Communication from the Commission to the Council, the European Parliament and the Economic and Social Committee on a Community participation in the debt relief initiative for highly indebted poor countries (HIPC)
Date: 1999-10-26
Institutions: European Commission
Subjects: EU aid, EU initiative, European Development Fund, debt reduction, fourth Lomé Convention

COMMISSION OF THE EUROPEAN COMMUNITIES 

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Brussels, 26.10.1998 
COM(1999) 518 final 

COMMUNICATION FROM THE COMMISSION 

TO THE COUNCIL, THE EUROPEAN PARLIAMENT 
AND THE ECONOMIC AND SOCIAL COMMITTEE 

on a Community participation in the debt relief initiative for 

highly indebted poor countries (HIPC) 

EUROPEAN COMMISSION 

Communication of the Commission 

on a Community participation in the debt relief initiative for 

highly indebted-poor countries-(HIPC) 

The Highly Indebted Poor Country (HIPC) initiative was launched by the IMF and the 

World Bank in  September  1996 with  the  aim to  help  relieve  the  debt burden  of the 

poorest countries that make adjustment efforts in  a concerted way and are committed 

to  fight  poverty.  It  represents  a  co-ordinated  effort  by  all  donors,  including  in 

particular  multilateral  creditors.  The  initiative  covers  those  poorest  countries  which 

are eligible for highly concessional  assistance from  the WB and the IMF, and whose 

debt burdens are deemed to be  unsustainable after all  other debt relief measures have 

been applied. 

As  a  major _partner  of developing  countries,  the  Community  is  mainly  supporting 

development  through  grants.  Thus,  it  is  only  ·a  small  multilateral  creditor.  For 

instance,  it ·will  account  for  only about  2%  of the  latest  total  estimated cost  of the 

mPC initiative, or roughly 4.3% of that of multilaterals (13.3 Billion US$). 

From  the  outset,  the  Community  has  strongly  supported  the  HIPC  initiative.  It  has 

been fully participating in it with regard to its claims to eligible ACP countries. It has 

made a commitment to provide in due time debt-relief to all  HIPC a~sistance eligible 

ACP countries as  laid down  in  the  Council  decision  of July 6  1998.  Furthermore,  it 

has  also attempted to address  some specific  problems  such  as  interim  relief through· 

additional actions as a donor (annex  l ). 

At the  G-7  Cologne  summit,  Ministers  agreed  to  an  'expanded  initiative that  will 

provide faster,  deeper and broader debt relief'  (annex 2).  As a result of the proposed 

·enhancements, the total  costs of the Initiative are now expected to more than  double 

to US$ 27.4 bn. 

If adopting the  ambitious  targets  set  at  the  Cologne G7  Summit,  some  financing  is 

still  needed  in  order  to  fully  finance  the  multilateral  share  of the  enhanced  HIPC 

initiative: 

Table 1: Financing needs for the HI PC initiative (Billion  US$) 

Institutions (exc.  IMF) 

World Bank 
AtDB 
IaDB 
Other 
(including EC) 
Total (including IMF) 

multilaterals 

Total 
Financing 
needs 
5.1 
2.0 
1.0 
2.9 

13.3 

Already 
Identified 

Rcmaini 
ng 

2.0 
0.6 
0.4 
1.8 

3.1 
1.4 
0.6 
1.1 

6.2 

o/w. 
short 
term 
0.6 
0.8 
0.6 
0.6 

2.6 

Sources:  'The Enhanced HIPC Framework:  Financing the  World Bank's HIPC Debt Relief',  IDA,  August 
26,1999,  and manual update after the last Bretton Woods Institutions Annual meetings 

There  is  growing pressure exerted on  multilateral  institutions  to  internally mobilise 

the required funds enabling them to meet their contributions to the enhanced IDPC in 

order to reduce the bilateral financing  gap.  For all  Multilateral Development Banks, 

the main limit to additional contributions is the fact that further internal funding from 

these institutions would be at the expense of their aid programmes.  As for the AtDB 

the exercise is almost impossible. 

During the  last  Annual  meetings  of the  Bretton  Woods  Institutions  in  Washington 

th~ Donor community took  some far- reaching  policy decisions  which  are  expected _ 

to have significant implications for the group of highly indebted poorest developing 

countries.  For  the  first  time  a  close  relation  has  been  stressed  between·  poverty 

alleviation  strategies,  structural  adjustment  programmes  and  a  debt relief initiative. 

Both  the  Thl'tF  and  the . World Bank  have  been  put  at  the  heart  of a  set  of  more 

coherent, effective and co-ordinated development instruments. The concession a}  IMF 

facili.ty  for  the  poorest  countries  (ESAF)  has  been  re-focused  towards  fighting 

poverty and transformed into a new  Poverty Reduction and Growth Facility (PRGF). 

New Poverty Reduction Strategy papers will  be jointly prepared by the World Bank 

and  the  IMF.  In  addition  multilateral  and  bilateral  creditots  announced  significant 

contributions to the financing of the HIPC Initiative (and to its special Trust Fund in 

particuhtr).ln spite of those  recent pledges, the level of bilateral contributions  to  the 

HIPC  Trust  Fund  (1.4  billions)  remains  insufficient  to  cover  the  2.6  short  term 

remaining financial gap (table 2). Moreover, although-rather limited (especially when 

taking account of the very low US contribution to bilateral debt alleviation within the 
2 

enhanced HIPC framework),  the US administration pledge still  needs the agreement 

of the US Congress, which is not se~ured. 

