Debt Reduction: Initiatives for the Most Heavily Indebted Poor Countries

Congressional research reportFeb 1, 2000

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CRS Report for Congress

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Debt Reduction: Initiatives for the

Most Heavily Indebted Poor Countries

February 1, 2000

(name redacted)

Specialist in Foreign Affairs

Foreign Affairs, Defense, and Trade Division

Congressional Research Service ˜ The Library of Congress

ABSTRACT

This report offers a broad overview of the debate concerning debt reduction for poor

developing countries. It profiles the scope and structure of debt and reviews previous debt

relief strategies and the current HIPC Initiative. It analyzes and compares competing

alternatives endorsed by the Administration, congressional activists, NGOs, and other G-7

governments. Several key issues, such as costs, impact, and conditionality, of pending

proposals are also assessed. The report will be updated to reflect new debt relief proposals

and congressional debate.

Debt Reduction: Initiatives for the

Most Heavily Indebted Poor Countries

Summary

Many developing nations have experienced declining economic conditions while

accumulating higher levels of debt, largely owed to multilateral public lending

agencies, such as the World Bank and the IMF, and to foreign governments, including

the United States. For the 41 nations that have been identified as the most Heavily

Indebted Poor Countries (HIPC), external long-term debt rose rapidly from less than

$7 billion in 1970, to $47 billion a decade later, to $158 billion by 1990, and to $169

billion today. The largest portion — 85% — is owed to public lenders (governments

and institutions like the World Bank). Although roughly half of the HIPC long-term

debt is owed to bilateral lenders, only 3.7% is owed to the United States.

Since 1989, the U.S., Japan, and major European governments, recognizing that

the mounting debt burden for some borrowers has undermined efforts to stimulate

economic growth and to finance basic social programs, have extended a series of

increasingly broad debt relief arrangements. The most recent initiative — HIPC —

aims to reduce the debt burden of poor countries that have demonstrated sound

economic and social policy reforms to manageable, or “sustainable” levels that can be

serviced comfortably by export revenues and capital inflows. When it was launched,

poor country debt relief proponents hailed the initiative for its comprehensive and

integrated approach, especially the inclusion of World Bank and IMF participation,

and for its objective to provide lasting debt solutions.

But after three years, only four countries fully qualified for HIPC debt reduction

terms and strong international pressure built to expand and deepen HIPC terms.

Critics argued that it takes countries too long to qualify, that the conditions for

eligibility are inappropriate, and that the poverty reduction focus is insufficient. U.S.

and other G-7 leaders forged an agreement for expanding HIPC at the June 18-20,

2000 summit in Germany, the contents of which were adopted by the World Bank and

the IMF at their annual meetings in September.

Several legislative initiatives were introduced in 1999. H.R. 1095

(Representative Leach), would reform HIPC by providing debt relief more quickly,

to more countries, and in greater amounts, with an emphasis on poverty reduction.

Senator Mack introduced similar legislation (S. 1690), recommending that debt relief

savings finance both poverty and economic reform activities. Other legislation

includes H.R. 2232 (Representative Waters), H.R. 3049 (Representatives McKinney

and Rohrabacher), H.R. 772 (Representative Jackson), and S. 1636, a modified

companion measure to H.R. 772 (Senator Feingold).

As one of the final legislative issues of the first session, Congress agreed (H.R.

3422), to $123 million for bilateral debt reduction in FY2000 and (in H.R. 3425) to

authorize U.S. support for an off-market IMF gold sale to finance the Fund’s

participation in HIPC. (Each bill was incorporated into the Consolidated

Appropraitions Act, FY2000, P.L. 106-113.) But lawmakers did not approve an

additional $847 million requested by the President for debt relief through FY2003 and

barred the U.S. to use any of the $123 million this year for multilateral debt reduction

and contributions to the HIPC Trust Fund.

Contents

Debt Profile of the Most Heavily Indebted Nations . . . . . . . . . . . . . . . . . . . . . . 2

Evolution of Debt Reduction Programs for Poor Nations . . . . . . . . . . . . . . . . . . 7

Paris Club Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

U.S. Debt Reduction Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Heavily Indebted Poor Country (HIPC) Initiative . . . . . . . . . . . . . . . . . . . . . . . 13

Overview of the HIPC Initiative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

HIPC Eligibility Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

HIPC Timing and Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Financing HIPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

HIPC Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Country Eligibility and Timing of HIPC Implementation . . . . . . . . . . . . . . 19

Critics, Proposals for Reform, and HIPC Expansion . . . . . . . . . . . . . . . . . . . . 19

Setting the Stage for HIPC Expansion . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

U.S. Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

World Bank/IMF and G-7 Proposals . . . . . . . . . . . . . . . . . . . . . . . . 20

Congressional Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Critics Views of HIPC, Proposals for Change, and the Response . . . . . . . 24

HIPC Debt Relief Comes Too Slowly . . . . . . . . . . . . . . . . . . . . . . . . 24

Debt Sustainability Definitions and Targets Are

Limited or Inappropriate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Performance Requirements Are Flawed . . . . . . . . . . . . . . . . . . . . . . 28

Cost Implications of Enhanced HIPC Debt Relief Measures . . . . . . . . . . . 31

Cost Burden-sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

List of Figures

Figure 1. HIPC Debt 1998, by Type of Creditor . . . . . . . . . . . . . . . . . . . . . . . . 2

Figure 2. HIPC Country Long Term Debt: 1970-1998 . . . . . . . . . . . . . . . . . . . . 3

List of Tables

Table 1. Debt Profile of HIPC Countries, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . 4

Table 2. Debt Profile of Sub-Saharan Africa Countries, 1997 . . . . . . . . . . . . . . 6

Table 3. U.S. Debt Reduction, 1989-1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Table 4. U.S. Sovereign Debt Owed by HIPC and Other Countries . . . . . . . . . 10

Table 5. Selected Debt Ratios of HIPC and Other Countries . . . . . . . . . . . . . . 17

Table 7. Comparison of Debt Reduction Initiatives—Existing and Proposed . . 34

Debt Reduction: Initiatives for the

Most Heavily Indebted Poor Countries

For the past several decades, the United States, other industrialized nations, and

international financial institutions have extended considerable financial assistance,

provided as both loans and grants to developing countries — with mixed results.1

Many developing nations have experienced declining economic conditions while at the

same time accumulating higher levels of debt, largely owed to multilateral public

lending agencies, such as the World Bank and the IMF, and to foreign governments,

known as “bilateral” lenders, including the United States, Germany, France, Great

Britain, and others. Since 1989, the United States, Japan, and major European

governments, recognizing that for some borrowers the mounting debt burden

undermined efforts to stimulate economic growth and to finance basic social

programs, have extended a series of increasingly broad debt relief arrangements.

Despite these efforts, economic difficulties for the world’s most heavily indebted

poor nations persist. In sub-Saharan Africa, home to most of these heavily indebted

countries, after several years of improving economic performance, economic growth

slowed to 2.1% in 1998 and per capita income fell by 1%. Debt is not the sole cause

of this slowdown, but it is noteworthy that in 1998, total debt stock for African

nations grew to about $226 billion, up from $219 billion the year before. Net foreign

aid and other official transfers remained stagnant at about $12 billion in 1998, but

have declined overall by more than 50% in real terms during the 1990s.2

A broad consensus emerged among creditor governments and public institutions,

poor debtor countries, and non-governmental organizations (NGOs) that more

aggressive debt relief measures — centered around the World Bank/IMF Heavily

Indebted Poor Country (HIPC) Initiative — should be pursued. At their September

1999 annual meetings, the World Bank and IMF endorsed a substantial expansion of

HIPC, including steps that will increase the number of qualifying countries, provide

larger amounts of debt relief, potentially shorten the time required for receiving debt

reduction, and strengthen the program’s impact on poverty reduction. Nevertheless,

questions remain on how these measures will be implemented and how donor

organizations and governments will pay for the costs of a more expansive HIPC.

Many issues related to an expanded HIPC are raised in an array of executive and

legislative debt reduction proposals enacted and pending in the 106th Congress.

President Clinton initially proposed $120 million for FY2000 debt relief funding, a

figure that was subsequently increased to $970 million (over four years) in a

For a recent analysis of the successes and failures of foreign aid, see Assessing Aid: What

Works, What Doesn't, and Why, A World Bank Policy Research Report 1998.

World Bank, Global Development Finance, 1999, p. 168-170.

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September 21, 1999, budget amendment to the Foreign Operations appropriations

request. Congress approved in mid-November only $123 million of the

recommendation in H.R. 3422, leaving much of the debate over funding for 2000.

Congress also authorized in H.R. 3425 a mechanism that allows the IMF to revalue

a portion of its gold holdings so that the Fund can pay for its costs of canceling debt

owed to it by HIPC countries. (The legislation, however, allows the IMF to use only

a part of the “profit” generated by the gold transaction for HIPC relief. Congressional

leaders said they would review the issue in 2000 and consider Administration requests

to lift the limitation.) H.R. 3425 further supports the expansion of U.S. debt

reduction programs largely along the lines endorsed by the President, the G-7, and the

World Bank and IMF.3 Still pending are other congressional initiatives introduced in

the 106th Congress, some of which go beyond current Administration and World

Bank/IMF plans for an expanded HIPC program or which introduce different

qualification criteria for debtor country participation.

This report offers a broad overview of the debate concerning debt reduction for

poor developing countries. It profiles the scope and structure of debt and reviews

previous debt relief strategies and the current HIPC Initiative. It analyzes and

compares competing alternatives endorsed by the Administration, congressional

activists, NGOs, and other G-7 governments. Several key issues, such as costs,

impact, and conditionality, of pending proposals are also assessed.

Debt Profile of the Most Heavily Indebted Nations

For the 41 nations which have been identified by the World Bank and IMF as the

most heavily indebted poor

Figure 1. HIPC Debt 1998, by Type of Creditor countries (HIPC countries), external

debt rose rapidly in the 1970s and

1980s.4 From less than $7 billion in

Bilateral Debt

1970, long-term debt obligations

50.3%

grew to $47 billion a decade later,

and to $158 billion by 1990. Debt

accumulation during the 1980s was

affected especially by the 1979 oil

Multilateral Debt

crisis, rising interest rates, and

34.8%

falling global commodity prices for

goods developing countries

Private Debt

produced. Debt levels have been

14.9%

more stable in the 1990s as private

creditors scaled back on their

lending and public lenders

(governments and international financial institutions) shifted from loans to grant

Source: World Bank

Congress passed both H.R. 3422 and H.R. 3425 as part of the Consolidated Appropriations

Act, FY2000 (P.L. 106-113).

Unless otherwise noted, the source for the debt figures in this section is the World Bank’s

Global Development Finance, 1999.

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foreign aid. HIPC country long-term debt peaked at about $185 billion in 1995, fell

back to $163 billion by 1997, but is estimated to have increased to $169 billion in

1998.

