Debt

Debt relief and poverty reduction

Debt relief frees up long term resources for poverty reduction. It is a predictable source of aid, allowing countries to plan the use of the savings effectively. The main international initiatives have delivered over $110 billion (about £74 billion) of debt relief since 2000.

This money has made a huge difference. It has reduced the debt burden of countries receiving relief by about 90%. This means that countries can now spend more on essential services. And they do: annual spending on anti-poverty programmes increased from $6 billion to $21 billion since 1999.

Mozambique, for example, has tripled its poverty reducing expenditure from $792 million to $2 billion, partly as a result of international debt relief. This has contributed to a large increase in school enrolment rates: from 64% in 2003 to 90% currently. This means that there are now 1 million more children in school. Improvements have also been made for mothers: since 2003, 120,000 more women per year are able to give birth in a hospital or clinic.

International action on debt relief

The big shift on debt came in the second half of the 1990s, when the international community agreed that the debt problems of many of the poorest countries were so severe that the multilateral institutions would have to provide relief. Until then, countries could only get relief from government creditors. This is why the Heavily Indebted Poor Countries Initiative was launched in 1996, and further improved in 1999. When it became clear that more debt cancellation was needed, the Multilateral Debt Relief Initiative was created in 2005.

The Heavily Indebted Poor Countries (HIPC) Initiative: helping the poorest with unpayable debt

The HIPC Initiative aims to ensure that no poor country faces a debt burden it cannot manage. Through coordinated action, the international financial community reduces the external debts of the most heavily indebted poor countries to sustainable levels.

To qualify for HIPC assistance, a country must demonstrate a commitment to poverty reduction and have a track record of good financial management. To date, countries have benefited from $68 billion of debt relief under the HIPC Initiative.

24 countries have completed the initiative and received irrevocable debt cancellation. Another 11 are receiving relief on debt service. 6 more will qualify for debt relief when they meet the required standards.

See the full list of countries and the progress they have made(38kb).

How the HIPC initiative works

The Multilateral Debt Relief Initiative: cancelling 100% of debt

Despite the successes of the HIPC Initiative, more debt relief is needed to allow countries to make the investments in health, education and infrastructure they need to meet their development objectives. Many bilateral donors, including the UK, have always given more assistance than necessary under HIPC and have provided 100% relief. Multilateral institutions, however, have only provided relief at around half this level. This is why the Multilateral Debt Relief Initiative (MDRI) was established.

This ground-breaking deal was agreed under the UK’s presidency of the G8 in 2005 and has so far delivered $43 billion of debt relief. All countries that complete the HIPC Initiative receive 100% debt cancellation of the debt owed to the World Bank, the African Development Bank and the International Monetary Fund.

How the MDRI works

Further information on debt:

• The UK goes even further in helping to lift the debt burden.
• How more countries benefit from debt relief.
• The UK has taken steps to tackle the threat of 'vulture funds'.
• How can we make sure that debt relief savings are spent on poor people?
• Douglas Alexander's statement to parliament on debt relief