Debt Relief for Heavily Indebted Poor Countries: Issues for Congress
Released: 2006-04-18T00:00:00

Summary:
In recent decades, the rapid growth in poor country debt has emerged as a key foreign policyconcern. Many analysts believe that this debt burden is an impediment to economic growth andpoverty reduction. Others contend that for the poorest countries, other factors such as weak politicaland economic institutions, are a greater impediment to growth than the debt burden.
There have been many efforts to help reduce poor country debt. In 1988 a group of majorcreditor nations, known as the Paris Club, agreed for the first time to cancel debts owed to theminstead of refinancing them on easier terms as they had done previously. In 1996, the InternationalMonetary Fund (IMF), the World Bank, and the regional development banks agreed to allow aportion of debts owed to them by a select group of countries to be cancelled. This effort is knownas the Debt Relief Initiative for Heavily Indebted Poor Countries (HIPC). In June 2005, the Groupof Eight (G8) nations agreed to further deepen debt relief and proposed 100% cancellation of allmultilateral debt for countries that have finished the HIPC program. Several pieces of legislation( H.R. 1130 and S. 1320 ) also have been introduced that could extend debtrelief to an even larger group of countries. As introduced, the G8 proposal raises four possibleconcerns:
Scope of Debt Cancellation -- The proposed agreement is limited to the IMF,the World Bank, and the African Development Bank. Several other development banks are majorcreditors and are not included in the proposal.
No Net New Assistance -- The proposed agreement specifies that HIPCcountries that receive debt reduction will have their total assistance flows reduced by the amount ofdebt forgiven. This money will then be reallocated among all low-income countries.
Funding is Not Assured -- The agreement promises that G8 countries willcompensate the development banks for any debt relief they provide. However, future contributionsto the development banks are not guaranteed.
Future Commitments are Unspecified -- The agreement commits G8members to cover the cost of debt relief for countries that may later enter the HIPC process. Depending on which, if any, countries are added, the potential cost of debt relief may risesignificantly.
No congressional appropriations are required at this time to implement the G8 proposal. However, additional U.S. funds may need to be appropriated in the future to fund higher levels ofHIPC debt relief.
This report will no longer be updated. For information on the current status of the G8 debtrelief proposal, see CRS Report RS22534 , The Multilateral Debt Relief Initiative , by Martin A.Weiss.

subsections: section_title: Introduction
paragraphs: At the June 2005 Group of Eight (G8) (1) finance ministers meeting, member nations agreed on a financingplan for 100% debt relief for countries that complete the International Monetary Fund (IMF) andWorld Banks' Heavily Indebted Poor Countries (HIPC) debt relief program. If the proposal is fullyimplemented, 18 countries that have completed the HIPC program would receive complete andimmediate forgiveness of their multilateral debts, approximately $40 billion. An additional 20countries are eligible for debt relief, but are currently implementing pre-requisite economic reforms. If all of the 38 HIPC-eligible countries receive debt cancellation, total debt relief would beapproximately $55.6 billion. According to the proposal, creditor nations will provide additionalfunding for the World Bank and the African Development Bank (AfDB) to fund their debt relief. IMF debt relief will be funded by the remaining proceeds of a 1999 sale of IMF gold reserves. 
To date, the Bush Administration has not requested new funds to contribute toward the U.S.share of the G8 debt relief proposal. Congress, however, is currently considering appropriations forthe World Bank and the AfDBs' concessional lending facilities and, although none of this fundinghas been specifically earmarked for HIPC, it appears that the administration would like to use someof this funding for the increased debt relief. There are also two pieces of legislation( H.R. 1130 and S. 1320 ) that if enacted would allow for higher levels ofdebt relief than is provided for in the G8 proposal.
This report addresses the HIPC debt burden and the various debt relief initiatives, bothbilateral and multilateral, that have been implemented and proposed. Following a brief backgroundand a discussion of the economic literature on debt relief, this report addresses: (1) previous U.S.debt relief initiatives; (2) multilateral debt relief through the HIPC program; (3) the June 2005 G8proposal for 100% debt cancellation; and (4) congressional action.
section_title: Background
paragraphs: In recent decades, the rapid growth in poor country debt has emerged as a key foreign policyconcern. As early as 1967, the United Nations Conference on Trade and Development (UNCTAD)argued that debt service payments in many poor nations had reached "critical situations." (2) Since then, and notably in thelast ten years, there has been pressure exerted on national bilateral creditors and multilateral lenders(such as the International Monetary Fund or the World Bank) by non-governmental organizations(NGOs) and several Western nations for creditors to cancel all debts owed to them by the poorestand least developed countries. In a speech to the United Nations in 2002, UK Chancellor of theExchequer [author name scrubbed] challenged developed nations to help build "a virtuous circle of debtrelief, poverty reduction and sustainable development for the long term" for the world's poorestcountries. (3) According toU.S. Secretary of the Treasury John Snow, debt has been "locking these poorest countries intopoverty and preventing them from using their own resources [for development]." Requiringrepayment of the debt is, he added, "morally wrong." (4) 
Much of the recent debt relief momentum has been spurred by the Jubilee (formerly theJubilee 2000) debt campaign. Initially launched in 1996, the Jubilee campaign's mission is toconvince major creditor nations to cancel the unpayable debts of the poorest countries under a fairand transparent process. (5) The international campaign is spearheaded primarily by various Catholic and Protestantorganizations that have had longstanding involvement in debt relief issues and includes numeroushigh-profile supporters such as Sir Bob Geldof, an Irish rock singer and activist, and Bono, leadsinger of the Irish band U2. 
