The Heavily Indebted Poor Countries (HIPC) Initiative - Frequently Asked Questions
02 January 2008
- How will debt relief help achieve the Millennium Development Goals?
- How much progress has been made under the HIPC Initiative?
- Which countries have qualified for debt relief under the HIPC Initiative?
- How is HIPC debt relief delivered?
- How much has the UK contributed under the HIPC Initiative?
- Why attach conditions to the HIPC Initiative?
- What has been the impact on poverty so far?
- What about longer-term debt sustainability?
- What about non-HIPC poor countries?
How will debt relief help achieve the Millennium Development Goals?
Where governments are committed to eradicating poverty, debt relief can free up resources for investment in key programmes, and play an important part in our efforts to meet the Millennium Development Goals (MDGs). But, debt relief alone will never provide sufficient resources to finance the MDGs. If the MDGs are to be met, additional resources beyond debt relief will be needed.
Poverty-reducing expenditures in countries that receive HIPC assistance are projected to have increased from 6.4% of GDP in 1999 to 8.4% of GDP in 2007. The UK government remains committed to reach the UN target of spending 0.7% of ODA as GNI by 2013, ahead of the agreed European target of 2015. Current spending plans show we are broadly on course to meet this target, but the uneven profile of debt relief will mean that figures fluctuate year by year.
We were instrumental in creating the MDRI in 2004 and securing G8 agreement to it at Gleneagles in 2005. We work with other donor countries in implementing the Heavily Indebted Poor Countries (HIPC) initiative and encourage other donors to give 100% debt relief as we do. This represents an extra $50 billion worldwide, including an extra $25 billion for Africa. This will mean significantly faster progress by poor countries towards meeting the MDGs.
How much progress has been made under the HIPC Initiative?
The HIPC Initiative has had considerable success, both in terms of the levels of relief it has delivered, and in ensuring that this relief is channelled towards poverty reduction. To date, relief totalling more than US$60 billion has been agreed for 32 countries (23 have received full cancellation and 9 are receiving interim debt relief), reducing their debts by around two-thirds, and freeing up resources for spending on poverty reduction. Poverty-reducing expenditures in countries that receive HIPC assistance are projected to have increased from 6.4% of GDP in 1999 to 8.4% of GDP in 2007.
Which countries have qualified for debt relief under the HIPC Initiative?
The 32 countries that have qualified for debt relief under the enhanced HIPC framework are:
- Afghanistan
- Benin
- Bolivia
- Burkina Faso
- Burundi
- Cameroon
- Central African Republic
- Chad
- Democratic Republic of Congo
- Ethiopia
- Ghana
- Guyana
- Gambia
- Guinea
- Guinea Bissau
- Haiti
- Honduras
- Madagascar
- Malawi
- Mali
- Mauritania
- Mozambique
- Nicaragua
- Niger
- Republic of Congo
- Rwanda
- Sao Tome and Principe
- Senegal
- Sierra Leone
- Tanzania
- Uganda
- Zambia
How is HIPC debt relief delivered?
HIPC relief is delivered in two stages. When countries reach the first stage, Decision Point, they receive interim relief and cease to make payments on their debt. When HIPC governments have demonstrated progress in tackling poverty, they reach the second stage, Completion Point. At this stage they receive 100% cancellation in their stock of debt. Of the 32 countries that have so far qualified for HIPC relief, 23 have reached Completion Point and had their debts cancelled. These countries are:
- Benin
- Bolivia
- Burkina Faso
- Cameroon
- Ethiopia
- Ghana
- Guyana
- Honduras
- Madagascar
- Mali
- Malawi
- Mauritania
- Mozambique
- Nicaragua
- Niger
- Rwanda
- Sao Tome & Principe
- Senegal
- Sierra Leone
- Tanzania
- Uganda
- Zambia
How much has the UK contributed under the HIPC Initiative?
The UK goes beyond the requirements of the HIPC Initiative and writes off 100% of all bilateral debts for HIPC countries when they qualify. The UK Government holds in trust any debt service payments received from HIPC countries that have not yet qualified for debt relief, to be returned for spending on poverty reduction when they reach Completion Point.
