offered at a low 

interest rate and over a long repayment period, for example, 

• the U. S. Department of Agriculture sells agricultural commodities to 

low-income countries with repayment periods of 10 to 30 years and 

low interest rates, under its Public Law 480 program.

Other concessional debt has a below market interest rate, as shown in

table 8.

Table 8: Concessional Loans Offered by Four Major Multilateral Institutions

Institution Lending arm

Interest rate/ 

service charge 

(in percent)

Maturity

(in years)

Grace period

for principal

(in years)

Grant

element,

using a

10-percent

discount

ratea

 (in

percent)

Grant

element,

using a

5.25-percent

discount ratea

(in percent)

World Bank Group International 

Development 

Assistance 

0 interest 

Service charge of 

0.75

35-40 10 81.3 60.1

International Monetary 

Fund

Poverty Reduction and 

Growth Facility 

0.5 10 5-1⁄2 74.4 51.7

African Development Bank 

Group

African Development 

Fund

0 interest 

Service charge of 

0.75

50 10 83.8 64.4

Inter-American Development 

Bank 

Fund for Special 

Operations

1 during grace 

period 2 

thereafter

Up to 40 Up to 10 76.5 51.0
Appendix II

Type of Debt Incurred by Poor Countries

Page 96 GAO/NSIAD-00-161 Debt Relief Initiative

a

“Grant element” is a measure of a loan’s concessionality. It is calculated as the difference between the 

nominal, or face, value of a loan and the net present value of all scheduled principal and interest 

repayments, discounted at a market interest rate. The grant element is often expressed as a 

percentage of the loan’s face value. For these loans, we use the Special Drawing Right interest rate as 

the discount rate (5.25 percent, which represents the July − December 1998 average Commercial 

Interest Reference Rates, or CIRR—the method used by the World Bank and IMF staffs in analyzing 

countries’ debt profiles under the HIPC Initiative) to calculate the grant element. For example, a 

country may borrow $100 from the International Development Association, and the net present value 

of all future loan repayments is $40. This is equivalent to the country’s receiving a grant of $60 and a 

loan of $40 repayable at a market interest rate. Two methods for measuring concessionality are cited 

here. The distinction is important because the degree of concessionality seems higher under one 

method—the Development Assistance Committee (DAC) of the Organization for Economic 

Cooperation and Development method that uses a standard 10-percent discount rate—than under the 

second method—the CIRR—which is a better measure of a country’s debt burden. In other words, as 

shown in table 8 for World Bank loans, a country may think it has to pay about $19 for debt service 

when calculated using the DAC but actually has to pay about $40, as calculated under the CIRR 

method.

Source: GAO analysis of World Bank, IMF, African Development Bank Group, and Inter-American 

Development Bank documents.

Types of 

Nonconcessional Debt 

Incurred by Poor 

Countries

Various creditors offer nonconcessional loans. Table 9 shows the 

nonconcessional loans offered by four major multilateral institutions.

Table 9: Nonconcessional Loans Offered by Four Major Multilateral Institutions

Institution Lending arm Finance charges Maturity (in years)

Grace period for 

principal (in years)

World Bank Group International Bank for 

Reconstruction and 

Development 

Average cost of 

borrowing + 0.75% + 1% 

front-end fee + 0.75% 

commitment charge per 

year for undisbursed 

amountsa

12-20 (amortization 

period)

3-5

International Monetary 

Fund

General Resources Accountb Special Drawing Right 

interest ratec

 + charge to 

increase reserves

1-10 0

African Development Bank 

Group

African Development Bank Financial charges that 

reflect the cost of funds

12-20 Up to 5

Inter-American 

Development Bank

Ordinary Capital Account Cost of borrowing + 0.5% 

+ credit commission of 

0.75% per year

Varies Varies
Appendix II

Type of Debt Incurred by Poor Countries

Page 97 GAO/NSIAD-00-161 Debt Relief Initiative

a

The International Bank for Reconstruction and Development interest rate is a “market-based” rate 

derived from the average cost of borrowing plus 0.75 percent. The weighted average interest rate for 

fiscal year 1999 was 6.63 percent. A portion of the finance charges may be waived based on an annual 

determination. For most of the past 10 years, a portion of the interest and commitment charges has 

been waived. 

b

The General Resources Account is used for most transactions between member countries and the 

IMF.

c

The Special Drawing Right (SDR) interest rate is a composite interest rate derived as a weighted 

average of the 3-month interest rates of the IMF’s five largest members (the United States, Japan, 

Germany, the United Kingdom, and France). As of May 1, 2000, this rate was 4.29 percent.

Source: World Bank, IMF, African Development Bank Group, and Inter-American Development Bank 

documents.

• Loans from other multilateral financial institutions.

• Export credits − Loans for the purpose of trade that may be extended by 

the government or the private sector. If extended by the private sector, 

they may be supported by government guarantees. For example, 

• the U.S. Export-Import Bank finances the exports of U.S. 

manufactured goods through buyers’ credits, project finance, 

suppliers’ credit, and small business credits and

• the United Kingdom’s Export Credit Guarantee Department provides 

guarantees, insurance, and reinsurance against loss to exporters of 

United Kingdom goods.

• Commercial loans − loans offered by the private sector (e.g., banks) at 

market rates.

• Short-term credit − trade financing with a maturity of 1 year or less.
Page 98 GAO/NSIAD-00-161 Debt Relief Initiative

Appendix III

Amount and Type of Debt Owed to the United 

States by 40 Heavily Indebted Poor Countries, 

End of 1998 ApendxiI

U.S. dollars in millions

Country Concessional loans Nonconcessional loans Guarantees Total

Angola $38.0 $7.0 $0 $45.0

Benin 0 0 0 0

Bolivia 32.3 43.1 13.9 89.4

Burkina Faso 0 0 0 0

Burundi 0 0 0 0

Cameroon 0 54.8 8.3 63.1

Central African Republic 0 8.8 0 8.8

Chad 0 0 0 0

Congo, Democratic Republic 449.1 1,678.9 0 2,128.0

Congo, Republic 32.1 27.4 0 59.6

Côte d’Ivoire 90.1 231.6 40.8 362.5

Ethopia 92.0 2.2 0 94.2

Ghana 0 8.1 9.1 17.2

Guinea 103.8 22.9 0 126.7

Guinea-Bissau 0 0 0 0

Guyana 32.8 5.6 0 38.4

Honduras 0 86.5 57.4 143.9

Kenya 36.5 39.0 36.5 112.1

Lao, PDR 0 0 0 0

Liberia 252.3 67.2 0 319.5

Madagascar 2.8 38.0 0 40.8

Malawi 0 0 0 0

Mali 0 0 0 0

Mauritania 0 6.6 0 6.6

Mozambique 0 53.0 0 53.0

Myanmar 2.6 0 0 2.6

Nicaragua 28.9 88.2 2.1 119.2

Niger 0 12.7 0 12.7

Rwanda 0 0 1.3 1.3

Sâo Tomé and Príncipe 0 0 0 0

Senegal 0 17.4 0 17.4

Sierra Leone 65.4 0 0 65.4

Somalia 207.4 249.6 0 457.0

Sudan 507.5 766.7 0 1,274.2

Tanzania 0 21.4 4.0 25.4

Togo 0 0 0 0
Appendix III

Amount and Type of Debt Owed to the United 

States by 40 Heavily Indebted Poor 

Countries, End of 1998

Page 99 GAO/NSIAD-00-161 Debt Relief Initiative

a The Treasury has requested funding to provide debt relief to 22 countries of the 40 potential HIPC 

recipient countries. Of the remaining 18 countries, 4 countries are not likely to qualify as heavily 

indebted poor countries (Angola, Kenya, Vietnam, and Yemen); 4 countries have outstanding debt to 

the United States but are not likely to qualify within the next few years (Liberia, Myanmar, Somalia, and 

Sudan); and 10 countries have no understanding debt to the United States, as shown in the last 

column of the table.

Source: Preliminary data from the U. S. Treasury.

Uganda 0 0.9 0.9 1.8

Vietnam 130.1 0 0 130.1

Yemen 98.6 2.5 0 101.1

Zambia 134.2 158.4 0 292.6

Total 22 $1,066.1 $2,566.8 $137.8 $3,770.8

Total 40a

 $2,336.6 $3,698.9 $174.3 $6,209.8

(Continued From Previous Page)

U.S. dollars in millions

Country Concessional loans Nonconcessional loans Guarantees Total
Page 100 GAO/NSIAD-00-161 Debt Relief Initiative

Appendix IV

Multilateral Institutions Participating in the 

HIPC Debt Initiative ApendxiIV

Table 10 shows the multilateral institutions with outstanding claims on the 

40 heavily indebted poor countries. The institutions were expected to 

provide debt relief under the HIPC Initiative, but several, such as the East 

African Development Bank and the Central American Bank for Economic 

Integration, have said they support the initiative’s goal but will not be able 

to finance debt relief. The institutions are listed by the amount of debt 

relief they were expected to provide, from highest to lowest.

Table 10: Multilateral Creditors’ Outstanding Claims (end of 1998) on 40 Heavily Indebted Poor Countries and Estimated Amount 

of Debt Relief Under the HIPC Initiative, as of the End of 1999

U.S. dollars in millions

Outstanding debt (claims)

Institution Headquarters

Nominal

value

Net present

value

Of which

arrears

(net

present

value)

Debt relief

(net

present

value)

World Bank Group Washington, 

D.C., United 

States

$39,247 $20,300 $746 $6,300

International Development Association 36,919 17,925 328 5,700

International Bank for Reconstruction and Development 2,327 2,376b 418 600

International Monetary Fund Washington, 

D.C., United 

States

8,192 6,218 1,660 2,300

African Development Bank Abidjan, Côte 

d’Ivoire

10,275 6,929 997 2,200

Inter-American Development Bank Washington, 

D.C., United 

States

3,812 2,844 N/A 1,100

European Investment Bank/European Union Brussels, 

Belgium; 

Luxembourg

2,373 1,811 209 638

Central American Bank for Economic Integration Tegucigalpa, 

Honduras

853 920 N/A 392

International Fund for Agricultural Development Rome, Italy 1,237 689 33 219

Arab Bank for Economic Development in Africa Khartoum, 

Sudan

437 398 222 176

Organization of Petroleum Exporting Countries Fund for 

International Development 

Vienna, Austria 533 488 153 145

Islamic Development Bank Jeddah, Saudi 

Arabia

405 489 35 112
Appendix IV

Multilateral Institutions Participating in the 

HIPC Debt Initiative

Page 101 GAO/NSIAD-00-161 Debt Relief Initiative

Asian Development Bank Manila, 

Philippines

892 434 N/A 103

Corporación Andina de Fomento − Andean multilateral 

development bank

Caracas, 

Venezuela

178 185 N/A 77

Arab Fund for Economic and Social Development Safat, Kuwait 451 738b 317 64

Caribbean Community Multilateral Clearing Facility Port of Spain, 

Trinidad

108 101 N/A 54

Central Bank of West African States Dakar, Senegal 229 194 1 48

West African Development Bank Lomé, Togo 183 183 8 43

Fund for the Financial Development of the River Plate Basin Santa Cruz de la 

Sierra, Bolivia

55 50 N/A 24

Caribbean Development Bank St. Michael, 

Barbados

51 34 N/A 18

Bank of Central African States (Banque des Etats de 

l’Afrique Centrale)

Dakar, Senegal 51 54 18 16

Nordic Investment Fund Helsinki, Finland 96 44 N/A 14

Arab Monetary Fund Abu Dhabi, 

United Arab 

Emirates

122 160a N/A 11

Economic Community of West African States Fund for 

Cooperation, Compensation and Development 

Lomé, Togo 42 54a 9 11

East African Development Bank Kampala, 

Uganda

10 11a N/A 7

Nordic Development Fund Helsinki, Finland 33 32 N/A 3

Central American Fund for Monetary Stabilization (Fondo 

Centroamericano de Estabilización Monetaria)

N/A 3 N/A 2

Conseil de l’Entente (Council of the Entente) Abidjan, Côte 

d’Ivoire

10 11a N/A 2

Eastern and Southern African Trade and Development 

Bank 

Nairobi, Kenya 1 1 N/A 1

Total $69,878 $43,370 $4,409 $14,080

(Continued From Previous Page)

U.S. dollars in millions

Outstanding debt (claims)

Institution Headquarters

Nominal

value

Net present

value

Of which

arrears

(net

present

value)

Debt relief

(net

present

value)
Appendix IV

Multilateral Institutions Participating in the 

HIPC Debt Initiative

Page 102 GAO/NSIAD-00-161 Debt Relief Initiative

Legend

N/A = Not available.

Note: Figures include Ghana, Liberia, Somalia, and Sudan.

a

For these institutions, the net present value of these claims is greater than the nominal value, because 

the interest rate used to discount in 1998 was lower than the interest rate charged on these claims.

Source: World Bank documents, including Updates on Costing the Enhanced HIPC Initiative

(Washington, D.C.: World Bank, Dec. 1999).
Page 103 GAO/NSIAD-00-161 Debt Relief Initiative

Appendix V

Conditions Eight Countries Are Expected to 

Meet to Reach HIPC Milestones ApendxiV

Table 11 describes the conditions eight countries are expected to meet in 

order to reach their milestones under the enhanced HIPC Initiative. These 

milestones are the entry (decision) point and exit (completion) point. The 

eight countries have either reached their decision points under the 

initiative or are expected to reach this point by September 2000. These 

conditions are contained in documents describing the reforms countries 

agreed to undertake for the HIPC Initiative as well as targets and actions 

they agreed to meet under their existing World Bank- and International 

Monetary Fund (IMF)-supported programs. In addition to these conditions, 

countries are also to receive satisfactory assurances that creditors will 

provide debt relief. Countries agree to not impose or intensify restrictions 

on international trade or payments.

Table 11: Conditions Eight Countries Are Expected to Meet in Order to Reach HIPC Initiative Milestones (Monitored under World 

Bank- and IMF-supported programs)

Country

Poverty 

reduction 

strategy 

Macroeconomic

stability and

public finances

Foreign

exchange

system

reform

Tax

reform

Financial

sector

reform

Public

sector

reform

Social

sector

reform

Governance/

anticorruption Privatization

Bolivia

Before 

decision 

point −

reached 

Jan. 2000

Prepare interim 

strategy

X XX X X

Before 

completion 

point 

Prepare full 

strategy

XX X

Guineaa

Before 

decision 

point

Prepare interim 

strategy

X XX X

Before 

completion 

point −

possible 

areas

Prepare full 

strategy

Prepare one 

progress report 

on 

implementation

X X XX

Hondurasa

Before 

decision 

point 

Prepare interim 

strategy

X XX
Appendix V

Conditions Eight Countries Are Expected to 

Meet to Reach HIPC Milestones

Page 104 GAO/NSIAD-00-161 Debt Relief Initiative

Before 

completion 

point 

Prepare full 

strategy 

Prepare one 

progress report 

on 

implementation

X X XX

Mauritania

Before 

decision 

point −

reached 

Jan. 2000

Prepare interim 

strategy

X X XX X X

Before 

completion 

point 

Prepare full 

strategy 

Successfully 

implement for 

at least 1 year

X XX X X X X

Mozambique

Before 

decision 

point −

reached 

April 2000

Prepare interim 

strategy

X XX

Before 

completion 

pointb

Prepare full 

strategy

X XX X X

Nicaraguaa

Before 

decision 

point

Prepare interim 

strategy

X XX X X X

Before 

completion 

point −

tentative 

Complete 

strategy

 Implement 

strategy

X X X XX

Tanzania

Before 

decision 

point −

reached 

April 2000

Prepare interim 

strategy

X

(Continued From Previous Page)

Country

Poverty 

reduction 

strategy 

Macroeconomic

stability and

public finances

Foreign

exchange

system

reform

Tax

reform

Financial

sector

reform

Public

sector

reform

Social

sector

reform

Governance/

anticorruption Privatization
Appendix V

Conditions Eight Countries Are Expected to 

Meet to Reach HIPC Milestones

Page 105 GAO/NSIAD-00-161 Debt Relief Initiative

a

Information for Guinea, Honduras, and Nicaragua is based on preliminary HIPC documents and is 

therefore subject to change.

b

World Bank and IMF staffs note that, in assessing Mozambique’s performance before the completion 

point, due consideration will be given to the damage caused by the floods in January and February 

2000.

Sources: World Bank and IMF documents. 