Table 2: Bilateral support to the HIPC Trust Fund  (Million  US$) 

Contr0 

Old 
Pledses 

Recent 
Pledses 

Total 

Conlr0 

Old 
Pledses 

Recent 
Pledses 

Total 

Australia 
Belgium 

Canada 
Denmark 
France 
Finland 

Germany 
Greece 
Ireland 
Italy 
Japan 

5 
4 
27 
26 

14 

l 
16 

10 

8 

21 

27 

70 

5 
12 
27 
26 
21 
14 

81 
I 
16 
70 
10 

54 

Luxembourg 
Netherlands 

Norway 
Portugal 
Spain 
Sweden 

Switzerland 
UK 
USA 

1 
61 
41 
15 
15 
29 
28 
36 

70 

135 

50 
650? 

1 
131 
41 
15 
15 
29 
28 
22/ 
650 

Tot11l 

329 

331 

754 

1414 

Source:  'HIPC Initiative:  Perspectives on the Current Framework and Options for Change·.  IDA.  Apri/2,  /999,  with 
partial update with information aVoilah/e to the Commission. 

During 

the  same  meeting,  and  following  an 

'information  note' 

from 

the 

Commission's services on a possible Community contribution to the enhanced HIPC, 

the Presidency of the European Council made the following statement: 

''The EU is prepared to use  funds  in  the  framework  of existing EDF instruments for 

the purpose of making a substantial contribution towards attenuating the debt burden 

of ACP States which are eligible for the HIPC initiative, and will  approach  the ACP 

States with  a  positive proposal  to that end.  The treatment' of non-ACP States 'should 

be  a  fair  one,  in  the  global  effort  of the  international -Community.  This  initiative 

would include contributions  for  debt cancellation  of the  order of magnitude  of one 

billion euros". 

The  proposal  of  the  Commission,  which 

follows  on 

the  above-mentioned 

'information note', is to be seen in this-perspective. 

*  * 

3 

• 

The decision adopted by the Council on 6 July  1998 on a proposal of the Commission 

confirmed the Community's full  participation in  the original initiative both  as  a donor 

and as a creditor: 

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as a donor, by making available supplementary resources under the 8th EDF structural 

adjustment facility for countries  having reached their "decision point"; 

as a creditor, by using,  in  the first  place,  interest earned on EDF funds  to deal directly 

(at the agreed level  for multilateral  donors)  with  the debt of countries  having reached 

their "completion point" . 

As  those  two  dimensions  did  not  concern  .non  -ACP  HIPCs,  funding  (40·  miiJion 

Ecus) was only drawn from EDF. 

The reduction  in  the  eligibility ratio,  the  retroactive  application of new  criteria,  the 

greater number of countries and the  speeding-up of decision  will  increase the cost of 

the  enhanced  initiative  in  such  a  way  that  the  interest  earned  on  EDF  funds  or 

possible  reflows,  as  provided  for in the  Council  Decision  of July  1998  will  not  be 

sufficient. 

The  overall  EU  contribution  can  be  financed  mainly  with  non-allocated  gth  and 

previous EDF resources.  However,  in  view  of the  enhancement of the  Initiative,  the 

Commission  proposes  that  also  the  external  indebtedness  of  non-ACP  HIPCs  be 

addressed  and  supported  with  budgetary  resources.  As  regards  the  ACP  countries, 

available EDF-based resources, which are in excess of €  1  bn, are derived as follows: 

co-operation with non-performing countries for which  programmable resources  have 

not  been  allocated;  some  are  also  the  result  of programming  by  tranche  under  the 

revised  Lome IV,  which  means  that  the  second  tranche  of programmable  resources 

has  not  been  mobilised  for  a  number  of underperforming  countries;  finally,  unused 
Stabex  funds  may become available after the  expiration of Lome  IV  on  February 29, 

1999. 

However, for any mobilisation of EDF resources,  a decision  of the ACP-EC Council 

of Ministers will  be needed, as the proposed Community action  is outside the normal 

procedures of the Lome Convention. To prepare for such a decision, a dialogue has to 

be  opened  in  the  very  near  future  between  the  European  Community  and  its  ACP 

partners. Similarly, the use of funds from the General Budget to support the initiative 

for  non-ACP countries  will  be  implemented in  coherence  with  the  Commission  Co-

4 

operation Strategies towards them. The legal basis for the Community's action  will be 

the  ALA  Regulation  n.  443  I  92 ·  which  emphasises  a  new  commitment  towards 

poverty  alleviation  {art.  4)  and Community's  support to enable EU  partner countries 

to overcome macroeconomic and structural problems (art. ·5). 

*  * 

The Commission's proposal is based on three elements: 

Role of the Community as a creditor: 

For all  multilateral  creditors,  it  is impossible,  at  this  stage,  to  give  definitive  figures 

on their contribution to the initiative. Indeed, some countries will only qualify, if they 

do1  in 2001 or later,  and reliable analysis of their debt si~uation will  only be available 

by  then.  Accordingly,  the  degree  of  future  debt  alleviation  can  only  be  very 

approxin1ately estimated for the totality of eligible countries (annex 3). 

Going  by  current  estimates  and  setting  them  against  a  Community  claimable  debt, 

including  arrears,  in  the  order  of  €  1.3  bn  in  net  present  value,  the  cost  of the 

Community's contribution for potentially eligible countries would be in  the region  of 

€550  Million  {ru.mex  4)~ out of which  40  MEUR  already  secured  by  the  July  1998 

decision, through interest from former EDFs. 