Tables 1 and 2 provide specific details on debt owed by these 41 countries,

including how much debt is owed to the United States. One of the most striking

characteristics of the debt burden of the HIPC countries is the large proportion that

is owed to public lenders rather than the private sector. As illustrated in Figure 1, the

World Bank estimates that creditor governments and institutions account for more

than 85% of HIPC debt obligations. By comparison, only 28% of Latin American

long-term debt is owed to public lenders. For all developing nations, the amount is

42%.

Although roughly half of the HIPC long-term debt is owed to bilateral lenders,

as shown in Table 4 (page 10), only a small amount is owed to the United States:$6

billion at the end of 1997, or 3.7% of total long-term HIPC debt. For 23 of the 41

HIPC nations, outstanding debt to the U.S. totals less than 1% of their outstanding

obligations. Only for a few countries — Democratic Republic of Congo, Liberia,

Somalia, and Sudan — does U.S. debt represent a sizable portion of overall stock.5

Figure 2. HIPC Country Long Term Debt: 1970-1998

$175

$150

Private Debt

Multilateral Debt

Bilateral Debt

$125

$100

$75

$50

$25

1970

1980

1990

Source: World Bank

U.S. Department of Treasury. Various tables.

1997

1998

CRS-4

Table 1. Debt Profile of HIPC Countries, 1997

($s — millions)

Long-Term Debt

Long-Term Debt, of which owed

to:

Total Debt

Stock

Public &

Publically

Guaranteed

Private

NonGuaranteed

Concessional

NonConcessional

Multilaterals

Govt

Other

Bilaterals

Angola

10,160

8,885

2,230

6,655

234

2,623

Benin

1,624

1,393

1,265

128

871

519

Bolivia

5,248

4,144

426

2,965

1,605

2,681

1,344

Burkina Faso

1,297

1,139

1,077

1,003

132

Burundi

1,066

1,022

989

872

149

Cameroon

9,293

7,688

198

3,955

3,931

1,465

5,569

CAR

885

804

727

607

174

Chad

1,027

939

804

135

749

173

Congo, DR of

12,330

8,617

3,103

5,514

2,179

2,080

3,524

Congo, Rep of

5,071

4,284

1,554

2,730

619

2,774

Cote D’Ivoire

15,609

10,427

2,071

4,507

7,991

3,301

378

4,181

Equatorial Guinea

283

209

139

101

Ethiopia

10,079

9,427

8,633

794

2,459

6,523

Ghana

5,982

4,691

267

3,975

983

3,179

1,051

Guinea

3,520

3,008

2,484

524

1,557

111

1,269

Guinea-Bissau

921

838

666

172

387

451

Guyana

1,611

1,345

909

436

666

592

Honduras

4,698

3,910

259

2,287

1,882

2,303

151

1,261

Kenya

6,486

5,108

325

3,727

1,706

2,785

126

1,695

Laos

2,320

2,247

2,243

816

1,431

Liberia

2,012

1,061

585

476

405

333

132

Madagascar

4,105

3,871

2,679

1,192

1,661

2,133

Malawi

2,206

2,073

1,947

126

1,791

261

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Long-Term Debt

Long-Term Debt, of which owed

to:

Total Debt

Stock

Public &

Publically

Guaranteed

Private

NonGuaranteed

Concessional

NonConcessional

Multilaterals

Govt

Other

Bilaterals

Mali

2,945

2,687

2,621

1,453

1,234

Mauritania

2,453

2,037

1,698

339

938

1,068

Mozambique

5,991

5,430

3,385

2,090

1,626

3,737

Myanmar

5,074

4,640

4,090

550

1,171

3,012

Nicaragua

5,677

4,819

2,509

2,310

1,571

100

2,756

Niger

1,579

1,331

1,057

370

881

437

Rwanda

1,111

994

986

850

141

Sao Tome&Principe

261

227

223

156

Senegal

3,671

3,110

2,395

770

1,803

1,280

Sierra Leone

1,149

893

733

160

494

329

Somalia

2,561

1,853

1,503

350

723

431

664

Sudan

16,326

8,998

496

4,636

4,858

2,001

1,202

4,319

Tanzania

7,177

6,054

5,091

1,004

2,939

2,827

Togo

1,339

1,207

955

252

717

491

Uganda

3,708

3,202

2,950

252

2,399

723

Vietnam

21,629

18,839

3,209

15,630

828

136

13,138

Yemen

3,856

3,418

2,411

1,007

1,390

102

1,089

Zambia

6,758

5,233

3,797

1,449

2,227

278

2,586

Total, HIPC

201,098

162,102

4,292

97,699

68,695

56,851

6,046

77,964

Sources:

World Bank, Global Development Finance, 1999

U.S. Department of the Treasury.

Note: U.S. debt figures include private debt guaranteed by the U.S. government.

CRS-6

Table 2. Debt Profile of Sub-Saharan Africa Countries, 1997

($s — millions)

Long-Term Debt

Africa

HIPC countries*

Long-Term Debt, of which owed

to:

Total Debt

Stock

Public &

Publically

Guaranteed

Private

NonGuaranteed

Concessional

NonConcessional

Multilaterals

Govt

Other

Bilaterals

147,752

118,740

3,607

77,076

45,271

45,421

5,436

53,341

Africa Non-HIPC countries:

Botswana

562

290

232

383

Cape Verde

220

211

172

159

Comoros

197

181

173

151

Djibouti

284

253

252

136

117

Eritrea

Gabon

4,285

3,671

971

2,700

528

2,932

Gambia

430

407

394

326

Lesotho

660

624

487

137

468

113

Mauritius

2,472

1,187

789

344

1,632

245

297

Nigeria

28,455

22,361

295

1,322

21,604

4,013

871

12,074

Seychelles

149

131

South Africa

25,222

11,246

2,633

13,879

Zimbabwe

4,961

3,124

475

1,398

2,201

1,616

699

Total, Africa

215,725

162,774

7,799

83,020

87,783

53,542

6,462

69,888

Sources: World Bank, Global Development Finance, 1999; and U.S. Department of the Treasury.

* See Table 1 for individual country data.

CRS-7

Evolution of Debt Reduction Programs for Poor Nations

For the past decade, members of the G-7 have taken the lead for initiating plans

to reduce or cancel public debt owed to them by severely indebted developing

nations.6 Through the Paris Club, an informal forum of creditor governments that

review, negotiate, and adopt debt relief programs for poor countries, the United

States, Germany, Japan, France, and others have implemented a series of debt

measures. Prior to 1988, the Paris Club generally engaged only in rescheduling, but

not reducing debt. This solved immediate debt servicing crises, but offered no

permanent relief. In some cases, reschedulings fueled mounting debt stocks of

developing nations, ultimately setting the stage for a subsequent financial emergency.

Paris Club Arrangements. Following the 1988 G-7 meeting in Toronto, the

Paris Club endorsed a menu of debt relief options through which heavily indebted

countries could receive forgiveness for as much as one-third of the net present value

(NPV)7 of their public bilateral non-concessional debt that was eligible for

rescheduling. Eligible debt included portions that were in arrears or due in the next

18 to 24 months, but not amounts previously rescheduled. These so-called “Toronto

Terms” were broadened three years later at the G-7 conference in London where

creditor countries agreed to implement “Enhanced Toronto Terms” and reduce up to

50 percent of NPV of eligible poor country public non-concessional debt. Between

1988 and 1995, Paris Club members rescheduled under Toronto and Enhanced

Toronto Terms about $14.8 billion of debt owed primarily by African nations.

The Paris Club further expanded debt reduction options following the 1994 G-7

summit in Naples. Under what became known as “Naples Terms,” developing

countries could receive forgiveness for up to two-thirds of their total NPV of nonconcessional debt (not just the portion eligible for rescheduling). Paris Club members

continue to use Naples Terms today, although for those countries which qualify, even

more generous HIPC terms are applied (see below for a discussion of HIPC).

U.S. Debt Reduction Programs. The United States did not participate in Paris

Club debt reduction initiatives until 1994, although independently, the U.S. forgave

about $3.58 billion in poor country debt in the late 1980s and early 1990s, and an

additional $10.2 billion in debt owed by Egypt, Poland, and Jordan, 1990-1995. Each

of these arrangements were implemented under special authorities legislated, and in

some cases, initiated by Congress:

Sec. 572 Debt Relief — Section 572 of the Foreign Operations

Appropriations for FY1989 (P.L. 100-461), authorized the President

Much of this discussion of the history of bilateral debt reduction initiatives is drawn from,

Africa’s Debt Burden: Proposals for Further Forgiveness, by (name redacted). CSIS

Africa Notes, Number 189, October 1996.

In evaluating a country’s debt burden, analysts generally examine the debt’s net present

value (NPV) rather than its face value. The NPV of debt takes into account the degree of

concessionality — that is, the extent to which loans carry interest rates below market levels.

If a loan has an interest rate below the market rate, the NPV of debt will be smaller than the

face value, with the difference reflecting the concessional element of the loan.

CRS-8

to cancel debt from development assistance concessional loans owed

by African and other relatively least developed countries that

maintained economic reform programs with the World Bank or IMF.

Over a three year period, the United States forgave 100% of $2.02

billion owed by 17 African countries, four Latin American nations,

and Bangladesh. As a result of this initiative, and because the United

States had shifted in the early 1980s to grant rather than loan aid, a

relatively small amount of concessional debt is still owed to the

United States by heavily indebted nations in Africa and elsewhere.

Sec. 411 Debt — Section 411 of the Agricultural Trade

Development and Assistance Act, more commonly referred to as P.L.

480, authorizes the forgiveness of concessional food aid loans held

by least developed countries that are either pursuing their own

economic reform program or have programs with the IMF or World

Bank. In 1991-92, the United States canceled $689 million of food

aid loans for 12 African and Latin American nations.

Enterprise for the Americas Initiative (EAI) Debt — Enacted in

1990, the EAI supported economic growth goals for Latin American

and Caribbean nations. One element of the Initiative authorized the

President to forgive concessional food aid loans to any EAI-eligible

country. Through 1993, the United States canceled $875 million in

debt owed by Latin American countries that did not meet the “least

developed” criteria under the Sec. 411 debt reduction program.

Most debt relief went to El Salvador and Jamaica.

Egypt Debt Forgiveness — In recognition of the security risks taken

by Egypt in signing a peace accord with Israel in 1979 and of Egypt’s

leadership in the Arab world following Iraq’s invasion of Kuwait in

1990, the President asked and Congress approved the cancellation of

military aid loans totaling $7 billion (Foreign Operations

Appropriations, 1991, P.L. 101-513). Much of this debt had been

incurred during the early 1980s when the United States provided

most military assistance as loans bearing commercial interest rate

terms.

Polish Debt Relief — With the collapse of Soviet control over

Eastern Europe, the United States took several steps to help the

emerging states transition to democratic governments and market

economies. Under a special provision in the Foreign Operations

Appropriations for FY1991 (P.L. 101-513), the U.S. canceled $2.46

billion in agricultural credits owed by Poland.

Jordan Debt Relief — Following the signing of an Israeli-Jordan

peace agreement in 1994, Congress approved the President’s request

to relieve some of Jordan’s debt to the United States. Through

authority granted in the Foreign Operations Appropriations, 1995

(P.L. 103-306), and subsequent appropriation measures, the U.S.

forgave $698 million of Jordan’s debt.

