The World Bank and IMF have classified 42 countries as heavily indebted and poor; three quarters of these are in subSaharan Africa. In 1996, creditors agreed to create the HIPC Initiative to address concerns that some poor countries would have debt burdens greater than their ability to pay, despite debt relief from bilateral creditors. In 1999, in response to concerns about the continuing vulnerability of these countries, the World Bank and the IMF agreed to enhance the HIPC Initiative by more than doubling the estimated amount of debt relief and increasing the number of potentially eligible countries. A major goal of the HIPC Initiative is to provide recipient countries with a permanent exit from unsustainable debt burdens. Under the enhanced HIPC Initiative, countries seeking debt relief must first carry out economic and social reforms under specified programs. At a country’s decision point, the World Bank and the IMF assess the country’s eligibility to receive debt relief under the initiative. At the completion point, the World Bank and the IMF assess whether the country has continued to implement sound economic policies and is eligible to receive full debt relief. To determine the amount of assistance that is required for each country to achieve debt sustainability, the World Bank and the IMF prepare detailed economic analyses called debt sustainability analyses (DSA), which include economic projections covering 20 years. To date, 27 poor countries have reached their decision points, and 10 of these have reached completion points. (See app. II for the status of each country.) In 1996, to help multilateral creditors meet the cost of the HIPC Initiative, the World Bank established a HIPC Trust Fund with contributions from member governments and some multilateral creditors. The HIPC Trust Fund has received about $3.4 billion (nominal) in bilateral pledges and contributions, including $750 million in pledges from the U.S. government. The United States has already paid $600 million of this total. The World Bank, AfDB, and IaDB face a combined financing shortfall of $7.8 billion in present value terms under the existing HIPC Initiative. (See table 1.) The World Bank’s share of the shortfall is $6 billion, which it will begin addressing in spring 2004. The AfDB needs to secure at least $1.2 billion in additional funding. The IaDB expects to finance its $600 million shortfall by reducing future lending to poor countries. Bilateral donors may be asked to contribute additional funds under the existing initiative; the United States may be called on to contribute an additional $1.8 billion. However, the total projected funding gap of $7.8 billion is understated because the World Bank estimate does not include the costs for four countries that are eligible for debt relief but for which data are unreliable. In addition, the estimates of all three banks do not account for any additional relief that may be provided to countries because their economies deteriorated since they qualified for debt relief. Financing the enhanced HIPC Initiative remains a major challenge for the World Bank. The total cost of the enhanced HIPC Initiative to the World Bank for 34 countries is estimated at $9.5 billion. About $8.8 billion of this debt relief cost is for the highly concessional loans made by IDA, which provides financing to the World Bank’s poorest member countries. The remaining $700 million in debt relief is for loans made by the International Bank for Reconstruction and Development (IBRD), which provides market-based loans to the World Bank’s middle-income member countries. As of June 30, 2003, the World Bank had identified $3.5 billion in financing, resulting in a gap of about $6 billion. (See table 1.) To cover this gap, we estimate that IDA’s financing needs beginning in 2006 for 34 HIPCs will be about $584 million on average per year through 2020. In 2002, donor countries agreed to review the financing gap during the IDA- 14 replenishment discussions beginning in spring 2004. If donor countries close the financing gap through future replenishments, we estimate that the U.S. government could be asked to contribute $1.2 billion, which is based on its historical replenishment rate of 20 percent to IDA. Over 70 percent of the funds IDA has identified thus far come from transfers of IBRD’s net income to IDA. Although IBRD has not committed any of its net income for HIPC debt relief beyond 2005, we estimate that the financing gap of $6 billion could be reduced to about $3.5 billion, or by about 42 percent, if the net income transfers from the IBRD continue. Similarly, the U.S.’s potential share decreases by the same percentage, from $1.2 billion to about $700 million. However, transferring more of IBRD’s net income to HIPC debt relief could come at the expense of other IBRD priorities. For example, a portion of its