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COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 25.03.1997 
COM(97) 129 final 
COMMUNICATION FROM THE COMMISSION 
SUPPORT FOR STRUCTURAL ADJUSTMENT AND DEBT RELIEF IN 
HEAVILY INDEBTED ACP STATES 
A COMMUNITY RESPONSE TO THE HIPC DEBT INITIATIVE 
Proposal for a 
COUNCIL DECISION 
concerning Exceptional Assistance for the Heavily Indebted ACP countries 
(presented by the Commission) 

EUROPEAN COMMISSION 
COMMUNICATION FROM THE COMMISSION 
SUPPORT FOR STRUCTURAL ADJUSTMENT AND DEBT RELIEF IN 
HEAVILY INDEBTED ACP STATES 
A COMMUNITY RESPONSE TO THE HIPC DEBT INITIATIVE 
CONTENTS 
Page 
1. Introduction 1 
2. The HIPC Debt Initiative 2 
3. Community-level Exposure to the HIPCs and Potential Costs to the Community 3 
4. Principles to Guide a Community Contribution to the HIPC Initiative 4 
5. Enhanced Community Assistance to the HIPCs - Proposed Action as a Donor 5 
5.1 Additional Adjustment Support 5 
5.2 Support for Commercial Debt Reduction 5 
5.3 Technical Assistance for Debt Management 6 
6. Support for Debt Relief- Proposed Action as a Creditor 6 
6.1 Modalities of Debt Relief 6 
a) Debt forgiveness or refinancing 6 
b) Concentrating debt relief on the special loans 8 
c) Country decisions 8 
6.2 Source of finance for the Community participation 9 
a) Financing from reflows 9 
b) Practical mechanisms 10 
7. Conclusion 10 
A^ 
1. Introduction 
Debt burdens remain heavy for a group of low-income countries, most of which are in Sub-
Saharan Africa, in spite of their efforts to pursue economic reforms and sound macro-
economic policies. In recent years, creditors and donors have implemented a range of 
measures to alleviate debt burdens of the poorest countries, but for a group of Heavily 
Indebted Poor Countries (HIPCs) these measures have not been sufficient to bring down debt 
burdens to sustainable levels. Consequently, the international debate on the debt issue has 
increasingly come to focus on the need to find more long-term and comprehensive solutions 
to the debt problems of the HIPCs. An important response in this respect was the decision by 
the Paris Club to grant stock of debt operations to provide countries with an exit from the 
constant process of rescheduling. 
More recently, the International Monetary Fund and the World Bank, at their spring 1996 
meetings, presented a comprehensive programme of action to alleviate the debt problems of 
the HIPCs - the HIPC Debt Initiative. The initiative was endorsed by the Interim and 
Development Committees at the Autumn 1996 IMF/World Bank Annual Meetings. This 
initiative involves co-ordinated action by all creditors to reduce debt burdens to sustainable 
levels. A key new element of this approach is the recognition of the need to also deal with 
the burden of multilateral debt, as part of a country's overall debt burden. 
The European Community is concerned by this initiative both as a major development 
partner of the countries concerned and as a creditor to these countries. 
As a donor, it is providing substantial resources within the framework of the Lomé 
Convention - the overall envelope for the Second Financial Protocol amounting to 14.6 
billion ECU for the 70 ACP States. In particular, the Community is providing substantial 
financial and technical resources to those ACP countries implementing structural adjustment 
programmes. 
As a creditor, total Community-level exposure to the 11 ACP States most likely to need 
action under the initiative, amounts to around 600 million ECU in nominal terms. 
The debt issue has been a major concern to the ACP States during negotiations of successive 
Lomé Conventions. The Community has taken several measures in order to prevent a further 
increase in the ACP States' debt to the Community. Since Lomé IV, all EDF resources apart 
from risk capital are channelled in the form of grants, as there are no longer special loans nor 
any requirement for countries receiving Stabex transfers to contribute to the replenisliment of 
the system. Furthermore, in 1991, the Council decided to abandon the obligation to 
contribute to the repayment of Stabex resources granted under earlier Conventions and in the 
context of the mid-term revision of Lomé IV in 1995, the Community agreed to transform 
into grants all special loans of the previous Conventions which had not yet been committed. 
Within the framework of the HIPC initiative, the Commission is proposing further measures 
to alleviate the debt problems of the most heavily indebted ACP States. The proposal 
presented in this Communication aims to strengthen the adjustment process in these 
countries with the objective of facilitating sustainable growth and poverty alleviation. In 
order to reach this objective, these countries will continue to need adequate levels of external 
assistance, even after having benefited from debt relief measures under the HIPC initiative. 
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In this context, it should be noted that the major role of the Community vis-à-vis these 
countries will continue to be as a donor granting financial and technical assistance to support 
their reform and development efforts. Such support is and will continue to be of vital 
importance for the HIPCs. 
It is proposed that the Community, as a donor, ensures and enhances continued support for 
heavily indebted poor ACP States by: 
i) granting additional structural adjustment support on a case-by-case basis; 
ii) considering, on a case-by-case basis, support for debt reduction of commercial debt; 
J and 
iii) strengthening support for debt management. 
It is proposed that the Community, as a creditor: 
iv) takes action to reduce the net present value of the eligible countries' debt to the 
Community. 
2. The HIPC Debt Initiative 
The principal objective of the HIPC Debt initiative is to ensure that the adjustment and 
reform efforts of the Heavily Indebted Poor Countries are not constrained by continued high 
debt and debt service burdens. Analyses undertaken by the IMF and the World Bank show 
that, even after the full application of existing mechanisms for debt relief and in spite of their 
efforts to pursue growth-oriented policies, the debt burdens of a group of HIPCs will remain 
above sustainable levels over the medium term. The HIPC Debt Initiative is based on a 
commitment by the international financial community to take action to reduce these 
countries' debt burdens to sustainable levels, provided that the countries complete a period of 
strong economic policy performance. A key element of the HIPC initiative is its aim to deal 
with the debt problems of the HIPCs in a comprehensive way, including co-ordinated action 
by bilateral, commercial and multilateral creditors. Another key element is the new approach 
of assessing debt sustainability. 