Debt relief proponents often maintain that poor country debt is illegitimate, or according toBono, "immoral and unjust." (6) This claim rests on the so-called "odious debt" argument. Odiousdebt is normally considered to be debt which benefits ruling elites in a borrowing country (throughgraft and corruption) but has little or no benefit for the general population. Debt critics questionwhether successor regimes should be obligated, under international law, to repay money that wasstolen, wasted, or otherwise used in ways having little benefit for their people. Although the odiousdebt concept has gained popularity in the NGO community, it has not been endorsed by anyinternational legal or financial body. Moreover, there is almost no likelihood that debts incurredthrough World Bank or IMF projects could be legally determined to be odious, since they wereundertaken for nominally development-related projects. Nonetheless, many agree that high levelsof debt are a major burden for the poorest countries and that any effort to promote economic growthand reduce poverty needs to address the HIPC debt burden.
The poor country debt burden is indeed staggering. For the 38 International DevelopmentAssociation (IDA) (7) countries that have been designated as the most Heavily Indebted Poor Countries, total external debtrose from $19.7 billion in 1975 to a peak of $222 billion in 1995, a major increase over otherdeveloping countries. (8) Table 1 compares debt as a percentage of gross domestic product (GDP) for three tiers of poorcountries: HIPCs, other IDA countries, and other lower middle income countries. (9) (See Appendix 1 forinformation on the World Bank debt and poverty classification systems.)
 Table 1. External Debt as a Percentage of GDP (PeriodAverage)
Source: World Bank.
In the 1980s and early 1990s, as the debts of the poorest countries increased rapidly comparedto other low-income countries, several debt relief efforts were introduced. In 1988, a group of majorcreditor nations, known as the Paris Club, (10) agreed for the first time to cancel debts owed to them instead ofrefinancing them on easier terms as they had done until then. 
In 1996, the International Monetary Fund, the World Bank, and the regional developmentbanks agreed to allow a portion of debts owed to them to be cancelled as well, and created the DebtRelief Initiative for Heavily Indebted Poor Countries (HIPC). At the meeting of the G8 financeministers on June 11, 2005, member nations extended debt relief and committed themselves tocancelling permanently all remaining multilateral HIPC external debt, providing up to $55 billionin additional debt relief. According to the proposal, the 18 countries that have completed the HIPCprogram would receive immediate debt relief (worth $40 billion at face value). Countries that arein the middle of the program, or have not yet begun, would receive total debt relief upon completionof the program. If the remaining 20 countries complete the HIPC program, total debt relief couldexceed $55 billion.
There are several root causes of the HIPC debt burden. A 1999 IMF study concluded thatthe rise in HIPC debt had its origins in weak macroeconomic policies, a lack of economic structuralreform, and poor debt management practices on the part of debt-stressed countries, as well as adversetrade shocks and political factors such as war, famine, and social strife. (11) The debt problem wascompounded by the willingness of creditor nations and multilateral institutions to provide loans andaccept risks that the private sector would not. William Easterly, formerly a World Bank economistand currently a professor at New York University, points out that between 1979 and 1997, the IMFand World Bank provided more financing to HIPCs than other countries of their income level,despite HIPC countries' often poor economic policies. (12) 
section_title: The Economic Debate over Debt Relief
paragraphs: Among economists, the likely success of debt relief in spurring meaningful economic reformor make substantial inroads against poverty is often questioned. Critics maintain that money to funddebt relief must be transferred from other resources and there is a risk that donors will take all orsome of these resources from other parts of their foreign assistance budgets. If this occurs, overallresources for promoting development may not increase, or may increase by less than the amount ofdebt relief provided. Moreover, many analysts argue that there are foreign aid activities, such asadditional investments in the legal, financial, education, or public health systems that may have agreater impact on promoting economic growth and providing resources for poverty reductionactivities than debt relief. A second problem is determining whether the actual debt load is itself sobig as to impede growth and development. Advocates of debt relief argue that such a "debtoverhang" must be relieved if a country is to resume growth.
Debt Overhang: Theory. Most debt relief isgrounded in the "debt overhang" theory which holds that the accumulation of a large stock of debtwill frighten off potential lenders and investors. It originated in the 1980s and was based on thelargely positive economic growth that several heavily indebted countries experienced following a1989 debt relief initiative known as the "Brady Plan," named after then-U.S. Treasury SecretaryNicholas Brady. (13) Thetheory suggests that if investors expect a country's debt level to impair its ability to repay its loans,they will not invest out of a concern that the government may resort to distortionary measures, suchas expanding the money supply (which promotes inflation) or raising taxes on their profits to financedebt payments. (14) Evenif the debt is not being serviced, the theory suggests that it is still an impediment to economic growthbecause of the effect the large debt stock has dissuading private investors. 
When a large stock of external debt is present, creditor countries could continue to lend atconcessional rates in the hope that continued aid will spur economic growth and that the recipientcountry will one day be able to repay its debts. According to the debt overhang theory, however, itis better to forgive the debts, either entirely or to some reduced "sustainable" level so that investorconfidence will be restored. It is presumed that at a "sustainable" level debtor nations would be ableto make some debt payments to their creditors without sacrificing economic growth. 
