    Developing Countries: Debt Relief Initiative for Poor Countries Faces
    Challenges (Chapter Report, 06/29/2000, GAO/NSIAD-00-161).

    Pursuant to a congressional request, GAO: (1) assessed whether the
    enhanced Heavily Indebted Poor Countries Initiative (HIPC) is likely to
    free up resources for poverty reduction and achieve the goal of debt
    sustainability; (2) described the strategy to strengthen the link
    between debt relief and poverty reduction and how this strategy is to be
    implemented; and (3) described the challenges creditors face in fully
    funding the enhanced initiative.

    GAO noted that: (1) the enhanced HIPC initiative will provide debt
    relief to recipient countries; (2) however, given the continued
    fragility of these countries, the initiative is not likely to provide
    recipients with a lasting exit from their debt problems, unless they
    achieve strong, sustained economic growth; (3) the decline in debt
    service will only free up resources for additional poverty reduction if
    countries continue to borrow at the same level and concessional terms as
    in the years just prior to their qualifying for debt relief; (4) this
    occurs because countries previously borrowed for several reasons
    including debt payments, and they will need to continue borrowing after
    receiving debt relief in order to meet their remaining debt payments and
    to increase spending on poverty reduction; (5) debt relief under the
    initiative is linked to recipient countries' preparation of a poverty
    reduction strategy; (6) linking debt relief and poverty reduction
    creates tension between quick debt relief and preparing such strategies;
    (7) many actions are required to prepare and implement a strategy,
    including gaining the support of key stakeholders, such as political
    leaders with the power to affect change, and collecting and analyzing
    necessary data, such as data on the extent and major causes of poverty;
    (8) however, weaknesses in countries' ability to collect and analyze
    these data and other challenges may limit these efforts; (9) the desire
    to receive debt relief quickly may cause some countries to quickly
    prepare the strategies, which could diminish the strategies' quality, or
    the level of civil society participation; (10) the World Bank, the
    International Monetary Fund, and the U.S. Treasury said that these
    concerns are mitigated because some countries do not have to prepare a
    full strategy in order to qualify for debt relief; (11) financing the
    initiative has proven to be a challenge for many creditors, with some
    multilateral and smaller bilateral creditors reporting that they are
    facing difficulties in providing their full share of debt relief and
    need external funding; (12) for multilateral and smaller bilateral
    creditors, difficulties in financing their shares stem from legal,
    technical, and financial restrictions; and (13) difficulties in fully
    financing the initiative could undermine the success of the initiative,
    since debt relief is supposed to be additional to the assistance that
    donors and creditors would otherwise provide to low-income countries.

    --------------------------- Indexing Terms -----------------------------

     REPORTNUM:  NSIAD-00-161
         TITLE:  Developing Countries: Debt Relief Initiative for Poor
    	     Countries Faces Challenges
          DATE:  06/29/2000
       SUBJECT:  Developing countries
    	     Indebtedness waivers
    	     Foreign loans
    	     Debt
    	     Foreign economic assistance
    	     Economic development
    	     International economic relations
    	     Economically depressed areas
    	     Strategic planning
    IDENTIFIER:  Heavily Indebted Poor Countries Debt Initiative
    	     Uganda
    	     Tanzania
    	     Bolivia
    	     Honduras
    	     Mauritania
    	     Mozambique
    	     Nicaragua

    ******************************************************************
    ** This file contains an ASCII representation of the text of a  **
    ** GAO Testimony.                                               **
    **                                                              **
    ** No attempt has been made to display graphic images, although **
    ** figure captions are reproduced.  Tables are included, but    **
    ** may not resemble those in the printed version.               **
    **                                                              **
    ** Please see the PDF (Portable Document Format) file, when     **
    ** available, for a complete electronic file of the printed     **
    ** document's contents.                                         **
    **                                                              **
    ******************************************************************

    GAO/NSIAD-00-161

    8

    24

    Poor Countries' Debt Burdens 25

    Prior Debt Relief Efforts Did Not Significantly Lower Countries'
    Debt Burdens 28

    Enhanced HIPC Initiative 29

    Objectives, Scope, and Methodology 38

    Initiative Is Not Likely to Provide a Lasting Exit From Debt Problems

    42

    Enhanced HIPC Initiative Provides Significant Debt Relief 43

    To Fund Additional Spending for Poverty Reduction, Countries
    Must Continue to Borrow 44

    Ability to Repay Debt in the Future Hinges on the Assumption of
    Strong Economic Growth 49

    Between Quick Debt Relief and Comprehensive Strategies

    57

    Preparing Strategies Is Complicated and Resource Intensive 57

    Country Ownership and Donor Support of the Strategy Can Be
    Difficult to Achieve 62

    Differing Views on Whether to Directly Link Debt Relief to
    Poverty Reduction Strategies 66

    Challenges

    69

    Large Bilateral Creditors Are Important to HIPC Success 70

    Three of the Four Largest Multilateral Creditors Face Considerable Financing
    Gaps 81

    90

    Appendix I: Human Development Indicators for 38 Countries

    92

    Appendix II: Type of Debt Incurred by Poor Countries

    95

    Appendix III: Amount and Type of Debt Owed to the United
    States by 40 Heavily Indebted Poor Countries,
    End of 1998

    98

    Appendix IV: Multilateral Institutions Participating in the
    HIPC Debt Initiative

    100

    Appendix V: Conditions Eight Countries Are Expected to
    Meet to Reach HIPC Milestones

    103

    Appendix VI: Methodologies Used to Analyze the Debt
    Sustainability of Potential Recipients of HIPC
    Debt Relief

    106

    Appendix VII: Information on Selected Elements of Poverty
    Reduction Strategies

    111

    Appendix VIII: Civil Society Participation in Bolivia

    123

    Appendix IX: How the United States Budgets and Accounts
    for Debt Relief

    128

    Appendix X: Six Industrial Countries' Methodologies for
    Budgeting and Accounting for Debt Relief

    143

    Appendix XI: Bilateral Contributors to the HIPC Trust Fund

    166

    Appendix XII: Comments From the Department of the
    Treasury

    168

    Appendix XIII: Comments From The International Monetary
    Fund

    172

    Appendix XIV: Comments From the World Bank

    177

    Appendix XV: GAO Contact and Staff Acknowledgments

    179

    Table 1: Status of Implementation of the HIPC Initiative, Countries Grouped
    by Milestone Reached, as of May 3, 2000 (Debt
    expressed in net present value terms unless otherwise noted) 33

    Table 2: Estimated Debt Reduction for Seven Countries Under the
    HIPC Initiative 43

    Table 3: Key Economic Indicators for Seven Countries (Projected
    and Historic, Using Nominal Dollar Values) 51

    Table 4: Relationship Between a Decline in Export Earnings and
    Increases in Aid Flows - Tanzania 55

    Table 5: Seven Industrialized Countries' Participation in the
    Enhanced HIPC Initiative 72

    Table 6: Financing Challenges Facing Major Multilateral Creditors 82

    Table 7: Human Development Indicators of 38 Countries Potentially Eligible
    for Debt Relief Under the Enhanced HIPC
    Initiative, as of 1997 92

    Table 8: Concessional Loans Offered by Four Major Multilateral Institutions
    95

    Table 9: Nonconcessional Loans Offered by Four Major Multilateral
    Institutions 96

    Table 10: Multilateral Creditors' Outstanding Claims (end of 1998)
    on 40 Heavily Indebted Poor Countries and Estimated
    Amount of Debt Relief Under the HIPC Initiative, as of
    the End of 1999 100

    Table 11: Conditions Eight Countries Are Expected to Meet in
    Order to Reach HIPC Initiative Milestones (Monitored
    under World Bank- and IMF-supported programs) 103

    Table 12: Status of Six Selected Countries' Efforts to Define and
    Address Poverty 112

    Table 13: Examples of Projects Prioritized by the Communities
    for the Annual Operating Plan for 1997 of the City of
    Punata, Agreed Upon in Assembly, December 12, 1996 118

    Table 14: Country A's Debt Reduction at 90 Percent 134

    Table 15: Status of Bilateral Donor Pledges to the HIPC Trust
    Fund, as of May 31, 2000 166

    Figure 1: Composition of External Debt for 40 Heavily Indebted
    Poor Countries, 1995-97 (Nominal value, in billions of U.S. dollars) 26

    Figure 2: Process for Implementing the Enhanced HIPC Initiative 30

    Figure 3: Key Elements of the Poverty Reduction Strategy as
    Described in World Bank and IMF Documents 37

    Figure 4: Tanzania's Required Balance-of-Payments Financing
    With and Without HIPC-related Spending for Poverty
    Reduction, 2000/01-2017/18 46

    Figure 5: Uganda's Required Balance-of-Payments Financing With
    and Without HIPC-related Spending for Poverty Reduction, 2000/01-2014/15 48

    Figure 6: Tanzania's Total Debt With and Without Borrowing for
    Poverty Reduction, 2000/01-2017/18 50

    Figure 7: Creditors' Shares of HIPC Debt Relief 70

    Figure 8: Districts in Uganda with Capacity-building Programs
    Funded by Official Donors and Creditors (Shown by
    Shaded Areas) 120

    Figure 9: Bolivia's Process for Involving Civil Society in
    Developing the Poverty Reduction Strategy 124

    Figure 10: Results Expected from Bolivia's Process for
    Involving Civil Society in Developing the Poverty
    Reduction Strategy 125

    Figure 11: Illustration of U.S. Government International Debt
    Reduction Program Direct Modification - Subsidy
    Cost Increase 138

    GDP Gross domestic product

    HIPC Heavily indebted poor country

    IMF International Monetary Fund

    OECD Organization for Economic Cooperation and Development

    OMB Office of Management and Budget

    SDR Special Drawing Right

    National Security and
    International Affairs Division

    B-285473

    June 29, 2000

    The Honorable James A. Leach
    Chairman
    The Honorable John J. LaFalce
    Ranking Member
    Committee on Banking and Financial Services
    House of Representatives

    The Honorable Spencer Bachus
    Chairman
    The Honorable Maxine Waters
    Ranking Member
    Subcommittee on Domestic and International
    Monetary Policy
    Committee on Banking and Financial Services
    House of Representatives

    This report responds to your request that we (1) assess whether the enhanced
    Heavily Indebted Poor Countries Initiative is likely to free up resources
    for poverty reduction and achieve the goal of debt sustainability, (2)
    describe the strategy to strengthen the link between debt relief and poverty
    reduction and how this strategy is to be implemented, and (3) describe the
    challenges creditors face in fully funding the enhanced initiative.