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Table 3. U.S. Debt Reduction, 1989-1998

($s — millions)

Date

Grand Total

Sec 572

Debt Reduction Authority

Paris Club/

Sec 411

EAI

HIPC

Special

Legisl.

Total

2,051.6

689.1

840.1

732.1

10,161.1

14,474.0

Africa:

Benin

Burkina Faso

Cameroon

CAR

Congo, DRO

Congo, Rep

Cote d’Ivoire

Ghana

Guinea

Kenya

Madagascar

Malawi

Mali

Mozambique

Niger

Nigeria

Rwanda

Senegal

Tanzania

Togo

Uganda

Zambia

1989-91

1991

1991/98

1994-98

1990-91

1996

1990/98

1990-91

1989/97

1989

1990/97

1990-91

1989/96

1994-96

1990-91

1998

1989/94

1991/97

1989

1991/98

1989/96

720.1

29.8

2.4

61.4

--54.1

--17.9

83.7

4.5

85.9

5.6

29.5

5.1

--6.9

64.8

----79.7

7.4

8.6

172.8

416.2

--------------95.8

--102.0

53.4

2.2

--52.9

------34.5

59.1

--16.3

---

0.0

---------------------------------------------

482.1

----20.3

7.0

--10.7

220.4

--4.3

--24.8

----47.4

8.5

--.9

10.2

18.9

--.9

107.8

0.0

---------------------------------------------

1,618.4

29.8

2.4

81.7

7.0

54.1

10.7

238.3

179.5

8.8

187.9

83.8

31.7

5.1

100.3

15.4

64.8

0.9

44.7

157.7

7.4

25.8

280.6

Latin Amer.

Argentina

Bolivia

Chile

Colombia

El Salvador

Guyana

Haiti

Honduras

Jamaica

Nicaragua

Uruguay

1993

1991/95

1991

1992

1992/96

1991/95

1991/96

1991

1991/98

1991

1,039.9

--339.6

30.6

----76.3

--333.9

--259.5

---

272.9

----------40.3

98.9

108.9

--24.8

---

840.1

3.8

30.7

--31.0

463.9

------310.8

--3.7

213.3

--58.6

------9.9

7.9

77.0

--59.9

---

-------

---

2,366.2

3.8

428.9

30.6

31.0

463.9

126.5

106.8

519.8

310.8

344.2

3.7

Other

Bangladesh

Bosnia

Poland

Egypt

Jordan

1991

1998

1991

1990

1995-98

291.6

---------

-------------

36.7

--36.7

-------

10,161.1

----2,464.7

6,998.1

698.3

10,489.4

291.6

36.7

2,464.7

6,998.1

698.3

Source: U.S. Department of the Treasury.

-------------

CRS-10

Table 4. U.S. Sovereign Debt Owed by HIPC and Other Countries

(as of December 31, 1997 — $s - millions)

Non-Concessional Debt

Concession

Debt

Direct

Loans

Private Loans

Guaranteed by

Total

Debt

US Debt

as % of

World

Debt*

HIPC:

Angola

0.4%

Benin

0.0%

Bolivia

2.2%

Burkina Faso

0.0%

Burundi

0.0%

Cameroon

0.9%

CAR

1.1%

Chad

0.0%

Congo, DR of

445

1,635

2,080

24.1%

Congo, Rep of

1.4%

Cote D’Ivoire

241

378

3.6%

Equatorial Guinea

0.0%

Ethiopia

1.0%

Ghana

0.3%

Guinea

103

111

3.7%

Guinea-Bissau

0.0%

Guyana

2.3%

Honduras

147

3.8%

Kenya

126

2.5%

Laos

0.0%

Liberia

257

333

31.4%

Madagascar

0.9%

Malawi

0.0%

Mali

0.0%

Mauritania

0.3%

Mozambique

0.9%

Myanmar

0.1%

Nicaragua

101

2.1%

Niger

1.0%

Rwanda

0.1%

Sao Tome&Principe

0.0%

Senegal

0.5%

Sierra Leone

7.2%

CRS-11

Non-Concessional Debt

Concession

Debt

Direct

Loans

Private Loans

Guaranteed by

Total

Debt

US Debt

as % of

World

Debt*

Somalia

201

230

431

23.3%

Sudan

493

709

1,202

13.4%

Tanzania

0.6%

Togo

0.0%

Uganda

0.1%

Vietnam

136

0.7%

Yemen

102

3.0%

Zambia

134

144

278

5.3%

Total, HIPC

2,279

3,584

183

6,046

3.7%

Botswana

4.6%

Cape Verde

0.0%

Comoros

0.0%

Djibouti

0.0%

Eritrea

0.0%

Gabon

2.2%

Gambia

0.0%

Lesotho

0.0%

Mauritius

0.7%

Nigeria

871

897

4.0%

Seychelles

0.0%

South Africa

141

144

1.3%

Swaziland

0.1%

Zimbabwe

151

203

6.5%

Memo Item:

Total Africa

2,053

4,307

441

6,801

4.2%

Albania

0.0%

Bangladesh

502

515

3.5%

Cambodia

361

17.8%

Haiti

2.2%

Mongolia

0.0%

Nepal

1.2%

Sri Lanka

687

125

812

12.2%

Tajikistan

3.9%

Non-HIPC Africa:

Other “IDA-Only”:

Source: U.S. Department of the Treasury.

*U.S. debt owed as a % of total worldwide long-term public and publically-guaranteed debt.

CRS-12

Under authority first granted by Congress in 1993 (Foreign Operations

Appropriations, section 570, P.L. 103-87), the United States began in 1994 to

participate in Paris Club arrangements to reduce non-concessional debt owed by

developing nations with strong economic reform records. This authority, which has

been annually re-enacted in each Foreign Operations measure since 1993, allows the

U.S. to cancel partial repayment on loans issued under U.S. Agency for International

Development (USAID) housing and other credit programs, military aid loans,

Export-Import Bank loans and guarantees, and, for Latin American nations,

agriculture credits guaranteed by the Commodity Credit Corporation. All of these

loans and loan guarantees are made on non-concessional terms.

In order to be eligible, countries must be able to borrow only from the World

Bank’s concessionary loan window, the International Development Association

(IDA),8 and comply with a series of standards regarding excessive military

expenditures, terrorism, narcotics control, and human rights. Since 1994, the United

States has reduced $732 million in non-concessional debt through the Paris Club, on

both Naples and HIPC terms.

Two new U.S. bilateral debt reduction programs took shape in 1998. As one

element of the President’s Africa Initiative to boost trade, investment, and

development opportunities, the United States intends to cancel 100% of concessional

debt owed by the strongest performing African nations. Only about $2.1 billion in

concessional debt remains, however, and most — $1.44 billion — is owed by poorly

performing countries mired in conflict and without near-term prospects for economic

recovery: Congo/Zaire, Liberia, Sierra Leone, Somalia, and Sudan.

The second new program — Debt Relief for Tropical Rainforest Countries —

originated in Congress and was enacted into law in P.L. 105-214. Modeled after the

EAI debt relief program, it authorizes the President to buy back, swap, or cancel

concessional U.S. economic and food aid loans in order to generate local currencies

that will be used to support tropical forest conservation programs.

Such countries are commonly referred to as “IDA-only” nations. In most cases, the World

Bank designates countries with a 1997 per capita GNP of less than $925 as IDA-only

borrowers.

CRS-13

Calculating the Cost of Debt Reduction Initiatives and the Role of Congress

As noted in the discussion above, Congress must authorize U.S. participation in new debt

reduction programs. Under provisions of the Federal Credit Reform Act of 1990, Congress

must also appropriate, in advance, the anticipated costs to the U.S. government of canceling

such debt. The appropriated amount, which is usually included in the annual Foreign

Operations spending measure, equals the estimated loss to the U.S. treasury of implementing

the debt reduction agreement. Each year’s federal budget assumes that a certain amount of loan

reflows, or off-setting receipts, will be received. Over time, the appropriation off-sets the loss

of these reflows.

The calculation of how much money must be appropriated to reduce or cancel a certain

amount of debt is complicated, and depends on a number of factors including the value of debt

(whether it is concessional or non-concessional) and the likelihood of repayment by the debtor.

For loans that bear interest rates at or above current levels that were made to countries with a

good repayment history, the amount of appropriations will be much higher than for concessional

loans to countries that pay late or default. For example, during the 1990s Congress

appropriated $386 million to cancel roughly $700 million of debt owed by Jordan. Since Jordan

had a good debt service record and held loans bearing above market interest rates, Jordan’s debt

forgiveness was a more “expensive” initiative in budget terms. On the other hand, for the

poorest countries that have less capacity to service their debt, which consists mainly of highly

concessional loans, the cost and the appropriation is much smaller. In FY1999, the Treasury

Department estimated that it would use $43 million appropriated the previous two years to

cancel $376 million (face value) of debt owed by 11 HIPC countries. In other words, Jordan’s

debt was more “valuable” to the U.S. government in terms of anticipated repayment than loans

made to poorer countries.

Heavily Indebted Poor Country (HIPC) Initiative

The series of incremental and sometimes uncoordinated debt rescheduling and

relief plans during the late 1980s and early 1990s did not produce the degree of

sustainable debt reduction that international aid agencies and debtor governments had

envisioned. The stock of long-term debt owed by the severely indebted low-income

countries actually grew from $61 billion in 1980, to $245 billion in 1995, while their

debt as a percent of exports had risen from 102% to 421% during the same period.

Further, the share of debt owed to international financial institutions (IFIs), such as

the World Bank, increased sharply in the early 1990s — from 21% in 1990 to 27%

in 1995.9

One of the major criticisms of earlier debt relief initiatives was the absence of

participation by the IFIs. World Bank and other IFI officials asserted that to engage

in debt reduction, they would have to pass the costs on to their middle-income

country borrowers. Instead, the IFIs increased lending on highly concessional terms

to the poorest countries. Nevertheless, under growing pressure from nongovernmental organizations and some creditor governments, especially Britain, the

World Bank, Global Development Finance, 1997, vol. I, p. 204.

CRS-14

World Bank and IMF sponsored the initiation in September 1996 of the Heavily

Indebted Poor Countries Debt (HIPC) Initiative. HIPC remains the centerpiece

international debt workout plan of today.

Overview of the HIPC Initiative

The intent of the HIPC Initiative is to reduce the debt burden of poor countries

that have demonstrated sound economic and social policy reforms to manageable, or

“sustainable” levels that can be serviced comfortably by export revenues and capital

inflows. When it was launched, poor country debt relief proponents hailed the

initiative for its comprehensive and integrated approach, especially the inclusion of IFI

participation, and for its objective to provide lasting debt solutions.

HIPC Eligibility Criteria. To be selected for possible HIPC status, countries

must meet specific criteria:

receive only concessional financing from the World Bank and IMF

(that is, borrowing only from the World Bank’s International

Development Association (IDA) and from the IMF’s Enhanced

Structural Adjustment Facility (ESAF)).

! establish a track record of economic reforms under IMF and World

Bank-sponsored programs.