Debt Overhang: Evidence. A 2002 study of 93developing countries between 1969 and 1998, and a follow-up study of 61 countries over the sametime period, were cited as strong support for the debt-overhang theory. The first study found thatexternal debt began to have a negative impact on growth when its net present value (15) exceeded 160% to 170%of exports and 35% to 40% of GDP. Study simulations suggest that doubling the average stock ofexternal debt in these countries would slow down annual per capita growth by Â½% to 1%. Thesecond study found that doubling a country's average external debt level would reduce growth ofboth per capita physical capital and productivity by almost 1%. The studies concluded that largedebt stocks negatively affect growth by slowing both the accumulation of physical capital andproductivity, often at the expense of investment. (16) 
Although the debt overhang theory may be true in general, several new studies have arguedthat it does not hold for HIPC countries. One study points to two key differences between the Bradyand HIPC countries. (17) In contrast to the Brady countries, there never was a significant amount of private investment in theHIPC countries, and the HIPC countries have never suffered a negative net flow of resources becauseinflows of foreign aid are typically more than sufficient to cover debt payments. (18) Moreover, debt relief thatthe HIPC countries have received has not been sufficient to allow them access to private sector creditmarkets. 
Thus, rather than a debt overhang, some argue that lack of institutional capacity (legal,political, educational, health, etc.) are the HIPCs' major impediments to economic growth, and thatin the absence of additional funds dedicated for debt relief, other forms of targeted assistance maybe more effective in boosting economic growth than debt relief. If the economies of countries grew,they argue, the debt would not be a problem. Instead of forgiving debts, creditor nations may be ableto help the poorest countries by helping to improve their domestic institutions, expand their exportsectors, and by providing greater market access for their goods. 
section_title: U.S. Bilateral Debt Relief
paragraphs: U.S. bilateral debt relief is accomplished two ways. One is through legislation enacted byCongress granting authority to the President to cancel country debt obligations. (19) The second is throughthe Paris Club. The Paris Club is the major forum where creditor countries renegotiate official sectordebts. By definition, 'Official sector' debts are those that have been either issued, insured, orguaranteed by creditor governments. A Paris Club 'treatment' refers to either a reduction and/orrenegotiation of a developing country's Paris Club debts. The Paris Club includes the United Statesand 18 other permanent members, the major international creditor governments. Besides the UnitedStates, the permanent membership is composed of Austria, Australia, Belgium, Canada, Denmark,Finland, France, Germany, Ireland, Italy, Japan, Netherlands, Norway, Russia, Spain, Sweden,Switzerland, and the United Kingdom. Other creditors are allowed to participate in negotiations onan ad-hoc basis. 
By contrast, a separate informal, voluntary group of private sector participants meets torenegotiate some of the developing country debt they are owed. The London Club, a parallel,informal group of private firms, meets in London to renegotiate commercial bank debt. Unlike theParis Club, there is no permanent London Club membership. At a debtor nations request, a LondonClub meeting of its creditors may be formed, and the Club is subsequently dissolved after arestructuring is in place. 
The Paris Club does not exist as a formal institution. It is rather a set of rules and principlesfor debt relief that have been agreed on by its members. Five 'principles' and four 'rules' currentlygovern Paris Club treatments. Any country that accepts the rules and principles may, in principle,become a member of the Paris Club. Yet since the Paris Club permanent members are the majorinternational creditor countries, they determine its practices. 
The five Paris Club 'principles' stipulate the general terms of all Paris Club treatments. Theyare: (1) Paris Club decisions are made on a case-by-case basis; (2) all decisions are reached by full consensus among creditor nations; (3) debt renegotiations are applied only for countries that clearlyneed debt relief, as evidenced by implementing an International Monetary Fund (IMF) program andits requisite economic policy conditionality ; (4) solidarity is required in that all creditors willimplement the terms agreed in the context of the renegotiations; and (5) the Paris Club preserves the comparability of treatment between different creditors. This means that a debtor country cannotgrant to another creditor a treatment on more favorable terms than the consensus reached for ParisClub members. (20) 
While Paris Club 'principles' are general in nature, its 'rules' specify the technical details ofParis Club treatments. The 'rules' detail (1) the types of debt covered -- Paris Club arrangementscover only medium and long-term public sector debt and credits issued prior to a specified"cut-off"date; (2) the flow and stock treatment; (21) (3) the payment terms resulting from Paris Club agreements; and(4) provisions for debt swaps. (22) 
Since the Paris Club is an informal institution, the outcome of a Paris Club meeting is nota legal agreement between the debtor and the individual creditor countries. Creditor countries thatparticipate in the negotiation sign a so-called 'Agreed Minute.' The Agreed Minute recommends thatcreditor nations collectively sign bilateral agreements with the debtor nation, giving effect to themultilateral Paris Club agreement.