    We are sending copies of the report to the Honorable Lawrence H. Summers,
    Secretary of the Treasury; the Honorable Madeleine K. Albright, Secretary of
    State; the Honorable James D. Wolfensohn, President of the World Bank; and
    the Honorable Horst K�hler, Managing Director of the International Monetary
    Fund; and other interested parties. Copies will also be made available to
    others on request.

    Please contact Harold J. Johnson, Associate Director, International
    Relations and Trade Issues, at (202) 512-4128 if you or your staff have any
    questions concerning the report. An additional GAO contact and staff
    acknowledgments are listed in appendix XV.

    Henry L. Hinton, Jr.
    Assistant Comptroller General

    Executive Summary

    In 1996, the World Bank and the International Monetary Fund1 agreed to
    undertake a comprehensive approach, called the Heavily Indebted Poor
    Countries Initiative, for providing debt relief to the poorest and most
    indebted countries in the world. In September 1999, in response to concerns
    about the continuing vulnerability of these countries, the World Bank and
    the Fund agreed to enhance this initiative.2 The enhancements more than
    doubled the estimated amount of debt relief, from $12.5 billion for 29
    countries to over $28 billion for 32 countries, and added the central goal
    of reducing poverty in the poorest countries.3 Creditors expected to provide
    debt relief under the initiative include governments, the World Bank, the
    Fund, other international financial institutions, and commercial creditors.
    This debt relief is to (1) lower countries' debt-service payments
    significantly, (2) free up resources that will be spent on poverty
    reduction, and (3) provide a lasting exit from debt problems. To qualify for
    debt relief, countries must undertake economic and social reforms. After
    receiving debt relief, it is assumed that countries will have a sustainable
    level of debt (reach "debt sustainability"), meaning they will be able to
    make their future debt payments on time using internal and external
    resources, and without the need for further debt relief. In order for
    countries to remain debt sustainable, the World Bank and the Fund assume
    that countries will achieve continuous, strong economic performance,
    supported by their effectively using their resources and donors continuing
    to provide assistance for 20 years or more following debt relief. Over the
    last 2 years, the U.S. Treasury has requested more than $1 billion from
    Congress to fund U.S. participation in the initiative, mostly to help
    finance the participation of some multilateral institutions.

    Recognizing that previous efforts did not resolve the debt problems of poor
    countries, the Chairmen and the Ranking Members of the House Committee on
    Banking and Financial Services and its Subcommittee on Domestic and
    International Monetary Policy asked GAO to review the enhanced initiative.
    In response, GAO (1) assessed whether the enhanced initiative is likely to
    free up resources for poverty reduction and achieve the goal of debt
    sustainability, (2) described the strategy to strengthen the link between
    debt relief and poverty reduction and how this strategy is to be
    implemented, and (3) described the challenges creditors face in fully
    funding the enhanced initiative.

    The enhanced Heavily Indebted Poor Countries Initiative will provide
    significant debt relief to recipient countries, with the debt for six of the
    seven countries GAO analyzed projected to be reduced by one-third or more.
    However, given the continued fragility of these countries, the initiative is
    not likely to provide recipients with a lasting exit from their debt
    problems, unless they achieve strong, sustained economic growth. GAO's
    analysis shows that the decline in debt service for the seven countries will
    only "free up" resources for additional poverty reduction if countries
    continue to borrow at the same level and concessional terms as in the years
    prior to their qualifying for debt relief.4 This occurs because countries
    previously borrowed for several reasons including debt payments, and they
    will need to continue borrowing after receiving debt relief in order to meet
    their remaining debt payments and to increase spending on poverty reduction.
    Furthermore, in order for countries to service their debt after receiving
    debt relief, World Bank and Fund staffs assume that countries will achieve
    sustained, strong economic performance. For example, the World Bank and the
    Fund assume that export earnings will grow an annual average of over 9
    percent for 20 years in four of the seven countries GAO analyzed. GAO's
    analysis indicated that this assumption may be optimistic, since these
    countries rely on primary commodities, such as coffee, for much of their
    export revenue, and the prices of such commodities have fluctuated over
    time, with export earnings in fact declining in certain years. Failure to
    achieve the projected levels of economic growth could lead, once again, to
    these countries having difficulty repaying their debt.

    Debt relief under the initiative is to be linked to recipient countries'
    preparation of a comprehensive strategy focused on reducing poverty that
    integrates numerous policies, such as achieving rapid, sustainable growth
    and improving health care systems. However, linking debt relief and poverty
    reduction creates tension between quick debt relief and preparing such
    strategies. Preparing a comprehensive, "country owned" poverty reduction
    strategy can be complicated and resource intensive. In 1999, World Bank and
    Fund staffs estimated that it could take countries up to
    2 years to prepare such a strategy. However, Uganda, which the staffs
    consider at the forefront of these efforts, has been working on a strategy
    for about 5 years. Uganda has prepared a comprehensive strategy, but,
    according to the staffs, it still needs to provide additional estimates of
    the cost of poverty reduction programs and strengthen the links between
    expenditures and poverty indicators. Many actions are required to prepare
    and implement a poverty reduction strategy, including gaining the support of
    key stakeholders, such as political leaders with the power to affect change,
    and collecting and analyzing necessary data, such as data on the extent and
    major causes of poverty. However, weaknesses in countries' ability to
    collect and analyze these data and other challenges may limit these efforts.
    According to officials from some nongovernmental organizations, such as
    Catholic Relief Services and Jubilee 2000, the desire to receive debt relief
    quickly may cause some countries to quickly prepare the strategies, which
    could diminish the strategies' quality, or the level of civil society
    participation, at least in the short term. The World Bank, the Fund, and the
    U.S. Treasury said that these concerns are mitigated because some countries
    do not have to prepare a full poverty reduction strategy in order to qualify
    for debt relief, some countries will receive a significant share of their
    debt relief after they qualify for the initiative, and because debt relief
    can be an incentive for countries to prepare the strategies.

    Financing the initiative has proven to be a challenge for many creditors,
    with some multilateral and smaller bilateral creditors reporting that they
    are facing difficulties in providing their full share of debt relief and
    need external funding. For example, some smaller bilateral creditors, such
    as Tanzania, are themselves potential debt relief recipients and may find it
    difficult to absorb the costs of forgiving other countries' debts. For
    multilateral and smaller bilateral creditors, difficulties in financing
    their shares stem from legal, technical, and financial restrictions.5 For
    instance, the African Development Bank has stated that it is unable to
    finance its share of debt relief under the initiative solely through its own
    resources and at the same time maintain an adequate level of reserves and
    its commitment to future concessional lending. Difficulties in fully
    financing the initiative could undermine the success of the initiative,
    since debt relief is supposed to be additional to the assistance that donors
    and creditors would otherwise provide to low-income countries.

    The uncertainties over whether the initiative provides a lasting exit from
    debt problems, the tension between quick debt relief and preparing poverty
    reduction strategies, and the difficulties in financing the initiative
    should not be seen, however, as a reason to abandon efforts to provide debt
    relief to eligible countries. Heavily indebted poor countries continue to
    carry unsustainable debt burdens that are unlikely to be lessened without
    debt relief, but participants and observers may need to have a more
    realistic expectation of what the initiative may ultimately achieve.

    The World Bank and the Fund have classified 40 countries as heavily indebted
    and poor.6 Thirty-two of these countries are in sub-Saharan Africa. The
    United Nations classified 27 of the 40 countries as being in its lowest
    category of human development, based on life expectancy, literacy, and per
    capita national income. (See app. I for a list of the human development
    indicators for 38 of 40 countries. Data were not available for Liberia and
    Somalia.) Most receive substantial amounts of development assistance from
    governments, multilateral organizations, and nongovernmental organizations.
    Some, such as Rwanda and Sierra Leone, are engaged in or have recently
    emerged from civil strife or external conflict.

    The debt problems of many of these countries continue to be a concern for
    the international community. In 1996, in response to concerns that even
    after receiving debt relief from bilateral creditors through existing means
    some poor countries will have debt burdens that remain too large relative to
    their ability to pay, creditors agreed to the Heavily Indebted Poor
    Countries Initiative. The initiative--the first comprehensive effort to
    include bilateral and multilateral creditors--provided full debt relief to
    four countries. Nongovernmental organizations and some governments
    criticized this initiative as providing too little relief too slowly. In
    September 1999, the creditors agreed to provide increased debt relief more
    quickly to more eligible countries. They also called for a strong link
    between debt relief and poverty alleviation and said that debt relief should
    free resources for spending on priority poverty reduction areas. These
    changes were contingent on creditors providing sufficient financing so that,
    among other things, normal aid flows would not be reduced.

    Under the enhanced initiative, the debt levels of eligible countries are
    expected to be lowered to a point that is considered sustainable; that is,
    countries will continue to be able to meet their future debt obligations on
    time without the need for further debt relief. The staffs of the World Bank
    and the Fund assume that this point (debt sustainability) is reached when
    the ratio of the net present value of a country's debt level to its exports
    is 150 percent or less. After calculating the amount of debt relief a
    country needs to reach this level, the staffs of the two institutions
    together with the recipient government project the factors supporting
    continued debt sustainability, including estimates of future debt levels,
    exports, income, tax revenue, and donor assistance for the 20-year
    projection period. The staffs assume that donor assistance will be an
    important source of external flows for these countries and may help finance
    any future gaps that countries experience in meeting their debt obligations.