Before 

completion 

point 

Prepare full 

strategy

X X XX X X

Uganda

Before 

decision 

point −

reached 

Jan. 2000

Prepare 

contents of 

strategy

X XX

Before 

completion 

point −

reached 

May 2000 

Finalize 

strategy

X

(Continued From Previous Page)

Country

Poverty 

reduction 

strategy 

Macroeconomic

stability and

public finances

Foreign

exchange

system

reform

Tax

reform

Financial

sector

reform

Public

sector

reform

Social

sector

reform

Governance/

anticorruption Privatization
Page 106 GAO/NSIAD-00-161 Debt Relief Initiative

Appendix VI

Methodologies Used to Analyze the Debt 

Sustainability of Potential Recipients of HIPC 

Debt Relief ApendxiVI

We addressed a number of methodological issues in evaluating the debt 

sustainability of potential recipients of HIPC debt relief. The HIPC 

documents that we analyzed presented detailed economic projections by 

World Bank and IMF staffs and host country officials for countries that are 

reviewed for eligibility in the initiative (referred to as the “debt 

sustainability analysis”). We examined the debt sustainability analyses 

documents for seven countries: Bolivia, Honduras, Mauritania, 

Mozambique, Nicaragua, Tanzania, and Uganda.1

 The documents provide 

projections over a 20-year period for key macroeconomic variables as well 

as for countries’ debt service and the net present value of the debt stock. 

The projection period provides a baseline scenario of how the economy 

would evolve over the long term, under certain assumptions. However, 

inconsistencies and gaps in the types of information reported in the debt 

sustainability analyses presented challenges in our analysis of the 

documents.

General Approach We examined the implications of the World Bank and IMF staffs’ and host 

country officials’ projections contained within the debt sustainability 

analyses for key economic variables, including debt levels, GDP, 

government revenue, donor grant and loan assistance, exports, and debt 

relief for each of the seven countries’ total debt, debt service, and external 

finance requirements. We also compared the nominal dollar growth rate 

projections for these variables—implicit in the HIPC documents—with 

historical data from the World Bank’s Global Development Finance and the 

IMF’s International Financial Statistics. We supplemented our analyses 

with information from IMF and World Bank officials. We reviewed with 

these officials the underlying methodology of the debt sustainability 

analyses, clarified areas of ambiguity, and asked country-specific questions. 

In situations where we had to make assumptions, we vetted these with IMF 

officials as well as among our own staff economists. We also met with U.S. 

Treasury and nongovernmental organization officials in the United States; 

and government, donor, and nongovernmental organization officials in four 

recipient countries—Bolivia, Nicaragua, Tanzania, and Uganda — to help 

us clarify their understanding of “freed-up resources” and how this was 

applied under the HIPC Initiative. 

1

Our analysis focused on seven of the eight countries in which a debt sustainability analysis 

from the World Bank and the IMF was available to us to analyze. Due to the limitations of 

time, we were unable to review the final country, Guinea.
Appendix VI

Methodologies Used to Analyze the Debt 

Sustainability of Potential Recipients of 

HIPC Debt Relief

Page 107 GAO/NSIAD-00-161 Debt Relief Initiative

Main Methodologies 

Used

Our examination of the debt sustainability analyses required us to make 

projections for a number of variables, including the amount of borrowing 

countries would have to undertake after receiving debt relief to remain 

debt sustainable, the impact of a decline in exports on debt sustainability, 

and projections of future donor assistance. A brief description of the 

approach we used in each of these areas is described in the next 

paragraphs.

External Viability Analysis According to the IMF, a country is externally viable if it is able to pay its 

external obligations with its own resources (tax revenues, external account 

surpluses, and nonconcessional borrowing), without recourse to donor 

assistance. If, after subtracting HIPC debt service relief, further external 

financing2

 is required, then a country is not considered externally viable. 

Hence, the continued presence of a financing gap after HIPC debt service 

relief indicates that the country is not externally viable after HIPC debt 

relief. When the documents provided data separately for program grants 

and loans (i.e., external assistance used specifically to finance the 

balance-of-payments gap) from project assistance, we were able to directly 

determine if the country would become externally viable after receiving 

HIPC debt relief. 

When there was no separation in the data between program and project 

assistance after debt relief, we employed a financing gap analysis to 

identify the point of external viability for each country. The financing gap 

analysis measures the amount of continued external assistance that each 

country would require after accounting for identified sources of financing 

(including internal resources and assistance) in order to remain debt 

sustainable. If, after receiving HIPC debt relief, a country continues to 

require concessional external assistance to close its remaining financing 

gap, it is not considered externally viable. 

2

External financing (or balance-of-payments financing) includes program grants 

concessional program loans, and any additional exceptional finance such as IMF 

disbursements and the remaining financing gap (sometimes referred to as “new borrowing” 

or “unidentified borrowing”).
Appendix VI

Methodologies Used to Analyze the Debt 

Sustainability of Potential Recipients of 

HIPC Debt Relief

Page 108 GAO/NSIAD-00-161 Debt Relief Initiative

To determine what a country’s external financing needs would be if the 

country did not choose to spend resources equivalent to the amount of 

resources “freed up” for spending on poverty reduction, we focused on 

each country’s pre-HIPC debt relief external financing requirements. From 

those external financing requirements we subtracted the annual HIPC debt 

service relief that they are projected to receive and the additional debt 

service the country would incur had it borrowed the equivalent amount of 

“freed-up” resources for poverty spending.3

Determining Additional 

Borrowing Requirements 

Under Alternative Export 

Growth Assumptions

If the growth rate in export earnings declines from its projected level (as 

contained in HIPC documents), the country will generate a lower amount 

of foreign exchange earnings than projected in subsequent years. This 

would impact the country’s requirement for external financial assistance, 

its stock of debt, and its debt burden. To estimate these effects, we assume 

that the annual shortfall in foreign exchange earnings from a fall in exports 

will be replaced by increased donor assistance (loans and grants).4

Comparing Projected Levels 

of Donor Assistance 

The projections of donor assistance are based on the data given in the debt 

sustainability analysis for each country. Assistance includes official grants 

and loans for both program and project purposes.5

 We calculated the net 

present value of the loan and grant components, generally from the year 

2000 to 2018 for each country. We then compared these debt sustainability 

analysis-based projections of donor assistance (in net present value terms) 

to net present value projections we calculated based on historic data on 

donor assistance for the same country. The data for the historic-based 

projections of assistance are from the World Bank Global Development 

Finance 1999. We developed three approaches for comparing the debt 

sustainability analysis-based projections to both high and low versions of 

3

The actual amount of borrowing may be less than the HIPC debt service relief if (a) the 

amount of program grants provided by donors is greater than projected, (b) the decision is 

made not to borrow all of it, and (c) the country becomes externally viable after receiving 

HIPC relief.

4

This methodology implicitly assumes that GDP has declined because exports have 

decreased, but domestic spending remains the same because external loans and transfers 

have increased. 

5

Loans include disbursements (such as those from the IMF) and “balance-of-payments” 

financing such as international reserve buildup, unidentified new borrowing, and/or other 

exceptional financing.
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historical projections assuming (1) constant nominal levels for historical 

assistance, (2) constant real levels of historical assistance (2 percent 

nominal growth rate),6

 and (3) growth of nominal assistance at each 

country’s 1990s historic assistance growth rates. These approaches yielded 

very similar results.

Challenges in 

Analyzing and 

Comparing HIPC 

Documents 

In our examination of the debt sustainability analyses, we confronted 

several challenges that derived from the reporting decisions made within 

these documents. While recognizing that there are differences in data 

availability across countries and that different World Bank/IMF teams 

prepare each debt sustainability analysis, the absence of consistency as 

well as gaps in information provided make comparisons across countries 

very difficult. Addressing inconsistencies in the types of information 

reported and gaps in the presentation of some key variables would assist 

future analysis and improve the transparency of these documents. 

Reporting Inconsistencies We found considerable variation in the form and substance of the data 

presented in the IMF and World Bank debt sustainability analyses we 

reviewed. Although there was uniformity in the general types of tables 

presented within these documents, the specific variables included within 

these tables varied from country to country. In many cases, data for key 

economic variables such as IMF purchases, loan disbursements, or 

government revenue either were not provided or could not be easily 

deduced. For example, although the dollar amount of total debt after relief, 

annual exports, and government revenue were all available for other 

countries, in the case of Uganda, this information was not directly reported 

and had to be deduced from other data. Projected annual information for 

key variables was not available for Mozambique, Mauritania, or Tanzania, 

and instead the data were reported as averages over certain periods of time 

(e.g., 2008-2017).7

 The breakout of future external financing between 

program and project assistance was available for only two countries, 

Uganda and Tanzania. The absence of this information in the documents of 

6

We used 2 percent because U.S. inflation is expected to grow at this rate over the projected 

period. Adding the 2-percent inflation rate means assistance will also grow at a rate of

2 percent, thus maintaining a constant real level of assistance.

7

According to the IMF, the use of averages instead of the full-time series is due to the 

difficulty of presenting large amounts of data in long-time series on one page.
Appendix VI

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Sustainability of Potential Recipients of 

HIPC Debt Relief

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the other countries made our calculations of external viability more 

challenging. 

Information Gaps Critical information that we derived from the debt sustainability analyses is 

not presented explicitly within HIPC documents. In some of the decision 

point documents, the actual amount of debt relief a country would receive 

is not explicitly presented and had to be deduced from other data provided. 

In addition, the amount of borrowing that each country would need after 

debt relief in order to remain debt sustainable is not reported and required 

a complex methodology for us to derive. Finally, although the documents 

discuss the resources that debt relief would contribute to poverty 

reduction activities, they do not mention that these are financial resources 

that each country would have to borrow.
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Appendix VII

Information on Selected Elements of Poverty 

Reduction Strategies ApendxiVI

This appendix provides information on selected elements of the poverty 

reduction strategies to further illustrate the challenges countries face in 

developing the strategies and the numerous causes of poverty that were 

discussed in chapter 3. Reducing poverty takes time and effort. This 

appendix discusses (1) the multiple definitions and measurements of 

poverty, (2) the numerous causes of poverty, and (3) the use of 

decentralization and citizen participation as ways to reduce poverty in 

Bolivia and Uganda. 

The Characteristics of 

Poverty Are Broadly 

Defined and 

Multidimensional

Poverty is defined broadly because it can combine economic 

considerations with those of living conditions and quality of life. Countries 

use both national and international definitions to define poverty and a 

variety of indicators to measure various socioeconomic sectors such as 

health and education. Poverty can derive from numerous and mutually 

reinforcing factors, such as disease, natural disasters, war, weak economic 

systems, and governance. It can affect a significant portion of the 

population and can be concentrated in specific regions and ethnic groups 

and on women. 

The reduction of poverty has been a priority goal of international 

development. Targets set by the United Nations and the World Bank to 

address poverty include reducing (1) the number of people living in global 

poverty by half between 1993 and 2015, (2) the proportion of malnourished 

children by half between 1995 and 2005 and by half again by 2015, and 

(3) global adult illiteracy (ages 15-24) by three fourths between 1990 and 

2015.1

Poverty Is Broadly Defined According to the U.N. Development Program, poverty can be defined as the 

inability to satisfy minimum food and nonfood needs, the lack of minimally 

adequate income or expenditures, or the lack of essential human 

capabilities such as being literate or adequately nourished.2

 In addition, 

countries can use their own national standards that can differ between 

countries and change as a country’s per capita income grows. They can also 

1

This means reducing global male and female poverty illiteracy rates to 8 percent by 2015, 

according to the United Nations.

2

Overcoming Human Poverty Report 1998, U.N. Development Program (New York: United 

Nations, 1998).
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use the international poverty line jointly agreed to by the United Nations 

and the World Bank that is calculated as one person living on $1 per day.

The countries that we analyzed used a variety of indicators to assess their 

levels of poverty. According to a U.N. Development Program survey, the 

majority of countries use both non-monetary and monetary definitions of 

poverty. Table 12 shows which measures of poverty countries that we 

analyzed use, whether they have estimated the rates of poverty, and 

whether they have set targets for reducing poverty.

Table 12: Status of Six Selected Countries’ Efforts to Define and Address Poverty

a

“Extreme poverty” is defined as indigence or destitution, usually specified as the inability to satisfy 

even minimum food needs.

b

“Overall poverty” is defined as a less severe level of poverty, usually the inability to satisfy essential 

nonfood as well as food needs. 

°Non-income definition of poverty.

♦Plan under development, according to country authorities.

Source: Overcoming Human Poverty Report 1998, U.N. Development Program (New York: United 

Nations, 1998).
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In Tanzania, poverty is indicated by the national poverty line of $0.65 a day 

and by the definition that it is “a state of deprivation, prohibitive of a decent 

human life.” Bolivia uses a nonincome definition of poverty and describes it 

as the inability to satisfy basic needs as a result of lack of opportunities to 

obtain sufficient income, reduced access to public services, high 

vulnerability, and social exclusion. Countries also use a variety of poverty 

monitoring indicators that measure socioeconomic areas such as infant 

mortality, maternal mortality, mortality for children under 5 years old, and 

life expectancy and other factors including the percentage of the 

population with access to safe water and the number of children in primary 

school (enrollment rates).

Uganda provides an example of the challenges countries face in relying on 

indicators as a means for monitoring reductions in poverty. Although 

Uganda has achieved substantial improvements in some indicators, many 

others remain low and some critical ones have in fact deteriorated, 

according to World Bank and IMF staffs. The most notable success has 

been in primary education, where the net primary school enrollment rate 

increased from 56 percent in 1995/96 to 94 percent in 1998/99. 

Improvements were also realized with regard to access to clean water, 

literacy rates, and the prevalence of stunting (generally caused by 

malnutrition) among small children. However, life expectancy at birth has 

declined from 47 years in the early 1990s to 42 years in 1998, with Uganda 

now having one of the shortest life expectancies in Africa, according to the 

U.N. Development Program. (See app. I.) This decline in life expectancy is 

directly related to the estimated 10 percent of the population that is 

infected with the HIV/AIDS virus. 

Poverty Is Caused by 

Numerous Factors

The causes of poverty are numerous and often involve mutually reinforcing 

factors that can vary significantly between different countries, according to 

the United Nations. Some of these factors, for example, include the lack of 

productive resources to generate material wealth, illiteracy, the prevalence 

of diseases such as HIV/AIDS, weak and/or discriminatory economic and 

political systems, natural disasters such as drought and floods, and 

man-made calamities such as war. According to the U.N. Development 

Program, human poverty is the result of a whole set of intersecting 

inequalities—social, political, and economic. Poverty is thus caused by 

more factors than simply a shortage of income, as the following examples 

illustrate.
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• According to Bolivia’s interim poverty reduction strategy paper, poverty 

is caused by economic, social, and cultural factors such as limited 

access to health services, limited property rights that restrict the ability 

of the poor to gain physical and financial assets, and social exclusion. In 

Bolivia, the poor lack property rights to accumulate both physical and 

financial assets, and this has led the poor to be more vulnerable to 

factors such disease, economic shock, natural disaster, conflict, or 

discrimination. 

• In a Ugandan study that included the views of the poor,3

 in addition to 

low income, consumption, education levels, and health status, the poor 

said poverty is also caused by previously unconsidered factors such as 

lack of security (that is, living in areas prone to conflict) and 

vulnerability to risks such as droughts and poor harvests.

• In Tanzania, low economic growth has been the main reason for 

continuing high poverty, while other factors such as the insufficient 

funding of the social sector are also an issue. Although social sector 

spending has gradually recovered in Tanzania after a fiscal crisis in the 

mid-1990s, according to its Public Expenditure Review, compared to the 

actual requirements for the sectors to provide basic social services to all 

Tanzanians, the current allocations are inadequate to meet their needs. 

Poverty Can Concentrate on 

Specific Groups and Affect 

Significant Portions of a 

Country

Poverty can also affect a significant portion of a country’s population and 

be concentrated in specific regions and ethnic groups or be rooted in 

gender inequalities. Bolivia’s interim poverty reduction strategy estimated 

that in 1992, 70 percent of households lived below the national poverty line. 

In 1998, the U.N. Development Program reported that 94 percent of 

Bolivia’s rural households lived in poverty, as opposed to about 50 percent 

of households in urban areas. In Nicaragua, 44 percent of the population is 

estimated to live under its poverty line, while Mozambique’s interim 

poverty reduction strategy estimated this proportion to be 70 percent. 

Women in these countries also suffer from poverty disproportionately 

compared to men. According to the United Nations, compared to men, 

women have a higher incidence of poverty, their poverty is more severe, 

and their incidence of poverty is increasing. In addition to lower income 

levels, women also suffer from compounding problems of low status, 

incidences of violence against them, and lower levels of education and 

3

Uganda Participatory Poverty Assessment: Key Findings (Kampala, Uganda: The Ministry 

of Finance, Planning, and Economic Development, 1999).
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health care. For example, of the 900 million illiterate adults in the world, 

two-thirds of them are women. In Tanzania, literacy rates for women are 

62 percent compared to the male literacy rate of about 82 percent, 

according to the U.N. Development Program.