Prior to U.S. involvement, Paris Club members began providing outright debt cancellationin 1988. Previously, debt treatments involved rescheduling of debts on increasingly concessionalterms. At the 1988 Toronto meeting of G7 finance ministers, it was agreed that Paris Club memberswould extend to some countries up to one-third forgiveness of their bilateral debts. (23) 
Over the next decade, the Paris Club gradually increased the amount of debt that it would bewilling to write off from 33.33% in 1988 to 90% in 1999. (24) There are currently two Paris Club debt cancellation options,"Naples" terms for non-HIPC IDA countries and "Cologne" terms for HIPC countries (see box). These terms are named after the cities where they were negotiated by G7 countries.
The United States joined Paris Club debt forgiveness negotiations in 1994, under authoritygranted by Congress in 1993 (Foreign Operations Appropriations, section 570, P.L. 103-87 ). Annually re-enacted since 1993, this authority allows the Administration to cancel various loansmade by the United States. These may include U.S. Agency for International Development (USAID)loans, military aid loans, Export-Import Bank loans and guarantees, and agricultural creditsguaranteed by the Commodity Credit Corporation. 
Between 1990 and 2005, the United States forgave $23.1 billion in foreign debt owed to theUnited States, only a small part of which -- $3.14 billion -- was reduced via the Paris Club. (25) Debt has also beenreduced through various legislative measures and congressionally authorized U.S. bilateralnegotiations. These include (Appendix 2 provides U.S. bilateral debt relief data): 
Section 411 Debt Relief. Under Section 411 of the Agricultural TradeDevelopment and Assistance Act of 1954 (PL 83-480; 7 USC sec. 1736e), Congress authorized thePresident to cancel concessional food aid loans to poor and indebted countries under an IMF orWorld Bank economic program.
Section 572 Debt Relief. Under Section 572 of the Foreign Operations,Export Financing, and Related Appropriations Act for Fiscal Year 1989 ( P.L. 100-461 , 22 USC2151), the U.S. President was authorized to forgive debt during fiscal years 1990 and 1991 fromconcessional development assistance loans to African and other poor and indebted countries thatmaintained an economic reform program with the IMF or the World Bank.
Enterprise for the Americas Initiative (EAI). The Enterprise for theAmericas (EAI) Initiative supports trade, investment and economic growth in Latin America and theCarribean. Debt reduction legislation in support of the EAI Initiative was enacted in 1990 to forgiveU.S. food aid loans for EAI countries that did not meet the necessary criteria for Section 411 debtrelief ( P.L. 102-549 , Enterprise of the Americas Act of 1992, which added part IV to the ForeignAssistance Act of 1961; 22 USC 2430 et seq.) and in 1992 for USAID and Export-Import Bank debt( P.L. 102-429 , Export Enhancement Act of 1992, which added Section 12 to the Export-Import BankAct of 1945; 12 USC 635-6).
Conservation of Tropical Forests. The Tropical Forest Conservation Actof 1998 (TFCA) ( P.L. 105-214 , which added part V to the Foreign Assistance Act of 1961; 22 USC2431 et seq.) authorizes the President to request debt relief for low and middle-income countries withtropical forests to support conservation of endangered forests. (26)
Debt Swaps under the SEED Act. The Support for East EuropeanDemocracy (SEED) Act of 1989 ( P.L. 101-170 , USC 5401 et seq.) authorized debt relief to supportEastern European countries as they progressed towards democracies with free-marketeconomies.
Special Debt Reduction Programs. The U.S. government has reduced thedebts of Egypt, Poland, Jordan, and Pakistan for various national security reasons. Each of thesedebt relief activities was provided pursuant to special legislation.
section_title: Multilateral Debt Relief: The Heavily Indebted Poor Countries Program
paragraphs: For much of their history, the international financial institutions (IFIs) argued that since theywere lenders of last resort, providing assistance to poor countries that could not borrow money fromthe global financial markets, they required preferred creditor status. This means that the World Bankand the IMF would be paid first in the event that borrowers ran into financial difficulties, and thatdebts owed to them would not be reduced under any circumstances. Forgiving their debts, theyargued, would diminish their resources available for other poor and developing countries and set abad example for other indebted countries as they undertook often painful, albeit economicallycrucial, reforms. This is the so-called "moral hazard" problem with debt relief. Some creditors arguethat by providing debt relief, they are creating a "moral hazard" by convincing borrowers that theyneed not worry about repayment.
Despite initial reservations, and at the G8's request, the World Bank and the IMF created theHIPC debt relief program in 1996 to reduce some multilateral debt in conjunction with bilateral debtforgiveness. According to the IMF and the World Bank, the goal of the HIPC program would be tohelp the poorest and most indebted countries meet their "current and future external debt serviceobligations in full, without recourse to debt rescheduling or the accumulation of arrears, and withoutcompromising growth." (27) 
In 1999, the program was expanded to provide deeper, faster, and broader debt relief. Initially, the HIPC program determined that a debt service-to-exports ratio (28) of 250% was determinedto be sustainable. Moreover, it took a minimum of six years for borrowers to qualify for debt relief. Critics charged that this ratio was too high and the time-frame too long. When the program wasredesigned in 1999, the debt service-to-exports ratio was reduced to 150%, and the time period wasshortened. The HIPC program was also modified to include a greater focus on poverty reductionefforts. Countries receiving debt relief were now be required to use money freed up by debt relieffor poverty reduction as specified in a Poverty Reduction Strategy Paper (PRSP) approved by itslenders.
subsections: section_title: Eligibility
paragraphs: There are three criteria for HIPC eligibility. A country must: 
Be a low-income country eligible to borrow only from the World Bank'sconcessional facility, the International Development Association. (29)
Have a strong record of policy performance, evidenced by a strong track recordof economic reforms under World Bank and IMF-sponsored programs; and 
Possess a debt burden that is unsustainable (greater than 150% debtservice-to-exports ratio) after bilateral debt relief has been applied.