    According to the World Bank and the Fund, for debt relief under the
    initiative to be effective, it must be integrated into a country's overall
    strategy for reducing poverty. The recipient country prepares the strategy.
    The World Bank, the Fund, and others may help. The strategy is to
    (1) address a broad array of policies, including those aimed at increasing
    economic growth and improving living conditions; (2) be developed with the
    participation of civil society and donors; and (3) reflect the country's
    unique circumstances. The strategy is to be developed in an iterative
    process and updated about every 3 years. In recognition that the preparation
    of such comprehensive strategies could delay debt relief for countries that
    were progressing in their efforts to qualify under the original initiative
    and the calls for hastening the qualification for the enhanced initiative,
    the World Bank and the Fund agreed that countries could qualify for debt
    relief based on an "interim" poverty reduction strategy, a less detailed and
    relatively brief document.

    Is Not Likely to Provide a Lasting Exit From Debt Problems

    Enhanced Initiative Provides Significant Debt Relief

    The enhanced Heavily Indebted Poor Countries Initiative provides significant
    debt relief for all seven of the countries GAO analyzed: Bolivia, Honduras,
    Mauritania, Mozambique, Nicaragua, Tanzania, and Uganda.7 This analysis
    showed that the total amount of debt for these countries is projected to
    fall, following debt relief, by more than one-third in most cases and by
    one-half or more for five countries--Mauritania, Mozambique, Nicaragua,
    Tanzania, and Uganda. Furthermore, all seven countries' scheduled debt
    service is also expected to fall considerably, with reductions ranging from
    more than a 12-percent drop for Honduras to more than 50 percent for
    Mozambique and Uganda.

    To Fund Additional Spending for Poverty Reduction, Countries Must Continue
    to Borrow

    GAO's analysis shows that the seven countries' debt levels will again rise
    following the receipt of debt relief under the initiative. This occurs
    because in order to have the funds that are expected to be spent on poverty
    reduction, these countries must continue to borrow--at the same level and
    concessional terms as in the years prior to qualifying for debt relief under
    the initiative--given each country's projected amount of grants, loans, and
    revenue. Countries previously borrowed for several reasons, including debt
    payments, and they will need to continue borrowing after receiving debt
    relief in order to meet their remaining debt payments and to increase
    spending on poverty reduction. Thus, these countries cannot both increase
    their spending on poverty reduction and reduce their annual borrowing by the
    amount that their debt service was lowered.

    Ability to Repay Debt in the Future Hinges on the Assumption of Strong
    Economic Growth

    Countries' ability to repay debt depends on the assumption that countries
    will achieve strong, sustained economic growth. One underpinning of this
    assumption is that countries will use their borrowed resources effectively.
    Some argue that borrowing may be in the best interest of each country
    because governments can spend the borrowed resources on priority areas, such
    as poverty reduction, rather than to pay creditors. However, this involves
    deficit financing, meaning that countries have to borrow in order to
    increase their current spending. The need for debt relief is due in part to
    previous lending programs that did not sufficiently increase recipients'
    ability to pay their debt obligations. The initiative contains an implicit
    assumption that the process of preparing and implementing a poverty
    reduction strategy will result in a more effective and productive use of
    resources, leading to both economic growth and poverty reduction. However,
    such strategies are relatively new and untested. Failure to effectively use
    their resources could jeopardize countries' future ability to repay debt.

    Maintaining debt sustainability also depends on recipient countries'
    achieving continuous, strong economic growth. Most recipient countries that
    GAO has analyzed are projected by World Bank and Fund staffs to have robust
    growth in export earnings, with the projected growth for four of these
    countries--Honduras, Nicaragua, Tanzania, and Uganda--expected to average at
    least 9.1 percent a year over 20 years. The staffs also assume strong growth
    in gross domestic product and government revenue for most of the recipient
    countries that GAO has analyzed. The average annual growth (in nominal
    dollars) of these two factors was assumed to be greater than 6 percent in
    all cases and to exceed 9 percent for Honduras, Mozambique, Tanzania, and
    Uganda in one or both of those factors. Growth in exports, gross domestic
    product, and government revenue are presumed to contribute considerably to
    these countries' ability to meet their future debt obligations. Although
    such growth levels are generally consistent with the growth levels since
    1990, sustaining such levels over a 20-year period may be difficult. For
    example, these countries rely on a small number of primary commodities, such
    as coffee, for a majority of their export earnings, and the prices of these
    commodities tend to fluctuate over time, with export earnings in fact
    declining in certain years.

    Shortfalls in these growth projections will lower the amount of revenue
    these countries will be able to contribute toward their future debt service
    or poverty reduction. If these countries are to remain debt sustainable,
    continue to alleviate poverty, and maintain growth, this shortfall could be
    made up through increased donor assistance.8 Without such assistance,
    countries may no longer be debt sustainable and may require additional debt
    relief, or they may accumulate arrears. For example, if Tanzania's actual
    average annual export growth is about 20 percent less than projected, if
    Tanzania will be unlikely to repay its debt obligations unless donor flows
    (both concessional loans and grants) increase by about 30 percent. As a
    result, Tanzania's debt -to-export ratio could more than double over what
    was originally forecast for the projection period.

    Quick Debt Relief and Comprehensive Strategies

    The initiative calls for countries to prepare a comprehensive, "country
    owned" poverty reduction strategy before completing the initiative. However,
    accomplishing this task poses many challenges.

    Preparing Strategies Is Complicated and Resource Intensive

    In 1999, World Bank and Fund staffs estimated that most countries should be
    able to prepare a poverty reduction strategy within 2 years. However,
    Uganda, which the staffs consider at the forefront of these efforts, has
    been working on a strategy for about 5 years. Uganda has prepared a
    comprehensive strategy, but according to the staffs, it still needs to
    provide additional estimates of the cost of poverty reduction programs and
    strengthen the links between expenditures and poverty indicators. Many
    actions are needed to reduce poverty, given the high incidence and numerous
    and diverse causes of poverty. These actions include rapid sustainable
    growth, sound macroeconomic policies, measures targeted at the specific
    causes of poverty, good governance, and active civil society participation.
    The coordination of so many activities is challenging and time consuming,
    but GAO found that for poor countries the preparation of a poverty strategy
    can tax already limited government resources. Preparing a strategy depends
    on collecting and analyzing an extensive amount of data, which take time,
    resources, and expertise. For example, countries are to collect and analyze
    data that describe the nature, extent, and major causes of poverty in ways
    that can be used later to monitor progress. In the four countries GAO
    visited--Bolivia, Nicaragua, Tanzania, and Uganda--government officials,
    with technical and financial support from donors and others, were
    undertaking actions to improve their ability to gather and analyze data and
    monitor indicators. However, existing weaknesses in countries' capacity may
    limit their effort to collect and analyze data. The World Bank and the Fund
    are strongly encouraging donors to increase their technical and financial
    support in this area. Furthermore, there is limited evidence showing which
    actions have the greatest impact for achieving poverty reduction goals.

    Country Ownership and Donor Support of the Strategy Can Be Difficult to
    Achieve

    The effective preparation and implementation of the poverty reduction
    strategy requires countries to take ownership of the strategies, involve
    civil society, and receive donor support, according to the World Bank, the
    Fund, and some nongovernmental organizations. Nonetheless, there is a
    tension between the time needed to satisfy these requirements and the desire
    for quick debt relief. The World Bank and the Fund Executive Boards have
    said the strategies should reflect countries' unique circumstances and
    capacities and therefore have not defined specific criteria for judging key
    aspects of the strategies. Although countries are to define their own
    strategies, the World Bank and the Fund Boards must endorse the strategies
    in order for countries to receive debt relief and future loans from the Bank
    and the Fund. Thus, recipient countries need to determine how they will (1)
    define or achieve ownership (that is, reflect the outcome of an open
    participatory process involving governments, civil society, and relevant
    international institutions and donors); (2) address challenges to effective
    civil society participation; and (3) ensure that the donors will align their
    funding with the priorities outlined in these strategies. Officials from
    some donor governments, multilateral organizations, and nongovernmental
    organizations, such as Catholic Relief Services and Jubilee 2000, said they
    were concerned that countries' desire to receive debt relief under the
    initiative as soon as possible could adversely affect the degree of
    countries' ownership and the level, quality, and impact of civil society
    participation in the development of a poverty reduction strategy.

    Additionally, the strategy needs the support of key stakeholders such as
    political leaders. In a document on increasing participation, World Bank
    staff reported that attempts to bypass powerful stakeholders often resulted
    in their opposition, which usually compounded the problem of getting
    anything useful accomplished.9 Absence of the full range of stakeholders,
    especially politicians with the power to affect change, limits
    effectiveness. The effectiveness of the strategies is also influenced by the
    extent to which donors agree with and are willing to align their
    contributions with the countries' priorities. Field representatives of
    donors may support the concept of a recipient-led strategy but may not be
    able to reallocate their aid to fund the recipients' priorities due to the
    earmarking of spending by their governments.

    Differing Views on Whether to Directly Link Debt Relief to Poverty Reduction
    Strategies

    Given the vulnerabilities and debt problems of poor countries, some creditor
    governments, the U.N. Secretary General, and nongovernmental organizations
    have urged creditors to quickly provide debt relief under the initiative.
    Some representatives said that delaying debt relief adversely impacts
    countries' growth by diverting scarce resources from development needs to
    debt payments. They are also concerned that the conditions (such as some
    economic reforms) countries must meet in order to receive debt relief under
    the initiative will delay debt relief and, in some cases, hurt rather than
    help the country. However, the World Bank and the Fund argue that these
    concerns are mitigated because countries begin to receive significant debt
    relief when they qualify for the initiative and that conditions are needed
    to ensure that governments undertake reforms and use resources effectively.