Decentralization Is an 

Important Part of 

Bolivia’s and Uganda’s 

Poverty Reduction 

Strategies

Countries may choose a number of strategies to reduce poverty. In addition 

to undertaking many economic and social actions, some countries have 

been focusing on the importance of decentralization of government 

services as a means to improve efficiency of service delivery and increase 

civil society involvement. The process of decentralization may seek to 

transfer political decision-making power from the federal to subordinate 

levels, improve efficiency in the provision of services, and promote 

accountability at the local level. The experience of developing countries 

demonstrates some of the advantages of decentralization as well as the 

difficulties of pursuing this method. Both Bolivia and Uganda have pursued 

decentralization for several years, including efforts to transfer 

responsibilities to district governments from the federal level and to build 

citizens’ participation in planning and monitoring government activities. 

Bolivia According to Bolivia’s interim poverty reduction strategy, decentralization 

is an important tool for both reducing poverty and enhancing equality since 

this approach makes it possible to focus on local needs, encourages good 

governance, and generates a desire for communities to begin having a say 

in the development of their region.4

 According to Bolivian government 

officials, decentralization and popular participation in Bolivia have 

achieved some benefits, such as reducing distortions in the allocation of 

resources (resources were not previously allocated based primarily on 

need) and increasing citizens’ involvement in identifying priority needs. 

World Bank staff reported that decentralization has increased efficiency 

and local accountability, and popular participation has helped to make 

many municipalities more autonomous and responsive to civil society.5

However, the government and the Bank also noted that additional 

4

Bolivia: Interim Poverty Reduction Strategy Paper (La Paz, Bolivia: Republic of Bolivia, 

Jan. 13, 2000).

5

Bolivia: Implementing the Comprehensive Development Framework (Washington, D.C.: 

World Bank, May 21, 1999).
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improvements are needed for decentralization to be effective in reducing 

poverty. 

Decentralization seeks to transfer political power to municipal 

governments, promote fiscal responsibility through the handling of local 

public finances, and achieve greater efficiency in the provision of social 

services. According to the Bolivian government, such considerations led to 

administrative decentralization and popular participation laws in the mid1990s that sought to decentralize political and economic decision-making, 

transfer the administration of key public services and resources to the local 

level, promote citizens’ participation, and improve the allocation of 

resources at the local level. The U.N. Development Program stated that the 

main objective of the Popular Participation Law is to improve the quality of 

life of men and women through a more equitable distribution of public 

resources and decision-making authority.6

 The U.N. Development Program 

also said that it is the first Bolivian law that recognizes, promotes, and 

institutionalizes participation processes at the local level. According to the 

United Kingdom’s aid organization, for the first time these laws have put 

significant resources into local hands, offering the potential for more 

demand-driven development and greater local ownership and 

accountability.7

Bolivia’s interim poverty reduction strategy stated that, in the 5 years these 

laws have been implemented, several improvements have been made. For 

example, some urban areas were getting more resources on a per capita 

basis than poorer rural areas. The allocation of public resources has been 

improved due to these laws. Also, civic participation has become much 

more extensive, with the inclusion of about 14,000 local community 

organizations and 311 “vigilance committees” that help identify the 

communities’ priorities and monitor government activities as well as the 

removal of several mayors for mishandling public funds. Municipal 

investment in basic social services has also increased in recent years. 

Despite these gains, Bolivia’s interim poverty reduction strategy noted that 

efforts are needed to improve equity, municipal administration, basic social 

6

UNDP: Country Cooperation Frameworks and Related Matters − First Country Cooperation 

Framework for Bolivia (1998-2002) (New York: U.N. Development Program, DP/CCF/BOL/1, 

Feb. 2, 1998).

7

Bolivia: Country Strategy Paper 1998 (London: Department for International Development, 

Dec. 1998).
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services, and civil participation. World Bank staff identified problems 

implementing the government’s decentralization strategy as key constraints 

in strengthening institutional capacity at the local level and improving the 

quantity and quality of basic services to the population. The staff also said 

that failure to address these problems would limit progress in the fight 

against poverty. To address the problems, the government’s strategy 

proposed allocating more resources to regions with high levels of poverty 

and increasing the efficiency of social services. In order to help meet local 

demands, the processes of participatory planning are to be strengthened 

and implemented through municipal development plans, annual operating 

plans, and municipal institutional development plans. These plans are to be 

subject to public monitoring and evaluation.

In Bolivia, officials from the government and vigilance committees of two 

municipalities—Punata and Colomi—told us that, with technical assistance 

from the U.S. Agency for International Development, they have prepared 

plans that describe and prioritize the communities’ needs through a 

process that involves public participation and approval. Priorities are 

graded from A to E, with A being the highest priority. Excerpts from the 

city of Punata’s annual operating plan are outlined in table 13. 
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Table 13: Examples of Projects Prioritized by the Communities for the Annual Operating Plan for 1997 of the City of Punata, 

Agreed Upon in Assembly, December 12, 1996

Source: GAO translation of document provided by government officials from the city of Punata, Bolivia.

Table 13 shows that the highest priority projects are for irrigation and 

drinking water, second-tier priorities include access roads, and the lowest 

priorities are for community enhancements like chapel restoration and 

playing/sports fields. Officials said the vigilance committees have worked 

to ensure that the communities’ priorities are included in municipal plans 

and to exercise public oversight of the government’s implementation of 

these plans. 

Community Problem Proposed project Number of families Priority

Chirusi Kollo “A” Health Health center 55 C

Román Calle Low production Irrigation system 53 A

Pucara Morbidity/mortality Drinking water 100 A

Jorge Rojas Tardio Morbidity/mortality Sewage system 263 A

Leon Rancho Centro Sale of goods Local road 150 B

Junta Vecinal #2 (Gral 

Pando)

Dust Pave roads 400 B

Capilla Sale of goods Local road 280 B

Junta Vecinal #4 Household gas 155 E

Junta Vecinal #11 Morbidity/mortality Drinking water 350 A

Vintu Cancha Morbidity/mortality Drinking water 120 A

Tajamar B Low production Irrigation system 48 A

Junta Vecinal #3 Lack of road Completion of avenue 510 B

Chirusi Grande Low production Irrigation system 95 A

Tajamar Centro Low production Irrigation system 50 A

Laguna Centro Morbidity/mortality Drinking water 48 A

Pampa Grande Community enhancement Chapel restoration 290 E

Saca Saca Community enhancement Sports fields 85 E
Appendix VII

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Uganda Decentralization, including active civil society participation, is a crucial 

element of the Ugandan government’s poverty reduction strategy.8

 District 

government officials in Uganda told us that while decentralization and 

greater civil participation have achieved the benefits of improved service 

delivery and government accountability, increased government 

expenditure and greater transparency, accountability, and capability are 

needed to improve the local governments’ ability to manage resources. 

According to a HIPC document, the government’s antipoverty programs 

will increasingly be implemented at the local government level, because 

local governments (including local councils) are considered to be in the 

best position to assess local needs and to respond quickly and effectively to 

changing poverty conditions.9

 District government officials we spoke with 

in Uganda said that most of the priority services in rural areas—such as 

education, health, safe and reliable water, agriculture extension services, 

resettlement of displaced persons (important to districts bordering on 

countries in conflict), and land management—are now the responsibility of 

the local government. They said that the Ugandan government turned to 

participation as a means of letting local people decide their priorities and 

translate them into actions that reduce poverty.

For decentralization to be effective, the transfer of responsibilities and 

resources to the districts should be accompanied by efforts to build 

technical, operational, and administrative capacity at the local level. Donor 

governments, the World Bank, and others are undertaking efforts to 

improve local governments’ capacity in 20 of Uganda’s 45 districts, as 

shown in figure 8.

8

In Uganda, the 1995 constitution mandates the decentralization of public services to 

districts, and the 1997 Local Governments Act details the responsibilities assigned to each 

level of government. As stated in the constitution, Uganda’s principles include democratic 

elections; participatory decision-making; involvement of the underprivileged, especially 

women, youth, and the disabled; self-reliance; and accountability. 

9

Uganda—Enhanced Heavily Indebted Poor Countries Initiative—Second Decision Point 

Document (Washington, D.C.: IMF and World Bank, Jan. 19, 2000).
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Figure 8: Districts in Uganda with Capacity-building Programs Funded by Official Donors and Creditors (Shown by Shaded 

Areas)

Source: Ministry of Local Government, Uganda.

Arua

Nebbi

Gulu

Kigum Kotido

Moroto

Katakwi

Lira

Apac

Nakasongola

Masindi

Kiboga

Mubende

Mpigi

Masaka

Mbarara

Rakai

Kalangala

Bushenyi

Rukingiri

Kisoro Kabale

Ntungamo

Kasese

Bundibugyo

Sembabule

Kabarole

Kibaale

Hoima

Luwero

Kapchorwa

Mbale

Tororo

Pallisa

Soroti

Mukono

Jinja

Iganga

Bugiri

Busia

Adjumani

Moya

Kampala

Lake Kyoga

Lake Albert

Lake Victoria

Lake Edward

Kumi

Kamuli
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Despite these efforts and those of the Ugandan government, 25 districts are 

likely to need technical assistance from donors to further build local 

capacity to plan, budget, execute, and monitor projects and services. 

To build budgeting and programming capacities at the local level, the 

central government extended its medium-term budget framework to 

include all district governments. The government, the IMF, the World Bank, 

and others have been providing technical assistance in budget preparation, 

execution, and monitoring to district governments in order to improve their 

capacity to control and monitor expenditures and to assess the impact of 

district spending. 

The Ugandan government has also sought to enhance accountability in the 

use of resources by implementing an integrated fiscal management system 

and strengthening systems that enable citizens to monitor government 

performance. Uganda’s poverty reduction strategy notes that good 

governance involves making public expenditure transparent and efficient. 

This includes “bottom-up” accountability, meaning that communities hold 

local government and service deliverers accountable through local 

councils. To increase transparency, the amount of funding disbursed by the 

central government to districts for education is posted on many school 

notice boards so that citizens and others can monitor the receipt and use of 

funds. District government officials in Uganda told us that local citizen 

committees help oversee the use of resources, which increases 

accountability and democracy. Members of a school management 

committee that includes parents, teachers, and administrators told us they 

monitor expenditures, the quality of education, and students’ test results. 

They said this has become particularly challenging because Uganda’s 

program to provide free primary education to most students doubled the 

school enrollment rate over a very short period. Also, to increase the 

transparency in the use of money from the Poverty Action Fund—set up to 

channel savings from debt relief and other funds into priority spending 

areas—notices are published in the newspaper indicating the amounts 

disbursed to each district. Expenditures and outcomes are reviewed 

quarterly by the government, donors, and representatives of civil society. 

District government officials we spoke with in Uganda said that 

decentralization is a continuous process whose benefits—such as 

widespread service improvements and citizen empowerment— are mainly 

long term. The initial implementation is expensive as capacity is built and 

local governments and councils are established. They said decentralization 

motivates the government to be more accountable and requires 
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open-mindedness and government officials willing to share power because 

citizens’ sense of ownership and questioning of authority increase. 

Officials also said that while decentralization has increased the quality of 

services delivered and citizens’ sense of empowerment, the districts have 

not received enough funding from the central government—the local 

governments’ major source of revenue—to carry out all of the 

responsibilities they have been given. In part this reflects Uganda’s decision 

to transfer responsibilities before building sufficient local capacity. 

Government officials said that they were concerned that other countries 

that worked to build capacity first never actually decentralized. The 

officials said that significant resources are needed to build local 

government’s capacity to manage human resources and finances.

Representatives of nongovernmental organizations in Uganda told us that 

the main issue is building civil society capacity, especially at the local level, 

to (1) participate in identifying and executing projects and (2) monitor the 

level, use, and impact of government borrowing and expenditures. They 

said that local capacity needs to be strengthened if decentralization is to 

succeed. In their view, there has been much discussion of civil society 

participation at the national level, but it has not yet translated into greater 

activity or ownership at the local level. They told us that local governments 

need to be made aware of the importance of local civil society participation 

and that it takes a lot of energy and resources to build civil society and 

government capacity. They also said that grants from donors are needed to 

finance efforts to build local governments’ and civil society’s capacity 

because Uganda does not have sufficient funding.
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Appendix VIII

Civil Society Participation in Bolivia ApendxiVI

In 1997, the government of Bolivia conducted a “national dialogue” to 

involve civil society in its effort to build support for its new economic and 

social priorities. Although government officials said they considered that 

effort to have been quite worthwhile, nongovernmental organizations and 

donors that we talked with disagreed. They told us the dialogue consisted 

of a 1-day meeting in which the government selected whom to invite, 

involved little regional participation, gave little advance notice regarding 

the agenda to the invitees, provided little background information, and 

used the meeting to present its views. One nongovernmental organization 

representative characterized this effort as having been more a “regional 

monologue than a national dialogue.” In 1998, the United Nations reported 

that, according to a recent survey, 70 percent of Bolivians felt that their 

opinions did not count at all in the political system’s decision-making 

process. Additionally, there was little follow-up after this dialogue to 

ensure that actions were undertaken. In light of this experience, the drive 

for a new dialogue as part of the HIPC Initiative was met with some 

suspicion. 

To overcome the previous criticisms and involve civil society in preparing 

its poverty reduction strategy, the government is convening a second 

national dialogue that is to involve more participants, provide background 

papers prepared by the government and others, and establish a mechanism 

to follow up on commitments made during the dialogue. To involve more 

participants, the consultation process involves 27 meetings, lasting 1-2 days 

each, at rural, urban, and regional levels, as shown in figure 9. Figure 10 

describes the results expected from this process.
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Figure 9: Bolivia’s Process for Involving Civil Society in Developing the Poverty Reduction Strategy

Source: Government of Bolivia.
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Figure 10: Results Expected from Bolivia’s Process for Involving Civil Society in Developing the Poverty Reduction Strategy

Source: Government of Bolivia.
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The process is to culminate in a national dialogue in July 2000 and a full 

poverty reduction strategy shortly thereafter. 

According to the government of Bolivia, the goals of the national dialogue 

are to

• transform initiatives into state policies aimed at promoting growth and 

reducing poverty on the basis of agreements reached between the 

government, the opposition, and civil society;

• strengthen civil society trust in this approach;

• prioritize the use of resources for poverty reduction; and

• institute a participatory body in charge of following up on and 

monitoring commitments made in the course of the national dialogue.

A steering council and secretariat composed of government and civil 

society representatives are to oversee the national dialogue process. 

Meeting participants include representatives from local, regional, and 

central governments and civil society. Bolivia’s interim poverty reduction 

strategy, which contains a brief analysis of poverty and a conceptual 

framework that could guide discussions, and other documents prepared by 

the participants are to be used in the discussions.

Two other ongoing efforts are trying to achieve greater civil society 

involvement in the national dialogue. First, the Catholic Church in Bolivia 

is sponsoring a dialogue that it hopes will mobilize civil society 

participation, facilitate inclusion in setting poverty-reduction goals, and 

generate independent conclusions that will be integrated into the national 

dialogue. The church is sponsoring workshops in all nine Bolivian regions 

and a national dialogue to discuss

• the impact of structural adjustment and macroeconomic policies on 

poverty; 

• human rights and participation, including a mechanism for civil society 

to monitor resource allocations;

• urban development, including education, health, employment, and 

productivity; and

• rural development, including education, health, land ownership, and 

productivity. 

The Catholic Church, which a recent U.N. poll identified as the most 

respected and credible institution in Bolivia, opted to not become a 

member of the steering committee in order to remain independent, 
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according to U.N. Development Program officials. The church will 

participate in the national dialogue as a regular “invitee.” 

Under the second effort, private sector representatives from nine regions 

are meeting to prepare strategies that highlight the important role of the 

productive sector—particularly small- and medium-sized industries, 

agriculture producers, and mining—in fighting poverty. Their goal is to 

bring the productive sector into the national dialogue. 

The new process of civil society participation appears to address some of 

the criticisms that were expressed because it seeks to obtain a wider range 

of views, provide more information for discussion, and establish a 

participatory mechanism to follow up on the commitments made during 

the national dialogue.
Page 128 GAO/NSIAD-00-161 Debt Relief Initiative

Appendix IX

How the United States Budgets and Accounts 

for Debt Relief ApendxiIX

Our review of the seven leading industrial countries indicates that 

providing debt relief results in additional budgetary costs for each country. 

However, the impact on their budgets in providing debt relief vary based on 

five key factors: the amount of outstanding loans, the method used to value 

loans, the method used to budget for debt relief, the options used to 

provide debt relief, and constraints imposed by certain legal requirements. 

This appendix provides detailed information on those five factors for the 

United States. For the United States, the cost of debt relief is lower than the 

face value of the debt because the value of the debt is discounted. It will 

cost the United States about $346 million (in net present value terms) to 

forgive $3.8 billion (in nominal terms), or an average of 9 cents per dollar of 

the outstanding debt owed by 22 countries under the enhanced initiative. 