In 1996, at the start of the program, the World Bank and the IMF designated 41 countries aspotentially HIPC-eligible. Comoros was added in 2001. Of these 42 countries, Angola, Kenya,Vietnam, and Yemen were later removed after additional IMF/World Bank debt analysis determinedthat they could reach debt sustainability through bilateral debt relief.
Many critics argue that the four excluded countries, as well as many others, should be eligiblefor relief. They maintain that the debt sustainability analysis used to determine HIPC eligibilityrelied on overly optimistic assumptions with respect to GDP and export rates in deciding countryeligibility. An official review of the HIPC program in 2003 concurred with this assessment andcalled for more realistic economic projections in determining HIPC eligibility. (30) It has also been assertedthat the eligibility criteria were based on political and cost factors, rather the actual amount of debtrelief a country may need to be able to successfully pay off a given level of debt. (31) 
section_title: HIPC Stages
paragraphs: HIPC debt relief is divided into two stages: decision point and completion point. Pre-decision point HIPC countries do not receive any debt relief. 
Decision Point. In order to reach the decisionpoint, a country must establish a three-year track record of good economic performance underexisting IMF and World Bank lending arrangements. During the three-year period, the debtorcountry receives debt reduction from Paris Club official creditors on Naples Terms (67% net presentvalue reduction). Other bilateral and commercial creditors are expected by Paris Club members tooffer at least similar treatment. At the decision point, staffs of the World Bank and IMF carry outa debt sustainability analysis to determine whether bilateral Paris Club debt reduction (at NaplesTerms) is sufficient for the country to reach the 150% target ratio. If it is not, the IMF and Worlddetermine how much multilateral debt relief is required and the country enters the second phase ofdebt relief. 
Completion Point. If a country enters the secondstage, it must establish a further track record of good economic policies and implement its povertyreduction strategy. During the period between the decision point and the completion point, a debtorcountry receives bilateral debt rescheduling under Cologne Terms (90% to 100% debt relief) andinterim assistance is provided by the multilateral creditors. Once the World Bank and IMFdetermine that a country has reached the completion point, it receives full and irrevocable debt reliefof the amount determined at the decision point. Table 2 summarizes the HIPC program.
 Table 2. Summary of the HIPC Program
section_title: Financing HIPC Debt Relief
paragraphs: HIPC Trust Fund. The World Bank provides itsdebt relief through the IDA-administered HIPC trust fund. The trust fund has two components. Thefirst is for funds provided to reimburse IDA for HIPC debt relief. The second uses contributionsfrom donors to support HIPC debt relief provided by eligible regional multilateral creditors. Individual nations, including the United States, have also made pledges and contributed to the fund. As of the end of February 2005, bilateral contributions to the HIPC trust fund totaled $2.97billion. (32) 
The United States initially pledged $600 million to the HIPC trust fund. This pledge wasfulfilled with contributions in FY2001 and FY2002. In 2002, the Bush administration pledged anadditional $150 million for the HIPC trust fund to fund remaining costs. In FY2004, Congressappropriated $74.6 million for the HIPC trust fund. A funding gap of $75.6 million remains. Otherlarge contributors to the trust fund include the United Kingdom ($261 million), Germany ($232million), Japan ($219 million), France ($187 million), and the Netherlands ($174 million).
IMF Gold. The IMF initially funded its share ofHIPC debt relief through an interim arrangement that drew on the resources of the IMF's EnhancedStructural Adjustment Facility (ESAF), the predecessor to the IMF's current concessional lendingfacility, the Poverty Reduction and Growth Facility (PRGF). In order to create a permanent facilityto finance the IMF's HIPC participation, the IMF and several major contributors designed a plan inthe late 1990s to sell some IMF gold reserves. When the IMF was originally created, membernations were required to contribute a percentage of their quota in gold. (33) Although, the internationalfinancial system is no longer based on a gold standard, the IMF continues to hold this gold in itsreserves and values it at around $48 an ounce, significantly less than the current market price of $438per ounce. (34) The IMFcurrently holds 103.4 million ounces of gold that are valued on its balance sheet at about $9 billion. At current market prices the IMF's holdings amounts to around $45.3 billion.
Fearing disruption of the international gold market, the Clinton Administration and severalmembers of Congress strongly objected to any plans to sell IMF gold. (35) A compromise wasreached at the September 1999 IMF annual meetings authorizing off-market transactions in gold ofup to 14 million ounces to help finance IMF participation in the HIPC program. Between December1999 and April 2000, transactions involving a total of 12.9 million ounces of gold were carried outbetween the IMF and two members, Brazil and Mexico, that had financial obligations to the IMF. Gold was sold to Brazil and Mexico at the then-market price and profits were placed in a special IMFHIPC account. At the same time, the IMF accepted back the gold sold to Brazil and Mexico insettlement of their financial obligations to the Bank. The balance of the IMF's holdings of physicalgold remained unchanged although its usable resources shrank. (36) 
section_title: Current Status of HIPC
paragraphs: To date, 18 of the 38 HIPC-eligible countries have completed the HIPC program, elevencountries have reached their decision point, and nine are in pre-decision point status ( Table 3 ). (37) 
 Table 3. HIPC Countries and Their Status
Source: International Monetary Fund and World Bank.
