1. Debt is a major development issue. There is widespread support for lifting the burden of debt from the poorest countries. Debt relief frees developing countries from their debt service payments. They can then use these savings to contribute to a national poverty reduction strategy.
2. The UK provides 100 per cent irrevocable debt relief for Heavily Indebted Poor Countries (HIPCs) on debts owed to DFID, the CDC Group PLC and Export Credit Guarantee Department (ECGD)(5), as well as advice and technical assistance to strengthen countries’ management of their debts. We also make full additional annual contributions to the World Bank and African Development Bank (AfDB) to compensate them for the costs of debt relief under the Multilateral Debt Relief Initiative (MDRI), as well as a contribution to the International Monetary Fund (IMF) in 2005/06. Our contributions to the World Bank and AfDB have been reported from 2006/07, when the MDRI was launched, and our most recent contributions reported within Statistics on International Development 2008. They are reported as bilateral aid as these contributions are earmarked for a specific purpose.
3. A country’s debt can be described in terms of ‘principal’ and ‘interest’. The principal is the amount of the original loan still outstanding. A country’s debt stock is the outstanding principal, plus any interest accrued (as well as any penalties incurred for failure to make debt service payments).
4. Debt relief can take various forms, including:
5. Decisions to award a particular type of debt relief, for example, under the HIPC Initiative, are usually made by international consensus. All creditors participating in the HIPC Initiative are then expected to deliver agreed (or better) terms. Bilateral deals can also take place between creditors and debtor governments. The Paris Club is the main forum for agreeing treatment of bilateral (government to government) debt.
6. The Paris Club is an informal group of government creditors who work together to find co-ordinated and sustainable solutions to payment difficulties experienced by debtor nations. The UK is a permanent member of the Paris Club.
7. To date, the Paris Club, or ad hoc groups of Paris Club creditors, has reached just over 400 agreements (with 6 in 2007 and 4 so far in 2008) concerning 85 debtor countries. Debt treatments in the Paris Club can take various forms. Details of the options and terms available are given in the Glossary.
8. The HIPC Initiative was launched by the World Bank and the IMF in 1996 to reduce the debts of the poorest and most indebted countries to sustainable levels. The majority of bilateral (government) and multilateral creditors (such as the World Bank, IMF and Regional Development Banks) have agreed to participate.
9. The HIPC Initiative was strengthened in 1999 and re-launched as the enhanced HIPC Initiative (e-HIPC). This provided more relief for more countries more quickly and it put poverty reduction at the heart of debt relief. To be eligible, countries must demonstrate their commitment to sound economic management (and the implementation of an IMF programme) and poverty reduction (through the implementation of a national Poverty Reduction Strategy Paper, PRSP). A PRSP analyses poverty in the country and sets out what the government will do to reduce it. The strategy also contains expenditure frameworks which indicate how resources, including savings from debt relief, will be allocated.
10. Debt relief under HIPC is delivered in two stages. Initially countries work towards ‘Decision Point’ by developing a PRSP, and establishing a track record of sound economic management, generally under an IMF Poverty Reduction and Growth Facility (PRGF) funded programme. When these standards have been met, interim debt relief is delivered, meaning that debt service payments are considerably reduced. Countries then work towards ‘Completion Point’ and irrevocable debt stock cancellation by implementing their PRSP for at least a year. They must also continue their sound economic management under an IMF programme, as well as implementing any other reforms (“triggers”) they agreed to undertake at Decision Point. ‘Decision Point’ and ‘Completion Point’ status is decided by the Executive Boards of the IMF and World Bank and subsequently by the Board of the relevant Regional Development Bank. The Paris Club group then follows this lead.
11. Overall, debt relief worth over $65 billion has been agreed under HIPC for 33 countries so far. This has reduced their debts, on average, by around two-thirds, and freed up roughly $1 billion a year for spending on poverty reduction.
12. The table on the following page shows the progress of eligible countries through the HIPC Initiative. Twenty-three countries have now completed the HIPC Initiative and received irrevocable debt relief. Ten other countries are receiving interim relief. A further 8 countries are eligible for HIPC but have yet to progress through the Initiative. For the remaining countries slow progress through HIPC is often the result of governance problems or conflict. A further 3 countries, Sri Lanka Bhutan and Lao PDR, have decided not to participate in HIPC.