    Because recipient countries will be highly dependent on concessional
    financing and will be monitored under World Bank- and Fund-supported
    programs for the foreseeable future, some nongovernmental organizations have
    said that debt relief under the initiative should not be linked directly to
    the preparation of poverty reduction strategies. They said they want to
    ensure that the strategies are of high quality and the level of civil
    society participation is not compromised simply to meet the initiative's
    time frames. Also, countries may have the incentive to quickly complete the
    initiative because debt relief only becomes irrevocable at that point. Prior
    to that, creditors may revoke debt relief due to recipients' unsatisfactory
    performance. On the other hand, the World Bank, the Fund, and the U.S
    Treasury argue that these concerns are mitigated because some countries do
    not have to prepare a full poverty reduction strategy in order to qualify
    for debt relief, and countries will begin receiving debt relief after they
    qualify for the initiative. World Bank and Fund staffs estimated that for
    four countries--Mauritania, Mozambique, Tanzania, and Uganda--the reduction
    in debt service expected during the interim period is at least 70 percent of
    the debt service reduction expected with full debt relief. Moreover, the
    World Bank and the Fund see the receipt of debt relief under the initiative
    as a catalyst that should motivate countries to undertake difficult reforms
    and begin preparing the poverty reduction strategies. According to World
    Bank and Fund staffs, creditors agreed in 1999 to increase the amount of
    debt relief if the link between debt relief and poverty reduction were
    strengthened and thus may resist weakening this link.

    As a group, bilateral and multilateral creditors are expected to provide
    roughly equal shares of debt relief under the initiative that is estimated
    to total over $28 billion (in net present value terms);10 however, many
    creditors, especially the multilateral and smaller bilateral creditors,
    report that they are having difficulty identifying their share of the
    necessary financing from their own resources due to budgetary and other
    constraints. For example, an underlying premise of the initiative is that
    debt relief is supposed to be additional to the assistance that donors and
    creditors would otherwise provide to low-income countries. Difficulties in
    financing the initiative could delay debt relief and ultimately undermine
    the success of the initiative.

    Bilateral Creditors Are Important to Success of the Initiative

    Although bilateral creditors are expected to provide about $13 billion (in
    net present value terms) of debt relief under the initiative, the estimated
    cost of providing this relief varies among creditors, and some report that
    they have not secured the full financing to fund their obligations. GAO's
    review of the seven leading industrial countries11 indicates that providing
    debt relief results in additional budget costs for each country. However,
    the impact on their budgets in providing debt relief varies based on five
    key factors: the amount of outstanding loans, the method used to value
    loans, the method used to budget for debt relief, the options used to
    provide debt relief, and the constraints imposed by certain legal
    requirements. GAO's analysis indicates that, for four of the seven leading
    industrial countries (France, Germany, Italy, and Japan), the budgetary cost
    of providing debt relief is close to the face, or nominal, value of the
    debt. For the other countries, including the United States, the budgetary
    cost of debt relief is less than the face value of the debt because the
    value of the debt has been discounted, or reduced, in recognition of the
    risk that these loans may not be repaid. For example, according to U.S.
    Treasury officials, the budgetary cost to the United States is about $346
    million (in net present value terms) to forgive about $3.8 billion in debt
    (in nominal terms) owed by
    22 countries under the enhanced initiative. In addition to funding the
    direct costs of debt relief, large bilateral creditors are also expected to
    provide continued aid flows and contribute to help multilateral and smaller
    bilateral creditors meet their share of debt relief under the initiative.
    Bilateral creditors have pledged over $2.5 billion to assist multilateral
    creditors.

    Three of the Four Largest Multilateral Creditors Face Considerable Financing
    Gaps

    Although most multilateral institutions have expressed support for the
    overall goal of the initiative, many have yet to overcome serious
    difficulties in being able to provide their full share (about $14 billion in
    net present value terms) of debt relief. Collectively, the four major
    multilateral institutions--the World Bank, the International Monetary Fund,
    the African Development Bank, and the Inter-American Development Bank--are
    expected to provide about $12 billion (net present value terms) in debt
    relief. Of these four institutions, all but the Fund have large financing
    gaps that they are working to fill from internal and external sources.12
    Creditors' difficulties in financing their shares stem from legal,
    technical, and financial restrictions. For example, the African Development
    Bank has stated that it is unable to finance its share of debt relief solely
    through its own resources and at the same time maintain an adequate level of
    reserves and its commitment to future concessional lending. Also, some
    smaller multilateral institutions have raised the concern that providing
    debt relief under the initiative threatens their financial integrity.

    The Heavily Indebted Poor Countries Initiative represents a step forward in
    the international community's efforts to relieve poor countries of their
    heavy debt burdens, and it does so by seeking to include all creditors and
    providing significant debt relief to recipient countries. Elements of the
    current initiative--especially its goals and financing--have required and
    continue to require much negotiation among the various creditors and
    recipients; however, unless strong, sustained economic growth is achieved,
    the initiative will not likely provide recipient countries with a lasting
    exit from their debt problems. Furthermore, as long as the initiative links
    debt relief to poverty reduction strategies, the tension between quick debt
    relief and comprehensive country-owned strategies is likely to continue.
    These issues should not be seen, however, as a reason to abandon efforts to
    provide debt relief to eligible countries. Heavily indebted poor countries
    continue to carry unsustainable debt burdens that are unlikely to be
    lessened without debt relief, but participants and observers may need to
    have a more realistic expectation of what the initiative may ultimately
    achieve.

    GAO received written comments on this report from the Department of the
    Treasury, the International Monetary Fund, and the World Bank. These
    comments and GAO's evaluation of them are reprinted in appendixes XII-XIV.
    The organizations also separately provided technical comments that GAO
    discussed with relevant officials and included in the text of the report,
    where appropriate.

    The Treasury stated that it agrees with the report's main conclusions,
    including that there is tension between the objective to provide debt relief
    quickly and the need to develop quality poverty reduction strategies. The
    Treasury said that in its view, there is no degree of debt reduction that
    can by itself provide a definitive exit from debt problems and ensure
    adequate growth in these countries. The Treasury stated the report provides
    useful information and raises pertinent questions that will continue to be
    considered as implementation moves forward on this important initiative.

    Both the Treasury and the Fund commented on the fact that future borrowing
    will occur at below market loan terms. The Treasury stated that GAO's report
    is misleading when it argues that the initiative does not free up resources
    for increased spending for poverty reduction because GAO implies that the
    interest rates at which these countries borrow are unsustainable. Similarly,
    the Fund said that the report does not emphasize sufficiently that the
    borrowing to increase spending on poverty reduction is at rates that are
    substantially below market and that a larger share of aid is now in the form
    of grants, which do not have to be paid back. GAO disagrees with the
    Treasury's and the Fund's characterizations. GAO's analysis assumed,
    consistent with Fund and World Bank assumptions, that future borrowing would
    be at the same level and below market terms as in the years just prior to
    qualifying for debt relief. GAO's analysis of countries' future debt burdens
    also incorporates the level of grants and lending projected by World Bank
    and Fund staffs.

    The Treasury and the Fund also commented that if countries experience lower
    growth in exports than projected and debt sustainability is threatened, it
    would be reasonable to expect that adjustments would be made in countries'
    borrowing and expenditure plans. This implies that good debt management
    practices will be utilized. GAO agrees with this point. However, GAO notes
    that although efforts are being undertaken to improve debt management, there
    has not been a history of strong management in this area. Moreover, GAO
    believes that if policymakers adjust to the lower levels of export earnings
    by reducing imports, lowering domestic spending, raising tax revenue, or
    using a combination of these approaches, this would likely result in lower
    economic growth and lower expenditures on poverty reduction.

    The World Bank said the report provides much useful information and
    underscores important aspects of the Heavily Indebted Poor Countries
    Initiative that the partners will be able to take into account as they move
    forward with the initiative's implementation. The Bank strongly agreed with
    the need for countries to pursue prudent debt management policies and for
    lenders to follow responsible lending policies, if debt problems are to be
    avoided over the long term. Otherwise, the benefits of the initiative could
    be eroded, as GAO's report indicates. According to the World Bank, a durable
    exit from unsustainable debt remains a central objective of the initiative.

    Introduction

    The debt problems of many of the world's heavily indebted poor countries
    continue to be a concern for the international community. Most of these
    countries' debt is owed to official creditors consisting of other
    governments (bilateral) and international financial institutions
    (multilateral). In 1996, the World Bank and the International Monetary Fund
    (IMF)13 launched the Heavily Indebted Poor Countries (HIPC) Initiative.14
    The initiative--the first comprehensive effort to include all creditors in
    addressing poor countries' debt problems--responded to concerns that even
    after receiving bilateral debt relief through existing means, some poor
    countries would still have debt burdens that remain too large relative to
    their ability to pay. While recognizing that this first initiative was a
    positive step forward, nongovernmental organizations, U.N. organizations,
    and some borrower governments criticized the initiative as providing too
    little relief too slowly. In response to these concerns and the likelihood
    that changes to the initiative would be discussed by leaders from
    industrialized countries, in February 1999 the World Bank and the IMF
    launched a broad review of the HIPC Initiative that included suggestions
    from the public, governments, nongovernmental organizations, and
    international organizations. In April 1999, the Interim and Development
    Committees endorsed efforts to provide increased debt relief under the
    initiative and to strengthen the link between debt relief and poverty
    reduction. The committees stated that the debt relief should provide a clear
    exit from unsustainable debt burdens, meaning that recipients will be able
    to make their debt payments on time and without the need for future debt
    relief. In June 1999, the leaders of the seven major industrialized
    countries (Canada, France, Germany, Italy, Japan, the United Kingdom, and
    the United States) plus Russia called for an enhanced HIPC Initiative that
    would provide increased debt relief more quickly to more countries. However,
    the leaders reiterated the need for conditions to ensure that governments
    undertake reforms and use resources effectively. They said that to receive
    debt relief, countries must demonstrate a commitment to reform and poverty
    alleviation. They called for a strong link between debt relief and poverty
    alleviation and said that debt relief should free resources for spending on
    priority poverty reduction areas. In September 1999, the World Bank and the
    IMF endorsed these changes to the HIPC Initiative, subject to the
    availability of adequate financing.

    The World Bank and the IMF have classified 40 countries as potentially
    eligible for HIPC debt relief.15 Thirty-two of these countries are in
    sub-Saharan Africa. The United Nations classified 27 of the 40 countries as
    being in its lowest category of human development, based on life expectancy,
    literacy, and annual per capita national income. (See app. I for a list of
    countries, their per capita income, and their human development indicators.
    These data are available for 38 of the 40 potential HIPC recipients. Data
    were not available for Liberia and Somalia.) Most receive substantial
    amounts of development assistance from governments, multilateral
    organizations, and nongovernmental organizations. Some, such as Rwanda and
    Sierra Leone, are engaged in or have recently emerged from civil strife or
    external conflict.