Appendix 3 displays debt statistics for all HIPC countries. Countries with major debtobligations to the United States are: the Democratic Republic of Congo ($1.66 billion), Sudan($1.65 billion), Somalia ($592.7 million), Cote d'Ivoire ($327.7 million), and Liberia ($363.3million).
section_title: The 2005 G8 Proposal for 100% HIPC Debt Forgiveness
paragraphs: According to a 2004 IMF study, significant additional donor support and structural reformsare necessary for HIPC countries to reach debt sustainability. The study found that HIPC completionpoint countries had more robust economic policies and institutional frameworks than other HIPCcountries but they still fared poorly when compared to other developing countries. In addition theirdebt management capacity remained weak. (38) Many argue that these countries need additional donor supportfor other reasons as well, in areas such infrastructure, education, and AIDS prevention. Other similarresearch, as well as NGO pressure, led in 2004 to active discussions proposing 100% multilateraldebt relief for HIPCs and other poor indebted countries.
Discussion of 100% debt relief began in earnest among the G8 nations at the February 5,2005 finance ministers meeting in London. At the meeting, ministers announced their "willingnessto provide as much as 100% multilateral debt relief." (39) Moreover, ministers intended to work with the AfricanDevelopment Bank and the World Bank "to bring forward proposals ... to achieve this [additionaldebt relief] without reducing the resources available to the poorest countries through theseinstitutions." (40) 
Central to the multilateral debt cancellation debate was whether to compensate theinternational financial institutions for the amount of debt they would write off. U.S. officials hadreportedly argued that the cost of multilateral debt relief could be borne by the institutionsthemselves without compromising new assistance. The World Bank's IBRD resources haveincreased steadily over the past several years, and many argued that some of this money could bediverted to provide IDA debt relief without harming the bank's financial situation. (41) Other creditors, includingGreat Britain, believed the institutions should be compensated for their debt forgiveness so as notto possibly weaken the credit standing of the World Bank and force it to raise borrowing rates toIBRD borrowers. (42) 
On July 11, 2005, G8 finance ministers compromised on a plan to cancel all remaining HIPCmultilateral debt. (43) Thecompromise was that the multilateral development banks would receive new money from creditornations to offset their debt reductions and the IMF would absorb the cost of debt relief using internalresources, principally the remaining proceeds of the 1999 off-market gold transactions with Braziland Mexico. New gold sales had been proposed during the 2005 discussion but, like earlierproposals, were strongly opposed by the gold industry, the Bush Administration, and many Membersof Congress. (44) 
According to British Chancellor of the Exchequer, [author name scrubbed], "We are presenting themost comprehensive statement that finance ministers have ever made on the issues of debt,development, health and poverty." He further added that the agreement represents a "new dealbetween the rich and poor of the world." (45) U.S. Treasury Secretary John Snow called the agreement "anachievement of historic proportions." (46) 
According to officials at the meeting, the cost of forgiving this debt will be $16.7 billion --the net present value of payments that the IFIs would have received from the HIPCs between nowand 2015. Of this, the United States reportedly agreed to pay up to $1.75 billion over the next tenyears in compensation to the development banks over the next ten years to fund the debt relief. (47) According to British andGerman officials, Britain will pay $700 million to $960 million, and Germany will pay $848 millionto $1.2 billion to offset future lost repayments to the World Bank and the African DevelopmentBank. (48) 
Reaction from poor countries not included in the debt deal was critical. Many have longargued that debt relief benefits countries that have poor economic performance and that are lesswilling to service their debts than other developing countries. Some countries, such as Kenya, areineligible for debt relief, yet suffer from many of the same economic constraints as many HIPCcountries and are servicing their debts. "Those faithful in servicing their debt like Kenya are beingignored while HIPCs who have failed to service the debt are getting more attention. This is not goodfor Africa," asserted Kenyan Planning and National Development Minister Peter AnyangNyongo. (49) 
Both IMF Managing Director Rodrigo Rato and World Bank President Paul Wolfowitzcautiously welcomed the proposal but stressed the importance of providing debt relief withoutdiverting resources from other developing countries. According to Mr. Rato, although InternationalMonetary Fund member countries are committed to canceling debts of the world's poorest nations,debt relief should be carefully designed and implemented. He stressed that there is a "clearconsensus" among IMF directors that writing off the debt should not affect the fund's ability tocontinue to lend to poor countries. (50) Mr. Wolfowitz has also voiced support for the proposal. (51) However, several WorldBank concerns with the proposal were reported in the press. These will be discussed below.
subsections: section_title: Key Details of the Agreement
paragraphs: If fully implemented, the agreement would result in immediate 100% cancellation of theremaining debts of 18 countries that have reached HIPC completion point ($40 billion) from theInternational Monetary Fund, the World Bank, and the African Development Bank, and totalcancellation of $55.6 million if all HIPC-eligible countries complete the program. Decision pointand pre-decision point countries would be eligible for 100% debt cancellation upon their completionof the HIPC program. Key features of the agreement are: 
World Bank and AfDB debt cancelled under the proposal will be deductedfrom gross country allocations and redistributed among all available countries. 