The initiative was endorsed by the Interim and Development Committees at the autumn 
1996 Annual meetings of the IMF and the World Bank, when the participation of the 
Bretton-Woods Institutions in the initiative was confirmed. The Communiqués of the Interim 
and Development Committees placed particular importance on the comprehensive nature of 
the initiative, urging other creditors to participate in the initiative on an equitable basis, and 
for those creditors, that have not already defined their participation, to do so as soon as 
possible. 
With regard to bilateral creditors, the Paris Club indicated its readiness to go beyond Naples 
terms in providing, on a case-by-case basis, debt reduction of up to 80 percent in present 
value terms for countries qualifying for additional relief within the HIPC initiative. 
Furthermore, consistent with current practice, countries receiving assistance under the 
initiative would be required to seek comparable treatment on their debt owed to other 
bilateral and to commercial creditors. 
Debt sustainability will be defined on a country-by-country basis within the range of 200-250 percent for the 
net present value of the debt stock to exports ratio and 20-25 percent for the debt service to exports ratio. 
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The initiative will be open to HIPCs that pursue or adopt structural adjustment programmes 
supported by the IMF and the World Bank and face an unsustainable debt burden even after 
the full application of current debt relief mechanisms. In order to qualify for debt relief 
measures beyond current mechanisms, eligible countries must be able to demonstrate a track 
record of strong policy performance based on a programme of macro-economic, structural 
and social policy reforms. In addition to sound macroeconomic management, the HIPC 
initiative will place particular emphasis on improving the quality of public expenditures, 
strengthening institutional capacity and enhancing the delivery of social services. A 
description of the main features and stages of the HIPC initiative can be found in Annex 5. 
The World Bank and the IMF have estimated that 13 countries would need action beyond 
current debt relief mechanisms, of which 11 are ACP States . This country list is tentative; 
other countries may prove to be eligible at the time when a decision concerning them is to be 
taken. There are a handful of countries likely to come up for decisions in 1997, when the 
extent of likely action will need, to be agreed upon by creditors, on the basis of specially 
prepared debt sustainability analyses. At each country's decision point, the creditors 
concerned will be asked to commit to taking action to reduce the net present value of their 
exposure to that country, after the country has completed a further track record of good 
policy performance. The first country likely to require Community action is Uganda for 
which a decision regarding eligibility and the extent of debt relief needed, is currently 
expected to be required in spring 1997. 
3. Community-level Exposure to the HIPCs and Potential Costs to the Community 
The Community's exposure to the HIPCs falls within the framework of the Lomé 
cooperation: the HIPCs which have debts outstanding to the Community are all ACP 
countries and their debt has been incurred through the various Lomé Conventions and 
preceding these, the Yaounde Conventions. Community exposure to the potentially eligible 
HIPCs. comes from three instruments : special loans, risk capital and EIB loans on own 
resources. 
The European Community is a relatively small creditor in the context of the HIPC initiative. 
Total Community exposure to the 11 ACP countries which are currently estimated as likely 
to require action under the initiative amounts to 595 million ECU in nominal terms . Of this 
amount, special loans account for 69 percent, risk capital for 30 percent and EIB loans on 
own resources for 1 percent of total Community-level claims. The Commission estimates 
that the net present value of these claims amounts to about 300 million ECU. A description 
of the three instruments and individual country exposure for each instrument is provided in 
Annexes 2 and 3. 
Regarding the costs of the HIPC initiative to the Community, two aspects should be stressed. 
Firstly, any overall cost estimates will be subject to substantial uncertainty, because costs 
will only be determined on a country-by-country basis, as qualifying countries reach their 
2 
These 13 countries are Burundi, Ethiopia, Guinea-Bissau, Madagascar, Mozambique, Myanmar, Nicaragua, 
Niger, Rwanda, Sao Tome and Principe, Uganda, Zaïre and Zambia. The Community has no claims on 
Myanmar and Nicaragua. 
In line with the framework of the initiative, data in this paper refer only to loans extended to or guaranteed by 
the public sector and cover amounts already disbursed (unless otherwise noted). 
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decision points in the initiative. These country decisions will be spread over a number of 
years. It will therefore remain uncertain which countries will actually require additional debt 
relief under the initiative, how-much net present value debt reduction would be needed for 
each country to achieve debt sustainability and which countries will qualify in terms of 
economic policy performance. It is not certain that all the 11 countries estimated as likely to 
need debt relief measures will qualify for the initiative, as some potentially eligible countries 
may not adopt adjustment programmes or build up adequate track records. Similarly, it 
cannot be excluded at this stage that other countries might become eligible for action. 
Secondly, as decisions and implementation of debt relief commitments will be spread over 
the years, the actual costs of action to creditors will be spread accordingly (see annex 7 
showing likely timing of country decision points). 
In conclusion, it is difficult to give a reliable estimate of the total implied cost of the HIPC 
initiative to the Community and any estimates at this stage can only be seen as tentative. 
According to World Bank/IMF estimates, the cost to the Community could amount to about 
150 million ECU in 1996 present value terms, assuming participation in the initiative by the 
11 ACP States referred to above . This would correspond to around 5 percent of the total 
cost to be borne by multilateral creditors. The annual costs are expected not to exceed a few 
tens of millions of ECU a year on average. 
Given the uncertainties surrounding this estimate, as noted above, it should be underlined 
that actual costs can differ substantially from amounts mentioned here. 