The mobilisation of the required financing reaffirms the  strong political commitment 

{)y  the  European  Community  to  the  Initiative.  These  resources  will  however  be 

mobilised on a case-by-case basis, including with respect to the level of arrears to be 

taken into account, following a  favourable  opinion of the EDF Committee, in  such a 

way that each of the countries involved would, on reaching its "completion point", be 

able to prepay part of its debt to the Community on a Net Present Value basis (annex 

5). 

Role oftheCommunity as a donor: 

Over  and  above  this  amount,  which  corresponds  to  the  Community's  role  as  a 

creditor,  t~e  Commission  advocates  to  remain  on  the  lines  defined  by  the 

Community's involvement as a donor under the original HIPC framework. This refers 

to  a bonus on the  structural  adjustment support to eligible countries  having reached 

their "decision point",  so that they have  adequate financing  for their macroeconomic 

5 

reforms,  which  in  turn  will  facilitate  their efforts  to  reach  their  "completion  point" 

(annex  1).  The evaluation of the size of the bonus should in the future  also take into 

account  the  beneficiary country's  past track  record  in  servicing its  debt  towards  the 

Community. 

Such a contribution would be in line with two key elements of the Cologne proposal: 

the  need  for  adequate  support  to  HIPCs  during  the  interim  period,  and  the  need  to 

enhance the social content of the whole exercise (annex 6). 

In  the past,  this  additional  support was financed  by reallocations of.funds  within  the 

Structural  Adjustment  Facility  with  no  increase  in  the  overall  amount. 

If this 

instrument is to be deployed extensiv.ely in the near future,  bearing in mind the large 

number  of countries  that  will  become  eligible  for  the  initiative  over  the  next  24 

months,  there will  not be a  sufficient margin  to cover the additional  requirements  of 

the countries concerned.  The Facility will  thus have to be given more resources.  An 

additional argument in  favour of such an  increase is  that the  next EDF is  unlikely to 

enter into force before 2002. 

The Commission estimates that  t~e Community's contribution  to the  HIPC  initiative 

as  a  creditor  should  be  mirrored  by  an  increase,  as  a  donor,  to  the  tune  of 

€150  Million  in  the  8th  EDF Structural  Adjustment  Facility.  This  amount  will  also 

need to be mobilised from unallocated 8th and previous EDF money. 

The additional  SAP support  will  be mobilised on a  case-by-case  basis on  top of the 

structural adjustment programme whenever a country reaches its "decision point". 

Role of the Community as 11  major development stakeholder: 

As a major development partner, the Commission feel  that, on top of its participation 

stricto sensu to the enhancement of the HIPC Initiative, the Community should make 

a  contribution  to the overall  financing  of the HIPC  initiative,  and specifically to the 

HIPC Trust Fund. 

Such  an  additional  contribution  would  be  in  line  with  the  Community  support  to 

development  in  general.  This  policy  spans  from  the  Community  strategy  to  better 

integrate developing countries into the world trading system to its support for global 

debt alleviation and fighting poverty. 

6 

This participation, however, should be considered keeping in  mind the need to ensure 

a minimum of fair burden sharing among stakeholders. The Community cannot, on its 

own~ fully finance  the remaining gap,  and other donors  would have to play their fair 

part in the financing of the Initiative. 

Moreover,  it  would  make  sense  that  a  contribution  of  this  kind  should  not  be 

exclusively  funded  from. unallocated  EDF  resources.  It  should  rather  be  seen  as  a 

contribution to global  debt relief of the highly indebted poorest countries, which  also 

includes  non-ACP  countries.  As  such,  it  should  comprise  an  adequate  mix  of EDF 

and appropriate complementary financing  from  the  general  budget,  and contributions 

from all stakeholders in an agreed EU context. 

While  preserving  adequate  funding  for  existing  programmes,  this  funding  from  the 

general  budget  would  imply  a  redeployment  of  resources  within  the  financial 

envelope  allocated 

to 

the  concerned  non-ACP  geographical  co-operation 

programmes, covered by subsection B7 (external action) of the Community Budget. 

The amount of the  Community contribution  to the  HIPC  Trust Fund could be  of an 

order of magnitude of 200 to 300 MEUR, depending on final  decisions on fair burden 

sharing.  82%  would be financed  from  unallocated EDF resources  (annex 4), and the 

rest  from  the  Community  budget.  Taking  into  account  the  geographical  distribution 

and eligibility for debt relief of the  countries concerned,  the  approximate  breakdown 

over  a  period  of three  years  beginning  in  1999  could  be  15%  from  chapter B7 -31, 

'Cooperation with  Latin American developing countries', and 3% from chapter 87-30, 

'Cooperation with  Asian developing countries'.  However the precise split remains to 

be  determined~  including  in  the  course  of  discussions  with  the  World  Bank  on 

modalities/ 

The Community contribution to the HIPC Trust Fund would be earmarked. Resources 

originating from the EDF would be earmarked for the ACP countries, and in principle 

for  the  AfDB's  claims  on  African  HIPCs  belonging  to  the  group  of ACP countries 

(with  specific  dispositions  for the  sole non-African  ACP HIPC:  Guyana).  Resources 

originating  from  the  budget  would  help  financing  the  reduction  of claims  towards 

Asian  or Latin  American  HIPCs.  Specific  dispositions  will  be  taken  to  ensure  that, . 

following  EU  financing  to  the  Multilateral  Debt  Relief  Initiative,  beneficiary 

countries wiH use further domestic resources for social sector development. 

