Communication from the Commission - Support for structural adjustment and debt relief in heavily indebted ACP States - A Community response to the HIPC debt initiative
Date: 1997-03-25
Institutions: European Commission
Subjects: ACP countries, Community loan, EU initiative, European Investment Bank, debt reduction

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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 

1. 

Introduction 

2. 

The HIPC Debt Initiative 

Page 

1 

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 

5. 

Enhanced Community Assistance to the HIPCs - Proposed Action as a Donor 

5.1  Additional Adjustment Support 

5.2  Support for Commercial Debt Reduction 

5.3  Technical Assistance for Debt Management 

6. 

Support for Debt Relief- Proposed Action as a Creditor 

6.1  Modalities of Debt Relief 

a)  Debt forgiveness  or refinancing 
b) 
c) 

Concentrating debt relief on the special loans 
Country decisions 

6.2  Source of finance for the Community participation 

a) 
b) 

Financing from reflows 
Practical mechanisms 

7. 

Conclusion 

4 

5 

5 

5 

6 

6 

6 
6 
8 
8 

9 
9 
10 

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) 
ii) 

iii) 

J 

granting additional structural adjustment  support on a case-by-case basis; 
considering, on a case-by-case basis, support for  debt reduction  of commercial  debt; 
and 
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: 

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; 

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; 

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; 

i) 

ii) 

iii) 

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) 

v) 

Community  action  should  be  consistent  with  the  HIPC  initiative  and  be  taken  on  a 
case-by-case basis within a general  framework; 

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. 

- 9-

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. 

- 1 0-

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 

12-

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 
Loans 

Risk 
Capital 

Total 

EIB Own 
Resource 
Loans 

(a) Countries likely to require action under the initiative 

Burundi 
Ethiopia 
Guinea Bissau 
Madagascar 
Mozambique 
Niger 
Rwanda 
Sâo Tome e 
Principe 
Uganda 
Zaïre 
Zambia 

40:72 
30.05 
0.00 
27.34 
0.73 
22.84 
19.29 

0.00 
8.57 
132.93 
127.53 

12.38 
31.49 
3.36 
'20.73 
23.53 
12.89 
9.70 

1.33 
29.54 
17.90 
15.77 

0.00 
0.00 
0.00 
0.00 " 
0.00 
0.00 
0.00 

0.00 
0.00 
6.25 
0.00 

53.10 
61.54 
3.36 
48.07 
24.26 
35.73 
28.99 

1.33 
38.11 
157.08 
143.30 

Total 

410.00 

178.62 

6.25 

594.87 

(b) Other possibly stressed  countries 

Cameroon 
Côte d'Ivoire 
Congo 
Guyana 
Tanzania 

79.83 
69.06 
40.02 
37.65 
35.27 

0.85 
0.09 
13.09 
9.83 
16.45 

36.07 
92.72 
3.10 
0.00 
0.00 

116.75 
161.87 
56.21 
47.48 
51.72 

Total 

261.83 

40.31 

131.89 

434ÏJ3" 

(c) Other unsustainable  countries 

"sûdân 

Ï5JÔÔ 

26.87 

5!55 

41.87 

1. 

2. 

Loans to the private sector which are not publically guaranteed are excluded, since these loans do not 
fall 
under the initiative. 
Under current IMF/World Bank assumptions, the countries in section b) of this table would  not require 
action under the initiative. 

-  1 4 - / t r-

ANNEX 3 

Arrears of Countries Likely to Require Action under the HIPC Initiative 
(in million ECU as of 17/01/97) 

Country 

Arrears on 
EIB Own 
Resource 
Loans 

Arrears on 
Risk Capital 

Arrears on 
Special Loans 

Total 

a) Countries likely to require action under the initiative: 
Burundi 
Guinea-Bissau 
Madagascar 
Niger 
Rwanda 
Zaïre 
Zambia 

0.43 
1.30 
2.52 
2.57 
1.55 
10.41 
1.12 

7.31 

0.91 
- 
0.75 
0.76 
2.48 
20.46 
- 

Sub-Total 

7.31 

19.90 

25.36 

b) Other countries with unsustainable debt burdens: 

1.34 
1.30 
3.27 
3.33 
4.03 
38.18 
1.12 

52.57 

Sudan 

11.56 

3.95 

15.51 

c) Other possibly stressed countries: 

Cameroon 

Congo 

Sub-Total 

Grand Total 

5.27 

6.44 

11.71 

19.02 

0.35 

5.28 

5.63 

4.32 

5.42 

9.74 

37.09 

39.05 

9.94 

17.14 

27.08 

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 
Paris Club creditors 
Other official creditors 
Commercial creditors 

Multilateral creditors 

World Bank 
IMF 
Other multilateral creditors 

Total 

1.9 
0.4 
0.1 

1.1 
0.8 
1.3 

2.4 

3.2 

5.6 

Source: IMF and World Bank estimates 

-  19-

ANNEX 5 

COUNTRIES  IN THE DEBT  INITIATIVE 

countries  classified  as  Highly  Indebted  Poor  Countries,  whose  debt 

41 
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 
13 
further  in IMF/World  Bank work at this stage. The same approach has been taken  in this paper. 

However, data was insufficient  to properly analyse Liberia, Nigeria and Somalia at this stage 
Sudan has also been assessed as likely to require action under the initiative, but has not been  considered 

- 2 0-

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 

The information  in this annex is tentative. It is provided here for illustrative purposes only. Decisions will 

14 
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 
would embark upon an ESAF-supported adjustment  programme. 

Sudan has not been included above, but would likely fall into the "beyond  1999" category,  in the case it 

-21 -

PROPOSAL FOR A COUNCIL DECISION 
of 

ECn° 

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. 

2. 

3. 

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. 

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. 

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 

COM(97) 129 final 

DOCUMENTS 

EN 

11  01 

Catalogue  number  :  CB-CO-97-129-EN-C 

ISBN  92-78-17802-0 

Office  for  Official  Publications of the European  Communities 

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