4. Principles to Guide a Community Contribution to the HIPC Initiative 
The following principles are proposed to guide Community action in the context of the HIPC 
initiative: 
i) the aim of Community participation in this initiative should be to strengthen the 
adjustment process in the countries concerned, by providing incentives for sustained 
reforms and to make the adjustment process viable in the long-term by supporting 
broad-based programmes of macro-economic, structural and social policy reforms; 
ii) the Community should continué to play a key role supporting the HIPCs by 
providing financial and technical assistance to support structural adjustment and 
poverty reduction; 
iii) the Community should affirm its commitment to participate in the HIPC Debt 
Initiative with respect to Community-level claims, by taking action where needed to 
reduce the net present value of Community-level exposure on the countries 
concerned, in parallel to action taken by other creditors; 
4 
Two qualifications need to be made here: First, the cost estimates are based on assumptions regarding 
economic developments in the countries concerned. Actual costs, for a given group of countries, would differ 
from estimates if underlying assumptions change, e.g. if export growth or the level of aid flows to the countries 
concerned would be lower or higher than assumed. Secondly, this cost estimate is based on data reported to the 
World Bank in the Debtor Reporting System and not directly on data provided by the Community. Hence, there 
could be some errors in the data used. Reconcilitation of data is currently underway and initial work undertaken 
would seem to suggest that the preliminary WB/IMF estimates of the potential cost to the Community may be 
an overestimate. 
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iv) Community action should be consistent with the HIPC initiative and be taken on a 
case-by-case basis within a general framework; 
v) action involving debt relief on Community level claims should be taken in such a 
way that the preferred creditor status of the participating Community institutions is 
not negatively affected. 
vi) the eligible country must not be in a situation where the development co-operation 
with the Community is suspended 
vii) Community debt relief measures should not include the treatment of arrears. Arrears 
should in principle be cleared before the eligible country can benefit from any debt 
relief measures. 
5. Enhanced Community Assistance to the HIPCs - Proposed Action as a Donor 
It is proposed that the Community, in its role as a major donor, undertakes three measures, 
within existing EDF resources, to better assist the heavily indebted poor ACP States. 
5.1 Additional Adjustment Support 
Although the HIPCs have continued to receive positive net transfers, their dependence on 
external aid flows on concessional terms make them particularly vulnerable. As a major 
donor of structural adjustment support, the Commission has always stressed the importance 
of the adjustment process in the heavily indebted countries being adequately funded. For the 
countries qualifying for additional debt relief under the HIPC initiative, adequate levels of 
external aid flows will continue to be of critical importance for their development, even after 
they have participated in the initiative. Financing needs will also remain large for a number 
of other heavily indebted poor countries, in particular countries whose debt burdens fall 
slightly below the critical debt sustainability thresholds defined by the HIPC initiative, and 
which therefore will not qualify for additional debt relief. It is important that these countries 
also receive adequate levels of external assistance to support their adjustment efforts. 
The Commission's view is that there is a need to ensure that HIPCs, receive adequate 
financial support. Therefore, the Commission proposes that the Community grants, within 
available resources under the Structural Adjustment Facility, additional support to HIPCs, 
on a case-by-case basis and according to financing needs and economic performance. 
5.2 Support for Commercial Debt Reduction 
For the majority of the poorest countries, their debt to commercial creditors is relatively 
small. But even if commercial debt, on average is relatively limited for this group of 
countries, there can be tangible benefits from eliminating it. Therefore, any comprehensive 
treatment of the debt problem of the HIPCs needs to include measures to reduce the burden 
of commercial debt. This is being done through operations to assist these countries to buy 
back their commercial debt on the secondary market at a large discount. A number of the 
HIPCs potentially eligible for the HIPC debt initiative have already undertaken debt buy-
back operations with financial support from IDA and bilateral donors and further such 
operations are being planned. Consequently, it is expected that there will be a continued need 
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for such support, although it will diminish as there are less countries still to complete such 
debt buy-back operations. 
There is scope for the Community, together with other donors, to contribute to this effort. 
The Commission proposes that the Community, on a case-by-case basis and where the 
beneficiary country requests such support, should be able to contribute to internationally co­
ordinated and supported buy-back operations of commercial debt of heavily indebted ACP 
States. Such contributions would be financed from the National Indicative Programme of the 
country concerned.3 
5.3 Technical Assistance for Debt Management 
Weaknesses in debtor countries' debt management capacity have often made debt servicing 
more costly and resource consuming. Improved external debt management can therefore 
have tangible benefits in terms of reducing the administrative burden on the debtor country 
and sometimes also the costs of servicing the debt. In recent years, many HIPCs have 
established computerised debt management systems and undertaken training programmes in 
debt management, supported by donor assistance. 
In accordance with article 240 of the Lomé Convention, the Community can grant, at the 
request of an ACP State, assistance in studying and finding solutions to indebtedness and 
debt-servicing difficulties, assistance for training in external debt management and 
international financial negotiations and support to the ACP States in developing flexible 
techniques and instruments of debt management. 
The Commission sees scope for strengthening such support and proposes that the 
Community, on a case-by-case basis, should explore ways of enhancing its support for debt 
management, in co-ordination with assistance undertaken by other donors and 
organisations. 
6. Support for Debt Relief - Proposed Action as a Creditor 
The HIPC initiative is based on participation by all creditors - bilateral, multilateral and 
commercial - who are invited to provide exceptional assistance and debt relief beyond 
current mechanisms as required for the participating countries to reach debt sustainability. 
The Commission proposes that the Community, as a creditor, joins this effort and takes 
action to reduce the net present value of its claims on the countries concerned. 
6.1 Modalities of Debt Relief 
a) Debt forgiveness or refinancing 
The HIPC initiative gives each creditor almost limitless scope to design their own 
mechanisms for participating in the initiative. It is expected that the various international 
financial institutions will participate in this initiative in a variety of ways, consistent with 
" It should be noted that donor contributions to debt buy back operations do not relieve the commercial creditors from 
•heir share of the burden in the HIPC Debt Initiative. Commercial creditors are still required to grant debt relief on 
'i ins at least comparable to those agreed by the Paris Club. 