! hold a debt burden that is unsustainable under existing (Naples terms)

relief arrangements.

Through an initial analysis in 1996, the World Bank and IMF identified 41 heavily

indebted countries — the 41 HIPC countries.10

HIPC Timing and Terms. The HIPC process is divided into two phases.

During an initial three-year period, beginning at what is called the “entry point,”

countries must successfully follow World Bank and IMF adjustment programs. At

the conclusion of this phase, the Bank and Fund conduct a debt analysis to determine

whether a country still requires extraordinary debt relief beyond Naples terms. It was

presumed that during this three-year period, some countries might improve their

economic position to the extent that they could manage their debt burden without the

need for HIPC terms. The analysis is intended to determine whether the country can

service its debt based on a medium-term balance of payments projection. The

economic indicators used in the Bank/Fund analysis are the relationship between the

present value of external debt and the export of goods and services. For the first

three years of HIPC, if a country’s debt-to-export ratio fell above a range of 200250%, and debt service-to-exports exceeded 20-25%, its debt burden was categorized

as unsustainable, making the country eligible for HIPC terms. As discussed below,

critics charged that these thresholds were too high and prevented the cancellation of

sufficient debt to make a long-lasting difference. Consequently, the World Bank and

IMF have lowered the debt-to-export target to 150%.

See Table 1 for a list of HIPC countries. Originally, Nigeria was a HIPC country, but

because it is eligible for both concessional (IDA) and non-concessional World Bank loans, it

was removed from the list. Subsequently, Malawi was added.

CRS-15

At this stage of the process, known as the “decision point,” a country with

unsustainable debt may begin to receive from bilateral creditors a reduction of nonconcessional debt through Paris Club arrangements. During the first three years of

HIPC, creditor governments would cancel up to 80% of eligible debt (as opposed to

67% under Naples terms). G-7 leaders agreed, however, during their June 1999

summit, to increase the ceiling to 90%.11

At the decision point, countries begin a second period — originally three years,

but modified in September 1999 to an unspecified amount of time that may result in

more rapid qualification — during which they must continue to display good

performance under a Bank/Fund program. At the end of the second phase, referred

to as the “completion point,” a country becomes fully eligible for HIPC debt relief.

In addition to the 90% reduction from Paris Club debt, the World Bank, IMF and

other IFIs adjust debt levels to a “sustainable” amount — so that a country’s present

value of total debt as a percent of exports does not exceed 150%. Special treatment

may be given to nations with very open economies12 where the debt-to-export ratio

falls below 150%, but still face a heavy debt burden in relation to its fiscal revenues.

In these cases, creditors will reduce debt so that the present value of debt equals

250% of fiscal revenues.13 (For the first three years of HIPC, this target had been

280%.) Although debtor countries become fully eligible only at the completion point,

World Bank and IMF modifications in September 1999 will result in “interim” relief

by IFIs during the second stage, with a reduction in annual debt service payments

through what the IFIs are calling “front-loaded” assistance.

Financing HIPC. A key enhancement to previous debt reduction arrangements

introduced in the HIPC process is a more systematic method of burden-sharing of the

costs of implementing debt relief programs. Bilateral creditors, largely through the

Paris Club, meet the costs according to the budget rules that apply to their respective

national governments. In the case of the United States, Congress must appropriate

funds in advance of debt cancellation, providing an amount equal to the present value

of loans to be reduced. For poor countries, this can be a very small portion of the

loans’ face value — perhaps 10% or less.

The reduction of multilateral debt is financed through the IDA-managed HIPC

Trust Fund which receives resources in several ways. The World Bank pays for the

costs of canceling its loans by transferring net income and surplus from its market-rate

lending facility — the International Bank for Reconstruction and Development

(IBRD) — to the HIPC Trust Fund. The IMF initially covered the cost of its

G-7 leaders further adopted a U.S. proposal that they forgive 100% of concessional or

“foreign aid” debt owed by poor debtor countries. More recently, on September 29, President

Clinton announced that the United States was prepared to cancel 100% of all — concessional

and non-concessional debt — debt owed by HIPC countries, and urged others to follow.

Britain has endorsed the same policy while others have the issue under review.

Very open economies are those where the export-to-GDP ratio is higher than 40% and the

fiscal revenue-to-GDP ratio exceeds 20%.

Most countries have, or are expected to have their debt reduced based on the debt-to-exports

ratio. The World Bank estimates that three countries may receive assistance under the fiscal

criteria.

CRS-16

participation through an interim arrangement that drew on ESAF resources to service

debt obligations of eligible HIPC countries. In order to establish a permanent means

to cover IMF debt reduction costs, the IMF and several of its largest contributors

agreed on a plan to sell some of IMF’s gold holdings. Fearing that a large IMF gold

sale would further depress its value on global markets, U.S. gold firms and African

gold producing nations strongly objected to the proposal. At the September annual

meetings, the IMF and its members abandoned the gold sale approach, and instead

proposed to introduce a mechanism whereby the Fund would be able to “re-value”

about 14 million ounces of gold. This would generate enough money to pay the

IMF’s share of canceling HIPC country debt.14 Other IFIs, however, do not have

sufficient resources to fully cover their costs of reducing HIPC debt. As a result,

bilateral donors are asked to contribute to the HIPC Trust Fund to fill this financing

gap.

HIPC Contributions. As of December 31 1999, bilateral contributions to the

HIPC Trust Fund totaled $327 million. The Netherlands ($108 million) were the

largest donor. Pledges amounted to another $1.7 billion, including $600 million from

the United States.15 Germany ($80 million) Italy ($70 million), and the European

Union (about $730 million) are among those that have also made large pledges, but

not directly contributed. The U.K. says it will add $200 million to the $25 million

already paid. Germany, one of the other major aid donors that has not contributed to

the Trust Fund, has pledged DM 50 million.16 Notwithstanding these contributions,

the Treasury Department estimated in February 1999 — before the G-7 and World

Bank/IMF agreement to expand HIPC — that the HIPC Trust Fund faced a $2 billion

funding shortfall.17 With more recent estimates that show a doubling of the costs of

the HIPC initiative, the Trust Fund shortfall will be much greater.

The actual process by which the gold would be re-valued involves several steps. First, the

gold, which is carried on the IMF books at the original price of $48 per ounce, would be

purchased at current market value (over $260 per ounce) by a member country about to make

a large payment on an IMF loan. After buying the gold, the country will immediately make

its loan payment to the IMF, but in gold that it just purchased, rather than hard currency.

The IMF will invest the “profits” of its gold transaction in a security instrument and use the

earned interest to pay for the costs of canceling HIPC debt over a 20 year period. While many

IMF members have endorsed this approach, it requires the agreement of 85% of the Fund’s

voting shares. Congress must authorize U.S. support for the proposal, and since the United

States holds more than 15% of the votes, the gold re-valuation plan cannot be implemented

without U.S. — and congressional — approval.

Congress, in H.R. 2606, the FY2000 Foreign Operations Appropraitions, denied all HIPC

Trust Fund requests. President Clinton vetoed H.R. 2606, in part because of reduced funding

for debt relief. Subsequently, Congress increased (in P.L. 106-113) bilateral debt reducton

funding from $33 million in H.R. 2606 to $123 million, but blocked any of these funds for the

HIPC Trust Fund.

World Bank, HIPC Trust Fund -- Bilateral Donor Funding (as of Dec. 15, 1999).

Available online at the World Bank HIPC web site [http://www.worldbank.org/hipc].

U.S. Department of the Treasury. Treasury International Programs: Justification for

Appropriations, FY2000.

CRS-17

Table 5. Selected Debt Ratios of HIPC and Other Countries

(Present Value of Debt)

Debt as % of

Exports

Debt as % of

GNP

Debt Service as

% of Exports

1996

1997

1996

1997

1996

1997

Angola

219

165

310

200

13.3

15.9

Benin

215

160

6.8

9.1

Bolivia

270

30.9

32.5

Burkina Faso

241

161

10.8

11.8

Burundi

538

546

54.6

29.0

Cameroon

399

315

106

23.6

20.4

CAR

242

244

6.3

6.2

Chad

181

195

9.5

12.5

Congo, Dem. Rep. of

693

783

127

215

2.4

Congo, Rep. of

342

249

260

247

11.7

6.2

Cote D’Ivoire

299

268

171

141

26.2

27.4

Equatorial Guinea

157

124

2.6

Ethiopia

1,093

791

149

131

42.2

9.5

Ghana

208

229

26.4

29.5

Guinea

298

330

14.7

21.5

Guinea-Bissau

2,312

1,136

248

253

48.7

17.3

Guyana

236

134

252

145

15.1

14.4

Honduras

200

157

26.0

20.9

Kenya

177

161

27.5

21.5

Laos

177

217

6.3

6.5

Liberia

---

Madagascar

426

370

9.4

27.0

Malawi

294

182

18.6

12.4

Mali

261

240

17.9

10.5

Mauritania

318

377

157

169

21.7

24.2

Mozambique

1,344

785

411

171

32.3

18.6

Myanmar

296

289

---

8.0

Nicaragua

763

441

322

244

24.2

31.7

Niger

284

329

17.3

19.5

Rwanda

682

373

20.3

13.3

Sao Tome & Principe

2,268

1,146

651

382

31.5

53.8

Senegal

150

152

15.9

15.3

Sierra Leone

515

779

52.6

21.2

Somalia

---

Sudan

1,964

2,421

260

170

5.0

9.2

Tanzania

499

427

114

18.7

12.9

HIPC:

CRS-18

Debt as % of

Exports

Debt as % of

GNP

Debt Service as

% of Exports

1996

1997

1996

1997

1996

1997

Togo

191

129

10.8

8.1

Uganda

294

239

20.0

22.1

Vietnam

322

168

123

3.5

7.8

Yemen

160

2.4

2.6

Zambia

389

374

161

138

24.6

19.9

Total, HIPC

---

272

---

15.1

Botswana

---

4.9

---

Cape Verde

107

103

2.9

5.5

Comoros

334

331

102

2.3

3.9

Djibouti

132

122

5.4

3.1

Eritrea

Gabon

123

128

26.2

13.1

Gambia

113

1.4

11.6

Lesotho

6.1

6.4

Mauritius

7.2

10.9

Nigeria

240

148

114

16.0

7.8

Seychelles

4.7

4.0

South Africa

11.1

12.8

Zimbabwe

154

136

21.2

22.0

Albania

101

3.5

7.1

Bangladesh

166

130

11.7

10.6

Cambodia

191

175

1.2

1.1

Haiti

297

272

13.2

15.9

Mongolia

9.7

11.7

Nepal

102

7.7

6.9

Sri Lanka

7.3

6.4

Tajikistan

4.6

Non-HIPC Africa:

Other “IDA-Only”

Sources:

World Bank, World Development Indicators, 1998 and 1999.

World Bank, Global Development Finance, 1999.