net income is retained annually to ensure IBRD’s financial integrity. IBRD has also provided substantial resources to IDA for its new lending, representing about 24 percent of its net income over the last 5 years. Moreover, countries that borrow from IBRD have also benefited because this net income provides partial waivers of the interest and commitment fees IBRD charges on its loans. The total cost of debt relief to the AfDB for its 32 member countries is estimated at about $3.5 billion (see table 1). As of September 2003, the AfDB has identified financing of approximately $2.3 billion, including $2 billion from the HIPC Trust Fund and about $300 million from its own resources. Thus, AfDB is faced with a financing shortfall of about $1.2 billion in present value terms. Taking into account the total funds the AfDB has identified thus far from the HIPC Trust Fund, its internal resources, and its annual cash flow projections, AfDB estimates that it would have sufficient funds to cover its share of HIPC commitment to its 23 current decision and completion point countries up to 2007. We estimate that AfDB will need about $400 million to cover its shortfall for its 23 eligible countries, as well as about $800 million for its 9 potentially eligible countries. We estimate that the U.S. share of the AfDB’s financing shortfall is between $132 and $348 million, depending on the method used to close the $1.2 billion shortfall. First, assuming that the United States contributes at its historical replenishment rate of 11 percent, we estimate the U.S. share of AfDB’s financing shortfall could be at least $132 million. However, as of October 2002, the United States had contributed or pledged approximately 29 percent of the bilateral donors’ resources committed to the HIPC Trust Fund. Under that contribution rate, the U.S. share of the AfDB’s financing shortfall would be about $348 million. The IaDB expects to provide about $1.4 billion for HIPC debt relief to four countries—Bolivia, Guyana, Honduras, and Nicaragua. Most of the relief is for debt owed to the FSO, the concessional lending arm of the IaDB that provides financing to the bank’s poorer members. As of January 2004, the IaDB has identified financing for the full $1.4 billion, about $200 million from donor contributions through the HIPC Trust Fund and $1.2 billion through its own resources. Although the IaDB is able to cover its full participation in the HIPC Initiative, the institution faces about a $600 million reduction in lending resources in its FSO lending program for the years 2009 through 2019 as a direct consequence of providing HIPC debt relief. According to IaDB officials, the FSO will not have enough money to lend for the years 2009 through 2013. To eliminate this shortfall, donor countries may be asked to provide the necessary funds through a future replenishment contribution. Assuming that donor countries agree to close the financing gap, we estimate that the U.S. government could be asked to contribute about $300 million so that the FSO can continue lending to poor countries after 2008. This estimate is based on the 50-percent rate at which the U.S. historically contributes to the FSO. The $7.8 billion shortfall for the three MDBs is understated for two reasons. First, data for four eligible countries are unreliable. Second, the financing shortfall does not include any additional relief that may be provided to countries because their economies deteriorated since they originally qualified for debt relief. The World Bank and IMF estimate that this additional relief could range from $877 million to $2.3 billion. The estimated financing shortfall for two institutions—IDA and the AfDB— is understated because the data for four likely recipient countries—Laos, Liberia, Somalia, and Sudan—are unreliable. The World Bank considers existing estimates of the countries’ total debt and outstanding arrears to be incomplete, subject to significant change, and it is uncertain when the countries will reach their decision points. Similarly, the estimated costs of debt relief for three of AfDB’s countries—Liberia, Somalia, and Sudan—are likely understated due to data reliability concerns. Under the enhanced HIPC Initiative, creditors and donors could provide countries with additional debt relief above the amounts agreed to at their decision points, referred to as “topping up.” This relief could be provided when external factors, such as movements in currency exchange rates or declines in commodity prices, cause countries’ economies to deteriorate, thereby affecting their ability to achieve debt sustainability. The World Bank and IMF project that seven to nine countries may be eligible for additional debt relief. Our estimate of the likely funding shortfalls confronting the MDBs, discussed above, does not account for this potential additional debt relief.