7 

The technical modalities of such a combined financing of a possible EU contribution 

to the enhanced HlPC Initiative would have,  of course, to  be considered carefully in 

their  details.  In  particular,  specific  provisions  will  be  taken  to  ensure  adequate 

visibility, monitoring and financial  control  of the EU contribution to the  Initiative in 

general and to the Trust Fund in particular. 

In a nutshell, the Commission proposal is as follows: 

Contribution to the initiative as a creditor: 

550MEUR 

Increase of the Structural Adjustment Facility: 

150MEUR 

Contribution to the HlPC Trust Fund: 

200-300 MEUR 

Total 

900-1000 MEUR 

. 

..... 

8 

ANNEXES 

'to the 

Communication from the Commission 

on a Community participation in the debt relief initiative for 

highly indebted poor countries (HIPC) 

ANNEX I 

IM-PLEMENTATION OF Tit£ COUNCIL DECISION OF 6 JULY 1998 

Eight ACP countries reached "decision point" in  1997 and 1998 and so are covered by the 
Decision of 6 July 1998.·  With the new criteria all, rather than merely six of them, should 
eventually qualify for debt alleviation. 

Of these eight, only three have so far reached "completion point" in  the framework of the 
HIPC  initiative:  Uganda,  Guyana  and  Mozambique.  _Following  the  financing  decision 
adopted by the Commission on  24 July  1998, aU  Uganda's remaining obligations  in  the 
form  of  s~cial  loans  were  wiped  out  to  the  tune  of  ECU 4 590 000.  A  financing 
proposal  for Guyana wili  shortly go before the EDF Committee.  Naturaiiy, in  both cases 
an  additional  alleviation  will  take  place  once  the  new  debt  alleviation  objectives  are 
known.  Mozambique is a trickier case because a lot of risk capital has to be paid upfront, 
something which poses a number of technical problems.  Since the completion point has 
only just been decided,  the Commission proposes to wait a few  weeks/months while the 
alleviation objectives are revamped so as to move straight into the finalised version of the 
alleviation plan. 

Ever since it joined the HIPC initiative the Commission has considered that simply fully 
meeting its comrnitments  as  creditor was  not  sufficient in  view of the  scale of the  ACP 
countries'  debt  problem.  Hence  its  decision  to  readjust  the  share-out  of the  structural 
adjustment  facility  (SAF)  and  raise  the  HIPC  allocations  during  the  interim  period  by 
15%  (or  by  10%  for  countries  already  enjoying  a  15%  bonus  in  the  form  of regional 
integration  support).  Annex  3  shows  that  a  good  many  countries  will  gain  from  this 
measure in their 1999-2000 allocations. 

Note  that  this  Community  initiative  anticipated  the  G7's call  for  support  to  the  HIPC 
initiative  at  the  beginning  of the  interim  period,  as  well  as  its  intention  to  enhance  the 
social content of the process linked to the initiative (see Annex 6).  · 

9 

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ANNEXl 
THE MAIN FEATURES OF THE ENHANCED INITIATIVE 

Following a series of initiatives taken  by a number of member States,  the G7  meeting at 
Cologne  in  early  June  this  year  decided  to  facilitate  and  reinforce  the  highly  indebted 
poor countries'  access to the HIPC initiative. 

The proposals  made  at  Cologne,  which  have since been  endorsed by  the  Bretton  Woods 
institutions,  have  three  main  planks,  which  can  be  summed  up  by  the  slogan  "deeper, 
broader and faster". 

•  "Deeper" debt alleviation: 

*  reduce the NPV debt-to-export qualification ratio from 200-250% to 150%; 

*  make the  access conditions for the "fiscal  window" more flexible  by lowering 
the qualifying thresholds concerning the openness of the beneficiary economies 
and revenue as a proportion of GDP 1
; 

*  retroactive application of these new criteriato countries which already reached 
their 'decision/completion points', so that they are not penalised for having met 
the conditions more quickly; 

*  fix  final  debt reduction  objectives when  the  decision  point is reached,' namely 
when  it is  decided that  a  country qualifies  (with  no possibility of revision,  as 
hitherto,  at  completion  point,  i.e.  when  it  is  acknowledged  that  a  country  has 
met  the  conditions  laid  down  and  creditors  actually  start  to  reduce  the 
country's stock of debt),  meaning that  an  increase  in  GDP or exports  will  not 
penalise the beneficiary. 

•  "Broader" coverage of the initiative: 

*  thanks  to  these  changes  the  number  of the  41  HIPCs  that  should  ultimately 
qualify  for  the  initiative  should  rise  from  26  to  33,  and  even  36  if Liberia, 
Sudan and Somalia are included. 

•  "Faster" relief: 

*  the  international  financial  institutions  (IFis)· and  other  multilaterals  that  so 
. desire, wiJl  provide debt servicing relief during the interim period, i.e.  between 
the decision and completion points; 

*  the completion  point  will  become floating  in  the  sense  that  the  countries  will 
enjoy  a  final  alleviation  of  their  debt  as  soon  as  . they  have  met  all  the 
conditions set, even if they do so before  the  three  years  hitherto laid down  as 
interim period. 

To benefit from the "fiscal window .. , namely qualify even when the net present value of the debt is  less 
than  150%  of exports, 
it  is  now  enouah  that  the  NPV debt-to-revenue  ratio  is  over 250%  (against 
280%  previously),  that  exports  account  for  only  30tJ,  of GDP  (against  40%  previously)  and  lhat 
revenue exceeds 15% of this same GDP (against 20% previously). 

