Statistics on International Development 2006

Section 5

Contents | Section 1 | Section 2 | Section 3 | Section 4 | Section 5 | Table Index

The Heavily Indebted Poor Countries Initiative (HIPC) | Implementation Status of Heavily Indebted Poor Countries (HIPC) as of end August 2006 | DFID Bilateral Aid Debts | UK Bilateral Aid Debts | Multilateral Debt Relief | HIPC Debt Management Capacity Building Programme (CBP) | Reporting of Debt Relief

Debt Relief

Introduction

1. Debt is a major development issue. There is widespread support for lifting the burden of unpayable debt from the poorest countries.

Debt relief frees developing countries from their debt service payments. They can then use these savings to implement a national poverty reduction strategy.

2. The UK provides debt relief, where appropriate, on debts owed to DFID, CDC and ECGD¹ , as well as advice and technical assistance to strengthen countries’ management of their debts. The UK also makes additional contributions to international financial institutions such as the World Bank, African Development Bank (AfDB) and the International Monetary Fund (IMF) to compensate them for the costs of debt relief. Contributions to the IMF in 2005/2006, and to the World Bank and AfDB from 2006/2007, are or will be reported with other contributions to these bodies as multilateral aid.

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:

• Debt cancellation (sometimes called stock relief) - partial or 100 per cent reduction of amounts outstanding (principal and/or interest);
• Debt rescheduling where payments (interest and/or principal) are delayed or rearranged;
• Flow relief – partial or 100 per cent relief on debt service payments.

5. Decisions to award a particular type of debt relief, for example, under the Heavily Indebted Poor Countries (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.

The Paris Club

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, have reached 403 agreements concerning 84 debtor countries. Debt treatments in the Paris Club can take various forms. Details of the options and terms available are given in the Glossary.

1. See Glossary for a description of CDC and ECGD.

The Heavily Indebted Poor Countries (HIPC) Initiative

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). In particular, the link between debt relief and poverty reduction was strengthened under e-HIPC. 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 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 an interim 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 developing a full PRSP and implementing it for a year. They must also continue their sound economic management under an IMF programme, as well as implementing any agreed structural reforms. ‘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 $70 billion has been agreed under HIPC for 29 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. Several of these countries did not meet the full set of normal HIPC requirements, but the international community agreed to be more flexible in assessing eligibility for relief, including, for example, post conflict countries.

12. The table on the following page shows the progress of eligible countries through the HIPC Initiative. Twenty countries (16 of them African) have now completed the HIPC Initiative and received irrevocable debt relief. Nine more African countries are receiving interim relief. A further 14 countries are eligible for HIPC but have yet to progress through the Initiative. Some have struggled with governance problems or conflict, whilst 6 have only recently become eligible under the extended ‘HIPC Sunset Clause’ (end date by which countries can qualify for starting the Initiative). Of these 14 countries, Sri Lanka, Bhutan and Lao PDR have indicated that they do not wish to participate.

Implementation status of Heavily Indebted Poor Countries (HIPC) Initiative (August 2006)

DFID Bilateral Aid Debts

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. The annual sums reported as debt relief reflect the money available to the country in the year in question that would otherwise have been spent on debt servicing.² This is, effectively, converting loans to grants.

15. In September 1997, the UK also launched the Commonwealth Debt Initiative (CDI) to provide relief on the remaining aid debts (valued at £132m) 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. Debts cancelled, or rescheduled, under CDI are reported in the same way as RTA.

16. DFID bilateral debt relief given under RTA and CDI in recent years is included in Tables 1(27 kb), 11(30 kb), 12 and 21(17 kb)  under ‘DFID Debt Relief’. In 2005/06, £39.5m is shown as DFID debt relief³

2. These amounts of debt relief were ‘rolled up’ and reported to the DAC at the time the change to lump sum reporting was made (1999).
3. 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.

UK Bilateral Aid Debts

17. UK bilateral debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative covers debt relief on bilateral export credit and CDC loans to governments.

18. 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.

19. 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.