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their charters and financial policies. With respect to Community action, the treatment of the 
Community-level claims should be consistent with the objectives of the HIPC initiative and 
the principles proposed in section 4 above. In particular, the treatment of Community-level 
claims raise important questions of principle concerning the status of the participating 
Community institutions as preferred creditors. 
Regarding possible modalities for the Community participation in the initiative, there are, in 
principle, two key options to obtain the debt relief: i) a direct debt forgiveness (write-off) or 
ii) refinancing on grant terms of outstanding claims. In the latter case, grants could be 
provided to assist the country concerned either to prepay, or to service as it falls due, their 
debt, or a portion of their debt, to the Community. 
Action to write off claims might be seen as the most straightforward way to meet the 
requirements of the initiative. However, this option should be ruled out for EIB loans on own 
resources and risk capital, if the EIB is to be treated in the same way as other multilateral 
financial institutions, which have rejected the option of a direct debt forgiveness of their 
claims, on the grounds that such action would risk to damage their preferred creditor status.6 
The situation might be different for the special loans, where a case could be made that the 
special characteristics of this debt imply that direct debt cancellation could be appropriate. It 
is worth noting in this context that the special loan instrument was not renewed in Lomé IV, 
as it was considered to be more appropriate to provide this assistance in grant form. A write­
off of this debt would correspond to a retroactive adjustment of the terms of this assistance 
and it would match similar debt relief initiatives by Member States with respect to their 
bilateral aid credits. It could be argued that a write-off would have advantages in terms of 
administrative simplicity and that it might give the Community action higher visibility. 
Finally, a case could be made that writing off special loans would not have a negative impact 
on the Community's preferred creditor status more generally, since this action would be 
taken in the context of an exceptional initiative by the international community to assist a 
limited group of countries. 
Nevertheless, these arguments need to be balanced against any risk that such action, even on 
special loans, could negatively affect the status of the Community as a de facto preferred 
creditor. The Commission recognises the difficulties that a direct forgiveness of Community 
claims could create and in view of the fact that other preferred creditors have rejected this 
option, the Commission proposes that the Community takes action by refinancing debt on 
grant terms. This approach would be consistent with the approach taken by other preferred 
creditors. 
As mentioned above, refinancing, through the provision of grants, could allow the 
beneficiary country either to prepay its debt or to service that debt as it falls due (in full or in 
part). Such refinancing would seem to be better granted in a single tranche for the 
prepayment of debt, rather than for the servicing of debt as it falls due. The prepayment 
option would have the advantage of avoiding that implementation of debt relief measures for 
each country are spread over a number of years and would be administratively more simple 
for both the Community and the debtor countries. Furthermore, prepayment would be full) 
consistent with options presented by the World Bank in the context of the IDA-administered 
Multilateral Trust Fund 
Since EIB loans on own resources and risk capital both are signed by the EIB, the effect o\~ writing them off 
might negatively affect the EIB's preferred creditor status. 
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b) Concentrating debt relief on the special loans 
As described above, Community exposure comes from three instruments; special loans, risk 
capital and, albeit to a very small extent, EIB loans on own resources. All three types of 
loans fall under the initiative. The Community is expected to take measures to reduce the 
present value of its total exposure to each country eligible for the initiative. However, the 
Community does not need to take action regarding each instrument separately, but can 
choose to look at Community-level claims as a whole and to take action to deal with this 
overall exposure to each country. In other words, this implies that debt relief measures can 
be concentrated on one of the three Community-level instruments, as long as the 
Community, through these measures, provides the agreed amount of present value debt 
reduction for each country. 
The Commission proposes that debt relief measures are concentrated on the special loans. 
Firstly, focusing Community action on one instrument would be administratively most 
simple. Secondly, as discussed in the previous section, focusing debt relief measures on 
special loans would seem appropriate given the special characteristics of this instrument. 
Such action would be in line with measures already taken with respect to this instrument (i.e. 
the non-renewal of the special loan instrument in the Lomé IV Convention and the 
transformation of special loans not yet committed into grants). The Commission's view is that 
action taken by the Community should aim at eliminating outstanding special loans for the 
eligible countries. 
For the countries likely to be eligible for the initiative, the share of special loans in their 
overall debt to the Community varies from one to the other. Most potentially eligible 
countries have a relatively large share of special loans in their debt to the Community. It is 
therefore expected that in most cases, it would be sufficient for the Community to take action 
with regard to special loans, in order to deliver the required present value debt reduction. 
However, in some cases, the Community may not be able to provide the agreed level of debt 
relief by only taking action with regard to the special loans. This could be the case for 
countries whose special loans account for only a minor part of their outstanding debt to the 
Community and it would obviously also be the case for countries which have no outstanding 
special loans. In this case, it is proposed that the countries concerned would receive grants 
to meet their risk capital obligations to the extent required to achieve debt sustainability. 
As noted in section 3 above, for countries which at present are expected to need action under 
the initiative, there are practically no outstanding EIB loans on own resources. Nevertheless, 
it is possible that other countries may become eligible for the initiative for which there is 
significant EIB own resource exposure. In that event, a case could be made that this exposure 
should be dealt with by an EIB contribution to the initiative within the overall Community 
participation in the initiative (see further below). 
c) Country decisions 
When a HIPC has established a track record of good economic policy performance and 
hence reached the decision point in the initiative, a decision will be taken regarding the 
country's eligibility for additional support under the initiative and the extent of debt relief 
required in order to achieve a sustainable debt burden. 
When a country is assessed to be eligible, the Commission will determine the level of debt 
relief that the Community could provide to that country and, in collaboration with the EIB, 
prepare a specific proposal for how the Community would assist that country. The country 
proposals would be developed on a case-by-case-basis taking into account four factors: the 
structure and level of the country's debt to the Community; the desire for administrative 
simplicity; the objective of eliminating outstanding special loans and the need to ensure 
equitable and fair treatment between countries. 