In addition, the UK is the second largest contributor to the HIPC Trust Fund. The Trust Fund will either prepay or purchase a portion of the debt owed to a multilateral creditor and cancel such debt, or pay debt service, as it comes due. The UK has also contributed US$43 million to assist the International Monetary Fund with its costs of delivering HIPC debt relief.
Why attach conditions to the HIPC Initiative?
The UK Government has always stressed that debt relief must be linked to poverty reduction and has strongly supported the development of the Poverty Reduction Strategy (PRS) process as the best way of achieving this link. PRSs set out a clear, country-led strategy upon which donor support can be built. These set key policy priorities for low-income countries in the medium term, and make linkages to budgets and spending.
This ensures that government revenue, aid, and debt relief from the HIPC Initiative are directed towards poverty reduction.
We firmly believe that countries should lead their own development and that conditions linked to aid and debt relief should not be used to impose economic policies on governments. The World Bank recognises that mistakes have been made in the past on conditionality and has altered its approach. The UK's priority is the implementation of the World Bank's 2005 Good Practice Principles. Significant progress has been made, but greater focus is needed on the impact of these policies on the poor.
What has been the impact on poverty so far?
Significant development progress in many Poverty Reduction Strategy (PRS) countries has already been observed. For example, published results from the Tanzania Demographic and Health Survey show several positive changes relating to child health in Tanzania, including a fall in infant mortality rates by a third in between 2000 and 2005. Malawi is using debt relief to increase pro-poor spending and reduce domestic debt levels. Zambia has used some of its savings from debt relief under the Multilateral Debt Relief Initiative to abolish health fees in rural areas – thousands of people are now receiving free healthcare. Poverty-reducing expenditures in countries that receive HIPC assistance are projected to have increased from 6.4% of GDP in 1999 to 8.4% of GDP in 2007.
What about longer-term debt sustainability?
Debt reduction alone cannot guarantee long-term debt sustainability. In addition to debt cancellation, further steps still need to be taken to find a long-term solution to unsustainable debt. The international community must ensure that new financing provided to countries is delivered in the right mix of grants and loans to avoid debt crises in the future. The UK Government already gives all of its aid in the form of grants, but we need to ensure that the multilateral institutions also lend appropriately.
The UK is at the forefront of international initiatives on responsible lending and borrowing, aimed to ensure that poor countries do not accumulate unsustainable debts. We have been leading efforts with the Organisation for Economic Co-operation and Development (OECD) to get Export Credit Agencies to agree firm guidelines on responsible lending. In April 2007 we were successful in persuading OECD countries to extend the scope of the OECD Statement of Principles on Unproductive Expenditure beyond HIPCs.
We have also worked with other donors, the World Bank, IMF and African Development Bank to develop the Debt Sustainability Framework (DSF), which should be used consistently to inform both borrowing and lending decisions. The DSF will help ensure that countries that may be vulnerable to debt problems receive assistance on appropriate terms that will enable their continued development without accumulating unsustainable levels of debt in the future.
This commitment to ensure responsible lending and borrowing at the international level is reflected in the UK’s own lending policies. All of the UK’s export support to poor countries is rigorously assessed to ensure that it takes into account a country’s underlying debt position, the impact of the proposed borrowing on this, and the impact of the proposed project on the country’s economic and social development.
The UK's Export Credit Guarantee Debt is also committed to Responsible Lending and Productive Expenditure for all Low Income Countries.
What about non-HIPC poor countries?
The UK is committed to pay its share (10%) of the debt service owed to the World Bank and the African Development Bank on behalf of other (non-HIPC) low income poor countries with suitably strong public expenditure management systems to ensure the savings are directed towards poverty reduction. Eight countries (Armenia, Cape Verde, Georgia, Moldova, Mongolia, Nepal, Sri Lanka and Vietnam) are currently eligible for this support, but more will become so as they meet the public financial management criteria. Sri Lanka is receiving assistance in view of its exceptional post-tsunami reconstruction needs.
Other Non-HIPC countries that are having difficulties servicing their debts are able to approach the Paris Club for relief. The Paris Club assesses countries' debt levels and provides appropriate treatment by postponing, and in some cases reducing, debt service obligations. Since its first meeting in 1956, the Paris Club, or ad hoc groups of Paris Club creditors, have reached 369 agreements concerning 78 debtor countries. Since 1983, the total amount of debt covered in these agreements has been $410 billion.