    The total external debt of the 40 countries was over $200 billion in
    nominal, or face value, terms, as of the end of 1997. As shown in figure 1,
    most of this debt is owed to official creditors; that is, governments and
    multilateral institutions.

    Note: Total debt includes short-, medium-, and long-term debt. Short-term
    debt can be owed to either official or commercial creditors. It includes
    loans with maturities of less than 1 year (often trade financing) and
    interest arrears.

    Source: GAO analysis based on World Bank data.

    About $93 billion, or 44 percent, was medium- and long-term debt owed to
    bilateral (government) creditors, and about $65 billion, or 30 percent, was
    owed to multilateral creditors. Poor countries incur two major types of
    debt: concessional (below market interest rates) and nonconcessional
    (market-based interest rates). (See app. II for information on the types of
    debt incurred by poor countries and app. III for information on the amount
    and type of debt that potential HIPC recipients owe to the United States.)

    According to a 1999 IMF staff paper, the debt problems of poor countries
    originated in borrower countries' weak macroeconomic policies and debt
    management, adverse trade shocks, and official creditors' willingness to
    take risks unacceptable to private lenders.16 During the 1970s and 1980s,
    many low-income countries experienced a sharp increase in their external
    borrowing. Most of these countries had limited access to private finance and
    were more often borrowing directly from other governments or their export
    credit agencies, or through private loans that export credit agencies
    guaranteed would be repaid.17 This lending was primarily on nonconcessional
    terms. The 1999 IMF staff paper stated that this lending was, by definition,
    a highly risky business, with a real possibility that eventually much of the
    debt would not be repaid. This paper further stated that creditor
    governments lent this money in order to increase their domestic exports and
    the associated benefits of protecting or creating domestic employment, as
    well as to strengthen diplomatic relations with the borrower countries.
    According to a 1997 IMF staff paper, the commodity boom of the 1970s may
    have done more harm than good by contributing to optimistic export growth
    projections on the part of developing countries, encouraging them to
    overborrow.18 Much of the lending was not used effectively, and the debt
    continued to grow, according to the 1999 staff paper.

    In addition to the willingness of official creditors to lend and the debtors
    to borrow, several other factors contributed to borrower countries' debt
    burdens. These included adverse shocks in the terms of trade (that is, the
    prices of their exports fell or the prices of their imports increased); a
    lack of sustained economic reform by governments; weak debt management
    practices; and political factors, such as war and social strife. The World
    Bank reported that, by the early 1980s, interest payments became an
    increasing burden for indebted countries, and the share of new borrowing
    used for debt payments increased sharply. According to the 1999 IMF staff
    paper, by this time, many low-income countries had been brought to the point
    of collapse by years of economic mismanagement.

    According to a 1998 IMF staff paper, by the mid-1980s, the bulk of new loan
    financing to low-income countries was concessional financing from the
    multilaterals, particularly in countries where debt-service problems arose
    and private creditors no longer viewed these countries as creditworthy.19
    According to an academic study, the consequence of the switch from
    nonconcessional to concessional financing was a dramatic rise in the share
    of debt and debt service owed to the multilateral development banks.20
    Although the lending by the multilateral institutions became increasingly
    concessional during the 1980s, according to the 1998 IMF staff paper, in
    some cases such lending was inconsistent with these countries'
    debt-servicing capacity, particularly for countries that already faced very
    high debt levels.

    Debt Burdens

    Much of the debt owed by the heavily indebted poor countries cannot be fully
    paid using their own resources and is either paid through the support of
    donors or not paid at all. This has been true since the 1980s. Debt relief
    efforts since that time have been undertaken primarily by bilateral and
    commercial creditors. Multilateral creditors had generally not rescheduled
    or reduced debt owed them because of their belief that forgiving or reducing
    debt would diminish assurances of repayment on new lending and, in some
    cases, hurt their credit rating. Although bilateral creditors have reduced
    debt individually, they most commonly have worked together to offer debt
    relief on increasingly concessional terms through the Paris Club, an
    informal group of creditors that meets, as needed, to negotiate debt
    rescheduling and relief efforts for public or publicly guaranteed loans.

    In September 1996, in response to concerns that, even after receiving debt
    relief through these efforts, some poor countries will still have debt
    burdens that remain too large relative to their ability to pay, the World
    Bank and the IMF launched the HIPC Initiative. The initiative was the first
    comprehensive effort to include all creditors in addressing poor countries'
    debt problems. Participating creditors include governments; major
    multilateral creditors such as the World Bank, the IMF, and the African
    Development Bank; commercial creditors; and over 20 other multilateral
    organizations, including the International Fund for Agricultural
    Development. (See app. IV for a list of participating multilateral
    organizations.) Under the original initiative, seven countries qualified for
    debt relief, and four of these countries--Bolivia, Guyana, Mozambique, and
    Uganda--received full debt relief, as of May 1, 2000. However, while
    acknowledging that this first initiative was a positive step forward,
    nongovernmental organizations, U.N. organizations, some borrower
    governments, and some creditor governments criticized the original HIPC
    Initiative as providing too little relief too slowly. In response to these
    concerns and the likelihood that changes to the initiative would be
    discussed by leaders from industrialized countries, in February 1999 the
    World Bank and the IMF launched a broad review of the HIPC Initiative that
    included suggestions from the public, governments, nongovernmental
    organizations, and international organizations. In April 1999, the Interim
    and Development Committees endorsed efforts to provide increased debt relief
    under the initiative and to strengthen the link between debt relief and
    poverty reduction. The committees stated that the debt relief should provide
    a clear exit from unsustainable debt burdens.

    In September 1999, the Interim and Development Committees approved changes
    to the HIPC Initiative that are to provide faster, broader, and deeper debt
    relief with the central goal of reducing poverty in the poorest countries in
    the world. The committees stressed the need to ensure that debt relief will
    result in poverty reduction while recognizing that debt relief is only one
    part of a larger effort to reduce poverty. HIPC debt relief, together with
    forgiveness of debts arising from official development assistance, is to
    lower countries' debt-service burdens significantly and free resources for
    priority social spending. The committees endorsed the proposals, subject to
    the availability of financing. Like the original initiative, the enhanced
    initiative is to be implemented in two stages. (See fig. 2.)

    Sources: World Bank and IMF documents.

    � During stage one, a country must carry out economic and social reforms
    under World Bank- and IMF-supported programs, after which eligibility for
    HIPC debt relief is assessed. At that time, called the "decision point," the
    World Bank and IMF Executive Boards determine whether
    (1) existing debt relief mechanisms21 are sufficient to lower a country's
    debt to a point they consider sustainable or (2) the country requires
    additional relief. In making this determination, they decide whether the
    ratio of a country's debt (in net present value terms) to the value of its
    exports is more than 150 percent.22 If existing means are not enough to make
    debt levels sustainable and creditors are willing to support HIPC debt
    relief with pledges of financing, the country is considered eligible to
    enter the second stage of the initiative. At this time, the World Bank and
    IMF staffs together with recipient governments calculate the amount of debt
    relief creditors are to provide when countries complete this stage. Official
    creditors have agreed to share the costs of HIPC relief by providing equal
    percentage reductions of debt owed them after the full use of existing debt
    relief means. During this stage, the country receives some debt relief from
    the Paris Club, the World Bank, the IMF, and possibly other multilateral
    creditors. The World Bank, the IMF, and the recipient country agree on the
    specific actions to be taken or indicators to be monitored under World Bank
    and IMF programs that the countries are expected to meet in order to
    complete the initiative.

    � During the second stage, the country receives some debt relief, implements
    economic and social reforms agreed to with the World Bank and the IMF, and
    adopts and implements a strategy to reduce poverty. Once the country
    implements the reforms, it receives irrevocable debt relief. For a country
    to reach the completion point, the World Bank and IMF Executive Boards must
    determine that the country has met the specific actions that they agreed to
    at the decision point. As such, the completion point is to be based on
    countries' outcomes rather than the length of their track records, as was
    done under the original initiative. At the completion point, bilateral and
    multilateral creditors commit to provide an equal percentage of debt
    reduction.

    In 1999, World Bank and IMF staffs estimated that 36 of the 40 countries
    might eventually receive relief based on the initiative's specific criteria
    concerning income, indebtedness, and reform efforts.23 The reforms are to
    help ensure that debt relief is put to effective use. In 1999, World Bank
    and IMF staffs estimated that the enhanced HIPC Initiative could provide
    about $28 billion in debt relief (1999 net present value terms) to 32
    countries.24
    Table 1 shows that, as of May 2000, specific eligibility decisions had been
    made for five countries--Bolivia, Mauritania, Mozambique, Tanzania, and
    Uganda--under the enhanced initiative.