10 

ANNEX3: 
LIST OF POTENTIALLY ELIGIBLE COUNTRIES 

Decision ooint reached in 1997 
Benin, Bolivia Burkina Faso, Guyana, Uganda 

Decision ooint reached in 1998 
Cote d'Ivoire, Mali, Mozambique, Senegal. 

Decision ooint expected in 1999 . 
Chad, Ethiopia, Ghana, Guinea, Honduras, Laos, Malawi, Mauritania, Nicaragua, Niger, 
Tanzania, Togo, Zambia. 

Decision point expected in 2000 
Cameroon, Congo, Guinea-Bissau, Madagascar, Rwanda, Sierra Leone. 

Decision pqint expected in 2001 or later 
CAR, Burundi, Myanmar, Sao Tome &  Principe, .DRC, Liberia, Somalia, Sudan. 

ANNEXE4 
METHOD OF CALCULATING THE COMMUNITY'S CONTRIBUTION 

To be  able  to deduce  the  level  of the  Community contribution  from  what  is  set  out  in 
Annexes 3  and 5 we would need a  reliable estimate of the percentages of debt reduction 
that will  be decided.  But this is impossible as we are in a period of transition. 

•  In  the case of countries  that  have already reached  the  decision  point qualifying them 
for debt alleviation, we need to update the figures calculated earlier in the light of the 
new Cologne principles and this can be done only roughly. 2 

•  The  data  available  for  other  eligible  but  not  yet  qualified  countries  are  even  more 
unsatisfactory since we do not have any good estimate of the economic ratios and we 
do not kno~ the discount rate that will be used for calculating the net present value. 

We therefore cannot claim to give anything but rough estimates and a  large margin 
of error must be allowed  for.  The  Bretton  Woods  institutions ·have  tried.  They  have 
calculated that the total cost of the initiative will rise from  USD 6.2 billion to  13.3 billion 
for  all  the  multilateral  creditors,  meaning  that  the  principles  adopted  at  Cologne  will 
more or less double its cost. 

The  table  below,  drawn  up  on  the  basis  of  cun-ent  estimates,  gives  a  geographical 
breakdown of this total. 

·-

2 

In  principle  the cost of participation  in the  initiative  is  henceforth  fixed  at  the  decision  point on  the 
basis of current economic data.  ·But the way in  which the criteria are to be applied  retroactively to the 
countries  that  have  already  reached  it  is  not  clear.  Will  account  be  taken  of  the  evolution  of 
macroeconomic ratios  and data - exports,  earnings,  GDP and,  above  all,  discount  rates - or will  the 
new ratios be mechanically applied to the original data'? 

11 

Table 3: geographical breakdown of the total cost (o/o) 

% of the total cost, all HIPCs 

% of total cost, all HIPCs except ,SSL 

ACP 

~(which: non- SSL ACP 
~(which: non-African ACP 

ALAT 
Asia 

Source:  World Bank 

86 
62 
I 
11 
2 

113 
82 
2 
15 
3 

In  the  particular case  of the  Community,  note  that  the  "European" claimable  debt  is  of 
three types:  special loans, risk capital and loans on EIB own resources.  When it comes to 
participation in  the HIPC initiative, the Community will  assume the two former types of 
debt and the Em the third (the Bank having accepted the Council's request contained in 
the Decision of 6 July 1998).  The respective responsibilities are thus clearly identified. 

The problem arises  from- the fact  that it is technically not possible either to  make direct 
use of the  Bretton  Woods estimates3  or to make country-by-country estimates,  however 
approximate.4 

In  view of these constraints,  a  pragmatic approach  had t-o  be  adopted.  It  was  decided to 
apply, on the basis of figures supplied by the EIB (which gives the schedules and thus the 
net  present  values .of  each  of  the  special  loans  and  risk  capital  operations)  the  least 
unfavourable  reduction  percentage  available,  namely  the  one  derived  from  the  average 
estimates of the Bretton Woods institutions. 

In the preliminary document provided by these institutions,5 the figure put forward for the 
European. participation is USD 731  million in  1998 terms.  This figure represents 41% of 
the  net  present  value  of  the  ACP  debt  to  the  Community  and  EIB  including  arrears 
(lJSD 1.8 billion).  In  relative  terms,  this  order of magnitude  matches  the  increase  in  the 
total cost of the initiative to muhilaterals -·a 20% average reduction of debt was used as a 
working hypothesis  in  the earlier report  ( 1998) on the  Community's participation  in  the 
initiative. 

3  Not only do they  not distinguish between the different types of European claims referred  to above but 
also  their  estimate  of  the  net  present  value  is  altogether  excessive  in  the  light  of the  information 
available  to  us.  Furthermore,  using  the  Bretton  Woods  estimates  means  adopting  dollar  calculations 
and the Commission has always made clear that it  works only  in euros and that in  the framework of its 
participation  in  the  initiative  it  would  be  bound  only  by  NPV  percentage  reductions  (not  units). 
Indeed,  the  main  cause  of the  difference  between  the  Bretton  Wcx>ds  figures  and  those  of the  EIB 
would appear to stem from  the exchange rates used. 

The  \Vorld  Bank.  which  centralises  the  information  gathered  under  the  HIPC  initiative,  has  such 
estimates.  With  them  it  established  a  matrix  of  reduction  coefficients.  on  the  basis  of  which  it 
calculated the debt reductions for each of the potentially eligible countries.  It did not~ however,  want 
to publish this matrix or any table that would enable deductions to be made on the grounds that it could 
give rise to false hopes and give mere estimates too official a status.  If the. Commission were to try  to 
gather the information to make its own estimates. it would be faced with the same problem. 
Preliminary costing for individual MDBs- EIB/EU, MOBs meeting, Friday June 25  1999. 