Benin
July 2000
March 2003
Bolivia
Feb 2000
Jun 2001
Burkina Faso
April 2002
Cameroon
Oct 2000
May 2006
Ethiopia
Nov 2001
April 2004
Gambia
Dec 2000
Dec 2007
Ghana
Feb 2002
July 2004
Guyana
Nov 2000
Dec 2003
Honduras
April 2005
Madagascar
Oct 2004
Mali
Sept 2000
Feb 2003
Malawi
August 2006
Mauritania
June 2002
Mozambique
April 2000
Sept 2001
Nicaragua
Jan 2004
Niger
Rwanda
Sao Tome and Principe
May 2007
Sierra Leone
March 2002
December 2006
Senegal
June 2000
Tanzania
Uganda
May 2000
Zambia
Afghanistan
July 2007
Burundi
August 2005
Chad
May 2001
DR Congo
July 2003
Republic of Congo
March 2006
Guinea
Guinea-Bissau
Haiti
November 2006
Central African Republic
Comoros
Cote D'Ivoire
Eritrea
Kyrgyz Republic
Liberia
Nepal
Somalia
Sudan
Togo
In addition, three countries have opted not to participate in HIPC at this stage:
Bhutan, Lao PDR and Sri Lanka
13. DFID has cancelled nearly all of its aid debts for low income countries by Retrospective Terms Adjustment (RTA), providing over £1.3 billion of debt relief since 1978.
14. Debt relief is cancelled by the benefiting country during the year the terms are agreed. However, for RTA, SID reflects the money available to the country each year that would otherwise have been spent on debt servicing by reporting annual sums of debt relief. This is, effectively, converting loans to grants.
15. The outstanding amount still to be reported under RTA reduced to a minimal level by 2006/07. As such, the outstanding sum that would normally be reported each year in SID was combined into a single lump sum that was reported in SID 2007. As such 2006/07 is the final year for which SID will report RTA debt relief6.
16. In September 1997, the UK also launched the Commonwealth Debt Initiative (CDI) to provide relief on the remaining aid debts of lower-middle income Commonwealth countries. In order to benefit, countries were required to demonstrate their commitment to poverty reduction and the Millennium Development Goals, sound economic management, accountable and transparent governance and efforts to reduce corruption. To date, 12 countries (predominantly in the Caribbean) have benefited from debt relief under CDI. Under CDI, assessment either recommended the debt was written off in perpetuity or written off annually subject to assessment each time
17. Despite the successes of HIPC, debt owed by the poorest countries to multilateral institutions such as the World Bank, African Development Bank and IMF remained a significant burden to them. The UK therefore used its Presidencies of the G8 and EU in 2005 to promote 100 per cent debt relief by multilateral institutions to match the 100 per cent relief already being given by many bilateral creditors.
18. In 2005, the G8 agreed a proposal for a Multilateral Debt Relief Initiative (MDRI) that would cancel 100 per cent of the remaining debts of HIPCs to the concessional lending arms of the World Bank (IDA), IMF and African Development Bank (AfDB). Following agreement by the Boards of Governors of the World Bank, IMF and AfDF, the MDRI was implemented in 2006. Overall MDRI is worth over $50 billion to 41 countries, resulting in 100 per cent debt cancellation when countries reach HIPC ‘Completion Point’. So far, MDRI has delivered over US$43 billion worth of debt cancellation.
19. Donors agreed to fully compensate the Banks for the debt service that HIPC countries would otherwise have paid. These additional funds will be allocated to all poor countries using the institutions' performance-based allocation systems. After ‘Completion Point’ is achieved, no further conditions are attached to MDRI and post-Completion Point HIPCs receive this automatically as soon as they qualify for HIPC debt cancellation.
20. Under the MDRI, the IMF has cancelled 100 per cent of the debts of 22 countries (19 of which are African). The International Development Association (IDA), the concessional funding arm of the World Bank has cancelled the debt of 23 countries (19 of which are African), and the African Development Fund (AfDF) of the African Development Bank has cancelled the debt of 19 countries. Eighteen other countries are eligible for similar cancellation when they reach required standards.
21. The UK has committed to paying its share of the costs of the MDRI at the World Bank and African Development Bank by additional contributions to IDA and AfDF from 2006/07 onwards. Under this commitment the UK has already contributed £62 million to IDA and £12 million to the AfDF in debt cancellation. The costs of MDRI debt relief at the IMF were largely met from internal resources. The G8 however, agreed to provide additional resources to the IMF to ensure that it was able to continue to lend on concessional terms. In March 2006, the UK made a payment of £14 million to the IMF as part of this.
