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. 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) 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.