12 

!., 
i 
I 

About including arrears in  the claimable basis, it  is  worth  recalling that the  application  of 
the  rules  has  been  relaxed.  In  the  past,  the  treatment  of  arrears  to  multilaterals  in  the 
context  of the  HIPC  Initiative  had  been  guided  by  the  principle  of clearing  all  arrears 
before  a HIPC  could become eligible  for  assistance  under  the  initiative  (at  the  decision 
point)  so  that  it  would  enable  all  donors  to  take  part  in  the  debt  relief  action6
•  This 
remains true:  the final  settlement of actuai  debt relief will  not be decided until  all  arrears 
are  cleared  towards  all  multilateral  creditors.  However,  the  estimates  provided  by  the 
World Bank now include arrears in  the base for calculating the reduction ratio by treating 
them  as  part of the  regular debt.  On  this  issue,  there  has  been  an  understanding reached 
together  with  all  multilaterals  taking  part  in  the  Initiative,  and  which  was  reconfirmed 
during the October 1st Multilateral Development Banks meeting in Washington. 

According to EIB figures (see table 4 below), at 31  December 1998 the NPV at 4.5o/o 
of the special loans and  risk capital covered  by  the initiative stood  at €1209  million 
excluding arrears and at €1340  million  including arrears.  By  applying the rates of 
41 9/o  to  this last amount, we obtain €549  million  (or €516  million  excluding Sudan, 
Somalia  and  Liberia).  In  view  of the  margin  of error induced  by  the  estimation 
methodology  we  used 7
,  even  if Sudan,  Somalia  and  Liberia  are  very  unlikely  to 
benefit  from  the  initiative,  it  would  be  preferable  to  secure  a  sufficient  security 
margin and take a conservative figure of around €550  million8

• 

This figure includes an estimate of what our contribution would be to the debt alleviation 
of Somalia, Sudan and Liberia, plus countries with which the Community has  suspended 
cooperation. From the methodological point of view,  note that all  the figures cited above 
were  calculated  at  3.1  December  1998. 
In  other  words,  the  sums  reimbursed  by  the 
HIPCs up to the start of debt alleviation will have to be deducted. 

6 

7 

So  far  the  Community,  which  is  treated  as  a  preferred  creditor,  has  always  strictly  adhered  to  this 
principle in its assistance to third countries, and  the assistance provided under the HIPC framework has 
not called for  an  exceptional  treatment to  date (Uganda  being  the  only  ACP  country  having  received 
Community debt relief assistance and having no arrears to the Community). 
Applying  to  the  EIB  database  the  "European'  average  reduction  rate  derived  from  the  World  Bank 
estimates,  on  top  of above  mentioned  quality  problems,  is  definitely  a  'second  best'.  First  there  are 
great differences in  the  geographical  breakdown of loans on own resources, on  the one hand (fewer in 
number and concentrated in a small group of countries), and special loans and risk capital, on the other. 
One of the EIB 's main debtors in terms of loans on own resources is Cote d'lvoire, and  in  its case the 
debt  reduction  will  be  well  below  average.  Therefore  the  use  of the  "European"  average  rate  (i.e. 
including the EIB)  for  all  claims  relating  to  special  loans  and  risk  capital  tends  to  underestimate  the 
debt reduction necessary under the initiative.  Moreover, the data supplied by the EIB gives the NPV at 
31  December  1998, which  means  that all  new  disbursements after this date  but before the  cut-off date 
fixed  for  calculating  the  NPV  at  decision  point  will  have  to  be  added.  But  while  these  first  two 
elements tend to lead to underestimates, the choice of a discount rate appropriate to what would be the 
reference rate for  a decision point at end  1998  (4.5%)  would overestimate the NPV of the Community 
debt.  For countries that have already reached their decision point the reference discount rate  is  in  fact 
higher,  and  the  ~V thus  lower.  If the  upwards  trend  in  interest  rates  continues,  the  same  wilJ  apply 
for  countries qualifying in 2000 or after.  Added to this, disbursements that continue to be made  under 
the drawing rights have to be taken into account, as do the repayments made up to  the completion point 
that then  have  to  be deducted  from  the  value  of Community debts  at  31  December  1998.  Failing  any 
information  that  will  help  us  determine  which  factor  will  predominate,. we  shall  just  have  to  work  on 
the  assumption  that  they  will  cancel  each  other  out,  but  this  implies  to  accept  taking  a  significant 
security margin, when presenting the outcome of the estimate. 
Out of which 40 MEUR already secured by the July  1998 decision, through  interest from  former  EDFs. 

13 

How to deal  with the countries with  which cooperation is  suspended is a difficult matter. 
It is hard to see how  the Commission could commit itself to participating in  the initiative 
in  respect  of these  countries  unless  cooperation  had  resumed9
.  But  we  cannot  rule  out 
cooperation resuming with these countries, even in  the short term.  It .would thus be  wise 
to  include  the  potential  cost  of  these  countries'  becoming  eligible,  even  though  the 
Community's  participation  is  likely  to  come  much  later  in  their  case  than  that  of other 
multilateral creditors. 

