The Heavily Indebted Poor Countries (HIPC) debt relief initiative establishes a process that allows those of the world's poorest countries that are saddled with exceptionally high debt burdens to negotiate reductions in loans payments and in their total debt stocks.

The International Monetary Fund (IMF) and the World Bank jointly administer HIPC, which was launched in September 1996. HIPC covers "official debt" owed by the poorest countries' governments to the donor governments or to the IFIs; loans from these sources account for most of the poorest countries' debts. Traditionally, debt owed by the poorest countries to donor governments has been rescheduled and reduced through the so-called Paris Club, with representatives of the creditor and debtor governments meeting regularly in Paris to work out agreements. HIPC is unique by its inclusion of IFI loans as part of a program for negotiated debt reduction.

While four countries -- Bolivia, Guyana, Mozambique, and Uganda -- completed the original HIPC program and obtained relief on their debt service payments, the first HIPC initiative's rules were widely viewed as too onerous, making it difficult for countries to qualify, and, once in, to gain debt relief.

The IMF and the World Bank, prodded by the Group of Seven (G-7) major industrialized country governments, made significant changes in HIPC in 1999. Under the new enhanced HIPC program, launched in October 1999, more countries can qualify for the program, and the debt relief is made available faster and is directed toward the beneficiary countries' pressing social needs. At their summit in Cologne in June 1999, the G-7 countries endorsed the enhancements to HIPC. They also endorsed steps to forgive their own bilateral official debts with the poorest countries.

Under both the original and the enhanced HIPC, poor countries eligible for the initiative agree to enter IMF/World Bank-administered programs for economic reforms. In return for implementing reforms, the IFIs agree to, first, grant debt service relief on their loans, and then, by the conclusion of the program, to reduce the debt stock. As part of the process, the donor countries agree to reduce or forgive bilateral debts. This can be done either through the Paris Club process or unilaterally.

Proponents of the HIPC initiative have stressed that debt should be forgiven only as the country implements economic reforms. They maintain that debt forgiven without reforms will be wasted.

When the enhanced HIPC initiative was launched, 41 countries were identified as eligible, which is based on a variety of factors, including debt sustainability.

To date, 22 countries have completed the first phase of the enhanced HIPC initiative, reaching the so-called decision point, at which the countries have begun their economic reform programs and are beginning to receive debt service relief.

The 22 countries are Benin, Bolivia, Burkina Faso, Cameroon, The Gambia, Guinea, Guinea-Bissau, Guyana, Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, Sao Tome and Principe, Senegal, Tanzania, Uganda and Zambia. Uganda is the only country that has completed the program.

Once all 22 countries have reached the "completion" point of the program, they will see their foreign debt reduced by almost half, on average, according to a joint statement issued by IMF Managing Director Horst Koehler and World Bank President James D. Wolfensohn on December 22, 2000. When that debt relief is combined with traditional debt relief through the Paris Club and with the additional bilateral relief that has been pledged by donor nations, these countries will see their foreign debt fall, on average, by about two-thirds. As a result, says the IMF, these countries will be spared some $34,000 million in debt service obligations.

Additional information the HIPC program can be found at the IMF and World Bank web sites at: http://www.imf.org/external/np/hipc/hipc.htm and http://www.worldbank.org/hipc/

Source: International Monetary Fund and the World Bank.