KyrgyzRepublic: Background Information on the HIPC Initiative

  1. Background

Established in 1996, the Heavily Indebted Poor Countries (HIPC) Initiative is the only internationally agreed framework for providing comprehensive debt relief to HIPCs.Participation in the Initiative is voluntary for both creditors and debtors. Creditors commit to reducing the NPV of external debts in debtor countries to the HIPC Initiative thresholds (either 150 percent of exports or 250 percent of government revenues). To be eligible for debt relief under the Initiative, debtor countries must go through the steps described below.

In September 2004, the Boards of theIMF and IDA agreed to extend the sunset clause under the Initiative to December 31, 2006 for countries that are IDA-only and Poverty Reduction and Growth Facility (PRGF)-eligible and whose debt burden indicators as of end-December 2004, after full application of traditional debt relief mechanisms, are in excess of the HIPC Initiative thresholds.A preliminary list of countries satisfying these criteria, together with the related cost estimates, was presented to the Boards in the September 2005 HIPC Initiative Status of Implementation Report. The Boards requested staff to present the final list of countries potentially eligible for assistance under the HIPC Initiativein April 2006.Based on the data made available to Staffs of the World Bank and IMF, the KyrgyzRepublic meets the Initiative’s income and indebtedness criteria.

  1. Steps under the Initiative

There are four steps to achieving irrevocable debt relief under the Initiative:

  1. Assessment of potential eligibility: A country is considered potentially eligible for debt relief under the HIPC Initiative if the following conditions are satisfied: i) to be IDA-only and PRGF eligible and ii) to have their end-December 2004 debt burden indicators above the thresholds established under the HIPC Initiative.[1]
  1. Determination of eligibility:To become eligible, a country must have started a reform program supported by the IMF and/or IDA during the period October 1, 1996 to December 31, 2006. This relates to the HIPC sunset clause, i.e., a country can become eligible until end-December 2006, then the country can reach the next steps (decision and completion points) at any time in the future with no deadline.
  1. Qualification for debt relief (decision point):At decision point, the Executive Boards of IDA and the IMF determine whether or not a country qualifies for debt relief under the HIPC Initiative. The decision point is reached when a satisfactory track record of policy performance under an IDA and/or IMF-supported program is achieved (usually 6 months under a PRGF), a poverty reduction strategy (or at least an Interim-PRSP) is prepared, and mechanisms to monitor the use of interim debt relief are put in place. At this point:
  2. The amount of debt relief to be received under the Initiative as well as the contribution of each creditor (both based on the country’s debt indicators as of the end of the country’s fiscal year preceding the decision point date are determined);
  3. The requirements for reaching the completion point (this includes satisfactory macroeconomic performance, and having prepared and implemented a full PRSPfor at least one year as well as country-specific requirements towards poverty reduction) are established; and
  4. Some creditors start to provide debt relief on a voluntary basis (interim debt relief).
  1. Delivery of debt relief on an irrevocable basis (completion point):At completion point, the Executive Boards of IDA and the IMF determine whether or not a country has met the requirements established at the decision point. All creditors are expected to start providing debt relief on an irrevocable basis.
  1. Documents that need to be prepared in the context of the HIPC Initiative
  1. Preliminary HIPC Document. This document is issued to inform creditors about the country’s debt situation and the status of implementation of the requirements for reaching the decision point. The document also identifies the broad conditionality that staffenvisage for the country to reach its completion point. The HIPC preliminary document is normally submitted to the IDA and IMFBoards 6 months before the expected decision point.
  1. Decision Point Document. In this document staffdetermine how much assistance will be provided to a country under the HIPC Initiative and the contribution that each creditor is expected to provide. The document also establishesthe triggers required to reach Completion Point.[2]
  1. Completion Point Document.This document informs the Board on the country’s progress in meeting the completion point triggers and requests Board approval for the country’s completion point.
  1. The Kyrgyz Republic’s External Debt

Based on end-2004 data collected for the extension of the HIPC sunset clause exercise, the KyrgyzRepublic’s total external debt is US$ 1.955billion (Table 1). Given that the NPV of debt to revenue ratio is 345 percent, the KyrgyzRepublic would exceed the Initiative’s NPV of debt to revenue threshold (of 250 percent) by a substantial margin. Preliminary calculations suggest that the NPV of debt would be reduced by approximately 28 percent under the HIPC Initiative.

  1. IDA and IMF policies on delivering HIPC debt relief

IDA and the IMF can begin providing debt relief to HIPC countries at Decision Point. To the extent feasible, IDA deliversits share of debt relief within 20 years of the Decision Point. The Fund does so within 10 yearsof the Decision Point. IDA can provide up to 1/3 of its total assistance (in NPV terms) during the period between the decision and completion points.[3][4]This is called interim assistance. Interim assistance by the IMF is capped at 60 per cent of its total projected assistance.[5]

Though the Asian Development Bank is committed in principle to providing relief in the context of the Initiative, it has not been required to do so yet. It will determine the modalities for providing relief if and when it is required to.

  1. Multilateral Debt Relief Initiative

Countries that reach the completion point under the HIPC Initiative could be eligible for additional debt relief under the Multilateral Debt Relief Initiative that would entail a 100% reduction of the debtoutstanding to IDA (as of end 2003) and the IMF (as of end-2004).It does not include the Asian Development Bank.

1

[1] The thresholds are 150 percent for the ratio of the net present value of debt (NPV) to exports of goods and services (X) and 250 percent for the ratio of NPV to fiscal revenue (R). In addition, a country satisfying the second criteria must have its X/GDP and R/GDP ratios above 30 percent and 15 percent, respectively.

[2] Including maintaining satisfactory macroeconomic performance and having prepared a PRSP and implemented it for at least one year.

[3]IDA provides annual relief of not less than 50% (and up to a maximum of 90%) of IDA debt service due on the amounts disbursed and outstanding at the reference year for the decision point.

[4] In special circumstance, IDA can provide up to 50% of its relief in the period between the Decision and Completion points.

[5]Interim assistance from the IMF is delivered in annual tranches and is limited to 20 percent of total relief in NPV terms over a 12-month period.