CRS-19

Country Eligibility and Timing of HIPC Implementation

On the basis of the most recent debt sustainability analysis and announcements

in September 1999 for the substantial expansion of HIPC terms, the World Bank and

IMF estimate that 36 of the 41 HIPC countries potentially could qualify for HIPC

assistance based on the debt-to-export threshold, an increase of seven from preSeptember assessments.18 In addition to lowering the eligibility thresholds, the decline

in global commodity prices during the past year is a main reason why some nations

which Bank and Fund staff previously thought would achieve sustainable levels of

debt without extraordinary HIPC relief now fall within the HIPC parameters. These

countries are positioned at various stages in the HIPC process. Only four — Uganda,

Bolivia, Guyana, and Mozambique — had reached their completion points under the

“old” HIPC program. Uganda, Bolivia, and Mozambique are expected to be among

the first to receive a “topping up” of debt relief under HIPC’s new, more generous

terms. (Guyana has fallen out of compliance with an IMF arrangement and will not

be eligible for early review.) Altogether, these three plus six others19 may come

before World Bank/IMF boards for full HIPC debt relief consideration by April 2000.

It is less certain when or whether remaining countries will eventually reach the

decision and completion points.

Critics, Proposals for Reform, and HIPC Expansion

Setting the Stage for HIPC Expansion

Although the majority of creditor and debtor governments, development

institutions, and non-governmental organizations (NGOs) supported the general

concept of the HIPC Initiative, many were disappointed with the results achieved

since 1996 and recommended substantial reforms. Numerous NGOs advocated

extensive modifications to, if not abandonment of the HIPC process. The strongest

critics sought immediate, unconditional forgiveness of poor country debt. Foremost

among the NGO activists has been Jubilee 2000, a campaign launched at the June

1997 G-7 Denver Summit, and spearheaded primarily by Catholic and Protestant

organizations from over 60 countries that have been involved in debt relief and

poverty issues for many years.

U.S. Policy. While acknowledging weaknesses with the current HIPC structure,

global public financial institutions and creditor governments examined since spring

1999 ways to strengthen, but not replace HIPC. President Clinton announced in midMarch the outlines of a U.S. plan that would form the basis for a continuing American

campaign for the expansion of HIPC debt relief terms. Since its inception in 1996, the

The five that are not expected to need relief at HIPC terms are Angola, Equitorial Guinea,

Kenya, Vietnam, and Yemen. Four of the 36 that appear to qualify on debt sustainability

grounds may not participate. Sudan, Somalia, and Liberia are not close to meeting the

economic reform criteria. Ghana has said it may not want HIPC debt relief since it would lose

the ability to borrow from Japan, an important aid donor, if it participates.

Nicaragua, Burkina Faso, Tanzania, Honduras, Mali, and Senegal.

CRS-20

United States supported HIPC as a means to promote economic growth and poverty

alleviation, and to reward those countries with the best performance records with the

cancellation of debt that most likely would never be paid. At the same time, U.S.

officials emphasize that any debt relief program must be carefully designed so that it

does not result in negative incentives that will undermine the capacity of poor country

governments to borrow in the future. The United States also endorses HIPC for its

broad and comprehensive approach to debt reduction that involves bilateral and

multilateral creditors alike. Because the U.S. holds such a small amount of what is

owed by the most heavily indebted poor nations — less than 4% — unilateral

American action would have minimal impact on relieving the severe debt overhang.

World Bank/IMF and G-7 Proposals. Under pressure from member

governments and NGOs, World Bank and IMF officials said at their spring 1999

meetings that they would review HIPC and be prepared to propose substantive

reforms at the organizations’ annual meetings in September. Subsequently, Bank and

Fund staff prepared a policy modification paper to which the IMF Executive Board

gave a favorable review in mid-August.20 G-7 leaders, meeting in Cologne, Germany,

at their annual economic Summit, further issued a joint position statement endorsing

many of the recommendations put forward by the United States and those

incorporated into Bank and Fund staff papers. As expected, at the World Bank/IMF

annual meetings in late September 1999, the institutions endorsed broad expansion

of the HIPC Initiative, the details of which draw heavily from proposals issued earlier

by President Clinton, the British government, and congressional legislative initiatives

(see below). Many NGO concerns are also accommodated in the expanded outlines

of HIPC, although groups remain concerned about how the modifications will be

implemented and whether the promised financing will materialize. The major

enhancements, discussed in more detail below, to the expanded HIPC Initiative

announced in September 1999 include:

Broader debt reduction — Debt to export and fiscal qualification

thresholds are lowered so that 36 countries, up from 29, are expected

to qualify. (These numbers include Sudan, Somalia, and Liberia

which are unlikely to qualify for other reasons.)

Deeper debt reduction — With lower export and fiscal thresholds

now used to define “sustainable” debt, qualifying countries will have

more debt canceled.

Faster debt reduction — Instead of the previous requirement for

back-to-back three year periods of good economic performance,

debtor nations can now gain full HIPC benefits using a “floating”

completion point in which they must reach agreed-upon economic

reform targets anytime following successful implementation a the

first three-year program. IFIs have also agreed to extend interim

See, Modifications to the Heavily Indebted Poor Countries (HIPC) Initiative, July 23,

1999, found at [http://www.worldbank.org/html/extdr/hipc/mod072399/paper.htm]. See also,

IMF Executive Board Reviews HIPC Initiative Modifications, August 13, 1999, found at

[http://www.worldbank.org/external/np/sec/pn1999/pn9976.htm].

CRS-21

assistance between the decision and completion points, and to “frontload” debt service relief in some cases.

Poverty reduction emphasis — The World Bank and IMF pledge to

place greater emphasis on the poverty reduction goal of debt relief,

reform ESAF arrangements, and to require that debtor nations

prepare and implement a Poverty Reduction Strategy Paper that will

ensure that debt relief savings will be utilized to increase spending on

health, education, and other basic social programs.

Congressional Initiatives. During the 106th Congress, several bills have been

considered that endorse a significant expansion of U.S. debt relief policy. Some are

consistent with current U.S., G-7, and World Bank/IMF plans to broaden HIPC relief

terms while others go well beyond these proposals. Although formal action on any

of these bills did not begin until early November 1999, the discussion prompted by

their introduction helped shape U.S. policy changes and provided momentum for

many of the HIPC expansion initiatives recently announced by the World Bank and

IMF.

In the final days of the 106th Congress, 1st session, the White House and

congressional leaders negotiated the text of authorizing legislation (H.R. 3425,

incorporated by reference into the Consolidated Appropriations Act, FY2000, P.L.

106-113) that provides the Administration with authority to implement enhanced debt

reduction terms. But the legislation excludes a number of provisions that debt relief

advocates had sought in other bills, especially directives to reduce or eliminate the

role of IMF structural adjustment programs as a qualifying criteria for debt relief. A

more expansive debt relief framework — H.R. 1095 — had been reported by the

House Banking Committee in early November 1999, and drew broad support from

NGOs, Jubilee 2000, and other activists in the debt debate. H.R. 1095, however,

faces stiff opposition from the Administration. Table 7, found at the end of this

report, compares major elements of H.R. 3425, the new authorizing bill enacted on

November 29, with H.R. 1095, terms of the original HIPC program, and the

“Expanded HIPC” recommendation endorsed by the G-7.

International Debt Relief Act. This legislation (title V of H.R. 3425, P.L.106113) represents the outcome of executive-legislative negotiations during the final days

of the 1st session over the terms of enhanced U.S. debt relief programs and

authorization for U.S. officials to support the IMF off-market sale of gold and use of

a reserve account to finance the Fund’s participation in HIPC.21 In general terms it

approves HIPC qualification requirements that are in line with current Administration

policy, including several measures to strengthen the linkage between debt relief and

poverty reduction. The bill further authorizes U.S. support for the IMF to sell enough

gold to generate 2.226 billion Special Drawing Rights in profits. The sales will take

place only between the Fund and member countries (mainly Mexico) in nonpublic

H.R. 3425 is entitled, Making Miscellaneous Appropriations for FY2000. It is enacted by

reference in H.R. 3194, the Consolidated Appropriations Act of FY2000, legislation that

represents the final “budget package” for FY1999. President Clinton signed H.R. 3194 on

November 29, 1999.

CRS-22

transactions so that the IMF retains possession of the gold at the conclusion of the

exchange. “Profits” from the sales will be invested, with the earnings available to

finance IMF debt relief for HIPC countries. H.R. 3425, however, limits to 9/14 the

amount of earnings on investments that may be used by the Fund. Congressional

leaders pledged that Congress will review the issue during the first half of 2000 and

consider authorizing the use of the full amount.

Debt Relief for Poverty Reduction Act of 1999. H.R. 1095 aims to reform the

HIPC Initiative much along the lines recommended by Jubilee 2000/U.S., Bread for

the World, Oxfam America, and many other NGOs. Introduced by Representative

Leach on March 11, 1999, H.R. 1095 addresses only debt reduction issues and not

the broader array of African aid and trade policy raised in some other legislative

proposals. On several points — lowering the eligibility thresholds, emphasizing

poverty reduction goals, and extending more rapid debt relief — it is consistent with

the expanded U.S. HIPC debt relief policies and those announced at the World

Bank/IMF annual meetings in September. But on other issues, it goes beyond

Administration plans and would result in broader and deeper debt reduction for more

developing countries. H.R. 1095, reported by the House Banking Committee on

November 18, would require reforms that would expand by 10 the number of

countries, including Nigeria, that are expected currently to receive HIPC terms. The

legislation would also add several additional eligibility criteria relating to slavery

practices, labor conditions, female genital mutilation, and MIA cooperation. It further

“urges” lower debt-to-export thresholds than currently agreed upon. H.R. 1095 does

not fix a cost to expanding debt relief but authorizes the appropriation of “such sums

as may be necessary.”

Debt Relief for Poor Countries Act of 1999. S. 1690, introduced by Senator

Mack and others on October 5, follows much of the same outlines of H.R. 1095 but

without several eligibility requirements added during committee markup. In addition

to emphasizing poverty reduction goals, the legislation further requires debtor nations

to establish a mechanism through which debt relief savings will be used for economic

reform programs that promote sustainable growth and provide widely shared benefits

throughout the population.

Human Rights, Opportunity, Partnership, and Empowerment for Africa Act

(HOPE for Africa Act). H.R. 772, introduced by Representative Jackson on

February 23, 1999, represents a broad, comprehensive approach for a new U.S. policy

towards sub-Saharan Africa, including a commitment to cancel all African debt,

increase U.S. development aid to the region, provide preferential access to U.S.

markets of African goods, and ensure that such products are produced consistent with

sound labor, human rights, and environmental standards. It is an alternative proposal

to President Clinton’s Africa initiative launched in 1998 and to legislation passed by

the House last year and that is under consideration again in the 106th Congress (H.R.

434/S. 1387).22

For a discussion of the Clinton African initiative and related legislation, see CRS Issue Brief

IB98015, African Trade and Investment: Proposals in the 106th Congress, by Theodros

Dagne and (name redacted).