However, the U.S. administration faces challenges in obtaining the full $346 

million from Congress as well as in obtaining its proposed contribution of 

$600 million to the multilateral trust funds. This appendix also provides 

information on the amount of U.S. debt reduction provided to heavily 

indebted poor countries over the past 12 years. Similar information for 

Canada, France, Germany, Italy, Japan, and the United Kingdom is provided 

in appendix X, and a summary was provided in chapter 4. 

Outstanding Loans As of December 31, 1998, the U.S.’ exposure to the 40 heavily indebted poor 

countries was estimated by officials of U.S Treasury as $6.2 billion. The 

United States has outstanding claims with 30 of the 40 countries.1

 Two 

countries, the Democratic Republic of the Congo (34 percent) and Sudan 

(21 percent), accounted for about 55 percent of total U.S. claims (see 

app. II). U.S. official development assistance loans account for about 

38 percent of its total loans to the 40 HIPCs.2

 The United States has

1

Of the 40 potential HIPC recipient countries, the Treasury has requested funding to provide 

debt relief to 22 countries. Of the remaining 18 countries, 4 countries are not likely to qualify 

for HIPC debt relief (Angola, Kenya, Vietnam, and Yemen); 4 countries have outstanding 

debt to the United States but are not likely to qualify within the next few years (Liberia, 

Myanmar, Somalia, and Sudan); and 10 countries have no outstanding debt to the United 

States.

2

Official development assistance can be a grant or a loan with at least a 25-percent grant 

element for the promotion of economic development or basic human needs. (See app. II.)
Appendix IX

How the United States Budgets and Accounts 

for Debt Relief

Page 129 GAO/NSIAD-00-161 Debt Relief Initiative

proposed to cancel 100 percent of its pre- and post- cutoff date3 non-official 

development assistance loans, as well as 100 percent of its official 

development assistance loans to 22 potentially eligible HIPC recipients.4

The U.S. Treasury estimates that the cost to fully cancel these loans is $346 

million in net present value terms, or about $3.8 billion in nominal terms. 

The major programs under which international debt is owed to the U.S. 

government are loans and loan guarantees made under the Export-Import 

Bank Act;5

 loans under the Agriculture Trade Development and Assistance 

Act;6

 loans and loan guarantees under the Foreign Assistance Act;7 loans 

under the Arms Export Control Act;8

 and loan guarantees under the 

Commodity Credit Corporation Charter Act.9 Most of the U.S.’ international 

loans are associated with agriculture, defense, and export credits. 

Commercial bank loan guarantees by the U.S. government constitute only a 

small portion (about 3 percent) of total outstanding claims on the 

40 HIPCs. The U.S. claims on the 40 HIPCs represent about 6 percent of 

total bilateral creditors’ claims and about 3 percent of total creditors’ 

(bilateral and multilateral) outstanding claims.

3

Pre-cutoff date loans refers to loans made by a creditor before his first visit to the Paris 

Club to negotiate with a debtor, and post-cutoff date refers to loans made after the first visit 

to the Paris Club. Post-cutoff date loan cancellation refers to loans made by the U.S. 

government on or before June 30, 1999.

4

The International Debt Relief Act (Title V of H.R. 3425, incorporated by reference into the 

Consolidated Appropriations Act, 2000) requires the President to cancel these debts subject 

to appropriations. 

5

Export-Import Bank Act, 12 U.S.C. §635 (et seq.).

6

Agriculture Trade Development and Assistance Act, 7 U.S.C. §1701 (et seq.).

7

Foreign Assistance Act of 1961, Public Law 87-195, as amended, 22 U.S.C. § § 2181 and 2182.

8

Arms Export Control Act, 22 U.S.C. §2751 (et seq.).

9

Commodity Credit Corporation Charter Act, 15 U.S.C. § 714 (et seq.); and Agricultural 

Trade Act, 7 U.S.C. §§ 5621 and 5622.
Appendix IX

How the United States Budgets and Accounts 

for Debt Relief

Page 130 GAO/NSIAD-00-161 Debt Relief Initiative

Method Used in 

Valuing Loans

The budget costs of debt relief are influenced by the method the U.S. 

government uses to value its loans. The method used in valuing U.S. 

government international loans and loan guarantees is based on the 

Federal Credit Reform Act of 1990.10 The act requires U.S. agencies to value 

debts owed to the U.S. government on the basis of their net present value 

rather than their face value.11 Before new direct loans are obligated12 and 

loan guarantees are committed, agencies must calculate the cost of the 

credit to the U.S. government by estimating factors such as the likelihood 

of default, a loan’s interest rate, and the repayment period (maturity). This 

cost is called the “subsidy cost.” The subsidy cost is budgeted in net 

present value terms and is the estimated long-term cost to the government 

of a direct loan or a loan guarantee, excluding administrative costs. The net 

present value is calculated by discounting estimated future cash flows 

(disbursements by the government and payments to it) of each loan or 

guarantee, using a discount rate equal to the interest paid by the Treasury 

on loans of comparable maturity. The accounting standards and the 

budgetary treatment of federal credit programs are covered in the 

Statement of Federal Financial Accounting Standards Number 213 and the 

Office of Management and Budget’s (OMB) Circular Number A-11.

10Federal Credit Reform Act, 2 U.S.C.§661-661f.

11The act shifted the method of accounting for the budgetary cost of federal credit 

commitments made after September 30, 1991, from a cash-flow basis to a net-present value 

basis. Cash-flow accounting credits income as it is received and expenses as they are paid. 

Net present value records the current value of a single payment or of a stream of payments 

to be received in or made over a specified time period.

12A direct loan is a loan made by the government to a nonfederal government borrower. 

Loan guarantee means any guarantee, insurance, or other pledge with respect to the 

payment of all or part of the principal or interest on any debt obligation of a nonfederal 

borrower to a nonfederal lender. OMB Circular A-11, section 85.3 (d) (k) (1999).

13The accounting standards for federal credit are covered in the Federal Accounting 

Standards Advisory Board’s Accounting for Direct Loans and Loan Guarantees, Statement of 

Federal Financial Accounting Standards, No. 2, August 23, 1993. Beginning with fiscal 

year 1992, this method of accounting for the budgetary cost of direct loan and loan 

guarantees became effective. 
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The Federal Credit Reform Act of 1990 requires that funds be appropriated 

and budgeted in advance to cover the subsidy cost. 14 The unsubsidized or 

unappropriated portion of direct loans is financed with funds borrowed 

from the U.S. Treasury.15 The subsidy payment is combined with the 

unsubsidized portion to finance the direct loan. The direct loan is recorded 

on the balance sheet as an asset in the amount of the present value of its 

estimated net cash flows. With respect to loan guarantees, the estimated 

present value of the net cash outflows of the guarantee is appropriated to 

the program account before the guarantee can be made and is recognized 

as a liability on the balance sheet. The loan guarantee financing account 

holds the subsidy payment from the program account as a reserve against 

default claims.16 Based on OMB Circular Number A-11, agencies are 

required to reestimate the subsidy cost after the close of each fiscal year.

As a result of the Federal Credit Reform Act of 1990, an Inter-Agency 

Country Risk Assessment System was created to ensure and encourage 

more effective and consistent risk assessment by U.S. agencies, including 

those agencies that issue foreign loans and loan guarantees.17 The 

Inter-Agency Country Risk Assessment System technical team established 

an indicator system that results in placing a country within 1 of 11 risk 

categories,18 from the most creditworthy to the least creditworthy. Among 

other things, agencies calculate the cost of country risk19 based on the 

assigned Inter-Agency Country Risk Assessment System ratings and 

14OMB Circular Number A-11, (hereinafter OMB Circular No. A-11), section 85.3, (1999).

15OMB Circular No. A-11, 85.6 (a) (1) (1999).

16The financing account and the program account were established pursuant to the Federal 

Credit Reform Act of 1990. The program account is a budget account that receives and 

obligates appropriations to cover the subsidy cost of a direct loan or loan guarantee and 

disburses the subsidy cost to the financing account. The financing account records all of the 

cash flows resulting from post-1991direct loans and loan guarantees. These accounts will be 

discussed further in this section of the report.

17OMB chairs the Inter-Agency Country Risk Assessment System, and other members 

include the Departments of State, Treasury, Defense, and Agriculture; the U.S. 

Export-Import Bank; the Overseas Private Investment Corporation; the Council of 

Economic Advisors; and the Federal Reserve.

18The 11 categories are A, B, C, C-, D, D-, E, E-, F, F-, and F= (read as “double minus”).

19Country risk costs are the costs due to the risk that international loans or guarantees may 

not be fully repaid. It is one component, often the largest, of the subsidy cost in the Federal 

Credit Reform Act. See Credit Reform: U.S. Needs Better Method for Estimating Cost of 

Foreign Loans and Guarantees (GAO/NSIAD/GGD-95-31, Dec. 19, 1994).
Appendix IX

How the United States Budgets and Accounts 

for Debt Relief

Page 132 GAO/NSIAD-00-161 Debt Relief Initiative

corresponding risk premiums20 to arrive at the subsidy cost and thus the 

net present value of the loan.21

The Inter-Agency Country Risk Assessment System’s top eight country 

categories are assigned risk premiums and default rates, which vary by 

loan maturity. However, for the bottom three risk categories, a default rate 

is estimated for each category, which remains constant over all maturities. 

Most of the potential HIPC recipients are rated in the bottom three risk 

categories. The estimated present value of the loan for these last three 

categories is determined by multiplying the face value of the loan by a flat 

price, where the price is equal to one minus the estimated default rate. To 

estimate price for the last three categories, the Inter-Agency Country Risk 

Assessment team considers, among other things, the expected treatment by 

the Paris Club of official creditors. For example, if country A, which has the 

lowest rating, has an expected default rate of 93 percent, this means that 

the U.S. government expects, on average, to be repaid $0.07 per dollar of 

outstanding debt, on a net present value basis.22 Put another way, if 

country A borrows $100 million from the United States at the current 

Treasury rate, the U.S. government expects, on average, to be repaid 

$7 million on a net present value basis.23 Seven million dollars is the 

estimated net present value of the loan to the U.S. government, and the 

$93 million is the subsidy cost to the U.S. government, or the amount that is 

not expected to be repaid. As mentioned previously, agencies are required 

to reestimate the subsidy cost annually for each credit account. A 

reestimate could result in an increase or a decrease in the estimated net 

present value of the loan, thereby decreasing or increasing the expected 

cost to the U.S. government of extending the loan.24

20Risk premiums reflect the probability of default for a country by loan maturity and are 

applied to scheduled payment streams to obtain loan repayment projections. See Credit 

Reform: U.S. Needs Better Method for Estimating Cost of Foreign Loans and Guarantees.

21The other component includes interest rate costs (or income) and fee income. See Credit 

Reform: U.S. Needs Better Method for Estimating Cost of Foreign Loans and Guarantees.

22Actual country ratings are considered classified information.

23If the loan is provided at the current Treasury rate, there is no interest subsidy or income.

24Reestimates that resulted in an increase in the subsidy cost are financed by permanent 

indefinite authority. OMB Circular No. A-11, section 85.2 (1999). Permanent authority is 

available as a result of permanent legislation and does not require an annual appropriation. 

Indefinite budget authority is budget authority of an unspecified amount of money.
Appendix IX

How the United States Budgets and Accounts 

for Debt Relief

Page 133 GAO/NSIAD-00-161 Debt Relief Initiative

The Method Used in 

Budgeting for the Cost 

of Debt Relief

The Federal Credit Reform Act of 1990 substantially affects the way the 

U.S. government treats the cost of debt relief. The act makes it possible for 

the government to forgive several dollars in international loans and 

guarantees for only $1 in current budgetary cost. Since agencies must value 

their loans on the basis of their net present value, many outstanding loans 

to developing countries are reflected on the agencies’ books at a 

substantial discount from their face value. Countries that are considered 

high risk will have loans that are valued at a deep discount, and thus the 

additional budgetary cost of forgiving these loans would be relatively low 

because the government would have already recognized the cost of lending 

to risky countries.25

In addition, based on OMB Circular Number A-11, debt forgiveness is a 

“direct modification” of loans or guarantees.26 A direct modification is an 

action that alters the terms of existing contracts or results in the sale of 

loan assets.27 The act requires that any action by the government that 

changes the value of a direct loan or loan guarantee must be counted as a 

change in its cost.28 If the modification results in an increase in cost, the 

administration must request, and Congress must appropriate, funds before 

debt forgiveness can take place. Thus, debt relief creates new demands on 

the U.S. budget.

252 U.S.C. §661-661f.

26In addition, forbearance, reductions in interest rates, extensions of maturity, and 

prepayments without penalty are other examples of alterations to contract terms that are 

direct modifications. OMB Circular A-11, section 85.3(n) (1999). 

27Loans can also be “indirectly” modified. Examples include a new method of debt collection 

prescribed by law or a statutory restriction on debt collection. OMB Circular No. A-11, 

section 85.3(n) (1999).

28According to OMB officials, most of the HIPC loans that are being forgiven are pre-credit 

reform (or pre fiscal year 1992) loans; however, since they have been directly modified, their 

budgetary treatment becomes fully subject to the requirements of the 1990 act, and they are 

now accounted for on a net present value basis.
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How the United States Budgets and Accounts 

for Debt Relief

Page 134 GAO/NSIAD-00-161 Debt Relief Initiative

The U.S. cost of providing debt relief is the difference between the net 

present expected value29 of the loan before debt relief is provided and the 

net present expected value of the loan after debt relief.30 The calculation of 

how much money must be appropriated to reduce or forgive a certain 

amount of debt is complex and depends on a number of factors, including 

the value of the debt (the likelihood of repayment by the debtor) and 

whether the loan is concessional or nonconcessional. For nonconcessional 

loans that were made to countries with a good repayment history, the cost 

to the United States would be much higher than for concessional loans to 

countries that do not have a good repayment history. Table 14 provides a 

simplified illustration of how the Treasury and OMB generally determine 

the cost of debt relief (subsidy cost) for a country.31

Table 14: Country A’s Debt Reduction at 90 Percent

Note: This illustration assumes a constant default rate that does not vary with maturity or interest rates.

Source: GAO analysis of OMB and Treasury information.

29This is the term OMB uses to characterize the value of the loan.

30The estimate of remaining cash flows before modification must be the same as assumed in 

the baseline of the President’s most recent budget. The estimate of the remaining cash flows 

after modification must be the premodification cash flows adjusted solely to reflect the 

effects of the modification. OMB Circular A-11, section 8.56, 1999.

31Our simplifying assumptions include the assumption that the country is placed in one of 

the bottom three risk categories (F categories) and thus has a flat price. It also assumes that 

the U. S. Treasury borrowing rate is equal to the loan’s interest rate, thus there is no interest 

subsidy or cost.

U.S. Dollars in millions

Steps Description of the loan Value

1 Total scheduled payments − face value $90.00

2 Net present expected value before debt relief ($90 x 0.07) 6.30

3 Face value of debt reduced ($90 x 0.90), assuming a

90-percent reduction based on the enhanced HIPC terms 81.00

4 Face value after debt relief ($90 - $81) 9.00

5 Net present expected value after debt relief ($9 x 0.07) 0.63

6 Debt reduction cost or increased subsidy costs = net present 

expected value before debt relief minus net present expected 

value after debt relief ($6.30 - $0.63) $5.67
Appendix IX

How the United States Budgets and Accounts 

for Debt Relief

Page 135 GAO/NSIAD-00-161 Debt Relief Initiative

Based on the table, the following occurs:

• Country A has total nonconcessional debt to the U.S. government of 

$90 million. The illustration also assumes that the U.S. Treasury 

borrowing rate is equal to the loan’s interest rate, thus there is no 

interest subsidy or cost (step 1).32

• An “F=” rating is assumed for country A, which is the lowest 

Inter-Agency Country Risk Assessment System rating. Based on the 

Inter-Agency Country Risk Assessment System rating, the expected 

default rate for this loan would be about 93 percent, which is constant 

and does not vary by maturity or interest rate. The expected repayment 

rate would be about 7 percent, or $0.07 to be repaid per dollar of net 

present value of outstanding debt. An expected repayment rate of 

7 percent (or the flat price) was used to derive the net present expected 

value of the loan before debt relief is granted to country A (step 2).

• This illustration also assumed that country A would receive a 90-percent 

debt reduction, based on the proposed forgiveness under the enhanced 

HIPC Initiative. The face amount of the debt is multiplied by the 

percentage of debt reduction to derive the total stock of debt reduced 

(step 3).

• The face value of debt after debt relief was determined. Again, we 

assumed that there is no interest subsidy (step 4).

• To arrive at the net present expected value after debt relief, the face 

value after debt relief was multiplied by the flat price ($0.07) associated 

with the F= risk category (step 5).