After having prepared a country specific proposal in line with these objectives, the 
Commission would present it to the EDF Committee, seeking Member States' views in line 
with existing consultation arrangements for EDF operations. 
6.2 Source of finance for the Community participation 
a) Financing from reflows 
The Commission proposes that the cost of action on Community claims is met by the 
allocation of reflows from EDF-financed loans (special loans and risk capital). A decision by 
the Council to use reflows for this purpose would be in accordance with article 9 of the 
Internal Agreement on the financing and administration of Community aid within the 
framework of the Fourth ACP-EC Convention, whereby the Council can decide 
unanimously, on a proposal from the Commission, to allocate reflows to other operations 
than returning them to Member States. 
As set out in section 3, the IMF and the World Bank have tentatively estimated the total cost 
to the Community to about 150 million ECU in 1996 present value terms, to be spread over 
at least six years. The Commission proposes that a limited amount of reflows is set aside 
annually to finance the debt relief measures proposed in section 6.1. An allocation of 25 
million ECU a year over the four years 1997-2000 (a total of 100 million ECU) is expected 
to be sufficient to meet the needs of the initiative over this period. Thereafter, or earlier if the 
need arises, a review of the possible need for further resources would be undertaken. 
Such a solution would provide additional resources for the Community's participation in the 
HIPC debt.initiative. In order for the initiative to achieve its objectives, the Commission 
believes that the debt relief measures should be additional to existing levels of resource flows 
to these countries. Furthermore, it is desirable that the HIPC initiative does not divert 
resources intended for other developing countries and in particular, from other HIPCs 
making efforts to implement economic reforms and to improve their growth prospects. In 
fact, most of the 41 HIPCs will not fulfil the debt sustainability criteria for additional debt 
relief under the initiative, although there is no doubt that their debt levels and financing 
needs will remain high. 
In this context, it should be noted that the Council has once before decided to use reflows for 
a similar purpose, namely to partly finance the first Community contribution to the Special 
Programme of Assistance for Africa, SPA. On that occasion, the Council decided to allocate 
reflows to an amount of 60 MECU to finance General Import Programmes to SPA countries. 
These reflows enabled the Community to make a greater financial contribution to the SPA 
7 Total reflows on special loans and risk capital amount to around 100 million ECU a year. 
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than would have otherwise been the case and to become a major contributor to this 
programme from the outset. 
In addition to the proposed financing from reflows, the issue arises whether a direct EIB 
contribution should be sought. Although the EIB's own exposure is covered by Member 
States* guarantees, it would be consistent with the logic of the initiative, as a one-off effort of 
the international community, for the EIB, to contribute from its own resources, in cases of 
significant EIB exposure on its own resources. Consequently, an eventual EIB contribution 
to the financing of the Community-level debt relief is not excluded at this stage; this would 
be a matter for discussion by EIB shareholders. 
b) Practical mechanisms 
If the Council agrees to allocate reflows for the Community participation in this initiative, it 
is possible to envisage a simple mechanism through which the Community's support for debt 
relief could be channelled. Thus, an amount could be set aside from reflows on special 
loans/risk capital on an annual basis to a single account managed by the EIB. If the 
beneficiary country is to prepay its debt to the Community, there could be a one-off 
operation whereby the country in question would be given a grant from this account to 
enable it to prepay its debt on a present value basis. 
The Commission does not see a need for using the IDA-administered Multilateral Trust Fund 
(MTF). The Community is a small creditor in this context and should itself be able to finance 
the amount of relief needed on debt owed to the Community. The MTF is particularly useful 
for creditors whose own contributions need to be supplemented by contributions from 
bilateral donors and for creditors who wish that the MTF manages their contributions. 
7. Conclusion 
As a major donor to most of .the HIPCs, the Community needs to ensure that their 
adjustment and development efforts are not constrained by an unsustainable debt burden. 
The HIPC debt initiative represents a co-ordinated effort by the international community to 
deal with the debt problems of the HIPCs and constitutes an appropriate framework within 
which the Community can contribute to the alleviation of the debt burden of the heavily 
indebted poor ACP States. 
The measures proposed here should all be seen in the context of strengthening the 
adjustment process in the countries concerned. It is proposed that the Community, as a 
donor, takes measures to enhance its support for the HIPCs, within existing EDF resources. 
Such support would include additional adjustment support on a case-by-case basis, a 
possibility of contributing to debt buy-back operations of commercial debt and enhanced 
support for debt management. 
As a creditor to the countries eligible for action under the HIPC initiative, it is proposed that 
the Community takes measures with regard to these countries' debt to the Community. The 
Commission proposes that the Community provides such action by way of allocating grants, 
as far as possible, for the prepayment of special loans to the Community. Such action would 
be consistent with action to be taken by other preferred creditors. 
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The HIPC initiative provides a unique opportunity for the Community to give a political 
response to the debt issue; an issue which has been of major concern to the ACP States. The 
political impact of the proposed Community action is potentially great and would appear to 
considerably outweigh the relatively small costs involved. 
11 
ANNEXES 
Annex 1 Description of Community lending instruments 
Annex 2 Community exposure to countries potentially requiring action under the 
initiative 
Annex 3 Status of arrears on Community instruments 
Annex 4 Main features of the HIPC Debt initiative 
Annex 5 Debt classification of the 41 HIPCs 
Annex 6 Possible timing of decisions regarding potentially eligible countries 
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ANNEX 1 
Description of Community instruments 
Special loans 
Special loans, financed from the EDF, were granted under the two Yaounde and the first three 
Lomé Conventions. This instrument was not renewed in Lomé IV, as it was felt to be more 
appropriate to provide this type of assistance in the form of grants. The special loans are IDA-like 
loans which carry an interest of 0.5 to 1 %, with 40 years maturity and a 10 year grace period. 
The Yaounde loans were signed by both the Commission and the EIB, while the Lomé loans 
were signed by the Commission only. These loans are administered by the EIB. The repayments 
of these loans are returned to the Member States, via the EIB, in proportion to their contribution 
to the EDF which financed the loan. 