CRS-23

Debt forgiveness provisions of the HOPE for Africa Act are based on the basic

principles that sub-Saharan Africa’s debt burden is a serious obstacle to economic,

political, and social development in the region, that any policy aimed at promoting

growth and sustainable development in Africa must include unconditional debt

cancellation, and that IMF, World Bank, and other structural adjustment programs

have imposed “enormous preventable suffering on African people.” H.R. 772

essentially rejects the HIPC Initiative, substituting a policy of immediate,

unconditional debt forgiveness of the entire $6.8 billion of African debt owed to the

United States government,23 as well as all debt owed to American private lenders, and

advocating the implementation of similar policies by other creditor governments and

IFIs. H.R. 772 is the most expansive of the congressional bills, promoting 100%

immediate debt forgiveness, without conditions, for all sub-Saharan African nations.

If fully implemented, the HOPE for Africa bill would result in the forgiveness of about

$226 billion for all 48 African nations, plus potentially up to about $1 billion of debt

owed to U.S. persons. To cover the costs of U.S. debt forgiveness, H.R. 772

authorizes for FY2000-2002 the appropriation of “such sums as may be necessary,”

but does not attach any specific amount to the new policy.

HOPE for Africa Act of 1999. Senator Feingold introduced S. 1636, a modified

version of the House HOPE for Africa Act. Like H.R. 772, it would apply to all 48

sub-Saharan African countries and result in 100% cancellation of all debt owed the

United States by these countries. It would not require, however, the forgiveness of

private debt held by U.S. persons, as in H.R. 772, but instead call for a report by

January 1, 2000, from the Treasury Department setting out a plan for the U.S.

government to acquire this private debt. No specific amount of money is authorized

for implementation of S. 1636.

Debt Relief and Development in Africa Act of 1999. H.R. 2232, like H.R.

1095 and S. 1690, is focused directly on debt reduction issues and promotes

improvements to the HIPC process, not its abolishment. While similar in scope to the

Leach and Mack bills, legislation offered by Representative Waters on June 15, 1999,

would extend deeper debt reduction to a smaller group of nations, add additional

eligibility requirements for debtor countries, and explicitly reject the need for nations

to comply with an IMF structural adjustment program. Portions of the bill that

required HIPC countries to implement plans to protect their natural resources were

incorporated into the marked-up text of H.R. 1095. Like the HOPE for Africa Act,

H.R. 2232 applies only to countries in sub-Saharan Africa, rather than the world-wide

focus of HIPC and H.R. 1095/S. 1690.

Debt Emancipation to Enable Democracies (DEED) Act of 1999. The DEED

Act (H.R. 3049), introduced by Representatives McKinney and Rohrabacher on

October 7, adds as an eligibility requirement for debt relief that countries promote

democracy through the holding of free and fair elections, maintaining civilian control

over the military, and other democratic principals. H.R. 3049 further adds Haiti to

the list of HIPC countries, bans any U.S. funds to the IMF until the institution cancels

all debts owed by HIPC nations and abolishes ESAF, and permits operations of the

The $6.8 billion represents the total as of the end of 1997. More recent estimates suggest

that the figure has grown to about $7.5 billion.

CRS-24

Overseas Private Investment Corporation (OPIC) only in those HIPC countries that

are using the savings from debt forgiveness for poverty reduction purposes.

Debt Forgiveness Act of 1999. H.R. 1305, introduced by Representative

Campbell on March 25, 1999, has a far more limited scope than the other bills. Under

the Campbell legislation, the President must first cancel 100% of concessional and

non-concessional debt owed to the United States by all 41 HIPC countries before the

U.S. can transfer funds to the IMF. Last year, in P.L. 105-277, Congress

appropriated $17.9 billion to fund U.S. participation in an IMF quota increase and for

the Fund’s New Arrangements to Borrow facility.

Critics Views of HIPC, Proposals for Change, and the Response

While debt relief proponents have found fault with many aspects of the HIPC

Initiatives, the most significant concerns over which there is wide agreement center

on three issues: the speed of debt relief, how much relief is provided, and eligibility

requirements for HIPC participation. The discussion below explains each of these

criticisms and identifies reform proposals adopted by the G-7 and the World

Bank/IMF, and those included in congressional legislation.

HIPC Debt Relief Comes Too Slowly. Most agreed that a qualifying period

that can take up to six years was too long. Critics asserted that such delays were

actually counter-productive to the success of economic reforms undertaken by HIPC

countries; that debt relief provided during, rather than after completion of a structural

adjustment program can accelerate and strengthen the reform efforts. Moreover, they

argued, that countries emerging from conflict or have been victimized by a natural

disaster, such as Hurricane Mitch, should be provided with special accommodation

so that their debt obligations do not complicate reconstruction efforts.

While most support the requirement for some qualifying period, the issue

becomes how long a track record of good economic performance is sufficient to

ensure that debt relief is not wasted and that it will have lasting benefit.24 The World

Bank and IMF have maintained in the past that a second three-year period after a

country reaches its decision point may be necessary to guarantee that the full range

of complex structural reforms have time to take hold. But the institutions also

pointed out that the six year requirement was applied flexibly for the seven countries

at or near the end of the HIPC process — that Uganda and Bolivia, for example, had

their second stage shortened to one year.

One implication of shortening the qualifying period is the possibility of additional

costs. By reducing the time, countries would receive debt relief earlier, before the full

Not all debt relief proponents, however, endorse the need for a qualifying period of

economic reforms, arguing instead for immediate cancellation. This position is generally

based on the premise that much of the past debt was acquired illegitimately for reasons

unrelated to the development needs of the poor: that it was accumulated with the

encouragement of international financial institutions at a time when they had a capital surplus;

that it was thrust upon U.S. and Soviet Cold War client states, or that it was obtained by

prior, corrupt regimes that either squandered or stole the money.

CRS-25

impact of reforms had a chance to strengthen their economic position. As a result,

the debt-to-export ratios on which the amount of debt relief is calculated, would likely

be higher at an earlier point and would require more assistance to lower the debt

stock to the sustainable target of around 200%. An analysis by the World Bank

estimates that shortening the second three-year qualifying stage by one year would

add $2 billion, while the elimination of the second stage would raise HIPC costs by

$6.6 billion.25 From the perspective of the debtor country, the advantage under an

accelerated qualification scenario would be the receipt of earlier and higher amounts

of debt relief.26

World Bank/IMF Modifications. At their annual meetings, the Bank and Fund

endorsed G-7 proposals for multilaterals to extend “interim relief” and to establish

“floating completion points” that could shorten the time it takes a country to receive

HIPC debt relief. Instead of a fixed three-year second stage, nations could reach the

completion point once they had successfully met agreed-upon economic policy

targets. This, according to Bank and Fund officials, would offer strong incentives for

governments to implement reform programs more quickly and to assume more direct

control over how rapidly they become fully eligible for HIPC relief terms.

Congressional Recommendations. Except for H.R. 3425, each of the broadly

focused debt reduction bills propose to shorten the interim period. By not stating a

timing preference, H.R. 3425 would allow the President to implement debt reduction

programs at an accelerated pace as recommended by the G-7.

The Leach and Mack bills (H.R. 1095 and S. 1690) propose to

shorten the eligibility period to no more than three years, with special

accommodation for countries emerging from conflict of natural

disasters.

The HOPE for Africa measures (H.R. 772 and S. 1636) include few

specific dates for initiating debt relief actions, but through a series of

required reports by the President to Congress, the legislation implies

that rapid movement should occur. Beginning on December 31,

1999, the President must report annually on unilateral debt relief for

African nations; within nine months of enactment, the Secretary of

State must report on how other creditor governments have

responded to U.S. appeals for them to forgive bilateral Africa debt;

and within a year of enactment, the Secretary of the Treasury must

notify Congress how World Bank and IMF members have reacted to

U.S. proposals for the Bank and Fund to fully and unconditionally

cancel Africa’s debt.

World Bank. HIPC Initiative: Perspectives on the Current Framework and Options for

Change — Supplement on Costing. Table 5. April 13, 1999. Modified May 12, 1999.

For example, the GAO estimated that if the second stage for Guyana was reduced to one

year instead of three, HIPC assistance would be 68% higher with an increase of $103 million

in the present value of debt canceled. General Accounting Office. Status of the Heavily

Indebted Poor Country Debt Relief Initiative. September 1998, p. 38.

CRS-26

The Debt Relief for Development in Africa Act of 1999 (H.R. 2232)

would make HIPC terms available immediately once a debtor country

is determined to have a debt-to-export ratio above 100% and has

created a Human Development Fund and a Natural Resource

Development Plan.

Debt Sustainability Definitions and Targets Are Limited or Inappropriate.

Many HIPC critics believed that the debt-to-export and debt service-to-export

thresholds were set too high, excluding some heavily indebted countries from

qualifying for HIPC terms or from being included among the HIPC countries.

Bangladesh, Haiti, Comoros, among other poor countries, were not part of the HIPC

process, even though their debt-to-export ratios fell between 150-300%. Setting

targets too high, according to these critics, further restricted the amount of debt relief

provided, undermining the prospect that HIPC would provide a “permanent exit”

from an unsustainable debt burden. A downturn in global commodity prices or other

negative external factors, they argued, can shift a country from a sustainable to

unsustainable debt position. Debtor nations would be far less vulnerable to such

factors if HIPC provided deeper debt relief.

Some of these same critics also believed that HIPC places too much emphasis

on reducing debt stock and not enough on cutting the amounts of debt service.

Targets based on the relationship between debt and exports, they believed, are less

important than indicators focused on debt service and government revenues.

Reducing debt service obligations frees up resources immediately that can be used to

finance social and other poverty reduction programs. Many observers were dismayed

by World Bank and IMF admissions that debt service payments for the early qualifiers

of HIPC relief would not be much different than before; indeed, debt service for Mali

and Burkina Faso was expected to rise.27 Critics believed that indicators drawing on

the relationship between debt service and government revenues were more

appropriate for poor countries and would help achieve the duel goals of debt

reduction and increased spending on education, health, and other social programs.

The World Bank and IMF did not necessarily disagree with these concerns, and

acknowledged that HIPC targets were “judgmental rules of thumb” that should not

represent “discrete cutoffs.” They cautioned, however, that changes made to the

targets or the introduction of different indicators also raised serious implications.

Establishing an appropriate debt service target that would achieve debt sustainability,

they asserted, would be more difficult and lack a strong analytic basis. Bank and

Fund officials further said that a country’s capacity to service debt involves more than

just the collection of revenues, and needs to be examined in a full budgetary context.

They have also expressed concern that a substantial expansion and deepening of HIPC

relief would not necessarily lead to increased amounts of external aid — that because

of fiscal constraints of participating creditor governments and institutions, more debt

World Bank. HIPC Initiative: Perspectives on the Current Framework and Options for

Change — Annex 1. Implementation of the Initiative and Resource Flows. April 2, 1999,

p. 45.

CRS-27

assistance might come from funds that would otherwise go for development

assistance, which is already in decline.28

G-7 Proposal. Following recommendations issued by the White House in

March, G-7 leaders endorsed raising the level of canceled Paris Club bilateral nonconcessional debt from 80% to 90%, and even higher for the very poorest. Also at

the June Summit, participants proposed that the World Bank/IMF debt sustainability

targets be lowered from a debt-to-export ratio of 200% to 150%, and that the

alternative debt-to-revenue ratios decline from 280% to 250%. Not only would this

modification cancel a larger portion of debt held by eligible countries, it would also

increase the number of countries that would likely qualify for expanded-HIPC terms.

