*EPF202 11/07/00
Fact Sheet: State Department on HIPC Debt Relief Initiative
(U.S. provides $435 million for debt relief program) (1730)

The following fact sheet on the Heavily Indebted Poor Countries (HIPC) initiative was released November 7, 2000, by the U.S. Department of State.

(Note: In the text, "billion" equals 1,000 million.)

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HIPC Questions and Answers:

QUESTION: The United States will provide $435 million as its contribution to the enhanced Heavily Indebted Poor Countries initiative or HIPC. What is HIPC?

ANSWER: The HIPC initiative is a multilateral effort by creditors to provide substantial debt relief to poor, heavily indebted countries that have committed themselves to economic reform and agreed to channel the savings from debt relief into anti-poverty programs. The enhanced HIPC initiative, launched by the Group of Seven (G-7) major industrialized countries in June 1999, triples the amount of debt relief available to poor countries, and could reduce their debt by about 70 percent or $90 billion -- from an estimated $127 billion to as low as $37 billion. Last September, building on what the G-7 had agreed on, President Clinton announced that the United States would unilaterally exceed the terms of the G-7 initiative and entirely cancel the $5.7 billion in debt owed by qualifying countries to the United States. The $435 million approved by Congress will enable the United States to implement its commitments to support the enhanced HIPC initiative and to cancel bilateral debts.

Q: How will the $435 million be used? Will some of it be used for the HIPC program and some for debts the HIPC countries owe directly to the United States?

A: All of the money will be used to finance debt reduction under the HIPC initiative. The United States will use approximately $360 million to make a contribution to the HIPC Trust Fund, which helps finance the regional development banks' share of HIPC debt forgiveness. The remainder will finance forgiveness of the loans that eligible HIPC countries owe directly to U.S. government departments and agencies, including the Export-Import Bank, the U.S. Agency for International Development, the Department of Defense, and the Department of Agriculture (including the Commodity Credit Corporation and the PL-480 food program). The bilateral debt will be forgiven in the context of a broader HIPC plan. Essentially what happens is that as the beneficiary country meets the eligibility requirements, international creditors provide debt forgiveness (initially interim relief on debt payments, later debt stock forgiveness). The debtor country uses the savings to finance domestic poverty reduction programs.

Q: How will the funds that are provided to the HIPC Trust Fund be used?

A: HIPC is unique in that, for the first time, debt relief is being provided by the international financial institutions as well as by individual governments. The International Monetary Fund (IMF) and World Bank are able to finance most of their share of debt relief out of their own resources but the regional development banks -- notably the African Development Bank and the Inter-American Development Bank -- cannot. The HIPC Trust Fund, administered by the World Bank, helps to finance the regional development banks' share of HIPC debt forgiveness. The U.S. contribution, along with those from other creditor governments, will enable the regional development banks to participate in the HIPC program and provide their share of debt relief.

Q: How will the funds for bilateral debt forgiveness be used?

A: When a country is deemed eligible for HIPC debt relief, the United States will forgive up to 100 percent of upcoming payments (interim relief), followed at the completion point by forgiveness of up to 100 percent of the country's stock of debt owed to the United States. The appropriations for debt relief will be used to cover the cost of debt forgiveness.

Q: Can you explain the condition contained in the foreign aid appropriations legislation that prohibits HIPC beneficiary countries from taking on market-rate debt for two years after they receive HIPC relief?

A: The legislation requires that countries receiving HIPC debt reduction that is financed in part by a U.S. contribution to the HIPC Trust Fund make commitments that they will not accept any market-rate loans for 24 months from the regional development bank that made the loans being forgiven through HIPC. There is an exception allowed for loans to export-oriented commercial projects that generate foreign exchange, generally referred to as "enclave" projects. The legislative requirement will not affect concessional lending from the international financial institutions, or bilateral lending.

Q: Can you elaborate on Secretary of the Treasury Lawrence Summers' proposal that the World Bank affiliate, the International Development Association (IDA), expand the use of grant financing to HIPC beneficiary countries?

A: The World Bank already provides grant funding on a selective basis. IDA principally lends to the poorest countries at highly concessional terms, but it also provides some grant funding to provide debt relief as part of the Bank's participation in HIPC and to help jump-start development in post-conflict situations. The Bank provides annual grants (currently $147 million) for its Development Grant Facility for research and other global public goods.