On  a more  general  note,  the Community's participation  in  the  initiative  will  be  staggered 
over several  years  and  its  cost  should  be  viewed  in  a  timescale  beyond  the  provisional 
schedules  in  Annex  3.  Since  the  completion  point  will  henceforth  be  floating,  the 
schedule of costs is more tentative than ever.  And even if some countries qualify earlier 
than  predicted,  it  is  highly  likely  that  this  will  be  counterbalanced  by  others  doing  so 
later.  In  other  words,  the  completion  point  may  come  more  than  three  years  after  the 
decision  point.  Furthermore,  in  spite  of the  'enhanced'  treatment  of arrears,  a practical 
risk  remains,  leaving  aside  geopolitical  vicissitudes  (some  potential  beneficiaries  are  at 
war or politically very fragile)  that many could fail  to reach  their theoretical completion 
point dates on time, due to their incapacity to completely clear arrears. 

..:--

9 

This  is  clear if you  consider  that  reducing  these  countries' debt  is  in  some  way  equivalent  to  giving 
them budgetary aid because it releases resources that would otherwide be devoted to debt servicing. 

14 

Table 4:  Theoretical cost on the basis of average reductions (EUR) 

Total claims 

Nominal 

NPV (1) 
(a) 

of which special loans 
Nominal 
NPV (1) 

arrears 

(b) 

Cost 
Theoretical( 4) 
0.41  x (a+b) 

!/ 
I 

Angola 
Ben in 
Burkina 
Burundi 
Cameroon 
CAR 
Chad 
Congo 
Congo(DRC) 
Cote d'Ivoire 
Ethiopia 
Ghana 
Guinea 
Guinea-B. 
Guinea Eq. 
Guyana 
Kenya 
Liberia 
Madagascar 
Malawi 
Mali 
Mauritania 
Mozambique 
Niger 
Rwanda 
SaoT. &  P. 
Senegal 
Sierra Lenne 
Somalia 
Sudan 
Tanzania 
To go 
Uganda (3) 
Zambia 

2.107.710 
1.676.812 
15.885.850 
10.264.038 
45.536.152 
31.201.534 
54.201.588 
32.300.611 
83.838.177 
46.607.965 
13.916.421 
10.790.989 
8.142.926 
5.824.017 
47.480.297 
29.494.208 
138.731.707 
86.595.910 
82.059.529 
50.724.419 
81..595.071 
55.827.759 
47.409.459 
33.638.739 
145.616.081 
94.177.740 
5.610.600 
5.610.600 
4.403.616 
3.346.207 
51.096.680 
29.316.417 
144.989.180 
95.773.260 
6.400.453 
3.877.330 
49.098.029 
32.068.513 
89.070.772 
57.431.596 
57.263.432 
39.994.067 
59.223.561 
40.951.983 
45.115.734 
30.361.150 
34.272.625 
21.140.877 
35.652.251 
23.535.877 
1.103.932 
941.410 
93.860.217 
58.439.695 
34.368.124 
22.078.084 
19.022.338 
16.403.094 
37.676.792 
30.105.038 
75..067.684 
51.887.432 
29.459.809 
19.489.507 
41.664.619 
36.089.050 
161.261.860  100.477.562 

978.881 

10.477 
5.680.753 

0 
0 
2.796.735 
1.591.466 
11.629.399 
6.930.186 
42.689.409  23.511.196 
81.171.648  44.511.617 
4.454.571 
1.303.805 
2.595.257 
30.913 
5.331.606 
3.601.913 
37.085.907  21.376.347  16.323.192 
108.529.321  63.171.978  44.378.977 
11.400 
66.246.525  38.505.539 
32.650.644  18.248.946 
11.000 
29.437.474  18.416.877 
63.971.201  35.123.489 

4.402.095 
902.140 
2.602.258 

1.596.039 
1.286.313 

23.733 

1.205.131 
6.169.543 
7.073.035 

5.828.853 

7.687.004 

43.174.114  23.072.409 
87.432.193  51.447.287 
3.305.730 
30.170.338  16.967.571 
31.088.890  17.418.722 
26.078.948  14.742.812 
28.176.598  15.692.864 
3.235.408 
24.256.962  13.051.789 
23.735.701  13.886.726 
0 
66.365.451  37.302.249 
17.479.696 
9.745.864 
0 
0 
12.471.873 
36.289.449  22.940.210 
23.005.303  14.484.995 
4.590.000 
136.403.621  80.297.394 

(4) 

0 

24.762 
2.243.708 
5.558.634 
7.878.929  23.340.592 
569.059 
1.166.281 

3.558.294 

1.088.834 
4.208.256 
13.206.925 
15.572.359 
19.109.265 
4.958.865 
2.400.521 
18.785.134 
53.699.704 
20.801.~86 
22.893.891 
·13.791.883 
40.417.732 
2.670.223 
2.438.871 
12.019.731 
39.921.413 
2.117.094 
13.148.090 
23.556.685 
16.397.567 
16.790.313 
12.942.175 
11.197.272 
12.549.654 
385.978 
23.970.427 
9.971.935 
9.004.308 
21.912.708 
21.507.161 
8.468.873 
14.796.510 
42.654.701 

Total HC (2) 
Total- SSL 
Total 

1.542.271.432  1.009. 753.649 
894.067.425  516.006.485  46.306.967 
1.779.103.698  1.159.058.028  1.067.338.707  616.461.110  100.265.476 
1.842.203.281  1.209.443.489  1.085.639.433  627.645.769  130.451.015 

432.984.853 
516.322.637 
549.356.747 

(/) NPV=net present value at 4.5% on I  January 1999. 
(2)  Total  HCS  =  Tota!  excluding  countries  with  which  cooperation  is  currently  suspended:  Somalia,  Sudan  and 
Liberia (SSL)  + DRC,  Niger,  Sierra Leone and Togo 
(3)  In  the  case of Uganda  there  are  no  more  special loans  because  they  were  cancelled as part of the  Community's 
participation  in  the  HI PC inUiative.  But,  applying the  principle  of retroactivity,  we  have  added to  the  NPV of our 
claims the value these special loans had at the time oftheir early repayment. 
(4)  Theoretical cost ofthe Community's participation applying a rate  o.f4/% to  the  NPV of the  Community's claims 
including arrears. 