Analysts believed that the pre-September World Bank estimate of 29 potentially

qualifying nations would grow to 36 under ratio reductions recommended by the G-7.

The G-7 further endorsed a plan, also backed earlier by the United States, for

bilateral lenders to forgive all concessional foreign aid loans and to extend future

concessional financing mostly in the form of grant aid. Since the United States has

extended nearly all foreign aid as grants for over a decade, this latter proposal would

have no impact on current U.S. policy. This would also be the case for most other

donors. But for a country such as Japan, which in 1997 offered about 17% of its aid

as loans, this policy would require adjustments.

World Bank/IMF Modifications. Bank/Fund proposals follow closely those

endorsed by the G-7. They recommend that the NPV debt-to-exports ratio decline

form the current 200-250% range to a single target of 150%; that the NPV debt-torevenue ratio decline from 280% to 250%; and for those countries with very open

economies that qualify based on the fiscal window, that the current 40% of exportsto-GDP fall to 30% and the 20% of revenues-to-GDP decline to 15%. Addressing

concerns over debt service burdens, the institutions recommend “front-loading” more

debt relief after countries have reached their completion point. They further endorse

the lowering a debt service-to-exports ratio to a range of 15-20%.

Congressional Recommendations. H.R. 3425, as enacted, and three of the

pending debt reduction bills address the debt sustainability targets. Since the Jackson

and Feingold bills (H.R. 772 and S. 1636) propose full debt cancellation for all subSaharan African nations, debt targets would not be an issue.

The International Debt Relief bill (title V of H.R. 3425, P.L. 106113), the Debt Relief for Poverty Reduction Act of 1999 (H.R.

1095) and the Debt Relief for Poor Countries Act of 1999 (S. 1690)

all propose lowering the debt-to-export eligibility threshold to 150%.

They further recommend deeper debt reduction by setting a

sustainability level of 150% debt-to-exports ratio. H.R. 1095 and S.

1690 go beyond H.R. 3425 and Administration policy by requiring

that annual debt service payments are not larger than 10% of annual

government revenues generated from internal sources. This

requirement especially could expand the amount of debt relief

World Bank. Perspectives on the Current Framework and Options for Change.

CRS-28

provided and hasten the benefits for the debtor country. Although

there are no estimates of how much debt would have to be canceled

to meet the 10% requirement, it appears that debt service payments

would fall dramatically for some. Mozambique, for example, with

government revenues of about $448 million, paid $104 million

servicing its debt in 1997 and is projected to pay $71 million on

average through 2005 now that it has reached its completion point.29

Under the 10% ceiling, Mozambique would have paid $45 million in

1997. While the relief provided may be dramatic, the costs to

creditor governments and institutions might be as well.

The Waters bill (H.R. 2232) would extend deeper and broader debt

relief than other pending initiatives, except for the HOPE for Africa

legislation. The debt-to-export ratio eligibility threshold would fall

to 100%, making about 38 African nations eligible.30 The amount of

debt relief received would deepen due to a requirement that a

country’s debt burden be reduced so that the NPV of debt-to-exports

does not exceed 100% and that annual debt service payments are not

larger than 5% of annual government revenues generated from

internal sources. As noted above, the latter target especially would

deepen the debt relief and accelerate its impact for financing poverty

programs. The costs to creditor governments and institutions also

would grow, perhaps significantly.

Performance Requirements Are Flawed. For years, NGOs and many

developing countries especially have argued that IMF-sponsored structural adjustment

programs have in most cases not achieved their goals of expanding economic growth,

while inflicting a substantial negative impact on poverty reduction efforts in poor

countries. As such, the HIPC requirement to maintain such a reform arrangement

through the IMF’s Enhance Structural Adjustment Facility (ESAF), these critics

asserted, was not appropriate for HIPC eligibility. They believed that ESAF programs

should be replaced with alternative performance links with a poverty focus emphasis.

Debtor countries would be required to establish social development plans that would

result in increased spending on education, health care, environmental protection, and

other basic services.31

World Bank. Global Development Finance, 1999, volume II. Also, HIPC Initiative:

Perspectives on the Current Framework and Options for Change, Annex 1, p. 46; and

Modifications to the HIPC Initiative, July 23, 1999, p. 23.

Possible African countries that would not qualify because they are not “IDA-only”

borrowers or have a debt-to-export ratio below 100% are Botswana, Eritrea, Gabon, Lesotho,

Mauritius, Namibia, Nigeria, Seychelles, South Africa, and Zimbabwe.

Uganda, the first country to receive full HIPC benefits, now deposits $40 million it saves

annually from debt write-offs into a special poverty action fund. Ugandan officials argue, that

while creditor governments and institutions have set international poverty reduction targets,

they have not provided the means to finance them. Debt reduction targets based on debt

service levels rather than export earnings, they say, would provide needed resources. (The

Guardian, May 26, 1999, p. 11.)

CRS-29

The IMF rejects claims that ESAF structural reform programs have failed,

arguing that external evaluations have found that such activities have had positive

effects on growth and income distribution in poor countries.32 Bank and Fund staff

further stress that the HIPC Initiative has always pursued dual objectives of achieving

economic growth and alleviating poverty. Requiring countries to develop

comprehensive plans for poverty reduction and social development, they caution, may

be beyond their current capacity because of financial considerations. Sufficient time

would be required to design such initiatives, they say, a factor that might be counterproductive to efforts to accelerate the pace of debt relief. According to other

observers, given the evidence that HIPC will not provide much in the way of early

debt service relief for some countries, a requirement that debtor governments increase

spending on basic social programs, derived from debt reduction “savings,” may be

asking countries to spend funds that will not have been generated.

G-7 Proposal. Although G-7 leaders continue to support IMF and World Bank

policy reform programs for HIPC countries, they issued a strong recommendation for

the Bank and Fund to build an enhanced poverty reduction framework, especially

within the IMF’s ESAF programs. G-7 finance ministers called on the Bank and Fund

to help HIPC countries design and implement poverty reduction plans through a

transparent and participatory process that will ensure that debt relief savings would

be invested in health, education, and other social programs.

World Bank/IMF Modifications. The Bank and Fund now agree that an

enhanced HIPC initiative should include a stronger framework for poverty reduction,

although the details on how this might affect ESAF policy reform programs or

requirements for debtor countries to establish social development plans remain to be

worked out. IMF Board Directors have noted that proposals for interim assistance

and front-loaded relief on the part of the multilaterals could be a means to help HIPC

nations to find additional resources for social and other poverty-related activities.

Moreover, the IMF will require in the future that countries receiving debt relief must

develop and implement a Poverty Reduction Strategy Paper that has the full

participation of civil society. Fund officials have further implied that successful

implementation of these strategy papers may become a factor in IMF decisions

whether to proceed with ESAF loan transfers. (The IMF has subsequently re-named

ESAF as the Poverty Reduction and Growth Facility (PRGF).)

Congressional Recommendations. Of the bills introduced and considered in the

106th Congress, H.R. 3425, as enacted, is the only initiative that expressly requires a

country to adhere to a “social and economic reform program.” None of the other

broadly focused debt reduction bills would continue ESAF reform program

compliance as a requirement for HIPC eligibility. On the other hand, each, including

H.R. 3425, either requires or recommends additional standards connected with

strengthened poverty reduction spending on the part of debtor governments. The

issue of ESAF policy reforms linked with debt reduction eligibility was extensively

debated during the House Banking Committee markup of H.R. 1095 on November

See, for example, IMF. External Evaluation of the ESAF. 1998.

CRS-30

H.R. 3425, as enacted, requires that a qualified debtor nation

maintain a social and economic reform program that, among other

things, is designed through transparent and participatory processes,

integrates poverty-oriented development strategies and ensures that

the debt savings are used to reduce poverty and environmental

degradation, and expands the private sector. The legislation further

requires the U.S. to work through the IMF to modify the Fund’s

ESAF programs, incorporating provisions with a poverty reduction

focus.

H.R. 1095 would directly strengthen the poverty reduction

requirements of HIPC. The bill, as reported, requires that any

economic and social conditions placed on country eligibility include

measures for poverty reduction and environmental protection. The

bill further adds an additional requirement that in order to receive

relief, a debtor nation must establish a “Human Development Fund,”

into which funds saved from debt relief measures be deposited and

spent on basic social services. Through this, proponents intend to

ensure that debtor governments invest more of the country’s

resources in education, health, clean water, and other poverty

focused programs. During the markup session, the Committee

adopted an amendment by Representative Frank aimed at assuring

that a debtor nation’s eligibility for U.S. debt relief would be

determined not by the terms of an IMF structural adjustment

program, but by conditions established by the United States,

including those required by H.R. 1095. Another amendment by

Representative Sanders “urges” the President to seek changes in the

HIPC process that would eliminate the need for an IMF reform

program as a condition of eligibility. Other amendments intended to

bar the requirement for IMF structural adjustment programs or to

cancel debt unconditionally were either withdrawn or defeated.

S. 1690 includes similar poverty spending requirements as in H.R.

1095, plus an additional condition that governments use the debt

relief savings for economic reform programs that promote sustainable

development with benefits shared widely throughout the population.

The HOPE for Africa Act (H.R. 772) authorizes unconditional debt

relief for African nations, thereby eliminating any pre-conditions

regarding ESAF or other policy reform requirements. The Jackson

bill, however, includes a requirement for the Secretary of State to

encourage African governments to allocate 20% of their national

budgets to support the U.N.’s 20/20 Initiative.33

The U.N. 20/20 Initiative calls on foreign aid donors to focus 20% of their assistance on

poverty reduction programs and aid recipient governments to commit 20% of their revenues

to basic social programs.

CRS-31

The companion HOPE for Africa Act (S. 1636) includes standard

legislative eligibility requirements that countries not violate human

rights, promote terrorism, engage in drug production or trafficking,

or spend excessive amounts on their militaries. Like H.R. 772, the

bill endorses that African governments support the 20/20 Initiative.

The Debt Relief and Development in Africa Act of 1999 (H.R. 2232)

explicitly prohibits the use of structural adjustment programs as a

condition for HIPC eligibility. The Waters bill, like H.R. 1095, also

requires debtor nations to establish a Human Development Fund

which will be used to expand government financial allocations for

basic social programs. In addition, H.R. 2232 further mandates that

countries create a Natural Resource Development Plan that will

clearly identify, among other things, which natural resources are

being developed, to what extent companies involved in their

development will profit, the quantity of revenues that will be

generated through such development and how the government plans

to use the money, and government conservation and environmental

protection proposals. The bill authorizes the U.S. Agency for

International Development and directs international financial

institutions to assist debtor countries in creating the Plan and

negotiating the terms of contracts with foreign investors involved in

the development of natural resources. Further, H.R. 2232 bans U.S.

Export-Import Bank support for any private American business

involved in natural resource development in debtor nations unless

there is full public disclosure of their contracts with the government.