There are outstanding special loans to 9 of the 11 ACP countries currently assessed to need 
action under the initiative, amounting to 410 million ECU. 
Risk capital 
Risk Capital operations, financed from the EDF, are signed and administered by the EIB on 
behalf of the European Union. They can take the form of direct equity subscriptions or, which is 
mostly the case, the form of conditional and subordinated loans, whose repayment is linked to the 
performance of the project. The terms and conditions of loans depend upon the nature of each 
project carrying interest rates of up to 3 % and with a maturity of up to 25 years. Repayments 
flow back to the Member States as for the special loans. As repayments depend on the success of 
the project, the exact volume of reflows is less predictable than for special loans. 
Under this instrument, there is Community exposure to all 11 ACP countries currently assessed as 
likley to need action under the initiative, amounting to 179 million ECU. 
EIB loans on own resources 
The EIB also lends to the ACP States from its own resources, at the request of the Member States. 
The EIB loans on own resources are extended on market terms, but benefit from an interest 
subsidy of up to 4 % from the EDF. Grace periods and repayment periods are determined 
according to project characteristics. The EIB loans on own resources are guaranteed by the 
European Union, in proportion to Member States' shares of the EIB capital. 
There is exposure under this instrument only to one of the 11 ACP States, currently assessed as 
likely to need action under the initiative, amounting to 6 million ECU . 
9 
t 10 Amounts refer to disbursed loans. Loans to the private sector are excluded. All data exclude possible arrears. 
Outstanding special loans to the 41 HIPCs amount to 1.2 billion ECU and 1.5 billion ECU for all ACP States. 
However, it is possible that other countries to which there is substantial EIB exposure become eligible for the 
initiative. 
- 13-
ANNEX 2 
Community Exposure to Countries Potentially 
Requiring Action under the HIPC Initiative 
(disbursed amounts in million ECU as of 15/12/96) 
Country Special Risk EIB Own Total 
Loans Capital Resource 
Loans 
(a) Countries likely to require action under the initiative 
Burundi 40:72 12.38 0.00 53.10 
Ethiopia 30.05 31.49 0.00 61.54 
Guinea Bissau 0.00 3.36 0.00 3.36 
Madagascar 27.34 '20.73 0.00 " 48.07 
Mozambique 0.73 23.53 0.00 24.26 
Niger 22.84 12.89 0.00 35.73 
Rwanda 19.29 9.70 0.00 28.99 
Sâo Tome e 
Principe 0.00 1.33 0.00 1.33 
Uganda 8.57 29.54 0.00 38.11 
Zaïre 132.93 17.90 6.25 157.08 
Zambia 127.53 15.77 0.00 143.30 
Total 410.00 178.62 6.25 594.87 
(b) Other possibly stressed countries 
Cameroon 79.83 0.85 36.07 116.75 
Côte d'Ivoire 69.06 0.09 92.72 161.87 
Congo 40.02 13.09 3.10 56.21 
Guyana 37.65 9.83 0.00 47.48 
Tanzania 35.27 16.45 0.00 51.72 
Total 261.83 40.31 131.89 434ÏJ3" 
(c) Other unsustainable countries 
"sûdân Ï5JÔÔ 26.87 5!55 41.87 
1. Loans to the private sector which are not publically guaranteed are excluded, since these loans do not 
fall 
under the initiative. 
2. Under current IMF/World Bank assumptions, the countries in section b) of this table would not require 
action under the initiative. 
- 14-/tr-
ANNEX 3 
Arrears of Countries Likely to Require Action under the HIPC Initiative 
(in million ECU as of 17/01/97) 
Country Arrears on Arrears on Arrears on Total 
EIB Own Risk Capital Special Loans 
Resource 
Loans 
a) Countries likely to require action under the initiative: 
Burundi 0.43 0.91 1.34 
Guinea-Bissau 1.30 - 1.30 
Madagascar 2.52 0.75 3.27 
Niger 2.57 0.76 3.33 
Rwanda 1.55 2.48 4.03 
Zaïre 7.31 10.41 20.46 38.18 
Zambia 1.12 - 1.12 
Sub-Total 7.31 19.90 25.36 52.57 
b) Other countries with unsustainable debt burdens: 
Sudan 11.56 3.95 15.51 
c) Other possibly stressed countries: 
Cameroon 5.27 0.35 4.32 9.94 
Congo 6.44 5.28 5.42 17.14 
Sub-Total 11.71 5.63 9.74 27.08 
Grand Total 19.02 37.09 39.05 95.16 
16 
ANNEX 4 
Main features of the HIPC Debt Initative 
Eligibility 
The initiative will be open to HIPCs that pursue or adopt structural adjustment programmes, 
supported by the IMF and the World Bank, in the two years following the endorsement of the 
initiative in September 1996, after which the initiative will be reviewed and a decision made 
whether it should be continued. In order to qualify for exceptional assistance under the initiative, 
countries would have to be IDA-only, to face an unsustainable debt situation after the full 
application of current debt relief mechanisms and would have to show a sustained track record of 
sound economic policies and economic reforms. 
As a result of preliminary Debt Sustainability Assessments, countries have been classified as 
having sustainable, possibly stressed or unsustainable debt burdens (for classification see 
annex 6) 
Main steps 
For each country, the initiative will be implemented in two stages. 
First stage 
The first stage would be the existing three year track record required for a country to qualify for a 
stock-of-debt reduction by Paris Club creditors on Naples terms. During this period: 
- the Paris Club provides flow reschedulings on current Naples terms (up to 67 % debt 
reduction) 
- other bilateral and commercial creditors provide at least comparable treatment 
- multilateral institutions and donors continue to provide adjustment support in the framework 
of a World Bank/IMF-supported adjustment programme 
the country establishes a first three-year track record. 
