Participation in the HIPC Initiative: Benefits and Considerations
In addition to reduced external debt burdens, countries that choose to participate in the HIPC Initiative stand to gain from debt relief in a number of ways. For a country deciding whether participation in the Initiative is in order, these benefits must be weighed against some of the potential costs associated with the Initiative. This note identifies the principal costs and benefits of participation in the HIPC Initiative in the context of the Kyrgyz Republic.
Principal benefits of participation in the Initiative:
· Participation will result in a significant reduction in the external debt burden. The net present value (NPV) of the Kyrgyz Republic’s external debt would fall from approximately US$1.19 billion to roughly US$ 864 million, for a reduction of 28 percent. Annual average debt service would decline by USD 20 million over 24 years.[1]
· Members of the Paris Club typically grant debt relief above and beyond what is called for in the Initiative. Many members of the Paris Club have provided total debt write-downs to HIPC countries in the past.
· The reduction in debt service should allow for a significant increase in poverty reducing expenditures. In the countries that have reached the Decision Point, poverty-reducing expenditures have risen from an average 6.4 percent of GDP in 1999 to a projected 9.1 percent in 2005.
· At Completion Point full debt cancellation under the Multilateral Debt Relief Initiative is granted (MDRI). While the precise numbers cannot be determined at present, the MDRI will eliminate all debts to the IMF remaining after full delivery of the HIPC relief as of end-2004. All debts remaining to IDA after the HIPC relief at end-2003 will also be eliminated. This should result in an additional cumulative reduction in debt service of roughly US$500 million.[2]
· Participation in the Initiative enhances creditworthiness. Credit rating agencies do not view debt reduction obtained through the Initiative as detrimental to creditworthiness. Rather, Standard & Poor’s has noted that debt relief obtained through the HIPC Initiative improves a country’s creditworthiness. This is likely to be even more important given the additional relief provided through the MDRI.
Considerations:
· To obtain relief under the Initiative, countries must fulfill certain conditions. While substantial efforts are devoted to identifying conditions which will maximize the Initiative’s impact and safeguard financial resources, these conditions may demand strong efforts on the part of authorities. Importantly, countries must maintain a satisfactory macroeconomic track record – as evidenced by a successful completion of reviews under the IMF-supported program – to attain the Completion Point.
· As part of the Initiative’s requirements, new external financing must be concessional. This could limit the pool of potential financing. It also implies that financing at market rates is not possible. This is generally not a problem as no HIPCs have had market access while working their way to Completion Point. For the Kyrgyz Republic, this is not an issue, as the current IMF-supported PRGF program does not allow any public borrowing with a grant element less than 45 percent. In addition, the program sets an annual ceiling on contracting concessional external debt.
· Some bilateral creditors may scale back new assistance for a few years after they grant debt relief. Notably, Japan decided to provide grants instead of loans to these countries.
· Concerns that becoming a HIPC would adversely affect FDI inflows into Kyrgyz Republic are not well grounded. Current or prospective FDI are primarily in traditional sectors. Large share of FDI originate from the CIS or neighboring countries and would not be deterred by the HIPC status. On the contrary, better debt solvency indicators and structural reforms would send a strong signal to potential investors.
Common misunderstandings in relation to the Initiative:
· This is not an Africa-only Initiative. Eligibility is based on income and indebtedness criteria. All countries meeting the Initiative’s criteria as of end-2004 are potentially eligible for relief under the HIPC Initiative. Of the 18 countries having reached Completion Point, four are Latin American (Bolivia, Guyana, Honduras, and Nicaragua). Furthermore, three of the four countries which have become potentially eligible for the Initiative in the extension of the “sunset clause” are outside Africa. These are Haiti, the Kyrgyz Republic, and Nepal.
· The HIPC Initiative is not a panacea. It helps reduce poverty by re-directing the savings from debt relief to poverty reducing areas, but it cannot lead to an eradication of poverty. Similarly, HIPC relief cannot guarantee fiscal solvency. The Initiative provides debt reduction and improves government balance sheets. Long-term debt fiscal sustainability depends on solid growth based on sound government policies, including prudent external borrowing and debt management.
· Participation in the HIPC Initiative is purely voluntary. Both creditors and debtors have the option to participate in the Initiative. Though the World Bank and the IMF jointly make an assessment as to whether a country is eligible for relief under the Initiative, recipient countries ultimately decide if they wish to participate in the Initiative.
· A review of the HIPC Initiative by the Bank’s internal watchdog, the Operations Evaluation Department, found that there was a need to manage the expectations of what the initiative can achieve directly and how it relates to the broader efforts of the Bank and the international community to help these countries to achieve sustained growth and poverty reduction.
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[1] Includes only debt relief under the HIPC Initiative.
[2] These numbers should be used for illustrative purposes only. The eventual amount of MDRI relief may be substantially different.