Sections:
Statistics on International Development 2007
Annex 3 - 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 contribute to a national poverty reduction strategy.
2. The UK provides 100 per cent irrevocable 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 2005/06, and to the World Bank and AfDB from 2006/07, are or will be reported with other contributions to these bodies as multilateral aid.
Debt Terminology
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 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 just over 400 agreements (with 7 in 2006 and 5 so far in 2007) 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.
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-two countries have now completed the HIPC Initiative and received irrevocable debt relief. Nine other countries are receiving interim relief. A further 13 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. Of these 13 countries, Sri Lanka, Kyrgyz Republic, Bhutan and Lao PDR have indicated that they do not wish to participate.
Implementation status of Heavily Indebted Poor Countries (HIPC) Initiative (August 2007)
Decision Point Date |
Completion Point Date |
Countries at Completion Point |
Benin |
July 2000 |
April 2003 |
Bolivia |
February 2000 |
June 2001 |
Burkina Faso |
July 2000 |
April 2002 |
Cameroon |
October 2000 |
May 2006 |
Ethiopia |
November 2001 |
April 2004 |
Ghana |
February 2002 |
July 2004 |
Guyana |
November 2000 |
December 2003 |
Honduras |
July 2000 |
April 2005 |
Mali |
September 2000 |
February 2003 |
Mauritania |
February 2000 |
June 2002 |
Madagascar |
December 2000 |
October 2004 |
Malawi |
December 2000 |
August 2006 |
Mozambique |
April 2000 |
September 2001 |
Nicaragua |
December 2000 |
January 2004 |
Niger |
December 2000 |
April 2004 |
Rwanda |
December 2000 |
April 2005 |
Sao Tome and Principle |
December 2000 |
May 2007 |
Sierra Leone |
March 2002 |
January 2007 |
Senegal |
June 2000 |
April 2004 |
Tanzania |
April 2000 |
November 2001 |
Uganda |
February 2000 |
May 2000 |
Zambia |
December 2000 |
April 2005 |
Countries at Decision Point (interim relief) |
||
Afghanistan |
July 2007 |
|
Burundi |
August 2005 |
|
Chad |
May 2001 |
|
DR Congo |
July 2003 |
|
Republic of Congo |
March 2006 |
|
Gambia |
December 2000 |
|
Guinea |
December 2000 |
|
Guinea-Bissau |
December 2000 |
|
Haiti |
November 2006 |
|
Republic of Congo |
March 2006 |
|
Pre-Decision Point Countries |
||
Central Africa Republic |
||
Comoros |
||
Cote D'Ivoire |
||
Eritrea |
||
Liberia |
||
Nepal |
||
Somalia |
||
Sudan |
||
Togo |
||
In addition four countries have opted not to participate in HIPC at this stage |
||
Bhutan, Kyrgyz Republic, Lao PDR and Sri Lanka |
||
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. Debt relief is cancelled by the benefiting country during the year the terms are agreed. However, for RTA, SID relects 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 has reduced to a minimal level. As such the outstanding sum that would be normally be reported each year in SID has been combined into a single lump sum that has been reported this year. As such 2006/07 is the final year for which SID will report RTA debt relief2.
16. 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. Under CDI, assessment either recommended the debt was written off in perpetuity or written off annually subject to assessment each time.
17. DFID bilateral debt relief given under RTA and CDI in recent years is
included in Tables 3
,
4,
13
and 14 under ‘DFID Debt Relief’. In 2006/07, £61.2m
is shown as DFID debt relief3 .
UK Bilateral Aid Debts
18. UK bilateral debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative covers debt relief on bilateral export credit and CDC loans to governments.
19. 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.
20. 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.
21. 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’ Policy4 .
22. In 2006/07 DFID ‘Bilateral HIPC’ payments amounted to £24.6m. In Table 3, 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.
23. Table 5 contains details of debt relief given by ECGD. The total ECGD debt relief for 2006/07 was £1.9 billion. ECGD and CDC debt relief are combined in Table 2 under Debt Relief5 .
24. 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 2006/07,
£90.1m of CDC debts were cancelled as countries reached HIPC ‘Completion Point’
(see Tables 4 and
55).
Multilateral Debt Relief
25. 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 4 and as a DFID multilateral contribution in Table 18. UK multilateral contributions to the HIPC Trust Fund amounted to £18.7m in 2006/07. These contributions are reported as ODA for the relevant year and identified as debt relief in DAC reporting.
26. 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.
27. 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). Overall MDRI is worth over $50 billion to 44 countries, resulting in 100 per cent debt cancellation when countries reach HIPC ‘Completion Point’.
28. 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.
29. 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.
30. 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
2006/07 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 18.
31. 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 2006/07
totalled £51.9m. These payments are included in DFID Debt Relief in Tables 14
and 4.
HIPC Debt Management Capacity Building Programme
32. 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.
33. 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.
Nigeria Debt Buyback
34. 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.
35. 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 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). The UK has reported this discounted debt buyback as ODA as have Belgium, France, Germany, Italy, Japan, Spain and US. Austria and Denmark will report the Nigeria debt buyback as ODA in 2007. Further guidance on the ODA treatment of future debt buybacks is being developed by the DAC.