Debt Relief
Debt relief provides long term, predictable resources for countries to spend on health, education, infrastructure and other investments to help meet the Millennium Development Goals (MDGs). The UK Government is a staunch supporter of both the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). The UK played a pivotal role in the inception of both initiatives, with the MDRI agreed during our Presidency of the G8 in 2005.
The HIPC Initiative
The HIPC Initiative was first launched in 1996 by the International Monetary Fund (IMF) and World Bank, with the aim of ensuring that no poor country faces a debt burden it cannot manage. The Initiative entails coordinated action by the international financial community, including multilateral organisations and governments, to reduce to sustainable levels the external debt burdens of the most heavily indebted poor countries. Following a comprehensive review in 1999, a number of modifications were approved to provide faster, deeper, and broader debt relief and to strengthen the links between debt relief, poverty reduction, and social policies.
The Initiative is comprehensive - it calls for the voluntary provision of debt relief by all creditors, whether multilateral, bilateral, or commercial - and aims to provide a fresh start to countries struggling to cope with foreign debt that places too great a burden on export earnings or fiscal revenues.
A country is potentially eligible for the HIPC Initiative if:
- its annual per capita income is below the threshold for eligibility for concessional borrowing from both the World Bank’s International Development Association (IDA) and the IMF
- it faces an unsustainable debt burden, beyond traditionally available debt-relief mechanisms
- it establishes a track record of reform and sound policies through IMF and World Bank-supported programs
- it develops a full or interim Poverty Reduction Strategy Paper (PRSP) through a broad-based participatory process.
Once it has met or made sufficient progress in meeting these criteria, the Executive Boards of the IMF and IDA decide on its eligibility for debt relief and the international community commits to reducing debt to the agreed sustainable level. At this point the country will reach Decision Point, with many creditors, such as the World Bank, the IMF, multilateral development banks, and Paris Club bilateral creditors, providing interim debt relief on the country's debt service obligations.
In order to receive full and irrevocable debt cancellation under HIPC a country must reach completion point by continuing a track record of satisfactory performance on an IMF program and implementation for at least one year of the PRSP. Some triggers may relate to progress in social areas such as health and education, while others may relate to improving governance or fighting corruption to give donors sufficient confidence that debt relief assistance will be well used.
40 countries are assessed as eligible or potentially eligible for HIPC assistance. 26 countries have reached completion point, a further 9 have reached decision point, and 5 others are still to reach decision point.
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