At the IMF/World Bank meetings in Prague in September, Secretary Summers suggested greater recourse to grant financing by IDA specifically for eligible HIPC countries to enhance future prospects for the sustainability of their debt. This would expand IDA's current approach but would do so selectively with most lending remaining on non-grant -- but still highly concessional -- terms.

Q: The appropriations legislation also gave approval for the use of more income derived from IMF gold transactions to help finance the HIPC Initiative? How does the gold valuation work?

A: The IMF will now be allowed to use all of the earnings on the investment of profits from off-market gold transactions that had been earmarked for the HIPC Initiative. Previously, only nine-fourteenths (9/14) of those earnings could be used. The new legislation enables the IMF to use about $550 million, which is the final portion of the amount that the IMF committed to HIPC from the earnings on the investment of the profits of IMF gold sales. With the legislation now signed into law, the U.S. Executive Director on the IMF's executive board will be able to vote to allow the use of the remaining five-fourteenths (5/14) of the investment income from gold sale profits.

The IMF holds a quantity of gold that is valued on the basis of the gold's historic cost rather than at its current market value. The IMF has generated resources for the HIPC initiative using this gold through the following steps. Between December 1999 and April 2000, separate but closely linked transactions involving a total of 12.9 million ounces of gold were carried out between the IMF and two members (Brazil and Mexico) that had financial obligations falling due to the IMF. In the first step, the IMF sold gold to the member at the prevailing market price and the profits were placed in a special account and then invested for the benefit of the HIPC Initiative. In the second step, the IMF immediately accepted back, at the same market price, the same amount of gold from the member in settlement of that member's financial obligations falling due to the Fund. The net effect of these transactions was to leave the balance of the IMF's physical holdings of gold unchanged.

Q: The IMF and World Bank have identified 41 countries as eligible for the enhanced HIPC program. What is the status of the HIPC programs in the different world regions?

A: In Latin America, Bolivia and Guyana qualified for debt stock forgiveness under the original HIPC program. Bolivia and Honduras have qualified for additional, "interim" relief (reduction in upcoming payments) under the enhanced HIPC. Nicaragua is expected to reach its enhanced HIPC decision point in the near future. At that time, its eligibility for "interim" relief will be determined. Guyana is eligible for the enhanced HIPC program but is not yet participating.

In Africa, Mauritania, Mozambique, Tanzania, Senegal, Benin, Mali, Burkina Faso, and Cameroon have all qualified for "interim relief" under the enhanced HIPC. Uganda in May became the first country to qualify for "completion point" (debt stock reduction) relief under enhanced HIPC. Other HIPC countries in Africa still need to take further steps to qualify for debt relief. Some are already most of the way there, while others still have a lot of work to do. These HIPC eligible African countries are: Angola, Burundi, Central African Republic, Chad, Congo, Democratic Republic of the Congo, Cote d'Ivoire, Ethiopia, Gambia, Ghana, Guinea, Guinea-Bissau, Kenya, Liberia, Madagascar, Malawi, Niger, Rwanda, Sierra Leone, Sao Tomas and Principe, Somalia, Sudan, Togo and Zambia.

In Asia, Vietnam does not have sufficient levels of indebtedness to qualify for HIPC debt relief. Laos has said it is not interested in HIPC debt relief. Burma is nowhere near qualifying for debt relief, and will not even be considered until it begins to implement significant reforms. The Republic of Yemen is eligible, but not yet in the program.

The World Bank developed the current list of HIPC countries based on a number of criteria, including income levels and debt sustainability. Poor countries that are not among the 41 did not meet the criteria.

Q: World Bank President James Wolfensohn says he hopes to have at least 20 of the 41 HIPC eligible countries in the program by the end of 2000. Is there some estimate for how long it will take for all 41 countries to be in the HIPC program? How much debt is likely to be forgiven?

A: The speed at which countries qualify for HIPC debt relief depends almost entirely on their implementation of reforms. The HIPC program provides debt relief for countries that are implementing market-oriented reforms, developing effective poverty reduction strategies, and demonstrating that the savings from debt relief will be used to fund poverty reduction programs. It is possible that as many as 20 countries could qualify by the end of this year, and we would expect others to qualify next year. Several countries, however, have not begun to take the steps needed to qualify. Estimates are that the HIPC program could result in forgiveness of as much as $90 billion of the external debt of the world's poorest countries.

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(Distributed by the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)
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