The decision point 
The first stage leads up to the decision point. At this point, a Debt Sustainability Analysis will 
determine whether a Paris Club stock-of-debt operation, together with at least comparable action 
by other non-multilateral creditors, would be sufficient for the country to achieve debt 
sustainability, after the country has completed another three years of good economic performance. 
Three different country situations can be envisaged: 
- Countries for which existing mechanisms (Paris Club stock-of-debt operation together with 
comparable treatment by other bilateral and commercial creditors) would be sufficient for 
achieving debt sustainability within three years would not be eligible for additional support 
under the initiative. 
- For countries for which debt sustainability cannot be reached through existing mechanisms 
within three years, creditors would decide on the amount of additional debt relief needed and 
- 17-
give a firm commitment to provide the debt relief needed after a second period of sustained 
policy performance. 
- For borderline cases which are countries where there is doubt whether existing mechanisms of 
debt relief would achieve a sustainable debt situation, the possibility of receiving enhanced 
assistance under the initiative will be left open. These countries would be eligible for 
additional debt relief at the completion point if neede to achieve debt sustainability. 
The second stage 
Eligible countries will enter into a second stage of three years after which it will be granted 
additional debt relief if it can show sustained policy performance. 
During the second stage: 
- the Paris Club goes beyond Naples terms and provides up to 80 percent debt flow relief in net 
present value terms; 
- other bilateral and commercial creditors provide at least comparable treatment; 
- donors and multilateral institutions provide enhanced support through interim measures and 
- the country establishes a second track record of strong policy performance under a World 
Bank/IMF-supported adjustment programme. 
The Completion Point 
At the completion point, i.e. at the end of the second stage, creditors will deliver the debt relief 
promised at the decision point. For the borderline countries, a decision will be taken whether they 
need additional action. 
At the completion point: 
- the Paris Club provides a stock-of-debt reduction of up to 80 percent in NPV terms on eligible 
debt; 
- other bilateral and commercial creditors provide at least comparable treatment on the debt 
stock; 
- multilateral creditors take measures to reduce the NPV of their exposure. 
If the amount of debt relief needed differ from the forecast made at the decision point, creditors 
will have to decide whether to give more or less debt relief in order to attain the debt 
sustainability target set for that country. 
Track record 
The required performance periods will be implemented flexibly on a case-by-case basis, taking 
into account countries' policy performance under adjustment programmes up to the decision 
point. This implies that the required performance period can be substantially shortened for 
countries which have shown sustained records of sound economic policies. 
Debt sustainability 
Sustainable debt levels at the completion point would be defined on a country-by-country basis 
within the range of 200-250 percent for the debt-to-exports ratio and 20-25 percent for the ratio of 
debt service to exports taking into account country specific vulnerability factors, such as the 
concentration and variability of exports and taking into account the fiscal burden of debt service. 
The HIPCs Trust Fund 
As a vehicle for its own participation in the HIPCs Initiative, the World Bank has set up the HIPC 
Debt Initiative Trust Fund, through which action will be taken to reduce the net present value of 
its own claims as necessary under the initiative. Other multilateral development banks (MDBs) 
have been invited to use this trust Fund too. It is envisaged that both the MDBs using the Trust 
Fund as well as bilateral donors will contribute financially to the Trust Fund to ensure that there 
are sufficient resources to meet the action required of the relevant MDBs. Whilst a number of 
MDBs look likely to make use of this Trust Fund, other key multilateral creditors, such as the 
IMF, plan to take the required action in parallell. 
Overall costs of the HIPC Initiative 
Overall potential costs of the HIPC initiative have been estimated to 5.6 billion USD in 1996 
present value terms, distributed between creditors as follows1 x : 
Bilateral and commercial creditors 2.4 
Paris Club creditors 1.9 
Other official creditors 0.4 
Commercial creditors 0.1 
Multilateral creditors 3.2 
World Bank 1.1 
IMF 0.8 
Other multilateral creditors 1.3 
Total 5.6 
Source: IMF and World Bank estimates 
- 19-
ANNEX 5 
COUNTRIES IN THE DEBT INITIATIVE 
41 countries classified as Highly Indebted Poor Countries, whose debt 
sustainability has been analysed under the initiative12: 
Angola, Benin, Bolivia, Burkina Faso, Burundi, Central African Republic, Cameroon, Chad, 
Congo, Côte d'Ivoire, Equatorial Guinea, Ethiopia, Ghana, Guinea-Bissau, Guyana, Honduras, 
Kenya, Laos, Liberia, Madagascar, Mali, Mauritania, Mozambique, Myanmar, Nicaragua, Niger, 
Nigeria, Rwanda, Sao Tomé-Principe, Senegal, Sierra Leone, Somalia, Sudan, Tanzania, Togo, 
Uganda, Vietnam, Yemen, Zaïre, Zambia 
£ 
of which 20 have been classified as unsustainable or possibly stressed: 
Possibly stressed: Bolivia, Cameroon, Congo, Côte d'Ivoire, Ethiopia, Guyana, Madagascar, 
Myanmar, Niger, Rwanda, Tanzania, Uganda (12 countries) 
or Unsustainable: Burundi, Guinea-Bissau, Mozambique, Nicaragua, Sao Tomé-Principe, Sudan, 
Zaïre, Zambia (8 countries) 
£ £ 
of which 13 are currently estimated by IMF/World Bank to require action under 
the HIPC debt initiative13: 
Burundi, Ethiopia, Guinea-Bissau, Madagascar, Mozambique, Myanmar, Nicaragua, Niger, 
Rwanda, Sao Tomé-Principe, Uganda, Zaïre, Zambia 
£ 
of which there is Community level exposure to 11 countries: 
Burundi, Ethiopia, Guinea-Bissau, Madagascar, Mozambique, Niger, Rwanda, Sao Tomé-
Principe, Zaire, Zambia, Uganda 
12 However, data was insufficient to properly analyse Liberia, Nigeria and Somalia at this stage 
13 Sudan has also been assessed as likely to require action under the initiative, but has not been considered 
further in IMF/World Bank work at this stage. The same approach has been taken in this paper. 