15 

ANNEXES 
PRINCIPLES GOVERNING THE COMMUNITY'S CONTRIBUTION 

The European  Community shall  fully  participate  in  the  ffiPC  initiative  by  assisting  the 
countries which  will  qualify for this  initiative,  with  a  view  to helping  them  reducing  the 
net present value of their external financial  obligations towards  the Community.  For this 
purpose,  the  Community  shall  make  available  grant  resources  to  be  utilised  by  the 
eligible  countries  to  meet  outstanding  debt  and  debt  service  obligations  towards  the 
Community.  This  assistance,  together  with  resources  provided  by  other  creditors,  shall 
allow  the  eligible  countries  to  achieve  their  country-specific  debt  sustainability  target 
agreed within the framework of the HIPC initiative. 

This  assistance  referred  shall  primarily  be  used  by  the  beneficiary  countries  to ·prepay 
outstanding special  loans  on  a net  present  value  basis.  If such  action  is  not  sufficient to 
attain  the  agreed  level  of net  present  value debt  reduction,  the  beneficiary country shall 
use  the  allocated  grant  to  meet  any  outstanding  risk  capital  obligations  towards  the 
Community. 

The  Commission  shall  take,  on  a  case-by-case  basis,  specific  decisions  providing 
assistance to each eligible ACP country, in  accordance with the rules and procedu~es laid 
down  in  Chapter  IV  of  the  Internal  Agreement.  The  Commission's  decision  on  the 
amount of assistance  to  be provided in  each case shall  allow  for the necessary reduction 
in the net present value of that country's outstanding external financial  obligations toward 
the  Community  and  be  consistent  with  the  HIPC  initiative  methodology.  The  country 
specific  decisions  shall  also  take  into  account  the  structure  of the  country's  exposure 
towards  the  Community,  the  desire  for  administrative  simplicity  in  the  case-specific 
proposals  chosen  and  the  need  to  ensure  an  equitable  and  fair  treatment  between  the 
eligible  countries.  Each  country  decision  shall  make  explicit  the  modalities,  terms  and 
conditions for the implementation of the 6th July 1998 decision. 

16 

ANNEX6 
THE LINK BETWEEN THE INITIATIVE AND POVERTY REDUCTION 

The 07 did not rest on  its laurels with a "deeper, broader and faster"  initiative; it formally 
requested the IMF and the World Bank to give poverty reduction  a much  higher priority 
in  their operations  as  well  as  in  the  debt relief process.  The IMF's  Enhanced Structural 
Adjustment Facilities were explicitly mentioned. 

, 

It  is  not  yet quite clear what  the  operational  response  of the  Bretton  Woods  institutions 
will be but we are obviously heading for a radical change in the way structural adjustment 
programmes and policy framework papers are drawn up in future. 

This  strengthening  of  the  social  link  is  in  perfect  acc<;>rd  with  the  Community's 
longstanding  concerns  and  with  the  Commission's  new  guidelines  for  structural 
adjustment. 

Indeed,  the  Community's  structural  adjustment  support  programmes  were  designed  to 
underpin  and  expand  the  social  dimension  to  programmes  negotiated  with  the  IMF. 
From the start the main aim was to secure social spending and ensure that adjustment was 
not  achieved  at  the  expenses  of  social  standards.  Another  aim  was  to  extend  the 
necessary process of adjustment beyond the  purely mor:aetary/budgetary sphere in  order to 
make  the  public  administration  of  social  sectors  more  efficient. 
In  other  words,  the 
Commission has always tried to emphasis the social dimension of adjustment, even to the 
extent  of establishing  its  own  forms  of conditionality  specific  to  social  considerations. 
Seen.in this light, the G7's call is a response to longstanding Community concerns. 

It  also  fits  in  perfectly  with  the  Commission's  new  structural  adjustment  guidelines. 
Discussions between most major donors in  the  SPA framework have revealed ever more 
clearly that a reform of conditionality has to· be envisaged.  The Commission  has  played 
in  key  role  in  this  process.  A  pilot  scheme  it  carried  out  in  Burkina  Faso  produced  a 
number  of tools  that  could  radically  change  the  very  concept  of structural  adjustment 
programmes,  above all  by making aid depend on  performance indicators  mainly focused 
on the social needs of the population. 

The Commission's  last  communication  on  structural  adjustment  drew  conclusions  from 
these efforts and it has already been decided to start implementation, in  Madagascar and 
Senegal  for  example.  The  basic  idea  is  to  concentrate  on  the. results  of reforms  rather 
than  the  reforms  themselves.  This  will  n1ean  that:  (i)  the  focus  of reform  programmes 
will  become  longer  term;  and  (ii)  the  countries  concerned  will  have  to  assume  greater 
responsibility for the choice of measures and the pace and order of reforms;  transparency 
will  be  encouraged,  objectives  will  become  more  explicit  and  programmes  will  be 
assessed by results.  These efforts  will  have  poverty reduction  and institutional  building 
as priority objectives. 

The  Commission  hopes  that  the  Bretton  Woods  institutions  will  draw  on  these 
experiences  and  corne  up  with  an  operational  response  to  the  G7's  request  that  is  in 
accordance with SPA principles. 

· 

17