• Thus, the total debt reduction costs to the U.S. government is 

$5.67 million. This was determined by subtracting the net present 

expected value after debt relief from the net present expected value 

before debt relief (step 6). 

According to OMB and the U.S. Treasury, a multilateral debt reduction, 

such as under the enhanced HIPC terms, will result in an improvement in a 

country’s Inter-Agency Country Risk Assessment System rating, due to both 

the reduction in debt burden and the adoption of the economic reforms 

necessary to reach the completion point. As a result, the U.S. government 

assumes that countries that are rated F= would experience an increase of 

2 steps, to the F rating. Such a change would affect the cost of debt relief to 

the U.S. government.

32If the loan’s interest rate were less than the Treasury borrowing rate, then there would be 

an interest subsidy.
Appendix IX

How the United States Budgets and Accounts 

for Debt Relief

Page 136 GAO/NSIAD-00-161 Debt Relief Initiative

• For example, country A’s Inter-Agency Country Risk Assessment System 

rating of F= would be increased to F. As a result of the increase in rating, 

the net present expected value of the remaining 10 percent of country 

A’s debt could be higher than the $0.63 million indicated in step 5. Based 

on the Inter-Agency Country Risk Assessment System rating, the 

expected repayment rate would increase from 7 percent (the F= rating 

expected rate of repayment) to 31 percent (the F rating expected rate of 

repayment). As a result, the net present expected value after debt relief 

would be about $2.79 million ($9 million x 0.31). In this case, the cost to 

the U.S. government for debt reduction would be less: the net present 

expected value before debt relief ($6.30 million) minus the net present 

expected value after debt relief ($2.79 million) results in a cost of 

$3.51 million versus $5.67 million, as indicated in step 6.

Option Used in 

Providing Debt Relief 

The U.S. administration has decided to provide a stock of debt reduction33

(a cancellation of principal, interest, and arrears, if any) to potentially 

eligible HIPC countries at the completion point, with interim relief 

beginning at the decision point. Under the enhanced HIPC Initiative, debt 

relief will be calculated based on actual data at the decision point; thus, the 

administration is expected to obligate budgetary authority on the date of 

the Paris Club agreement (“agreed minute”) of each HIPC recipient’s 

decision point. While the bulk of the debt relief will be provided at the 

completion point, the impact on the budget, based on OMB rules, will occur 

at each country’s decision point. 

33Within the framework of the Paris Club, the two main options are debt reduction (a 

cancellation of principal and interest payments) and debt service reduction (a reduction in 

interest rate). 
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How the United States Budgets and Accounts 

for Debt Relief

Page 137 GAO/NSIAD-00-161 Debt Relief Initiative

The Budget and 

Accounting Treatment 

of Debt Relief

Credit reform provides for three accounts to handle credit transactions: 

program, financing, and liquidating. The program account receives 

appropriations for the subsidy cost of loans and for associated 

administrative expenses and is included in budget totals. When the direct 

loan is disbursed, the amount of the subsidy expense is charged to the 

agency’s program account and paid to a financing account. At the same 

time, the financing account borrows the balance (the nonsubsidized or 

nonappropriated portion) from the U.S. Treasury. The financing account 

handles all cash inflows and outflows of direct loans obligated or 

guarantees committed after fiscal year 1991 (when the new system took 

effect). The liquidating account handles cash flows deriving from direct 

loans obligated or guarantees committed before fiscal year 1992. Most of 

the loans that are being forgiven under the enhanced HIPC Initiative were 

obligated or committed before fiscal year 1992, that is prior to October 1, 

1991.34 Figure 11 illustrates the budgetary and accounting treatment of 

providing debt relief on precredit reform loans, which results in a subsidy 

cost increase. The flowchart continues with the illustration of debt 

reduction for country A, as described previously. In addition, an 

explanation of the flowchart follows the chart. 

34The Federal Credit Reform Act of 1990 separates credit into credit obligated or committed 

before October 1, 1991 (the beginning of fiscal year 1992) and credit obligated or committed 

on or after that date. For accounting purposes, the two groups of loans are treated 

differently.
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How the United States Budgets and Accounts 

for Debt Relief

Page 138 GAO/NSIAD-00-161 Debt Relief Initiative

Figure 11: Illustration of U.S. Government International Debt Reduction Program Direct Modification - Subsidy Cost Increase

Source: Treasury and OMB.

Agency's Debt Reduction Financing Account

1. Receives the payment for additional subsidy from

Treasury's Debt Restructuring Program Account 

($5.67M NPV) and Treasury borrowing ($0.63M NPV).

2. Purchases loan to be treated from the liquidating 

account valued at $0.63M NPV.

3. Pays back Treasury interest and principal amount 

received from borrower.

Borrower

 

of debt ($90M to $9M).

2. Repays $9M to the Debt Reduction Financing Account.

Agency's Liquidating Account

1. Receives one-time payment from the Debt Reduction

Financing Account to transfer existing loan ($6.30M NPV).

 2. 

Account valued at $0.63M NPV.

3. Transfers all funds received to the general fund of the 

 Treasury ($6.30M NPV).

Treasury's Debt Restructuring Program Account

1. Receives appropriation for increased subsidy 

($5.67M NPV). 

2. Provides Debt Reduction Financing Account with 

subsidy ($5.67M NPV) and borrowing ($0.63M NPV).

Congress

1. Appropriates additional

 subsidy in advance of debt

reduction ($5.67M NPV). 

 Agency

1. Provides Treasury with

loan schedule repayments

by debtor country. 

OMB

1. Reviews Treasury's

 calculation of the subsidy

cost estimates.

Treasury

1. Office of International Debt Policy calculates net

present value of loan, estimates cost of debt reduction,

2. Requests budget authorization from Congress 

 ($5.67M NPV). 

and provides information to OMB.

1. Receives a reduction of $81M in the face value of the stock 

NPV = Net present value

 OMB = Office of Management and Budget

Legend

Transfers direct loan asset to Debt Reduction Financing
Appendix IX

How the United States Budgets and Accounts 

for Debt Relief

Page 139 GAO/NSIAD-00-161 Debt Relief Initiative

The following narrative provides an explanation of the flowchart:35

1. As the flowchart shows, the agency provides Treasury’s Office of 

International Debt Policy with loan schedule repayments for debtor 

country A. 

2. The Treasury calculates the net present value of the loans, estimates 

the cost of debt reduction at 90 percent, and provides information to 

OMB. 

3. OMB reviews the calculation of the subsidy cost estimate.

4. The Treasury requests and receives budget authority for the increased 

subsidy from Congress ($5.67 million in net present value). The budget 

authority necessary to cover the increased subsidy cost must be 

available in the Debt Restructuring Program Account at the Treasury’s 

Bureau of Public Debt before the debt relief can be provided.36

5. The Treasury provides the increased subsidy ($5.67 million) to the Debt 

Reduction Financing Account at the agency level.

6. The illustration assumes that the loans are precredit reform loans, 

which are being directly modified for the first time. As such, the Debt 

Reduction Financing Account will purchase the loans from the 

liquidating account where the loans are held.37 In the case of precredit 

reform loans, the agency will first write down the loans to the net 

present expected value, according to credit reform rules. (Both the 

Debt Reduction Financing Account and the Liquidating Account are 

maintained at the agency level.) 

7. The value of the existing loans is the estimate of the net present value 

of the remaining cash flows assumed for the direct loans. In country A’s 

case, this net present expected value is $6.30 million, which is the 

35This illustration covers only a direct loan modification with increased subsidy cost. 

36The Treasury is acting in two separate roles. Steps 1 and 2 involve the Treasury’s Office of 

International Debt Policy acting in the role of a program agency, working to achieve policy 

goals. Step 4 involves the Bureau of the Public Debt, acting as a financing agent.

37If the loans have been treated before (that is, there was a Paris Club rescheduling), they 

would be held in the Debt Reduction Financing Account, and the additional subsidy would 

be used to pay back outstanding borrowing from the Treasury. 
Appendix IX

How the United States Budgets and Accounts 

for Debt Relief

Page 140 GAO/NSIAD-00-161 Debt Relief Initiative

remaining cash flow expected before the modification, or the amount 

before debt reduction takes place. The direct loan asset is transferred 

from the Liquidating Account, because it is a precredit reform loan, to 

the Debt Reduction Financing Account, where the loans are modified 

based on the terms of the debt reduction. 

8. Before the loan asset is transferred to the Debt Reduction Financing 

Account, the Debt Reduction Financing Account pays the Liquidating 

Account $6.30 million. To carry out this transfer, the financing account 

borrows $0.63 million from the Treasury and, together with the 

$5.67 million in subsidy cost it receives from the Treasury’s Debt 

Restructuring Program Account, the Debt Reduction Financing 

Account makes a one-time payment to the Liquidating Account. 

9. All funds received by the Liquidating Account are transferred to the 

general fund of the Treasury. In this case, the amount transferred is 

$6.30 million. 

10. The borrower receives a reduction in its stock of debt from a face value 

of $90 million to $9 million. (Funds transferred from the Debt 

Reduction Financing Account to an agency’s regular financing account 

are used to pay back borrowing from Treasury.)

11. When the borrower repays the loan, the Financing Account uses the 

loan repayments from the borrower to make principal and interest 

payments to the Treasury on the amount borrowed from the Treasury 

($0.63 million in net present value terms). Once this debt to the 

Treasury has been satisfied, any remaining funds would be paid to a 

Treasury receipt account.

The flowchart covers only a direct modification of precredit reform loans 

with increased subsidy costs. Loan guarantees are treated differently 

because they are a liability, not an asset, as in the case of direct loans. In 

that case, the Liquidating Account would pay the financing account 

because the financing account is acquiring a liability. The third party, the 

lender, has to be made whole for the total amount of the loan.38 The portion 

that is not forgiven (10 percent) becomes a direct loan between the U.S. 

38The unobligated balances and permanent indefinite appropriations to the Liquidating 

Account will be used to make the payment. Outlays will be recorded in the Liquidating 

Account in the amount of the payment when made.
Appendix IX

How the United States Budgets and Accounts 

for Debt Relief

Page 141 GAO/NSIAD-00-161 Debt Relief Initiative

government and the borrower. This new loan is also transferred to the 

financing account (as an asset of the government) to be repaid by the 

borrower.

Legal Constraints As previously discussed, the accounting and budgetary rules governing 

international loan valuation and debt forgiveness are embodied in the 

Statement of Federal Financial Accounting Standards Number 2 and OMB 

Circular Number A-11, which are based on the Federal Credit Reform Act 

of 1990. Under this act, loans must be valued on a net present value basis, 

and the administration must seek, and Congress must also appropriate in 

advance, the estimated costs to the U.S. government of providing debt 

relief before such relief can take place.39 An appropriation by Congress is 

required for legislating debt reduction on a bilateral and multilateral (Paris 

Club) basis. The appropriated amount is the estimated costs to the U.S. 

Treasury of implementing the debt reduction initiative. The administration 

had requested approximately $346 million under the enhanced HIPC 

Initiative in fiscal year 2000; however, so far Congress has appropriated 

about one-third of the bilateral contribution (approximately $110 million).40

Contributions to 

Multilateral Trust 

Funds

In addition to the $346 million request for bilateral contribution, the 

administration has pledged approximately $600 million as part of its 

contribution to the multilateral trust funds. The $600 million has not 

received congressional authorization. Further, Congress authorized the use 

of about 333 million Special Drawing Rights (SDR), or about $440 million41

by the IMF under the Second Special Contingency Account-2 at the IMF for 

debt relief.42

39Prior to the Federal Credit Reform Act, the administration did not require budget authority 

to provide debt reduction. Debt reduction was treated as a grant of authority to the 

President and did not require an appropriation.

40In addition, $37.4 million that remains unobligated from prior fiscal years will also be used 

for bilateral debt reduction under this program for a total of $147.4 million currently 

available.

41The exchange rate as of June 6, 2000, is SDR1.33 = US$1.

42In addition, the United States contributed $25 million to the Central American Trust Fund 

at the World Bank. This trust fund provides debt relief to those countries in Central America 

that were devastated by Hurricane Mitch. Two of the countries benefiting from this fund, 

Nicaragua and Honduras, are eligible for HIPC debt relief.
Appendix IX

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for Debt Relief

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Prior Debt Reduction 

Activities

The United States did not participate in Paris Club (multilateral) debt 

reduction activities until 1994. Prior to 1994, the United States participated 

through multilateral rescheduling options. However, unilaterally, the 

United States forgave about $2.7 billion in heavily indebted poor countries’ 

debt between 1989 and 1991.43

Under authority first granted by Congress in 1993, the United States began 

in 1994 to participate in Paris Club arrangements to reduce 

nonconcessional debt owed by developing nations with strong records of 

economic reform. This authorized the United States to cancel partial 

repayment on loans issued under the U.S. Agency for International 

Development housing and other credit programs; military aid loans; U.S. 

Export-Import Bank loans and guarantees; and, for Latin American nations, 

agriculture credits guaranteed by the Agriculture Department’s Commodity 

Credit Corporation. All of these loans and loan guarantees are made on a 

nonconcessional basis. Since 1994, the United States has reduced 

nonconcessional debt through the Paris Club, on both Naples and the 

original HIPC terms, by about $784 million, resulting in budgetary costs of 

about $69 million. 

43The United States forgave about $10 billion in debt owed by three severely indebted 

middle-income countries, Egypt (1991), Poland (1991), and Jordan (between 1994 and 1997) 

to assist in economic reform and to further national security interests.
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Appendix X

Six Industrial Countries’ Methodologies for 

Budgeting and Accounting for Debt Relief ApendxiX

Our review of the Group of Seven leading industrial countries (Canada, 

France, Germany, Italy, Japan, United Kingdom, and the United States) 

indicates that providing debt relief results in additional budget costs for 

each country.1

 However, the impact on their budgets varies based on five 

key factors: the amount of outstanding loans, the method used to value 

loans, the method used to budget for debt relief, the option used to provide 

debt relief, and the constraints imposed by certain legal requirements. 

Chapter 4 provides a summary of this information. This appendix provides 

detailed information on those five factors for Canada, France, Germany, 

Italy, Japan, and the United Kingdom. Similar information for the United 

States was provided in appendix IX. These governments confront varying 

degrees of challenges to providing debt relief under the enhanced HIPC 

Initiative. For example, the Japanese government is currently deliberating 

whether to write off the stock of eligible non-official development 

assistance debt at HIPC countries’ completion points. Current 

authorization allows Japan to grant interest rate reduction (a debt service 

reduction option, within the framework of the Paris Club), which could 

take many decades to achieve the net present value debt reduction called 

for by the enhanced HIPC Initiative. 

In addition to funding the costs of direct relief, large bilateral creditors, 

such as the Group of Seven industrialized countries, also face challenges in 

providing continued aid flows and in contributing to help multilateral and 

smaller bilateral creditors meet their share of debt relief under the 

enhanced HIPC Initiative. This appendix also provides information 

regarding the amount of funds that these seven countries have offered to 

contribute to the multilateral trust funds as well as their contribution over 

the past 12 years to debt relief initiatives, both bilaterally and through the 

Paris Club framework. The Group of Seven industrialized countries’ total 

outstanding loans to the heavily indebted poor countries represent about 

50 percent of bilateral creditors’ exposure.2

 Their share of the total 

estimated debt relief to be provided is about $6.5 billion in net present 

value terms, or roughly 25 percent of the total $28 billion in net present 

value terms. In addition, these seven countries have pledged at least 

1

According to an Italian Treasury official, debt relief has a direct impact on the 

implementing agencies’ budgets and an indirect impact on the national budget.

2

As of the end of 1998, total nominal debt outstanding of the 40 heavily indebted poor 

countries was estimated at $213 billion. Bilateral creditors’ exposure is approximately half 

of this total. 
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$2.5 billion to multilateral trust funds or development banks under the 

enhanced HIPC Initiative.

Canada

Outstanding Loans As shown in table 5, of the Group of Seven countries, Canada has the least 

exposure to the 40 heavily indebted poor countries, approximately

C$1.2 billion, or US$771 million in nominal terms.3

 Canada has indicated 

that it will go beyond the enhanced HIPC framework and provide 

100 percent cancellation of pre-and post-cutoff date, non-official 

development assistance debt to all potentially eligible countries. In 

addition, Canada has written off its official development assistance loans 

to the heavily indebted poor countries (with the exception of Myanmar)4

and has extended official development assistance only in the form of grants 

since 1986.

According to the Canadian Finance Ministry, Canada’s debt initiative would 

provide more generous and timely debt relief to more countries than the 

heavily indebted poor countries. For example, Canada has written off 

Bangladesh’s debt, and Haiti, which is not considered a heavily indebted 

poor country, may also qualify. The total cost of Canada’s debt relief 

initiatives, under the traditional mechanisms, the enhanced HIPC Initiative, 

and the Canadian debt initiative, is estimated at approximately C$1 billion, 

or about US$665 million in net present value terms. The Canadian 

government has already set aside provisions to implement this debt relief 

plan. 