22. In addition to participation in the MDRI, the UK has also agreed to pay its share (10 per cent) of qualifying non-HIPC poor countries’ debt service to IDA and AfDB until 2015 under the UK Multilateral Debt Relief Initiative (UK MDRI). The UK has recently changed the eligibility criteria for the initiative, in order to provide a clearer focus on good public financial management as a basis for countries being able to demonstrate the debt relief will be used for poverty reduction. This change means more of the poorest countries now benefit from this debt relief. Under the revised criteria, four new countries qualified to receive UK MDRI support (Bhutan, Lesotho, Samoa and Vanuautu) in addition to the eight countries that had already qualified (Armenia, Cape Verde, Georgia, Moldova, Mongolia, Nepal, Sri Lanka and Vietnam) for such assistance.
23. DFID also provides, through the HIPC Trust Fund at the World Bank, financial support to help multilateral institutions provide debt relief under HIPC. DFID is currently the second largest bilateral contributor to the Trust Fund. These contributions are reported as ODA for the relevant year and identified as debt relief in DAC reporting.
24. DFID debt relief given under RTA, CDI, HIPC and MDRI in recent years is included in Tables 3, 4, 13, and 14 under ‘DFID Debt Relief’. In 2007/08, £71.4m is shown as DFID debt relief7.
25. UK debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative covers debt relief on bilateral export credit and CDC loans to governments.
26. The Export Credit Guarantee Department (ECGD), like its counterparts in other developed countries, assists UK exporters to win business overseas by providing guarantees and insurance for contracts. Developing countries can acquire debt, however, if they default on paying for these goods and services.
27. If countries face difficulties with meeting their debt repayments, assistance may be provided in the form of rescheduling and, for poorer countries, partial cancellation. Such arrangements are generally agreed in the Paris Club and are conditional on the debtor country following sound economic policies, agreed with the International Monetary Fund ((IMF). Bilateral export credit debt is UK official debt, and so is eligible for debt relief under HIPC and other internationally agreed debt relief deals.
28. The UK exceeds its commitment under HIPC by providing 100 per cent cancellation of bilateral debts for qualifying countries. ECGD therefore offers 100 per cent debt service relief at Decision Point and 100 per cent debt cancellation at Completion Point. ECGD meets the costs of the relief agreed at the Paris Club and DFID pays for whatever additional relief is needed to bring the total to 100 per cent. DFID payments to ECGD under this HIPC 100 per cent relief policy are recorded as ‘Bilateral HIPC’. ‘Bilateral HIPC’ payments also include reimbursements to countries under the ‘Hold in Trust’ Policy8.
29. Table 5 contains details of debt relief given by ECGD. The total ECGD debt relief for 2007/08 was £4 million. ECGD and CDC debt relief are combined in Table 2 under Debt Relief9.
30. CDC (as described in the Glossary) had a portfolio of loans to governments. These are now ‘DFID Public Sector Loans’ managed by Actis but referred to as ‘CDC Loans’. From mid-2008 these loans will be managed and administered directly by DFID. This is UK official debt and so is eligible for debt relief under HIPC and other internationally agreed debt deals.
31. DFID co-funds (with Austria, Canada, Ireland, Sweden and Switzerland) a programme of technical advice and assistance for HIPC countries to strengthen their debt management capacity. The programme, currently in its fourth and final phase, also assists HIPCs to develop a debt management strategy to plan and manage future borrowing.
32. DFID also provides technical assistance in debt management for some non-HIPC countries, supporting developing countries’ participation in Bank of England, IMF and other training courses. Such assistance is included as ‘Technical Cooperation’ in Table 3.
33. A debt buyback is when a donor provides a grant to fund the recipient’s purchase of its debt. The amount is usually bought back at a discount.
34. At the time of the Nigeria agreement in October 2005, there was no DAC directive on the ODA treatment of a discount offered when a debtor buys back its own debt. The debt buy-back for Nigeria was concluded in April 2006. The DAC agreed that members who believe the main objective of the Nigeria debt relief package was developmental can report the discount as ODA; those that believe that the main objective was commercial can report the discount as an other official flow (OOF). Further guidance on the ODA treatment of future debt buybacks is being developed by the DAC.
(5). See Glossary for a description of CDC and ECGD.(6). Due to a change of policy at the DAC all remaining RTA debt relief was reported to the DAC in a lump sum in 1999.(7). Within this sum, annual cancellation under CDI will be included in the UK ODA figures for 2005 or 2006 but the debts reported on the ‘benefit to country basis’ will not be included in ODA figures as the relevant sums have already been reported to the DAC. The sum also includes UK MDRI.(8). From December 2000, the UK has held in trust any debt service payments received from pre-Decision Point HIPC countries. This money is then reimbursed for spending on poverty reduction when the country reaches Decision Point.(9). ECGD/ CDC debt relief is reported as UK ODA in the relevant year on a net basis (i.e. with deductions for any repayments made).
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