-20-
ANNEX 6 
HIPC Debt Initiative: possible timing of decision points for 
unsustainable and possible stressed countries14 15 
1997 
Bolivia 
Guyana 
Uganda , 
Côte d'Ivoire 
Mozambique 
Burkina Faso 
1998 
Ethiopia 
Cameroon 
Guinea-Bissau 
Nicaragua 
1999 
Congo 
Madagascar 
Niger 
Tanzania 
Zambia 
Beyond 1999 
Burundi 
Myanmar 
Rwanda 
Sâo Tome and Principe 
Zaire 
14 The information in this annex is tentative. It is provided here for illustrative purposes only. Decisions will 
also be taken with regard to countries presently classified as sustainable which are not shown in this list, apart for 
Burkina Faso. Some of the countries preliminary assessed to have sustainable debt burdens could prove to be eligible 
for the initiative. 
15 Sudan has not been included above, but would likely fall into the "beyond 1999" category, in the case it 
would embark upon an ESAF-supported adjustment programme. 
-21 -
PROPOSAL FOR A COUNCIL DECISION 
ECn° of 1997 
concerning Exceptional Assistance for the Heavily Indebted ACP countries 
THE COUNCIL OF THE EUROPEAN UNION, 
Having regard to the Internal Agreement on the financing and administration of 
Community aid within the framework of the Fourth ACP-CEE Convention, signed on 
16th July 1990, hereinafter referred to as "the Internal Agreement", and in particular 
Article 9, paragraph 1 thereof, 
Having regard to the proposal from the Commission, 
Whereas Article 9, first paragraph, of the Internal Agreement stipulates that the 
payments made to the Bank in respect of special loans, together with the proceeds and 
income from risk capital operations, shall be credited to the Member States in 
proportion to their contributions, unless the Council decides unanimously, on a 
proposal from the Commission, to place them in reserve or allocate them to other 
operations, and whereas it is appropriate to use this, possibility in order to allocate 
these payments to support for structural adjustment and debt relief in heavily indebted 
ACP States, 
Whereas a debt initiative for the Heavily Indebted Poor Countries, hereinafter referred 
to as the HIPC Initiative, was presented by the International Monetary Fund and the 
World Bank at their April 1996 Meetings and subsequently endorsed by the Interim 
and Development Committees at the Autumn 1996 Annual Meetings of the 
International Monetary Fund and the World Bank, 
Whereas the Council recognizes the importance of the HIPC initiative as a way to 
ensure that the debt burdens of the HIPCs, implementing economic reform 
programmes, are reduced to sustainable levels, with the assistance of coordinated and 
comprehensive action by all creditors, 
Whereas the Council recognizes the need for continued adequate levels of external 
assistance to the HIPCs and the European Community's role as a major development 
partner of the countries concerned, 
HAS DECIDED AS FOLLOWS: 
2^ 
Article 1 
The European Community shall participate in the HIPC initiative by providing 
exceptional assistance with a view to reducing the net present value of the Community 
exposure to the ACP countries defined as eligible for this initiative. For this purpose, 
the Community shall make available grant resources to be utilised to meet debt 
service obligations on outstanding Community claims. These grant resources shall 
primarily be used by the beneficiary countries to meet debt service obligations on 
special loans, including the possibility of prepayment on a net present value basis. If 
such action is not sufficient to attain the agreed level of debt relief, the beneficiary 
country shall use the allocated grant resources to meet outstanding risk capital 
obligations towards the Community. 
Article 2 
The Commission shall take, on a case-by-case basis, specific decisions for each 
eligible ACP country, providing for the amount of assistance in accordance with the 
rules and procedures laid out in Chapter IV of the Internal Agreement. The 
Commission's decisions on the amount of assistance to be provided in each case shall 
be guided by the level of resources necessary to permit a reduction of the net present 
value of that country's debt to the Community. This assistance, together with 
resources provided by all multilateral creditors, would allow the eligible country to 
achieve the debt sustainability targets, taking into account the debt relief to be 
provided by Paris Club creditors and at least comparable action by other official 
bilateral and commercial creditors under the initiative. The country specific decisions 
should further take into account the structure of the country's debt to the Community, 
the desire for administrative simplicity in the case-specific proposals chosen, the 
objective of securing full repayment of outstanding special loans and the need to 
ensure equitable and fair treatment between countries. The Monetary Committee will 
be kept informed, on a regular basis, on the implementation of this assistance. 
Article 3 
The ACP countries eligible for receiving this exceptional assistance shall be the 
countries which have been identified according to the procedures laid out in Chapter 
IV of the Internal Agreement. The grant assistance referred to in Article 1 shall be 
provided from an interest bearing single account to be opened for this purpose with 
the European Investment Bank, hereinafter referred to as the "debt relief account". 
Article 4 
From the payments, proceeds and income referred to in Article 9, paragraph 1 of the 
Internal Agreement, 25 million ECU shall be allocated in each of the years 1997, 
1998, 1999 and 2000 for financing the grants referred to in Article 1. These amounts 
shall be transferred to "the debt relief account", mentioned in Article 3. 
Article 5 
«2.3 
1. The Commission shall report regularly to the Council and inform the 
Parliament on the implementation of the present decision within the context of 
the HIPC initiative. 
2. At the end of the period of four years, mentioned in Article 4, or earlier if the 
Commission considers it appropriate, the Commission shall present a report to 
the Council containing a review of the possible needs for additional financing. 
3. If, at the end of the period of four years, as mentioned in Article 4, no decision 
has been taken to continue the financing, aimed at in the present decision, for a 
longer period, the Commission may decide to close the account, mentioned in 
Article 4. Any remaining funds in the account shall be redistributed to the 
Member States. 
Done at Brussels, 
For the Council, 
The President, 
2< 
ISSN 0254-1475 
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