3

Seventeen of the 36 countries potentially eligible for HIPC debt relief have debts 

outstanding to Canada.

4

The official development loan to Myanmar was fully budgeted at the time of disbursement 

and would not result in additional impact on Canada’s budget to participate in the HIPC 

Initiative.
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Canada provides loans and loan guarantees to foreign sovereigns through 

two principal venues: (1) the Export Development Corporation and 

(2) government guarantees to support Canadian Wheat Board sales. The 

Export Development Corporation is Canada’s official export credit agency.5

It promotes Canada’s exports abroad by guaranteeing and insuring 

payments to Canadian exporters in the case of default by foreign countries, 

as well as through direct lending. The government of Canada also 

guarantees the sovereign receivables of the Canadian Wheat Board under 

the Credit Grain Sales Program. Prior to 1986, the Canadian International 

Development Agency provided concessional loans as official development 

assistance.6

 Currently, the Canadian International Development Agency 

provides development assistance on a grant-only basis and is no longer 

offering loans as part of its development program. 

Method Used in Valuing 

International Loans

Canada determines the value of its nonconcessional loans based on 

country risk assessments.7

 Nonconcessional loans are discounted using a 

rating system, which is established by the government and is based upon 

the assessment of country risk, including information from credit rating 

agencies, the Export Development Corporation, and other sources. For 

heavily indebted poor countries, the discount is based upon the amount of 

debt reduction that these countries are expected to receive at the Paris 

Club or under the Canadian debt initiative, which is usually between 80 and 

100 percent. As mentioned earlier, Canada has written off its official 

development assistance loans to the heavily indebted poor countries, with 

the exception of Myanmar. Official development assistance loans were 

valued at zero, meaning that official development assistance loans were 

fully budgeted at the time they were disbursed. At the end of each fiscal 

year, Canada reassesses the value of its foreign loans and guarantees, and 

the fiscal costs of any deterioration in their values are reflected in its public 

accounts’ data. 

5

The Export Development Corporation functions in a similar capacity to the U.S. 

Export-Import Bank. 

6

The Canadian International Development Agency is similar to the U.S. Agency for 

International Development.

7

Canada’s accounting treatment of asset (loan) valuation is embodied in its Financial 

Administration Act, which requires assets and liabilities to adhere to generally accepted 

accounting principles.
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Method Used in Budgeting 

for the Cost of Debt Relief

The costs of debt relief are influenced by the methods countries use to 

value their loans. With respect to non-official development assistance 

loans, all Paris Club debt reduction operations are provisioned for in an 

account for general allowances. Specific provisions were accumulated 

within the general allowances in previous years to reflect the cost of 

multilaterally agreed debt reductions. Therefore, there is no new budgetary 

impact for Paris Club debt reduction operations. The cost of debt 

forgiveness, over and above the percentage agreed to by the Paris Club, 

such as the Canadian debt initiative, resulted in additional impact on the 

budget. In 1999, the government had set aside $50 million to cover the 

expected cost of the Canadian debt initiative. 

In the past, whenever there has been a write-down of sovereign debt as part 

of a Paris Club agreement, the Canadian government has paid the Export 

Development Corporation the amounts that would otherwise have been 

paid by the debtor government. This policy is currently under review. The 

Export Development Corporation is an independently capitalized 

corporation, which undertakes loans on commercial terms. However, the 

Export Development Corporation’s accounts are consolidated with those 

of the government of Canada at year-end, and the value of the loans, net of 

provisions, are reflected in the government’s consolidated fiscal position.

As mentioned previously, Canada has already written off nearly all of its 

official development assistance loans. Since Canada had fully budgeted for 

official development assistance loans to the heavily indebted poor 

countries at the time they were disbursed by the Canadian International 

Development Agency, the forgiveness of official development assistance 

loans did not result in additional impact on its budget when they were 

written off. 
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Option Used to Provide 

Debt Relief

In addition, the options creditors have chosen through the Paris Club 

framework to provide debt relief may affect the budgetary impact. In 

recognizing the legal and budgetary constraints of creditors, the options 

can enable creditors to spread their costs over time. Within the context of 

the Paris Club, creditors may chose options such as debt reduction (a 

cancellation of the stock of eligible debt)8

 or debt service reduction 

(interest rate reduction)9

 for the treatment of non-official development 

assistance debt.10 According to Ministry of Finance officials, while the 

choice has no differential budgetary effect on Canada since assets are 

valued on a current basis, Canada applies the debt reduction option for 

reasons of administrative simplicity. In addition, while Canada expects to 

provide interim relief beginning at a country’s decision point, in accordance 

with the Paris Club procedures, 100 percent of the heavily indebted poor 

countries’ debt (pre- and post-cutoff date) will be written off as each 

country reaches its completion point. Since Canada has already 

provisioned for the cost of debt relief beyond the enhanced HIPC terms, 

there is no additional budgetary impact of this forgiveness.

Legal Constraints Canada does not require additional legal authorization to provide debt 

relief within the context of the Paris Club. However, providing additional 

bilateral debt relief, such as the Canadian debt initiative, required 

parliamentary approval for the additional expenditure. The Canadian 

government has already received Parliament’s authorization to provide 

bilateral debt forgiveness under the enhanced HIPC Initiative. 

8

This option involves a cancellation of part of the stock of eligible debt and a rescheduling of 

the remaining debt at market interest rates.

9

This option involves a rescheduling or refinancing of the total eligible debt over a long 

period with interest rates below market rates.

10Official development assistance debt is not generally treated in the Paris Club. The 

treatment of official development assistance debt is largely linked to the treatment of nonofficial development assistance debt.
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Contributions to the 

Multilateral Trust Funds

Canada has contributed a total of C$215 million, or about US$143 million, 

to the multilateral trust funds.11 Of this total, C$150 million, or about 

$100 million, has already been provided to the HIPC Trust Fund at the 

World Bank. The remainder, C$65 million, or about $43 million, was 

provided to the Poverty Reduction Growth Facility/HIPC Trust at the IMF. 

Canada’s total contribution also includes about $27 million to the World 

Bank HIPC Trust Fund as part of the Interest Subsidy Fund allocation.

Prior Debt Reduction 

Activities

Since 1990, Canada has forgiven about C$600 million in official 

development assistance loans to several potential HIPC recipients.12 In 

addition, as a member of the Paris Club, Canada has participated in the 

debt reschedulings of several potential HIPC recipients since 1990. 

France

Outstanding Loans Of the Group of Seven industrialized countries, France has the highest 

exposure to the heavily indebted poor countries. As of December 31, 1998, 

France had claims outstanding on the 40 heavily indebted poor countries 

totaling about 11.2 billion euros, or about US$13 billion, according to 

officials of the French Ministry of Finance.13 Official development 

assistance loans account for about 34 percent of total claims. France has 

proposed to cancel 100 percent of its pre-cutoff date non-official 

development assistance claims and all official development assistance 

claims and estimates that its total costs for debt relief would be 

approximately French francs (FF) 42 billion, or about US$8 billion. 

11In addition, Canada has contributed $5.4 million to the Central American Trust Fund at the 

World Bank. This trust fund provides debt relief to those countries in Central America that 

were devastated by Hurricane Mitch. Two of the countries benefiting from this fund, 

Nicaragua and Honduras, are eligible for HIPC debt relief.

12Since 1978, about C$900 million in official development assistance loans was granted to 

several potential HIPC recipients.

13The debt owed by the 40 heavily indebted poor countries represented about 0.9 percent of 

France’s gross domestic product as of the end of 1998, also the highest proportion of the 

Group of Seven countries. The euro rate was about 1.17 to US$1 on January 4, 1999. 
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Agence Francaise de Developpement, a public agency, manages the 

majority of official development assistance claims, and Banque de France 

and Natexis, a private bank, manages the rest. Non-official development 

assistance claims are provided in the form of direct loans by the French 

government to another government or as commercial claims, which are 

guaranteed by the French government. COFACE, a private company, 

manages the non-official development assistance claims of the French state 

and is paid a fee for its service.

Method Used in Valuing 

International Loans

France’s method for valuing its loans is based on the general principle in its 

accounting and budgeting system that loans are worth their face value. For 

example, if France lends FF200 million to one of the potential HIPC 

recipients, the loan is valued and recorded at the full FF200 million. The 

loans are not discounted based on risk, and provisions are not set aside, in 

case of default, when the loans are disbursed. 

When a loan is made to a given country, it has an impact on France’s cash 

flow but only an indirect impact on its budget. The disbursement of the 

loan has no direct impact on the budget because the French government 

borrows the funds to issue the loan. The loan is recorded in a capital 

account, which is not a budget account. The capital account is subject to 

prior authorization by the French parliament, even if there is no impact on 

the budget. The capital account has an indirect effect on the budget 

because when a loan is made, there is a budgetary cost associated with the 

interest the French government pays on its own borrowing. The budgetary 

cost varies by the types of loans and the interest rates. In addition, interest 

repayments have a direct impact on the budget.

Method Used in Budgeting 

for the Cost of Debt Relief

The cost of debt relief is equal to the face value of the loan that is being 

reduced. For example, if a loan with a face value of FF100 million is 

cancelled, the impact on the budget is FF100 million. The treatment is the 

same for both official development assistance and non-official 

development assistance loans. According to French Ministry of Finance 

officials, France’s budgetary treatment is governed by rules emanating 

from the Maastricht Treaty.14 Under the rules, when a decision is taken to 

cancel a loan, the direct impact on the budget is equal to the amount of 

14The Maastricht Treaty created the European Union. The Treaty was approved in Maastricht 

by the heads of government of the 12 members of the European Community in 1991. 
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debt that is cancelled when the final decision is made. For example, under 

the enhanced HIPC Initiative, the final decision will be made at the 

completion point. Therefore, the largest impact on the budget will occur at 

the completion point of each country and not at the decision point.15

Interim relief will impact the budget at the decision point, and will be 

provided through flow treatments during the interim period, for France’s 

bilateral claims and for its multilateral claims through the European 

Development Fund.16

The French government recently reported that its debt relief initiative, for 

debt relief beyond what is provided under the enhanced HIPC Initiative, 

would allow for debt write-offs in the form of annual cash grants from 

France to all eligible HIPC countries. The decision to provide grants rather 

than simply to write off the debt was intended to foster greater 

transparency in the post write-off period with the funds being used to 

finance social programs and to reduce poverty. In practice, this means that 

a vote from parliament will be required annually to provide grants to cover 

the debt falling due each year.

The parliament sets a budget ceiling for the treatment of debt cancellation 

through the Paris Club, and the ceiling has been increased recently to 

3.1 billion euros (about $3.1 billion).17 In addition, according to French 

Ministry officials, debt reduction has no direct impact on the national debt 

because the national debt is measured on an aggregate basis with each 

component not separately valued.

15There could be a debate as to whether the Maastricht Rule is the same as France’s 

accounting rules. Eurostat (the accounting body of the European Union) is in charge of 

reviewing this issue and establishing a rule for all European Union countries.

16The origin of the European Development Fund is in the signing of international 

conventions between the member states of the European Union and 71 African, Caribbean, 

and Pacific states, known as the Lomé conventions. The aid these countries are granted by 

the European Community is for financing development projects and programs. 

17The 3.1 billion euros will be used to cover Naples terms, and the original HIPC and 

enhanced HIPC reductions, including official development assistance. France had argued in 

Cologne for a fair burden-sharing arrangement because of the significant impact that debt 

relief would have on its budget. The decision was that debt relief would amount to about 

0.1 percent of France’s GDP. The exchange rate used is 1 euro = US$1.
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Option Used to Provide 

Debt Relief

The French government has requested authorization from parliament to 

cancel principal, interest, and arrears, if any (debt stock reduction) at HIPC 

countries’ completion points, as part of the 3.1 billion euros requested from 

Parliament. Therefore, the largest impact on France’s budget will occur at 

countries’ completion points. In addition, as mentioned previously, the 

bilateral portion of the debt relief beyond the enhanced HIPC terms will 

impact the budget annually as payments fall due after full HIPC treatment 

at the completion point. 

Legal Constraints Some countries need legislative authorization to provide multilateral debt 

relief, that is, forgiveness of debt within the context of a Paris Club 

agreement. For France, if a debt reduction or cancellation is being 

provided, the debt reduction has to be authorized by the French 

parliament. For multilateral treatment of debt reduction, France complies 

with the rules of the enhanced HIPC Initiative as agreed in September 1999. 

When countries reach a completion point, France will grant debt reduction 

provided it has parliamentary authorization. In addition, in order to provide 

additional debt reduction on a bilateral basis, a parliamentary decision is 

also required. The authorization from parliament is also limited in size. The 

French Treasury is given a ceiling, and it must request new authorization 

from parliament when that ceiling is reached. As previously mentioned, 

France complies with the Maastricht Rule in its treatment of budgeting for 

the cost and the timing of providing for debt relief.

Contributions to the 

Multilateral Trust Funds

France has pledged funds totaling about US$310 million to the multilateral 

trust funds. France will provide about $21 million directly to the World 

Bank HIPC Trust Fund as well as about $180 million through the European 

Development Fund and the European Union’s budget. The European 

Development Fund and the European Union budget are expected to make a 

contribution to the World Bank HIPC Trust Fund in the amount of 

734 million euros (about US $734 million).18 Of the 734 million euros 

pledged to the World Bank HIPC Trust Fund, 680 million euros will be 

channeled primarily to the African, Caribbean, and Pacific countries and

18The European Development Fund will make a contribution of about 1 billion euros to the 

HIPC initiative, including 320 million euros for the cancellation of the European 

Development Fund’s claims in the context of the HIPC Initiative. 
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the rest to Latin American countries.19 France and Germany are the main 

contributors, with shares of about 25 percent each, compared to about 

12 percent each for Italy and the United Kingdom. The funds are already a 

part of the European Development Fund and have not yet been disbursed 

to the HIPC Trust Fund. France’s contribution to the Trust Funds creates no 

new demand on its national budget, or the other members of the European 

Union, since this money was already part of the European Development 

Fund. In addition, France has pledged $110 million to the IMF’s Poverty 

Reduction and Growth Facility/HIPC Trust. 

Prior Debt Reduction 

Activities

France has canceled about FF55 billion, or US$9.8 billion, of debt to the 

heavily indebted poor countries, which occurred primarily in two phases 

through the Paris Club: (1) 1988-89 and (2) 1994. Additional debt reductions 

resulted in smaller bilateral cancellation in 1988 and 1994 as well as in 1991 

and 1998, which are included in the FF55 billion total.

Germany

Outstanding Loans As of January 31, 2000, Germany’s total exposure to the 40 heavily indebted 

poor countries is estimated at deutsche marks (DM) 11 billion, or about 

US$6.6 billion in nominal terms (about $2.7 billion, or 41 percent, is official 

development assistance loans), according to Germany’s Treasury officials.20

Under the enhanced HIPC Initiative, Germany is expected to provide 

100 percent reduction on pre-cutoff date, non-official development 

assistance claims as well as 100 percent cancellation of all official 

development assistance claims. Official development assistance to the 

least developed countries has been given only in the form of grants since 

1978. The total cost to the German Treasury of providing debt relief is 

estimated at $5.7 billion.21

19This contribution is contingent upon the participation of other creditors, especially the 

United States, to the HIPC Trust Fund.

20The debt owed by the 40 heavily indebted poor countries represented about 0.3 percent of 

Germany’s gross domestic product as of the end of 1999.

21This includes an additional bilateral topping-up to 100 percent cancellation of debt worth 

approximately DM700 million, or US$350 million. 
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The German Ministry of Economic Cooperation and Development provides 

official development assistance grants and loans as well as technical 

assistance to developing countries. Grants and loans are disbursed by a 

government-owned development bank (Kreditanstalt für Wiederaufbau), 

which also manages the loan portfolio. German commercial banks provide 

trade financing for exports and for investment in development projects. 

The German government, primarily through the Hermes export credit 

agency, guarantees some of the debt. 

Method Used in Valuing 

International Loans

The federal government values and records loans at face value. The loans 

are not rated and are not valued for budgetary purposes, meaning that 

funds are not budgeted at the time the loans are disbursed to cover 

expected defaults. The federal government guarantees, up to a maximum of 

90 percent, repayment of commercial credits to exporters in the event of 

nonrepayments by debtor countries. The exporter incurs the loss of the 

10 percent, which the federal government does not guarantee. In the event 

of default, these claims would then become the asset of the federal 

government and subject to treatment in the Paris Club. 