                                               Millions of U.S. dollars
                                                              Amount of debt reliefa
                                                                                                         Estimated
                                                                                                        total debt
                                      Debt-to-export                                          Reduction   service
       Country    Decision Completion   target (in   Total Bilateral Multilateral IMF   World  in debtb   relief
                   point     point                                                      Bank     (in     (nominal,
                                        percent)
                                                                                              percent)   millions
                                                                                                          of U.S.
                                                                                                         dollars)
     Decision point reached under enhanced initiative
     Bolivia                                         $1,302$425      $876         $84   $194  30        $2,060

     Original     Sept.    Sept. 1998 225            448   157       291          29    53
                  1997

     Enhanced     Feb.     Floating   150            854   268       585          55    141
                  2000

     Mauritania   Feb.     Floating   137c           622   261       361          47    100   50        1,200
                  2000
     Mozambique                                      1,970 1,235     736          141   434   72        4,300

     Original     Apr.     June 1999  200            1,716 1,076     641          125   381
                  1998

     Enhanced     Apr.     Floating   150            254   159       95           16    53
                  2000

     Tanzania     Apr.     Floating   150            2,026 1,006     1,020        120   695   54        3,000
                  2000
     Uganda                                          1,003 183       820          160   517   40        1,950

     Original     Apr.     Apr. 1998  202            347   73        274          69    160
                  1997

     Enhanced     Feb.     May 2000   150            656   110       546          91    357
                  2000
     Completion point reached under original initiative

     Guyana       Dec.     May 1999   107c           256   91        165          35    27    24        410
                  1997
     Decision point reached under original initiative

     Burkina Faso Sept.    Apr. 2000d 205            115   21        94           10    44    14        200
                  1997

     C�te d'IvoireMar.     Mar. 2001d 141c           345   163       182          23    91    6e        800
                  1998

     Mali         Sept.    Spring     200            128   37        90           14    44    10        250
                  1998     2000d
     Total assistance provided/committed             $7,767$3,422    $4,344       $634f $2,146          $14,170
     Preliminary HIPC document issuedg
     Ethiopia     -        -          200            $636  $225      $411         $22   $214  $23       $1,300
     Guinea       -        -          150            638   256       383          37    173   34        1,148
     Guinea-Bissau-        -          200            300   148       153          8     73    73        600
     Honduras     -        -          137c           569   208       361          18    85    18        1,024
     Nicaragua    -        -          150            2,507 1,416     1,091        32    188   66        5,000
     No assistance required under original initiative − eligibility to be reassessed under enhanced
     initiativeh

     Benin        July
                  1997

     Senegal      Apr.
                  1998

    aAssistance levels are at countries' respective decision or completion
    points, as applicable.

    bIn percent of the net present value of debt at decision or completion point
    (as applicable), after the full use of traditional debt relief mechanisms.

    cEligible under fiscal/openness criteria; figures provided show the ratios
    of debt-to-exports that correspond to the targeted debt-to-revenue ratio.
    For Guyana and C�te d'Ivoire, a 280 percent debt (net present
    value)-to-revenue ratio was targeted at the completion point; for Honduras
    and Mauritania, a 250 percent ratio was targeted at the decision point.

    dCompletion points projected at the decision points.

    eNonreschedulable debt to non-Paris Club official bilateral creditors and
    the London Club of commercial creditors, which was already subject to a
    highly concessional restructuring, is excluded from the net present value of
    debt at the completion point in the calculation of this ratio.

    fEquivalent to Special Drawing Rights (the international reserve asset
    created by the IMF) of 374 million at a Special Drawing Right exchange rate
    to U.S. dollars of 0.744.

    gFigures are based on preliminary assessments at the time of the issuance of
    the preliminary HIPC document and are subject to change. Assistance levels
    for Ethiopia and Guinea-Bissau were based on the original initiative and
    applied at the completion point. For Guinea, Honduras, and Nicaragua,
    targets are based on the enhanced initiative, and assistance levels are at
    the decision point.

    hDeemed to have a sustainable level of debt.

    Sources: IMF and World Bank.

    Three of these countries--Bolivia, Mozambique, and Uganda--completed the
    first HIPC Initiative. (See app. V for information on the specific
    conditions that eight countries are expected to meet in order to reach their
    HIPC decision and completion points.)

    According to World Bank and IMF staffs and the former Managing Director of
    the IMF, to be effective, an enhanced HIPC Initiative needs to be supported
    by actions of both borrower and creditor countries, including the following:

    The major bilateral donors must be willing and able to (1) finance
    traditional debt relief measures (Paris Club) and HIPC debt relief,
    continued aid flows (especially grants), and multilateral concessional
    lending facilities; (2) reduce trade restrictions on the exports of
    low-income countries--which are mainly primary commodities such as raw
    materials and agricultural products;25 and restrain government-guaranteed
    commercial export credit lending to recipients, with no such loans for
    military purposes.

    The Managing Director also urged bilateral donors to contribute funds to
    enable some multilateral and smaller bilateral creditors to provide debt
    relief under the initiative.

    The recipient, or borrower, countries must be willing and able to

    � maintain a stable macroeconomic environment as called for under
    IMF-supported programs and

    � implement reforms that promote growth, sustainable development, and
    poverty reduction--including lower military spending and higher social
    spending; these include reforms outlined under World Bank- and
    IMF-supported programs.

    According to World Bank and IMF staffs, in the future, more disciplined
    lending and borrowing practices, greater provision of grant financing within
    a multiyear framework, and the development of country-owned poverty
    reduction strategies hold out the prospect for increasing the effectiveness
    of external assistance--including debt relief--within a more coherent
    framework for achieving poverty reduction in low-income countries.26

    According to the World Bank and the IMF, for HIPC debt relief to be
    effective, it must be integrated into a country's overall strategy for
    reducing poverty, called a "poverty reduction strategy paper." The recipient
    country prepares the strategy in a participatory process involving civil
    society and donors. The World Bank, the IMF, and others are available to
    help. The strategy is to be developed in an iterative process and updated
    about every 3 years to reflect experience gained in implementing the
    strategy. The World Bank and the IMF have not outlined a "blueprint" for the
    poverty reduction strategy because they want the strategy to be country
    owned. In general, as shown in figure 3, the strategy is to describe the

    � extent, nature, and causes of poverty;

    � key obstacles to reducing poverty;

    � long-term poverty reduction goals and outcomes;

    � policies and reforms for achieving these goals and their expected costs;

    � way the strategy is integrated into the country's macroeconomic framework;

    � intermediate indicators that will measure progress toward achieving
    long-term goals;

    � process for involving civil society and others; and

    � participatory process for assessing progress.

    Bank and IMF Documents

    Source: GAO analysis of World Bank and IMF documents.

    The strategy is to (1) address a broad array of policies, including those
    aimed at increasing economic growth and improving living conditions,
    (2) be developed with the participation of civil society and donors, and
    (3) reflect the country's unique circumstances. The causes of poverty are
    multifaceted and include limited access to social services, limited access
    to markets for selling goods, and restrictions on the ownership of property.
    Thus, efforts to reduce poverty are long term; complex; and cover a wide
    range of activities, including increased economic growth, higher
    immunization rates, improved water quality, and better roads. The HIPC
    Initiative may contribute to the financing of the strategy, such as spending
    on health and education programs, as well as monitor progress in
    implementing the strategy. This strategy is to provide the basis for all
    future World Bank and IMF concessional lending to low-income countries.
    World Bank and IMF staffs estimated that, for most countries, it could take
    up to
    2 years to develop an initial poverty reduction strategy.

    In recognition that the preparation of such comprehensive strategies could
    delay debt relief for countries that were progressing in their efforts to
    qualify under the original initiative and that the committees called for
    hastening the qualification for the HIPC Initiative, the World Bank and IMF
    Boards agreed that some countries could qualify for their decision points,
    and the start of debt relief, on the basis of "interim" poverty reduction
    strategies. The interim strategies could be less detailed and relatively
    brief, but would need to be followed by comprehensive and completed poverty
    reduction strategies prior to the completion point. During the year 2000,
    28 countries are expected to prepare an interim strategy.

    The poverty reduction strategy is to establish a framework that all
    creditors and donors can use to guide their activities. Ideally, according
    to the World Bank and IMF staffs, all donors and multilateral development
    institutions will support countries by contributing to the poverty reduction
    strategy's design and consultative processes, identifying their specific
    participation, and making up-front commitments regarding their
    participation. Some countries have noted that donors may need to consider
    new patterns of assistance consistent with poverty reduction priorities,
    such as
    longer−term support aligned with the long-term horizon of the
    strategies.

    The Chairman and the Ranking Member of the House Committee on Banking and
    Financial Services, as well as the Chairman and the Ranking Member of the
    Committee's Subcommittee on Domestic and International Monetary Policy,
    asked us to conduct a review of the enhanced HIPC Initiative. In response,
    we (1) assessed whether the enhanced initiative is likely to free up
    resources for poverty reduction and achieve the goal of debt sustainability,
    (2) described the strategy to strengthen the link between debt relief and
    poverty reduction and how this strategy is to be implemented, and (3)
    described the challenges creditors face in fully funding the enhanced
    initiative.

    For our first objective, we examined the World Bank's and the Fund's debt
    sustainability analyses of Bolivia, Honduras, Mauritania, Mozambique,
    Nicaragua, Tanzania, and Uganda. Our analysis focused on seven of the eight
    countries in which a debt sustainability analysis from the World Bank and
    the IMF was available to us to analyze. Due to the limitations of time, we
    were unable to review the final country, Guinea. In our analysis, we
    examined the basis for the IMF and World Bank projections for key economic
    variables including debt stock, gross domestic product (GDP), government
    revenue, donor assistance, and exports from 1999 through 2018. We
    supplemented this work with data from the IMF (International Financial
    Statistics), the World Bank (Global Development Finance), the Organization
    for Economic Cooperation and Development (OECD), and the United Nations. We
    held meetings with IMF and World Bank officials to review the underlying
    methodology of the debt sustainability analyses and to clarify areas of
    ambiguity. (See app. VI for a technical description of the economic
    methodologies used in this report.)

    We met with officials from the U.S. Treasury and nongovernmental
    organizations in the United States, and officials from the host government,
    donor organizations, and nongovernmental organizations in four recipient
    countries--Bolivia, Nicaragua, Tanzania, and Uganda--to discuss their
    understanding of "freed-up resources" and how this was applied under the
    HIPC Initiative. We also discussed with government officials in the four
    recipient countries their expectations of the impact of HIPC debt relief on
    their budgets and their ability to increase spending on priority poverty
    areas.

    For our second objective, we met with and obtained information on the
    strategy for strengthening the link between debt relief and poverty
    reduction and on how this strategy is being implemented from government
    officials of the United States, HIPC recipient countries, and other creditor
    countries; and officials from multilateral organizations and nongovernmental
    organizations. We met with and obtained documents discussing the strategy
    and countries' efforts to reduce poverty from officials at the U.S.
    Department of the Treasury, the Department of State, the U.S. Agency for
    International Development, the United Nations, the World Bank, the IMF, and
    the Inter-American Development Bank.