The amount of the redistributed assistance that the 18 completion pointcountries receive will depend on how they compare with other World Bank or AfDB countries. Thatthey meet the economic targets to reach completion point should serve as assurance that they willreceive some portion of the redistributed assistance under the proposal. 
The World Bank and the AfDB would receive additional contributions to offset"dollar for dollar" the principal and interest payments of forgiven debts. Additional funds would bemade available immediately to cover the full costs during the next three years , covering currentreplenishment periods. (52) 
For the period after this, donors commit to cover the full costs for the durationof the cancelled loans by making additional contributions to the World Bank and the AfricanDevelopment Bank over the next 10 years.
The Bush Administration has not requested any new funds to cover debt relief during IDA-14or AfDF-10. Reportedly, the intention is to finance the U.S. share of IDA and AfDF debt relief byearly encashment of regular U.S. appropriated contributions. (53) Early encashment is theimmediate disbursement of appropriated funds that are normally disbursed over a given period oftime. This means that either more contributions will be asked for later to replace funds used by earlyencashment or IDA aid will shrink in the future unless higher contribution levels are appropriated. Donors also committed to finance debt relief for any new countries that enter the HIPC program,either among the nine countries that have not yet reached the decision point, or any new countriesthat the program accepts. 
section_title: Potential Concerns
paragraphs: Since the proposal was released, several critiques of it have been published by various debtrelief-related NGOs. (54) Four potential areas of concern are: 
No Net Resource Gain. The proposed agreementspecifies that HIPC countries that receive debt reduction will have their gross assistance flowsreduced by the amount of debt forgiven. Many would prefer that any debt relief be additional tocurrent assistance. This is based on the belief, which is supported by some, that according to recentresearch, one-for-one changes in debt service payments and official aid flows have no net effect oneconomic growth. In this view, any potential economic growth due to the increased resourcesprovided by debt relief may be negated by a decrease in total net assistance. (55) 
Limited Debt Cancellation. As proposed, theagreement only covers one regional development bank, the African Development Bank. Althoughthe majority of HIPC countries are African, several are not, and many owe debt to the other regionalbanks, such as the Inter-American Development Bank or the Asian Development Bank. There arealso many smaller sub-regional development banks to which the HIPCs are indebted.
Multilateral Development Bank Compensation is NotGuaranteed. The proposed agreement to compensate the IFIs only covers the nextthree years, through the completion of the most recent replenishments of the World Bank and theAfrican Development Bank's concessional lending facilities. Future assistance to the developmentbanks, compensating them for their debt relief, is not assured. The agreement states that "donors willcommit to cover the full costs for the duration of the cancelled loans, by making contributionsadditional to regular replenishments" (emphasis added). However, there is no regular replenishmentamount for either institution. Every three years, donor nations meet and decide how much to fundthe institutions' concessional lending facilities. Since there is no baseline level of assistance, it maybe impossible to know if the funds for debt relief are additional to the amount of funding that themultilateral development banks would normally receive. 
The World Bank has expressed two additional concerns over the proposed debt relief terms.These are contained in an internal World Bank presentation that was leaked to the press. (56) First, although the WorldBank will write off the debt owed it immediately, promised donor contributions to cover the cost ofthis debt relief will be spread out over the next decade. Since the agreement includes no bindingfuture commitment to cover donor contributions during this period, the World Bank is concernedthat donor countries may not be committed to compensating the World Bank for all of the debtpayments it would have received from the debt relief recipients. Second, many concessional loansfrom the development banks have terms lasting up to forty years but the proposal only specifiesrepayment of lost debt payments for ten years. Theoretically, the Bank would lose 30 years' worthof repayments under the proposal. 
In response, the World Bank has suggested donor countries either make legal commitmentsnow for the extra money needed to finance the debt relief or allow creditor countries to receive debtrelief over time by relieving payments as they come due rather than wiping out the entire stock ofdebt immediately. This would have the same effect on net flows to debt relief recipients without theWorld Bank assuming a potentially unfunded liability by cancelling all debts owed to it immediately. For the United States, making a legal commitment to finance additional debt relief would requirecongressional action.
Future Cost May Rise. Depending on whichcountries are added, the cost of HIPC may increase. When the HIPC program was designed in 1996,a two-year sunset clause was included to limit the countries eligible for debt relief to those that havereached decision point as well as to prevent HIPC from becoming a permanent facility. Since then,the sunset clause has been repeatedly extended. In September 2004, the World Bank and IMFBoards agreed again to extend the sunset clause by two years, through 2006. (57) The Boards also extendedthe sunset clause to IDA-only and PRGF-eligible countries that have not yet benefitted from HIPCrelief. 