Method Used in Budgeting 

for the Cost of Debt Relief

In principle, the German federal budget is based on an annual expenditure 

and revenue cycle. International loans and guarantees are only budgeted 

when an expenditure or revenue arises. Therefore, the cost of debt 

reduction, or the impact on the budget, for official development assistance 

loans is defined in terms of the amount of revenue forgone—the value of 

the loans that is being forgiven. For commercial loans, the cost of debt 

relief is determined by the amount of expenditure required to indemnify or 

honor loans guaranteed by the government, which is generally up to a 

maximum of 90 percent of the face value of loan guarantees. In the case of 

the enhanced HIPC Initiative, the German government will forgive 

100 percent of pre-cutoff date commercial credits. As a result, the 

parliament has agreed that the government would incur the cost of the 

10-percent portion of the loan guarantee that is usually borne by the 

exporters.

Debt relief directly impacts the national budget and indirectly impacts the 

national debt. Debt reduction results in a reduction in revenues. No funds 

are earmarked for this purpose, therefore, if a budget deficit results, the 

deficit is financed by borrowing, which affects the national debt (debt held 

by the public). Loan valuation and, in consequence, treatment of debt relief 

are based on Germany’s national accounting system. 
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Option Used to Provide 

Debt Relief

Germany anticipates providing a stock of debt reduction (a cancellation of 

principal, interest, and arrears, if any) at the countries’ completion points 

for both official development assistance loans and nonconcessional 

credits. Interim relief, or flow rescheduling, will be provided at countries’ 

decision points. However, full write-off or cancellation of the eligible debt 

stock at HIPC countries’ completion point is contingent upon these 

countries satisfying the conditions set under the IMF and the World Bank 

poverty reduction strategy program. Thus, the majority of the relief will 

impact Germany’s budget at countries’ completion points. 

Legal Constraints With respect to nonconcessional claims, the German government is 

authorized to grant partial debt forgiveness in the context of multilaterally 

agreed debt settlements. However, bilateral debt reduction, in addition to 

multilaterally agreed debt reduction, requires approval by a parliamentary 

committee.22 With respect to Germany’s pledge to write off 100 percent of 

all HIPC countries’ debt, parliamentary approval was secured in April 2000. 

Parliament also agreed in April that the government would incur the cost of 

the 10-percent commercial loan guarantee that is borne by exporters.

As far as official development assistance claims are concerned, debts can 

be cancelled only if repayment would cause undue hardship for the debtor 

country (so stipulated by the German Federal Budget Act.) This law defines 

“undue hardship” as “requiring unjustifiable efforts on the debtor’s part to 

settle his debt.” As mentioned previously, under the enhanced HIPC 

Initiative, Germany will provide 100-percent debt cancellation of all official 

development assistance claims to the heavily indebted poor countries.

Contributions to the 

Multilateral Trust Funds

Germany has pledged approximately DM150 million, or US $75 million, to 

the World Bank HIPC Trust Fund. Of this US$75 million, about $24 million 

has already been contributed to the HIPC Trust Fund. A further DM500 

million, or US$250 million, represents Germany’s share of the European 

Union’s (European Development Fund and the European Union’s debt 

cancellation as a HIPC creditor) pledge to the HIPC Trust Fund. With 

regard to the IMF, Germany will contribute DM500 million, or US$250

22This is the Budgetary Committee (roughly equivalent to the U.S.’ Ways and Means 

Committee).
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million, by means of an interest-free loan of the Deutsche Bundesbank to 

the Poverty Reduction Growth Facility/HIPC Trust.23

Prior Debt Reduction 

Activities

Since 1989, when concessional debt reschedulings were first introduced by 

the Paris Club, Germany has cancelled approximately DM4 billion, or 

US$2 billion, of non-official development assistance claims to the heavily 

indebted poor countries. In addition, since 1989, Germany forgave 

approximately DM3.8 billion, or about US$2 billion, in official development 

assistance claims primarily to the heavily indebted poor countries. 

Italy

Outstanding Loans As of December 31, 1999, Italy’s exposure to the 40 heavily indebted poor 

countries is estimated at US$4.3 billion in nominal terms, with official 

development assistance loans comprising about 31 percent, according to 

an Italian Treasury official. Based on a new debt relief initiative that is 

currently under consideration by the Italian parliament, Italy anticipates 

providing 100-percent debt relief of pre-cutoff date, non-official 

development assistance debts of potentially eligible HIPC countries.24 In 

addition, Italy is expected to write off all (pre- and post-cutoff date) official 

development assistance loans to HIPC countries that have reached their 

completion points. The Italian government anticipates providing only 

official development assistance grants to the HIPC countries in the future. 

The total cost to the Italian government of providing debt relief is estimated 

at US$3 billion in nominal terms, which is based on the assumption that all 

eligible HIPC countries will reach their decision points. 

Italy provides loans and loan guarantees through three federal agencies. 

SACE is the insurer, which provides insurance (or guarantees) against 

political risks on export credits (for example, supplier and buyer credits). 

Mediocredito Centrale is a bank, which is the agent of the Italian 

23Germany has also contributed $13.2 million to the Central American Trust Fund at the 

World Bank. 

24The prior government proposal had requested 100 percent cancellation for eligible HIPC 

countries with annual per capita income below $300. This new proposal presented by the 

government in March calls for 100-percent debt cancellation for all eligible HIPC countries. 
Appendix X

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government that is responsible for extending concessional (official 

development assistance) loans. Mediocredito Centrale has the authority to 

sign the financial agreement with the relevant counterpart of the recipient 

country, and the Ministry of Foreign Affairs signs the intergovernmental 

agreement on official development assistance. Mediocredito Centrale can 

cancel official development assistance credits if duly authorized by the 

Italian government. Simest provides interest subsidy (for example, interest 

stabilization from floating to fixed interest rate) for export credits to Italian 

exporters, which is funded from the national budget. 

Method Used in Valuing 

International Loans

Technically, loans are valued at face value. The loans or guarantees are 

recorded in the budgets of SACE and Mediocredito Centrale at face value. 

The loans are outside the national budget; therefore, when loans are 

disbursed or guarantees are called, they do not have a direct impact on the 

national budget. These agencies can request reimbursement from the 

Italian government (Treasury) if they are not repaid because the 

government has guaranteed repayment of the loans.

At the time when the loans were disbursed, the Italian government did not 

budget for the cost of expected defaults of the heavily indebted poor 

countries because such costs were considered to be marginal. However, 

the government budgets for the expected defaults of emerging market 

countries. According to a Treasury official, the emerging market countries’ 

loans are not discounted, and they are not recorded at less than face value. 

For example, when SACE prepares its budget, it includes assumptions 

concerning the expected repayments of the loans. Its assumptions of 

expected repayments are usually high with respect to emerging market 

countries and lower, as little as zero, for the poorest countries. According 

to the Italian Treasury official, under this financial scenario the Italian 

Treasury is providing the money needed to run the agency. It is providing 

the difference between “expected losses” and “income” generated during 

the year. 

In the past, the agencies did not establish provisions when the loans were 

made. However, under recent export credits legislation (Law 143/98), SACE 

has adopted a “provisioning” mechanism, by which for every loan 

guarantee extended since October 1999 a provision is established. The 

funds for provisioning (based on the risk associated with each specific 

recipient country) are supplied through the budget of the Italian 

government. 
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Method Used in Budgeting 

for the Cost of Debt Relief

Debt relief has a direct impact on each agency’s budget and an indirect 

impact on the national budget. With respect to official development 

assistance loans, Mediocredito Centrale may be authorized by the Italian 

state to cancel official development assistance loans. For nonofficial 

development assistance claims, SACE issues supplemental/indirect 

guarantees of the Italian government, which guarantees reimbursement. 

Since the Italian state has made the decision to provide debt relief to all 

potentially eligible HIPC countries, and it did not budget for the likelihood 

of default or nonrepayment of these loans when they were disbursed, the 

cancellation of these debts will have an impact on the national budget. 

However, the Italian government is not required to reimburse its agencies 

immediately at the time of debt cancellation nor is it required to provide 

100 percent reimbursement. It can restore the money when the agencies 

are in need of the funds. Debt relief will not have a direct impact on the 

national debt because the government did not borrow funds from the 

public specifically for this purpose. 

Option Used to Provide 

Debt Relief

Under the enhanced HIPC Initiative, Italy anticipates providing full 

cancellation of principal and interest payments, and arrears, if any, at 

countries’ completion points (debt stock reduction) as well as granting 

interim relief at decision points. The impact on the federal agencies’ 

budgets will primarily occur at HIPC countries’ completion points, but the 

impact on the national budget depends on when funds are needed by its 

federal agencies. According to an Italian Treasury official, the budget 

treatment of debt relief is based on the Italian national accounting system. 

Legal Constraints The Italian government does not require authorization from its parliament 

to grant Paris Club debt relief under the debt service reduction option, 

which is a reduction in interest rates. However, since the Italian 

government has proposed to grant a reduction in the stock of debt and to 

provide further relief beyond the Paris Club agreement based on the 

enhanced HIPC Initiative, additional authorization must be provided by 

parliament. 

Contributions to the 

Multilateral Trust Funds

To date, Italy has pledged a total of about $258 million to the multilateral 

trust funds. About $138 million of this pledge is anticipated to flow directly 

from Italy to both the World Bank HIPC Trust Fund ($70 million) and to the 

IMF Poverty Reduction Growth Facility/HIPC Trust ($68 million). As part 
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of the European Development Fund and the European Union’s budget 

contribution, Italy’s share is estimated at 12 percent of the approximately 

$1 billion, or about $120 million.25

Prior Debt Reduction 

Activities

Between 1991 and 1999, Italy canceled bilateral official development 

assistance loans worth about $555 million to the HIPC countries. In 

addition, since about 1990, Italy has participated in debt reduction under 

the Paris Club terms for non-official development assistance loans and 

granted debt relief of approximately $500 million to heavily indebted 

countries.

Japan

Outstanding Loans As of December 31, 1998, Japan’s total exposure to the 40 heavily indebted 

poor countries was approximately US$11.2 billion, according to Japan’s 

Ministry of Finance officials. Official development assistance loans 

account for almost 90 percent of Japan’s total claims on the HIPC 

countries. Under its new debt reduction plan, which was announced on 

April 10, 2000, Japan agreed to forgive 100 percent of pre-cutoff date, nonofficial development assistance debt and 100 percent of (pre and post-cut 

off date) official development assistance debt owed by heavily indebted 

poor countries that reach their completion points.26 Japan estimates its 

total cost for debt relief at $8 billion. 

The Japan Bank for International Cooperation is responsible for 

administering the foreign loan and loan guarantee programs.27 The Ministry 

of Foreign Affairs, with the assistance of the Japan International 

Cooperation Agency, provides grant aid and technical assistance. Trade 

25Italy has also contributed $12 million to the Central American Trust Fund at the World 

Bank.

26Japan announced its plans for official development assistance debt relief prior to the 

Cologne Summit in June 1999.

27In March 1995, the Export-Import Bank of Japan and the Overseas Economic Cooperation 

Fund were merged and became known as the Japan Bank for International Cooperation.
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insurance is administered, implemented, and provided by the Ministry of 

International Trade and Industry.

Method Used in Valuing 

International Loans

The government of Japan values its loan on a face value basis. When loans 

are disbursed, they are recorded at face value. 

Method Used in Budgeting 

for the Cost of Debt Relief

The amount of debt relief that is provided is equivalent to the amount of the 

face value of the loan that is being forgiven. With respect to official 

development assistance claims, the Japanese government provides grant 

aid for debt relief. The grant aid for the official development assistance 

debt relief is drawn from the national budget through the Ministry of 

Foreign Affairs. The HIPC countries are required to spend this grant to 

purchase goods from countries that are members of the Organization for 

Economic Cooperation and Development/Development Assistance 

Committee countries.28 In addition, debtor countries are required to 

provide the Japanese government with a list of imports, which is to ensure 

that the grant aid is not used to purchase so-called “unprofitable goods.”29

However, official development assistance loans in yen are considered 

untied loans.

With respect to the treatment of debt relief for non-official development 

assistance claims, the Japanese government is currently deliberating 

whether to write off HIPC countries’ debts at their completion points. In 

past Paris Club debt reductions, Japan provided debt relief through a 

reduction in interest rate. If Japan were to choose the interest rate 

reduction option (with interest rate approaching zero) under the enhanced 

HIPC Initiative, it could take many decades to achieve the net present value 

reduction of 100 percent pre-cutoff date debt. However, the impact on the 

implementing agency’s budget (the Ministry of International Trade and 

28Based on the Organization for Economic Cooperation and Development terms and 

concepts, this form of aid would be considered “partially untied aid.” Partially untied aid is 

official development assistance (or official aid) for which the associated goods and services 

must be procured in the donor country or among a restricted group of other countries. 

Partially untied aid is subject to the same disciplines as tied aid credits and associated 

financing.

29According to the Ministry of Finance, unprofitable goods include weapons, goods relating 

to military, or other things that do not contribute to increasing the productivity of heavily 

indebted poor countries.
Appendix X

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Industry) would be gradual over time. According to the Ministry of Finance, 

this form of debt relief has an indirect impact on the national budget and a 

direct impact on the implementing agency’s budget. In addition, according 

to Japan’s Ministry of Foreign Affairs, once debt relief is extended to a 

country, it will be quite difficult to extend new loans to those countries in 

the future. Therefore, all future capital assistance will, in principle, have to 

be made in the form of grants.30

Option Used to Provide 

Debt Relief

As previously mentioned, the bulk of Japan’s loans outstanding to the HIPC 

countries is official development assistance loans. With respect to official 

development assistance loans, the Japanese government will reschedule 

the loans over 40 years and provide grant aid for debt relief when it 

receives debt service payments from the HIPC countries. Based on this 

treatment of official development assistance loans, the impact on the 

national budget is expected to be limited in the short run since the debt 

relief will be spread out over 40 years. With regard to non-official 

development assistance claims, the Japanese government has not decided 

on how it will treat this debt. Non-official development assistance claims 

comprised only about 10 percent of total claims outstanding, and only

pre-cutoff date claims are eligible. 

Legal Constraints According to an official of Japan’s Ministry of Finance, Japan is not faced 

with any legal restrictions to granting any particular option of debt relief or 

write-off on its claims. The government does not require the Diet’s31

approval to reschedule debt or to grant debt relief through the Paris Club 

(multilateral agreement). However, Diet approval is required when the 

agreement for bilateral rescheduling and provision of grants for debt 

reduction is concluded.

Contributions to the 

Multilateral Trust Funds

Japan’s total pledge or contribution to the multilateral trust funds is 

estimated at approximately US$328 million. So far, Japan has contributed 

US$10 million to the HIPC Trust Fund at the World Bank and has pledged to 

30Vietnam, Myanmar, Kenya, and Ghana indicated that they may not accept the grant 

assistance for debt relief approach because they would like to continue to receive official 

development assistance in yen loan form in the future. 

31The Diet is the legislative body, which is similar to the United Kingdom’s parliament.
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make an additional contribution of $190 million. About $128 million will go 

to the IMF Poverty Reduction Growth Facility/HIPC Trust, of which 

$62 million has already been contributed.

Prior Debt Reduction 

Activities

Between 1990 and 1998, Japan granted about US$2.4 billion in nominal 

terms of grant aid for debt relief of official development assistance claims 

to the least developed countries. In addition, Japan has provided debt 

reduction on a net present value basis within the framework of the Paris 

Club.32

The United Kingdom

Outstanding Loans As of December 31, 1999, the United Kingdom had total commercial 

(non-official development assistance) claims outstanding of about 2 billion 

pounds (about US$3.1 billion) against the heavily indebted poor countries, 

according to the United Kingdom’s Treasury.33 About 1.6 billion pounds 

(US$2.5 billion) of this total amount is pre-cutoff date claims.34 The United 

Kingdom will forgive all pre- and post-cutoff date debts of countries that 

participate in the enhanced HIPC Initiative. 

The United Kingdom’s export credit agency, the Export Credits Guarantee 

Department,35 holds all non-official development assistance claims. Its 

primary function is to facilitate exports of goods and services by providing 

guarantees and insurance. The Export Credits Guarantee Department will 

incur an estimated cost of about 1.4 billion pounds in nominal terms, or 

about US$2.2 billion to write off claims, for which it had already 

provisioned. The United Kingdom Treasury will only fund the cancellation 

of the non-official development assistance debts over and above the levels 

32Japan has not provided us with the amount of relief granted under the Paris Club 

framework.

33Of the 40 HIPC countries, 34 are indebted to the United Kingdom.

34Only three countries owe post-cutoff date debts: Ghana, Côte d’Ivoire, and Vietnam.