    We also met with and/or reviewed documents from nongovernmental
    organizations, including churches, in the United States and abroad, such as
    ActionAid, Action for Development, AIDS Support Organization, ANGOZA
    (umbrella organization for nongovernmental organizations on Zanzibar in
    Tanzania), Bread for the World, Bretton Woods Project, Catholic Relief
    Services, Center of Concern, Christian Aid, Civil Coordinator for the
    Emergency and Reconstruction, Cooperative for Assistance and Relief
    Everywhere, Debt Relief International, Development Group for Alternative
    Policies, Episcopal Church, European Network on Debt and Development, 50
    Years is Enough, Foundation for International Community Assistance, Grupo
    Propositivo de Cabildeo, Heritage Foundation, Inti Raymi Foundation, Jubilee
    2000, Women Against AIDS in Kilimanjaro, MaaSae Girls Lutheran Secondary
    School, National Council of the Churches of Christ in the USA/Church World
    Service, Overseas Development Institute, Oxfam, Presbyterian Church, St.
    Anne Kkonge School, TACOSODE (umbrella organization for nongovernmental
    organizations in Tanzania), Tanzania Association of Nongovernmental
    Organizations, Tanzania Coalition on Debt and Development, Tanzania
    Ecumenical Dialogue Group, Tanzania Social Economic Trust, Tanzania
    Educational Network, Uganda Debt Network, Uganda Microfinance Union, Ugandan
    Women's Efforts to Save Orphans, Ugandan Women's Finance Trust, United
    States Catholic Conference, and World Vision.

    To obtain information from recipient countries about the implementation of
    the HIPC Initiative, we interviewed government and other officials in
    Bolivia, Nicaragua, Tanzania, and Uganda. We selected recipient countries
    likely to represent a range of experiences under the HIPC Initiative and at
    different stages of the process. Within the recipient countries, we
    discussed efforts to reduce poverty, including the preparation of their
    poverty reduction strategies, with officials of relevant government bodies
    (such as HIPC implementation units and/or the ministries of finance,
    planning, health, and education); World Bank and IMF field staff; U.S.
    embassy and U.S. Agency for International Development officials; local
    representatives of other donor countries, the European Union, and the U.N.
    Development Program; local academics; and nongovernmental organizations,
    including those previously listed. We reviewed relevant documents on efforts
    to reduce poverty from these organizations.

    To determine the challenges faced by creditors in fully funding the
    initiative, we focused primarily on the seven major industrialized countries
    (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United
    States) and four major multilateral institutions (the African Development
    Bank, the Inter-American Development Bank, the International Monetary Fund,
    and the World Bank). These countries and financial institutions account for
    the majority of the outstanding claims against the heavily indebted poor
    countries and thus are expected to provide most of the debt relief under the
    HIPC Initiative. Specifically, we spoke to officials from these seven
    countries and reviewed and analyzed information to determine the extent of
    their financial exposure to the heavily indebted poor countries; the types
    of accounting, budgetary, and legal constraints they face in providing debt
    relief; and their estimated total costs to provide HIPC debt relief. Our
    analysis of foreign legal constraints is based largely, but not entirely, on
    interviews and other secondary sources.

    To describe the challenges facing the four major multilateral institutions,
    we interviewed senior officials and reviewed documents from each
    organization. Specifically, we focused on the identified financing and the
    funding needed to provide each institution's estimated share of debt relief,
    as well as the budgetary and administrative constraints each institution
    faces in identifying additional internal resources. We did not independently
    verify the amount of internal resources each institution reports as
    available to fund its share of HIPC debt relief.

    We performed our review from August 1999 through April 2000 in accordance
    with generally accepted government accounting standards.

    Unless Strong, Sustained Economic Growth Is Achieved, the Initiative Is Not
    Likely to Provide a Lasting Exit From Debt Problems

    The enhanced Heavily Indebted Poor Countries Initiative will provide
    significant debt relief to recipient countries, with the debt for six of the
    seven countries we analyzed projected to be reduced by one-third or more.
    However, given the continued fragility of these countries, the initiative is
    not likely to provide recipients with a lasting exit from their debt
    problems, unless they achieve strong, sustained economic growth. Our
    analysis of the World Bank, IMF, and host country projections contained
    within the HIPC documents27 shows that the decline in debt service for the
    seven countries will only "free up" resources for additional poverty
    reduction if countries continue to borrow at the same level and concessional
    terms as in the years prior to their qualifying for debt relief.28 As such,
    recipients' debt levels will rise faster than they would without borrowing
    for increased spending on poverty reduction. Although such borrowing would
    increase each country's future debt levels, it would be appropriate if the
    money contributes to economic growth. However, the need for debt relief is
    due in part to previous lending activities that did not sufficiently
    increase recipients' economic capacity, enabling them to pay their debt
    obligations. In order for countries to remain debt sustainable, World Bank
    and Fund staffs assume that countries will achieve sustained, strong
    economic performance, supported by countries effectively using their
    resources and donors continuing to provide assistance for 20 years or more
    following debt relief. Our analysis found that the assumption of sustained,
    strong economic growth might be optimistic since these countries rely on
    primary commodities, such as coffee, for much of their export revenue, and
    the prices of such commodities have fluctuated over time, with export
    earnings in fact declining in certain years. Failure to achieve the
    projected levels of economic growth could lead, once again, to these
    countries having difficulty repaying their debt.

    The enhanced HIPC Initiative provides significant debt relief for all seven
    of the countries we have analyzed, as shown in table 2.

                 Debt reductiona (in   Reduction in         Reduction in actual
     Country     percent, net present  scheduled debt       debt servicec (in
                 value)                serviceb (in         percent)
                                       percent)
     Boliviad    38.3                  24.9                 37.5
     Hondurase   18.1                  12.2                 45.6
     Mauritania  50.0                  36.1                 36.2
     Mozambiqued 72.1                  63.7                 60.5
     Nicaraguae  64.0                  44.6                 55.6
     Tanzania    53.8                  32.8                 30.7
     Ugandad     52.1                  54.4                 62.0

    Note: "Debt" refers to the total amount of debt that a country owes at a
    given point in time. "Debt service" refers to the periodic payments
    countries make to repay their debt.

    aPercentage reduction in debt stock (in net present value terms) due to HIPC
    debt relief is calculated as the ratio of HIPC debt relief (in net present
    value terms) to the initial debt total (in net present value terms), either
    at the completion point or at the decision point (whichever is applicable),
    after traditional debt relief and before HIPC debt relief is delivered.

    bPercent change in scheduled debt service (in net present value terms)
    before HIPC, but after traditional forms of debt relief, over the projection
    period (2000-2018), compared to estimated scheduled debt service (in net
    present value terms) after enhanced HIPC Initiative relief, over the same
    projection period.

    cComparison of the annual average amount of debt service paid during 1995-97
    with the average amount of debt service scheduled, 2001-2003, following HIPC
    relief.

    dIncludes debt relief under both the first and enhanced HIPC Initiatives.

    eInformation based on preliminary HIPC documents.

    Source: GAO analysis of IMF and World Bank data.

    According to our analysis of HIPC documents, after the provision of HIPC
    debt relief, the total amount of debt for these countries is projected to
    fall by more than one-third in all but one country and by one-half or more
    for five countries--Mauritania, Mozambique, Nicaragua, Tanzania, and Uganda.
    Furthermore, all countries' scheduled debt service is also projected to fall
    considerably, with reductions ranging from 12 percent in the case of
    Honduras to more than 63 percent for Mozambique. In five of the seven
    countries, the drop in scheduled debt service was one-third or more. In many
    cases, recipient countries could not fully service their debt in the years
    prior to receiving HIPC debt relief, accumulating arrears or rescheduling
    debt payments as a result. For that reason, a comparison of actual debt
    service paid pre-HIPC with the scheduled debt service to be paid post-HIPC
    provides a more meaningful indicator of the impact of debt relief on the
    amount of debt service countries actually pay. In all but one country, the
    reduction in actual debt service paid by recipients is projected to be at
    least one-third and more than one-half for three of the seven countries
    whose HIPC documents we have analyzed. These substantial reductions in
    actual debt service paid are much larger than those in the original HIPC
    Initiative.29

    Continue to Borrow

    According to our analysis, all seven countries' net present value debt
    levels will rise following the receipt of debt relief, in part because
    countries would need to continue borrowing concessionally--at the same level
    as the years prior to qualifying for debt relief--in order to free up the
    resources that are expected to be spent on additional poverty reduction
    activities. This occurs because countries borrowed prior to debt relief for
    several reasons, including debt payments, and they will need to continue
    borrowing after receiving debt relief in order to meet their remaining debt
    payments and to increase spending on poverty reduction. Thus, countries
    cannot both increase their spending on poverty reduction and reduce their
    annual borrowing by the amount that their debt service was lowered. If

    donors were to increase the amount of grant assistance they give recipients
    over what is currently projected, countries would need to borrow less.30

    For example, in the case of Tanzania, the HIPC documents we have analyzed
    indicate that debt relief is expected to lower Tanzania's debt service
    requirements by approximately $100 million per year in the initial years of
    the initiative (see fig. 4). This is represented by the gap between lines A
    and B, during the first 5 years of the initiative.

    HIPC-related Spending for Poverty Reduction, 2000/01-2017/18

    Note 1: A country's balance of payments summarizes its financial dealings
    with the outside world.

    Note 2: Line A represents Tanzania's required external financing needs,
    after subtracting out its export earnings, loans, and grants for project
    assistance, and private transfers and capital inflows. Line B represents the
    level of external financing (with the same subtractions as line A) if there
    are no additional spending and borrowing for HIPC-related poverty reduction
    activities and the additional financial cost savings derived from not
    borrowing the HIPC debt service relief. Line A is also equivalent to
    Tanzania's external financing needs without HIPC assistance.

    Source: GAO analysis of World Bank and IMF documents.