The DEED Act of 1999 (H.R. 3049) conditions any future transfers

of U.S. resources to the IMF on the abolishment of ESAF. Instead

of a poverty-focused requirement included in most other debt relief

bills, the McKinney-Rohrabacher legislation stipulates that only

governments that were chosen through free and fair elections and

which promote civilian control of the military, the rule of law, and

strengthened political, legislative, and civil institutions of democracy,

are eligible for debt relief.

Cost Implications of Enhanced HIPC Debt Relief Measures

While approval for altering HIPC policy, terms, and conditions has occurred,

there is less certainty whether sufficient funds will be committed to implementing the

considerably higher costs of a reformed HIPC initiative. The World Bank/IMF

estimate that changes announced at their annual meetings in September will increase

HIPC costs from about $12.5 billion to $27.4 billion.

Cost Burden-sharing. Financing and establishing some burden-sharing

arrangement among participating creditor governments and institutions could be a

difficult hurdle in future HIPC reform negotiations. World Bank/IMF estimates show

that expenses for bilateral creditors participating in HIPC through Paris Club debt

relief would increase from $5.2 billion under the previous framework to $11.5 billion

for an enhanced HIPC program. Multilateral creditor costs would grow from $6.2

CRS-32

billion to $13.3 billion, with the World Bank share climbing from $2.4 billion to $5.1

billion, and that of the IMF from $1.2 billion to $2.1 billion.

Multilateral Financing and IMF Gold Revaluation. For the costs of

multilateral debt write-downs under the original HIPC structure, the World Bank and

IMF agreed to draw from their own resources while other regional MDBs would

require some assistance from bilateral donors and their contributions to the HIPC

Trust Fund. Under an expansion of HIPC, World Bank officials seem more cautious

about the ability of the Bank to cover the additional costs and suggest they may have

to “borrow” International Development Association (IDA) resources to implement

debt relief. This would reduce IDA lending to these same poor countries, at least in

the short term, raise concern among international development proponents who

oppose extending debt relief at the expense of development aid.

For the IMF, the situation is more complicated. The Fund had planned to

finance part of its participation under the earlier framework from the sale of gold.

After gaining the support of G-7 governments, including the United States, for the

gold sale, the original plan was abandoned in the face of significant opposition from

gold mining business interests and gold-producing countries in Africa who believe the

sale would force the price of gold down. The IMF modified its gold proposal so that

through a complicated process, some of the Fund’s gold assets would be revalued

from the “book” price of about $48 an ounce to the current world market price of

more than $260 per ounce. In short, the “profit” from the revaluation of gold could

be used for writing off poor country debt owed the IMF.34 As noted above, Congress

approved legislation (H.R. 3425) that allow the U.S. to support the proposed

mechanism, although with certain limitations.

U.S. Costs. For the United States, full implementation of the enhanced HIPC

modifications requires additional appropriations of $970 million provided over several

years. President Clinton had earlier asked Congress to provide $120 million for debt

relief (including $50 million for the HIPC Trust Fund) in FY2000. After G-7

agreement to expand the terms of HIPC, the White House, on September 21, 1999,

amended its pending request, adding $850 million for a total of $970 million. Of this,

$370 million was sought for FY2000, with the balance provided in increments of $200

million in each the following three years. Of the total, $650 million would pay for

U.S. contributions to the HIPC Trust Fund.

These estimates, however, are highly tentative and could fluctuate widely. For

example, if conditions in Sudan, Somalia, and Liberia would change so that it became

possible for their participation within HIPC, U.S. expenses, especially for bilateral

debt reduction, would grow considerably. Since these three countries account for

roughly $2 billion of the $6 billion owed the U.S. by the 41 HIPC nations, the costs

of bilateral debt reduction for the United States might grow by as much as one-third

Moreover, at the World Bank/IMF meetings, President Clinton announced that the

United States was prepared to cancel 100% of all bilateral debt, going beyond the

90% level endorsed by the G-7 for non-concessional loans. This will push U.S. costs

up, although the White House says the initiative can be accommodated within the

See footnote 13, above, for details on how the process would work.

CRS-33

recent budget amendment. A main reason why U.S. costs for an expanded HIPC

would fall heavily on financing the multilateral dimensions rather than the bilateral

portion of debt owed directly to the United States is because the U.S. has previously

written off a large portion of concessional debt and has not extended foreign aid on

a loan basis for over 15 years.

Thus far, Congress has supported only a very small portion of the President’s

funding request for debt relief. As cleared for the White House on October 6, H.R.

2606, the FY2000 Foreign Operations Appropriations bill, provided only $33 million

for debt relief programs, none of which could be transferred to the HIPC Trust Fund.

President Clinton vetoed H.R. 2606 on October 18, largely because of spending

reductions, including those for debt relief measures. More recently, on November 18

and 19, the House and Senate, respectively, approved another Foreign Operations

appropriations (H.R. 3422) that increases debt reduction spending to $123 million for

FY2000 but still bars the use of funds for multilateral debt relief. President Clinton

signed H.R. 3422 into law (as part of the Consolidated Appropriations Act, FY2000,

P.L. 106-113) on November 29, but said he would seek the remaining HIPC

appropriations in subsequent budget requests.

CRS-34

Table 7. Comparison of Debt Reduction Initiatives—Existing and Proposed

Expanded HIPC

G-7 Proposal-June 1999

International Debt Relief

(title V of H.R. 3425, PL 106-113)

Debt Relief for Poverty &

Development (HR 1095)

For good economic performing

countries, debt level reduced to a

“sustainable” level.

For good economic performing

countries, debt reduced so countries

can meet basic needs and spur

economic growth.

To authorize actions for bilateral debt

relief and to improve multilateral debt

relief.

To improve existing debt relief

mechanisms & ensure savings

from debt can-cellation will

finance poverty reduction

- good economic record

-World Bank/IMF program

-IDA-only statusa

-NPV debt-to-export ratio over 200%

-NPV debt-to-fiscal revenue ratio

over 280%

- good economic record

-IDA-only statusa

-NPV debt-to-export ratio over 150%

-NPV debt-to-fiscal revenue ratio

over 250%

-IDA-only statusa

-NPV debt-to-export ratio over 150%

-NPV debt-to-fiscal revenue ratio over

250%

-maintain a social and economic

reform program

-IDA-only statusa or Nigeria

-NPV debt-to-export ratio over

150%

-NPV debt-to-fiscal revenue

ratio over 250%

-“urges” no ESAF program

requirement.

HIPC Terms, 1996 to mid-1999

Goal

Country

Eligibility

Other

Eligibility

Criteria

---

For U.S., legislative requirements

regarding human rights, terrorism,

drug cooperation, excessive military

spending, and expropriation of U.S.

owned property.

Legislative requirements regarding

human rights, terrorism, drug

cooperation, and excessive military

spending.

Legislative requirements

regarding human rights,

terrorism, drug cooperation,

excessive military spending,

slavery practices, and SE Asian

countries failure to cooperate on

POW/MIA matters.

President also to consider child

labor conditions & workers

rights, and a country’s female

genital mutilation record.

Poverty

Focus

Requirement

Number

Potentially

Eligible

Nothing explicit.

(25 in Africa)

Modify World Bank & IMF programs

to emphasize poverty reduction;

channel debt relief savings into

education, health and other social

programs.

Modify World Bank and IMF programs

to be consistent with debtor country

Poverty Reduction Strategy Papers.

(30 in Africa)

Deposit debt savings into a

Human Development Fund to

finance poverty reduction

programs; broaden access to

basic social services, education,

health, clean water,

environmental protection.

(35 in Africa)

CRS-35

HIPC Terms, 1996 to mid-1999

Expanded HIPC

G-7 Proposal-June 1999

Reduction in debt owed so that:

NPV debt-to-exports ratio is 200250%

NPV debt-to-exports is 150%.

For very open economies,b NPV debtto-fiscal revenue ratio is no more

than 280%

For very open economies,b NPV

debt-to-fiscal revenue ratio of 250%

Bilateral

Concessional

Debt Relief

Not applicable.

100%

None stated

“Urges”

100%

Bilateral Non

Concessional

Debt Relief

Up to 80%

Up to 90%; higher in exceptional

cases.

U.S. policy 100%

100%

“Urges”

100%

Multilateral

Debt Relief:

Targets and

Ratios

Bilateral: Begin after 3 years of an

IMF reform program.

Timing

Multilateral: Begin after up to 6

years of an IMF reform program.

HIPC

eligibility

responsibility

“Urges” the reduction in debt

owed so that:

NPV debt-to-exports is 100%.

Retain two stage, 6-year process, but

with the possibility of a significantly

shorter second stage; a “floating

completion point.”

Annual debt service consumes

no more than 10% of

government revenues raised

domestically.

U.S. should “urge” the World Bank

and IMF to complete by 12/31/00 a

debt sustainability analysis for as many

HIPC countries as possible.

Bilateral creditors through Paris Club

arrangements.

Bilateral creditors through Paris Club

arrangements.

Bilateral: Unspecified authorization of

appropriations through 2004.

World Bank & IMF with own

resources.

Authorize the IMF to sell gold and

utilize a reserve account to finance its

participation.

Multilateral: none stated.

Other multilaterals with own

resources and contributions from

creditor governments.

World Bank/IMF

Debt Relief for Poverty &

Development (HR 1095)

None stated

Multilateral: Early cash flow relief

by international institutions.

Financing

International Debt Relief

(title V of H.R. 3425, PL 106-113)

Bilateral donors may have to increase

Trust Fund contributions.

World Bank/IMF

Authorizes IMF “off-market” gold sale

that will generate 2.226 billion Special

Drawing Rights. Only 9/14 of the

earnings from investments of the gold

sale profits can be used.

World Bank/IMF

Bilateral: Immediate, after

Human Development Fund

created.

Multilateral: After Human

Development Fund and Natural

Resources Development Plan

created.

Bilateral: Unspecified

authorization of appropriations

through 2004.

Multilateral: Unspecified

authorization of appropriations

to the HIPC Trust Fund through

2004.

Authorizes IMF “off-market”

gold sale up to 14 million

ounces.

For bilateral debt relief, terms

set by U.S. government.

CRS-36

New Aid to

HIPCs

HIPC Terms, 1996 to mid-1999

Expanded HIPC

G-7 Proposal-June 1999

International Debt Relief

(title V of H.R. 3425, PL 106-113)

Debt Relief for Poverty &

Development (HR 1095)

No position.

Preferably grant aid.

None stated

“Sense of Congress” for grant

aid only.

Sources: World Bank, U.S. Department of the Treasury, G-7 Finance Ministers Report to the G-7 Economic Summit (6/18/99), Department of Treasury testimony before House

Banking Committee (6/14/99), Bread for the World, and Oxfam America.

Countries eligible to borrow only from the World Bank’s concessionary lending facility, the International Development Association. Generally, countries with an annual per capita

GNP of $925 or less are designated as “IDA-only.”

Very open economies under the original HIPC program referred to those countries where the export-to-GDP ratio exceeds 40% and fiscal revenue-to-GDP exceeds 20%. Under

the G-7 recommendation and H.R. 1095, “very open economies” are those with an export-to-GDP ratio above 30% and fiscal revenue-to-GDP above 15%.

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