35The Export Credits Guarantee Department is a department of the Secretary of State for 

Trade and Industry. The Export Credits Guarantee Department derives its statutory 

authority from the Export and Investment Guarantees Act of 1991. 
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of cancellation required under the HIPC Initiative. The face value of the 

remaining debt that the United Kingdom Treasury will fund is estimated at 

300 million pounds, or about $480 million, which represents new demands 

on the budget.36 The Department for International Development provides 

grants, loans, and technical assistance to developing countries and 

manages the loan portfolio. The Department for International Development 

has written off all its official development assistance loans to the HIPC 

countries since about 1997 and has since been providing official 

development assistance only in the form of grants to these countries.37

Method Used in Valuing 

International Loans

In terms of valuing non-official development assistance claims, the Export 

Credits Guarantee Department considers the potential recoverability of the 

loan. The Export Credits Guarantee Department performs a provision 

exercise, which assesses the debtor country’s ability to repay the debt.38 It 

sets provisions for irrecoverable claims based upon current perceptions of 

risks, including an assessment of the debtor country’s economic situation. 

The Export Credits Guarantee Department’s provisioning is based on 

country-specific estimates of the probability of default, and not on country 

ratings per se. The Department’s accounting system takes into account the 

different premiums and expected losses in discounting the loans. For 

accounting purposes, the Export Credits Guarantee Department has two 

accounts—Account 1 and Account 2.39 Account 1 is a reserve account, 

which is reflected on the balance sheet, and it handles guarantees issued 

for project business prior to April 1991 and guarantees issued by the 

Insurance Services Group of the Export Credits Guarantee Department. 

Account 2 covers guarantees issued for project business since April 1991. 

36The countries that will not be eligible for HIPC debt relief will receive a 67-percent 

reduction based on Naples terms.

37The cancellation of official development assistance loans is the result of the Retrospective 

Terms of Adjustment, a policy of aid loan write-off introduced by the British government 

following a resolution passed by the United Nations Conference on Trade and Development 

in 1978. The Conference had called for either the cancellation of aid loans or their 

availability on more concessionary terms.

38Based on the Export Credits Guarantee Department ‘s Annual Report 1997/98, provisions 

are estimated according to the following categories of risk: political, buyer, specific political 

risk provision, and specific buyer risk provisions.

39Account 1 is a liquidating account and appears similar to the U. S. government’s 

Liquidating Account, which was established as part of the Federal Credit Reform Act of 

1990. 
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The Export Credits Guarantee Department performs a reestimate of its 

loan assets every year, and the account reserve is adjusted to reflect any 

change in estimates. 

As mentioned earlier, the United Kingdom has written off all of its official 

development assistance loans. However, official development assistance 

loans were valued at zero because they were fully budgeted for at the time 

they were disbursed.

Method Used in Budgeting 

for the Cost of Debt Relief

Based on the 1991 Export and Investment Guarantees Act, the Export 

Credits Guarantee Department must maximize recoveries and manage its 

assets and liabilities in a way that minimizes the cost to the taxpayers. In 

the past, and for most countries, this has been taken to mean that the 

Export Credits Guarantee Department can offer debt reduction only if the 

value of the claims after debt relief is greater than or equal to the

risk-discounted value before debt relief. In other words, debt relief is 

granted under the condition that it will improve future collection rates. 

However, in the context of the HIPC Initiative, the Export Credits 

Guarantee Department is judged able to provide up to 100-percent debt 

relief within its statutory obligations if supported by a multilateral 

agreement. In order to fulfill the United Kingdom’s bilateral commitment to 

relieve all the debt of HIPC countries, when the level of relief given through 

the multilateral process is less than 100 percent, the United Kingdom’s 

Treasury will provide additional funds to the Export Credits Guarantee 

Department to make up the difference between the multilateral and 

bilateral levels of debt relief. This funding will be channeled through the 

Department for International Development’s budget, which will be 

increased especially for this purpose. The Department for International 

Development will provide grants to countries to cover their scheduled 

debt. 

When the Department for International Development cancels official 

development assistance loans, it is effectively converting an outstanding 

loan into a grant. The Department for International Development’s 

accountants record both the repayment of the outstanding loan and a grant 

issued to the debtor country. The impact on the Department for 

International Development’s budget is neutral. The original cost to the 

Department was budgeted at the time that the debt was created, and 

cancellation results in no new demands on the Department for 

International Development’s budget. As mentioned earlier, the United 
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Kingdom has written off all its official development assistance loans. If 

interest payments were anticipated, however, the interest payments 

forgone (through debt cancellation) would have an impact on the 

Department for International Development’s budget. The aid program 

would be reduced in proportion to the interest that is forgone on the debt 

that has been written off.

While debt relief does not directly impact the national debt, the 

consolidated fund benefits each year from any revenue it receives from the 

Export Credits Guarantee Department. Therefore, debt relief will lessen 

the amount contributed to the consolidated fund.

Option Used to Provide 

Debt Relief

When a country reaches its decision point, the United Kingdom will provide 

interim relief of 100 percent of debt service between the decision point and 

the completion point. Only when the country reaches the completion point 

is the commitment to provide 100-percent debt relief irrevocable. This 

mirrors the operation of the multilateral process through the Paris Club. In 

that case, the relief provided through a flow rescheduling at the decision 

point is made final through the reduction in the stock of debt at the 

completion point. As mentioned previously, the United Kingdom’s Export 

Credits Guarantee Department has already provisioned for most of the debt 

relief that it will provide under the enhanced framework. According to 

United Kingdom Treasury officials, the extra cost (bilateral portion of the 

debt relief) will be written off as principal and interest payments fall due 

over a 23-year period; therefore, the impact on the budget will occur 

gradually over this period.

Legal Constraints to 

Providing Debt Relief

The extra costs of financing the commitment to provide 100-percent debt 

relief will be met from the (Treasury) reserve in the first year and from the 

Department of International Development’s budget in subsequent years. 

The extra resources will therefore be voted as part of the United Kingdom’s 

public expenditure process. Separate parliament approval for the 

100-percent relief proposal is not required. As previously mentioned, the 

Export Credits Guarantee Department is restricted in the amount that it 

can provide for debt relief. Based on its enabling act, it must maximize its 

return to the taxpayers. 
Appendix X

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Contributions to the 

Multilateral Trust Funds

The United Kingdom has pledged a total of $359.3 million to the World 

Bank HIPC Trust Fund. It has made a contribution so far of about 

$36 million to this trust fund. The total amount pledged includes an 

expected $95 million share of the European Union’s contribution from the 

European Development Fund, which is earmarked for the African, 

Caribbean, and Pacific countries. The United Kingdom has also made a 

contribution of $43.3 million to the World Bank HIPC Trust Fund, which is 

earmarked for use by the International Monetary Fund to provide relief for 

Uganda at the completion point.40

Prior Debt Reduction 

Activities

Since 1992, the Department for International Development has provided 

about $513 million in debt relief to the heavily indebted poor countries. The 

Export Credits Guarantee Department did not participate in the loan 

write-off until about 1991-92. Since that time, the Export Credits Guarantee 

Department has written off debt to HIPC countries with a face value of 

372 million pounds. 

40In addition, the United Kingdom contributed $16.3 million to the Central American Trust 

Fund at the World Bank.
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Appendix XI

Bilateral Contributors to the HIPC Trust Fund ApendxiXI

Table 15 shows the amount and status of bilateral donor (government) 

pledges to the HIPC Trust Fund, as of May 31, 2000. Twenty-two countries 

have pledged about $2.5 billion to this Fund, which is used to help 

multilateral creditors provide their shares of HIPC debt relief to recipient 

countries.

Table 15: Status of Bilateral Donor Pledges to the HIPC Trust Fund, as of May 31, 2000

U.S. dollars in millions

Donor

Contributions

receiveda

Contributions

pledged prior

to Sept. 1999

Contributions pledged 

during and after Sept. 1999

Total

outstanding

announced

pledges

Overall contributions

and pledges to original

and enhanced HIPC

Initiativesb

European

Unionc Others

Australia $12 $12

Austria $19 $19 19

Belgium 4 $8 28 36 40

Canada 102 102

Denmark 26 16 $19 35 61

Finland 15 11 11 26

France 21 178 199 199

Germany 24 24 171 48 219 243

Greece 1 9 9 10

Ireland 15 4 4 19

Italy 92 70 162 162

Japan 10 190 190 200

Luxembourg 1 2 2 3

Netherlands 131 38 38 169

New Zealand 2 2

Norway 42 42

Portugal 15 7 7 22

Spain 15 43 70 113 128

Sweden 28 20 20 48

Switzerland 30 30 30 60

United Kingdomd 36 135 95 50 280 316

United States 600 600 600

Total $509 $188 $733 $1,077 $1,974 $2,483
Appendix XI

Bilateral Contributors to the HIPC Trust 

Fund

Page 167 GAO/NSIAD-00-161 Debt Relief Initiative

Note: Figures are approximate. Some contributions are in the donor’s national currency and in the form 

of a promissory note.

a

Includes allocations from the Interest Subsidy Fund (ISF)—that was set up in 1975 with donor 

contributions to subsidize the interest rates on International Bank for Reconstruction and Development 

loans to the poorest of this Bank’s borrowers—to the HIPC Trust Fund. Australia is retaining its surplus 

resources in the ISF (rather than transferring them to the HIPC Trust Fund) but has authorized the 

World Bank to use them to provide debt relief as necessary under the HIPC Initiative. There remains 

approximately $83 million in ISF surplus assets that have not been allocated.

b

Many donors have also provided debt relief through other initiatives and mechanisms including the 

Debt Reduction Facility for International Development Association-only countries that provides 

financing for commercial debt reduction efforts and specific country-held multilateral debt relief 

facilities. Most notably, additional debt service relief has also been provided to several Central 

American countries in the aftermath of Hurricane Mitch through the Central American Emergency Trust 

Fund. Bilateral donor funding to that trust fund to provide debt service relief to Honduras and 

Nicaragua include $2.7 million from Austria, $5.4 million from Canada, $10.9 million from Denmark, 

$13.2 million from Germany, $12 million from Italy, $12.8 million from the Netherlands, $15 million from 

Norway, $30 million from Spain, $16.6 million from Sweden, $15.5 million from Switzerland, 

$16.3 million from the United Kingdom, and $25 million from the United States. These resources are 

not included in the table since HIPC debt relief is additional to these efforts.

c

For illustration, the exchange rate is 1 euro equal to 1 U.S. dollar, and the attribution to member states 

is based on their respective contributions to the European Development Fund’s Eighth Replenishment.

d

In addition, the United Kingdom has contributed 31.5 million Special Drawing Rights to the HIPC Trust 

Fund for the IMF for debt relief to Uganda.

Source: World Bank.
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Appendix XII

Comments From the Department of the 

Treasury ApendxiXI

Note: GAO comments 

supplementing those in the 

report text appear at the 

end of this appendix.

See comment 1.
Appendix XII

Comments From the Department of the 

Treasury

Page 169 GAO/NSIAD-00-161 Debt Relief Initiative

See comment 3.

See comment 2.
Appendix XII

Comments From the Department of the 

Treasury

Page 170 GAO/NSIAD-00-161 Debt Relief Initiative
Appendix XII

Comments From the Department of the 

Treasury

Page 171 GAO/NSIAD-00-161 Debt Relief Initiative

The following are GAO’s comments on the Department of the Treasury’s 

letter dated June 8, 2000.

GAO Comments 1. Although the Treasury agrees that there is reason to be concerned 

about potentially optimistic economic assumptions, the Treasury 

highlights the fact that growth levels are generally consistent with what 

countries experienced from 1990 to 1997. As we discuss in the report, 

since HIPC recipient countries rely on primary commodities for much 

of their export revenue, and the prices of such commodities fluctuate 

over time and decline in certain years, a sustained growth in export 

earnings in excess of 9 percent over 20 years may be overly optimistic. 

For example, Uganda’s growth rate has declined since 1997, and the 

projected growth rates of the seven countries we analyzed are 

considerably higher than what those countries experienced from 1978 

to 1997.

2. The Treasury states that our report is misleading when it argues that 

the initiative does not free up resources for increased spending because 

we imply that the interest rates HIPC recipients borrow at are 

unsustainable. We disagree with the characterization that our report is 

misleading. We report that the resources derived from debt relief can be 

used to increase spending on poverty reduction only if the country 

continues to borrow at the same level and below market terms as in the 

years prior to qualifying for debt relief. Furthermore, our analysis of 

countries’ future debt burdens incorporates the level of grants and 

lending projected by World Bank and IMF staffs. 

3. The Treasury states that it is reasonable to expect that adjustments 

would be made in countries’ expenditure and borrowing plans to avoid 

unsustainable increases in debt. However, this implies that good debt 

management practices will be utilized. We agree with this point. 

However, we note that although efforts are being undertaken to 

improve debt management, there has not been a history of strong 

management in this area. Moreover, we note that if policymakers adjust 

to lower levels of export earnings by reducing imports, lowering 

domestic spending, raising tax revenue, or using a combination of these 

approaches, this would likely result in lower economic growth and 

lower expenditures on poverty reduction.
Page 172 GAO/NSIAD-00-161 Debt Relief Initiative

Appendix XIII

Comments From The International Monetary 

Fund ApendxXiI

Note: GAO comments 

supplementing those in the 

report text appear at the 

end of this appendix.
Appendix XIII

Comments From The International Monetary 

Fund

Page 173 GAO/NSIAD-00-161 Debt Relief Initiative

See comment 3.

See comment 2.

See comment 1.
Appendix XIII

Comments From The International Monetary 

Fund

Page 174 GAO/NSIAD-00-161 Debt Relief Initiative
Appendix XIII

Comments From The International Monetary 

Fund

Page 175 GAO/NSIAD-00-161 Debt Relief Initiative

The following are GAO’s comments on the IMF’s letter dated June 9, 2000.

GAO Comments 1. The IMF said that the report does not emphasize sufficiently that the 

borrowing to increase spending on poverty reduction is on highly 

concessional terms and that a larger share of the provision of aid is now 

in the form of grants. We disagree with the IMF’s characterization. We 

report that, in order for recipient countries to have the funds that are 

expected to be spent on poverty reduction, these countries must 

continue to borrow—at the same level and below market terms as in 

the years prior to qualifying for debt relief under the initiative—given 

each country’s projected amount of grants, loans, and revenue. Our 

analysis of countries’ future debt burdens incorporates the level of 

grants and lending projected by World Bank and IMF staffs. 

2. The IMF said that current projections show that for six of the seven 

country cases analyzed, the debt ratios of these countries are projected 

to decline. The IMF said that lower than projected export growth could 

threaten future debt sustainability, in the absence of corrective policy 

actions or additional grants. They see the appropriate response to this 

as to monitor carefully future borrowing in response to economic 

developments to prevent the reoccurrence of debt problems. We 

believe this implies that good debt management practices will be 

utilized. We agree with this point but note that although efforts are 

being undertaken to improve debt management, there has not been a 

history of strong management in this area. Moreover, we report that a 

20-percent decline in projected export earnings could more than double 

the debt-to-export ratio over what was originally forecast for the 

projection period. We consider it to be a reasonable assumption that 

the response to such a relatively small decline in export earnings would 

be an increase in concessional borrowing and grants in order to 

preserve what would be a fairly robust economic growth level with 

substantial progress on poverty reduction. If instead, policymakers 

adjust to these lower levels of export earnings by reducing imports, 

lowering domestic spending, raising tax revenue, or using a 

combination of these approaches, this would likely result in lower 

economic growth and lower expenditures on poverty reduction.

3. The IMF said the report does not emphasize sufficiently the measures 

taken to reduce the tension between quick debt relief and 

comprehensive country-owned poverty reduction strategies or the 

strong wish of the international community to link the provision of debt 
Appendix XIII

Comments From The International Monetary 

Fund

Page 176 GAO/NSIAD-00-161 Debt Relief Initiative

relief to effective poverty reduction. The report discusses the measures 

taken to reduce the tension—interim poverty reduction strategies and 

interim debt relief. We also report that countries may have an incentive 

to reach the completion point quickly because only then does HIPC 

debt relief become irrevocable. Chapter 3 discusses the desire of the 

international community to link debt relief and poverty reduction. We 

have added similar wording to the executive summary.
Page 177 GAO/NSIAD-00-161 Debt Relief Initiative

Appendix XIV

Comments From the World Bank ApendxXiIV
Appendix XIV

Comments From the World Bank

Page 178 GAO/NSIAD-00-161 Debt Relief Initiative
Page 179 GAO/NSIAD-00-161 Debt Relief Initiative

Appendix XV

GAO Contact and Staff Acknowledgments ApendxiXV

GAO Contact Thomas Melito, (202) 512-9601

Acknowledgments In addition to the name above, Cheryl L. Goodman, Bruce L. Kutnick, R.G. 

Steinman, Barbara R. Shields, Nima Patel Edwards, Katharine H. 

Woodward, Gezahegne Bekele, and Rona H. Mendelsohn made key 

contributions to this report.

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