In April 2006, the World Bank released a list of eleven countries that currently meet theHIPC income and indebtedness criteria and may wish to be considered for HIPC debt relief. The listincludes seven countries previously identified as HIPCs (Central African Republic, Comoros, Coted'Ivoire, Liberia, Somalia, Sudan, and Togo) and four new countries (Eritrea, Haiti, the KyrgyzRepublic, and Nepal). Three additional countries, Bhutan, Lao PDR, and Sri Lanka, also meet theHIPC criteria but do not wish to partake in the initiative. If HIPC debt relief is provided to all elevencountries, the total cost is estimated at $21 billion, broken up among various creditors. The cost tobilateral Paris creditors is estimated at $10.2 billion, while the cost to the IMF and the World Bankwould be $2.4 billion and $2.9 billion respectively. (58) 
Several analysts have proposed extending the HIPC program to countries eligible for grantassistance from the World Bank. In November 2004, the World Bank created a framework to assessthe level of debt burden necessary to qualify for 100 % grant assistance instead of loans. (59) Under the new "debtdistress" framework, 47 countries are projected to receive grant financing, 42 of which will receive100% of their IDA assistance in grants. The 47 countries eligible for grant assistance include 29HIPC and 18 non-HIPC countries. According to one analyst, the debt burden of these 18 countriesis comparable to those receiving HIPC assistance and they may be worthy of receiving debt reliefunder HIPC. This would mean an 18-country increase in the size of the HIPC program, and increasethe amount of debt relief provided by an additional $31.8 billion in nominal debt relief. ( Appendix4 provides debt information for the 18 additional countries.)
section_title: Proposed Legislation
paragraphs: Several Members of Congress have introduced legislation in the 109th Congress that wouldextend debt relief to a larger group of countries than is already covered by HIPC.
Multilateral Debt Relief Act of 2005. Introducedby Senator Mike DeWine on June 28, 2005, the Multilateral Debt Relief Act of 2005 ( S. 1320 ) would authorize the necessary funding to implement the June 2005 G8 debt relief andauthorize the Secretary of the Treasury to instruct the U.S. Executive Director of each internationalfinancial institution to use the voice and vote of the United States to reach an agreement among theother shareholder nations to permanently cancel 100% of the debts owed to each institution by allHIPC countries.
The proposed legislation also expresses the sense of Congress to expand the list of countrieseligible for debt relief. If enacted, the act would request that the Secretary of the Treasury pursueadditional bilateral and multilateral debt relief (including the Inter-American Development Bank)for each of the 47 countries that are eligible for World Bank grant assistance.
Jubilee Act of 2005. Introduced byRepresentative Maxine Walters on March 3, 2005, the Jubilee Act of 2005, is a much broader pieceof legislation, with higher costs. If enacted, H.R. 1130 would amend the InternationalFinancial Institutions Act to require the Secretary of the Treasury to commence immediate efforts,within the Paris Club, the International Monetary Fund, the World Bank, and other internationalfinancial institutions to:
Cancel all debts owed to each institution by 50 eligible poor countries whilelimiting any waiting period before receipt of debt cancellation to one month from the date of aneligible poor country's application for it. If implemented, this immediate debt cancellation wouldinhibit the World Bank and the IMF from seeking economic reforms from creditor countries inexchange for the given debt relief.
Encourage the government of each eligible poor country to allocate at least20% of its national budget, including the savings from such debt cancellation, for the provision ofbasic public health care, education, and clean water to its citizens.
Unrelated to debt relief, the Jubilee Act of 2005 would also set forth requirements forestablishing a framework to improve transparency regarding each international financial institution'sactivities; and require the availability on the Treasury Department's website of all U.S. ExecutiveDirectors' remarks at Bank or Fund meetings.
section_title: Appendix 1: World Bank Debt and Poverty Ratings
paragraphs: Indebtedness is measured by the World Bank primarily using two debt service ratios: theratio of the present value of total debt service to gross national income (PVGNI) and the ratio of thepresent value of total debt service to exports of goods and service (PV/XGS). According to theBank, these ratios reflect two of most important aspect of a country's ability to service its debts:gross national income, since this is the broadest measure of a country's total income, and exports,since these are the revenue generating mechanism for debt service (exports provide foreign reserveswhich are needed to service debt). 
If any of the 136 countries that the World Bank collects debt data on exceeds a critical value: 80% for the debt service to GNI ratio, or 220% for the debt service to exports ratio, the country isclassified as severely indebted. A country is classified as moderately indebted if both of its debtratios are three-fifths or more of the critical value (48% for the debt service to GNI ratio and 132%for the debt service to exports ratio) and less indebted if its debt ratios are below the three-fifthsthresholds. 
The World Bank also breaks out countries based on their level of income. Countries areclassified as low income if their 2003 GNI per capita is $765 or less. Middle income countries area much larger grouping including countries with GNI per capita between $766 and $9,385. Bycombining these two sets of indicators, the poorest and most indebted countries can be identified.
 Table 4. World Bank Debt Categories
Source: World Bank, 2005 Global Development Finance.
 Table 5. World Bank Debt Ratings
(HIPC countries are highlighted)
Source: World Bank, 2005 Global Development Finance.
section_title: Appendix 2: U.S. Debt Reduction Agreements FY1990-FY2004
paragraphs: (in U.S. $ millions)
Source: The Department of the Treasury and the Office of Management and Budget, U.S. Government Foreign Credit Exposure As of December 31,2004.
section_title: Appendix 3: HIPC External Debt Profile
paragraphs: (2003, in U.S. $ millions)
Source: World Bank, 2005 Global Development Finance.
section_title: Appendix 4: Non-HIPC Countries Eligible for 100% World Bank Grant Assistance
paragraphs: (2003, in U.S. $ millions)
Source: World Bank, 2005 Global Development Finance.