20. The UK exceeds its commitment under HIPC by providing 100 per cent cancellation of bilateral debts for qualifying countries. The Export Credit Guarantee Department (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’ Policy.⁴

21. In 2005/06 DFID ‘Bilateral HIPC’ payments amounted to £0.6m. In Table 1(27 kb), these payments are included within ‘Other Financial Aid’. They are reported as ODA for the relevant year and identified as debt relief in DAC reporting.

22. Table 22 (22 kb) contains details of debt relief given by ECGD. The total ECGD debt relief for 2005/06 was £1.6 billion. ECGD and CDC debt relief are combined in Table 2(27 kb) under Debt Relief.

23. 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’. This is UK official debt and so is eligible for debt relief under HIPC and other internationally agreed debt deals. In 2005/06, £18.2m of CDC debts were cancelled as countries reached HIPC ‘Completion Point’ (see Tables 21(17 kb) and 22(22 kb)⁵

4. 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.
5. 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).

Multilateral Debt Relief

24. 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. Contributions are recorded as ‘Multilateral HIPC Trust Fund’ in Table 21(17 kb) and as a DFID multilateral contribution in Table 16. UK multilateral contributions to the HIPC Trust Fund amounted to £11.1m in 2005/06. These contributions are reported as ODA for the relevant year and identified as debt relief in DAC reporting.

25. 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 bilateral creditors.

26. 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). This MDRI, worth over $50 billion to 43 countries, will mean 100 per cent debt cancellation when countries reach HIPC ‘Completion Point’.

27. 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. MDRI relief will be delivered with no additional conditions, although countries which have already passed HIPC Completion Point were required to demonstrate that they had maintained their commitment to poverty reduction and sound financial management.

28. The MDRI has now been agreed by the Boards of Governors of the IMF, World Bank and AfDB and is being implemented at all three institutions. The IMF has cancelled 100 per cent of the debts of 22 countries (16 of which are African). The International Development Association (IDA), the concessional funding arm of the World Bank has cancelled the debt of 20 countries, and the African Development Fund (AfDF) of the African Development Bank has cancelled the debt of 16 countries. Twenty three other countries are eligible for similar cancellation when they reach required standards. .

29. The UK will pay its share of the costs of the MDRI at the World Bank and African Development Bank by additional contributions to IDA and AfDF from 2006/7 onwards. The costs of MDRI debt relief at the IMF were 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 £13.7m to the IMF as part of this. This payment is included in the IMF payments in Table 16(31 kb).

30. 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). Six non-HIPC countries (Armenia, Cape Verde, Georgia, Mongolia, Vietnam and Sri Lanka) currently receive UK MDRI assistance. The UK also provided UK MDRI assistance to 17 Completion Point HIPCs in 2005/06 until their debts were cancelled under the new MDRI. In total, payments under UK MDRI during 2005/06 totalled £24.9m. These payments are included in DFID Debt Relief in Tables 12 and 21(17 kb).

HIPC Debt Management Capacity Building Programme

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 1(27 kb).

Reporting of Debt Relief

33. The UK, in line with other donors, reports cancellation of aid loans on a lump sum basis to the OECD-DAC. This means that the total outstanding is reported as ODA in the year in which a bilateral deal is signed between the UK and a debtor country, except for countries reaching Completion Point under HIPC where the date of the multilateral agreement is used as the date for DAC reporting.

34. The various components of UK debt relief are summarised in Table 21(17 kb). In 2005/06, DFID debt relief of £64.9m represents, 1 per cent of the DFID programme and UK debt relief of £1,653m represents 25 per cent of total GPEX. Debt relief for Nigeria of £1,135m represents 69 per cent of UK debt relief and 17 per cent of total GPEX. Countries receiving DFID and non DFID debt relief are shown in Tables 12 and 22(22 kb) respectively.

35. Table 14(50 kb) reports UK bilateral debt relief as reported to the DAC for 2004 as £415m. The sums reported to the DAC are lower than those shown in Table 21(17 kb) since a net figure is reported to the DAC (i.e. the difference between loans repaid and debts forgiven in the year in question) whereas elsewhere we show the total debt forgiven.⁶

6. Debt relief reported in SID under the heading ‘DFID debt relief’ (except the CDI component) is not included in current ODA/ OA figures as the relevant sums have already been reported. HIPC related payments and money for the CBP are included in the total ODA figures (although CBP payments are not identified as debt relief).

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