    However, any increase in spending on poverty reduction would need to be
    funded by borrowing all or part of this $100 million. IMF and World Bank
    staff projections assume that Tanzania and other HIPC recipients will borrow
    all of this money to increase spending on HIPC-related poverty reduction.
    Borrowing all of these resources would result in Tanzania's maintaining a
    post-HIPC need for financing (to meet its external requirements such as the
    remaining foreign debt service and trade deficits) that is identical to the
    need that existed prior to HIPC debt relief (line A). In other words,
    Tanzania's pre- and post-HIPC financing profile would be unchanged if it
    were to borrow all of the $100 million for spending on poverty reduction. If
    instead the decision were made that Tanzania would not borrow these
    resources for spending on HIPC-related poverty reduction, its post-HIPC
    external financing requirements would be substantially lower. This situation
    is represented by line B of figure 4.31

    Even without borrowing the $100 million per year, Tanzania is projected to
    continue to need a substantial amount of concessional donor financing to
    cover its remaining external debt obligations.32 This is represented by the
    area below line B in figure 4. Thus, although Tanzania would be considered
    debt sustainable following HIPC relief, it would not be "externally viable"
    because it would continue to require some external balance-of-payments
    assistance to close its financing gap.33 Achieving external viability is
    considered important because it indicates that the country is no longer
    dependent on concessional financing to meet its debt obligations. According
    to the IMF, a country is "externally viable" if it is able to pay its
    external obligations with its own resources (tax revenues, external account
    surpluses, and nonconcessional borrowing), without recourse to donor
    assistance. Without such assistance, Tanzania and the other HIPC recipients
    will not have sufficient resources to continue to meet their debt payments
    in the future. If, after receiving HIPC debt relief, all seven countries
    fully borrow the "freed-up" resources, they all will need donor assistance
    to continue to help pay their debt obligations.

    In the case of Uganda, as shown in figure 5, if the decision is made not to
    borrow the amount of resources (equivalent to debt relief) for spending on
    poverty reduction, based on our analysis of the projections contained in
    Uganda's HIPC documents, Uganda would become externally viable within 5
    years of receiving the enhanced HIPC debt relief and is projected to remain
    externally viable for the remainder of the projection period.

    HIPC-related Spending for Poverty Reduction, 2000/01-2014/15

    Source: GAO analysis of World Bank and IMF documents.

    External viability is represented by the point in which the lower line
    crosses the zero axis and remains below it. In contrast, the decision to
    borrow these resources for poverty reduction results in Uganda never
    achieving external viability over the projection period. This is represented
    by the top line, which is above the zero axis over the entire period. This
    means that Uganda will remain dependent on donor assistance to help meet its
    external debt obligations for the foreseeable future.

    Strong Economic Growth

    According to projections by World Bank and IMF staffs, countries maintain
    debt sustainability by keeping their future borrowing in line with the
    growth in their capacity to repay. One underpinning of these projections is
    that countries will use their borrowed resources effectively. Although the
    borrowing previously described would increase future debt levels, it would
    be appropriate if the borrowed money is spent effectively and contributes to
    economic growth. The initiative contains an implicit assumption that the
    process of preparing and implementing a poverty reduction strategy will
    result in a more effective and productive use of resources, leading to both
    economic growth and poverty reduction. However, such strategies are
    relatively new and untested.

    Some argue that such borrowing may be in the best interest of each country,
    because governments are to spend the borrowed resources to reduce poverty
    rather than to pay creditors. However, this situation would involve deficit
    financing, meaning that countries have to borrow in order to increase their
    current spending. The more resources that countries borrow for poverty
    reduction, the greater the poverty reduction presumably would be, but also
    the greater the future debt levels would be. In the case of Tanzania, its
    total debt stock is projected to steadily rise in the period following debt
    relief whether it borrows these resources or not; however, the rise is even
    greater if it borrows these additional resources (see fig. 6).

    Reduction, 2000/01-2017/18

    Legend

    NPV = net present value

    Note: Debt in net present value terms.

    Source: GAO analysis of World Bank and IMF documents.

    Our analysis of the projections in Tanzania's HIPC documents indicate that
    Tanzania's total debt will rise because Tanzania is assumed to have
    significant requirements for borrowing after debt relief, to use for
    development purposes and for its remaining external financing needs.
    However, the decision to borrow these resources will add considerably to its
    total debt, with the total debt levels approximately $900 million higher (in
    net present value terms) at the end of the projection period than if
    Tanzania chooses not to borrow these resources. This gap will continue to
    widen in the years following the end of the 20-year projection period, if
    these trends continue.

    Although the loans for poverty reduction are expected to have concessional
    terms, poor countries have had difficulties in repaying their loans in the
    past, as evidenced by the accumulation of arrears, debt reschedulings, and
    other prior debt relief efforts. As discussed later, the ability to repay
    these loans in the future depends on these countries achieving sustained,
    strong economic performance, supported by their effectively using their
    resources and donors continuing to provide assistance for 20 years or more
    following debt relief. The need for debt relief is due in part to previous
    lending programs that did not sufficiently increase recipients' ability to
    pay their debt obligations. The enhanced HIPC Initiative contains an
    implicit assumption that the process of preparing and implementing a poverty
    reduction strategy will result in a more effective and productive use of
    resources, leading to both economic growth and poverty reduction. However,
    the preparation of such strategies is relatively new, and there is little
    evidence as of yet to support this assumption. Failure to effectively use
    these resources could jeopardize countries' future ability to pay.

    As mentioned previously, according to projections by World Bank and IMF
    staffs, maintaining debt sustainability depends on recipient countries'
    achieving sustained, strong economic performance. Most recipient countries
    that we have analyzed are projected by World Bank and IMF staffs to have
    robust growth in export earnings, with the projected growth in U.S. dollar
    terms for four of these countries expected to average at least
    9.1 percent a year over 20 years. (See table 3.)

     In percent

               Projected  Historic   Projected Historic  Projected   Historic
                                     gross     gross
     Country   growth in  growth in  domestic  national  government  government
               export     export                         revenue     revenue
               earningsa  earningsb  product   product   growtha     growthd
                                     growtha   growthb,c
     Bolivia   7.5        7.3        7.0       7.5       7.4         15.8
     Honduras  9.3        12.4       8.4       7.0       9.9         7.3
     Mauritania5.4        0.6        6.9       0.3       6.2         3.9
     Mozambique8.5        9.0        9.2       4.3       12.3        N/A
     Nicaragua 9.1        15.6       7.6       7.4       7.8         13.1
     Tanzania  9.2        17.4       8.1       8.2       9.3         7.6
     Uganda    9.5        26.0e      9.8       10.7      11.0        20.0

    Legend

    N/A = Not available

    Note: Real growth rates could not be calculated for the projection period
    because the country debt sustainability analysis documents do not include
    price deflators. Annual amounts are reported in nominal dollars. Growth
    rates are calculated in U.S. dollar terms.

    aAs calculated from each country's debt sustainability analysis.

    bIn nominal U.S. dollar terms as reported in the World Bank's Global
    Development Finance data,
    1990-97.

    cGlobal Development Finance reports gross national product but not gross
    domestic product.

    dIMF's International Financial Statistics Yearbook 1999 and World Bank's
    Global Development Finance.

    eDoes not include information from 1998 and 1999, in which export earnings
    significantly declined.

    Sources: GAO analysis of IMF and World Bank data.

    The assumption of strong, sustained growth in export earnings is important
    for the projection of continued debt sustainability, since the income from
    exports is presumed to contribute considerably to these countries' ability
    to meet their external obligations. Although these levels of export growth
    are consistent with the experience of these countries in the recent past,34
    as we discussed in our previous report,35 these countries tend to rely on a
    small number of primary commodities for a majority of their export earnings.
    The prices of such commodities tend to fluctuate, and in the case of Uganda
    in 1998 and 1999, the large fall in the price of coffee resulted in a
    decline in its export earnings in those 2 years, following a period of
    substantial export growth in the early and mid-1990s. As a result, Uganda's
    debt-to-export ratio rose considerably, despite Uganda's having received a
    reduction in debt under the first HIPC Initiative. Due to continued weakness
    in Uganda's export sector, in April 2000 the World Bank and the IMF reduced
    the projected growth of Uganda's export revenues for
    2001-2003 by more than 16 percent from what was projected in January 2000.

    The World Bank and IMF staffs also assume strong growth in GDP and
    government revenue for most of the recipient countries that we have
    analyzed. A criticism by some nongovernmental organizations and academics of
    the first HIPC Initiative, including the external evaluators of the Enhanced
    Structural Adjustment Facility, was that it focused too heavily on exports
    as a proxy for a country's ability to pay its external obligations. Rapid
    growth in exports does not always translate into more resources for the
    government to use to pay its obligations.36 The new initiative has placed a
    greater level of attention on the recipient economy's ability to generate
    its own resources, as measured by GDP and government revenue. Robust
    increases in both factors are also considered important contributors to a
    country's ability to remain debt sustainable. Based on our analysis of HIPC
    documents, the projected average annual growth (in nominal dollars) of GDP
    and government revenue is greater than 6 percent for all seven countries and
    exceeds 9 percent in several instances (see
    table 3). Although these projected growth levels are generally consistent
    with the growth levels of the recent past, sustaining such levels over a
    20-year period may be difficult. For example, Uganda recently had to lower
    its GDP growth projection for the year 2000 because of a drought and
    continued weakness in coffee prices.

    According to our analysis of World Bank and IMF staff projections of donor
    assistance (both project and program aid), such assistance is expected to be
    at levels generally comparable to the assistance provided in the recent
    past.37 Continued donor assistance is necessary for countries to remain debt
    sustainable, since recipient countries will continue to rely on donor
    assistance to meet their future debt payments, separate from the resources
    they need for development purposes. Although the assumption that donor
    assistance will be at levels generally consistent with the past seems
    reasonable, the full amount of donor assistance that is required for
    continued debt sustainability might be optimistic. First, if the key
    economic factors of recipient countries do not grow as quickly as projected,
    their need for donor resources will likely increase in order to counter this
    shortfall. Otherwise, countries may not be able to meet their future debt
    payments. This is discussed in greater detail later in the report. Second,
    considering the substantial amount of donor resources required for the full
    financing of the initiative (as discussed in ch. 4), maintaining existing
    levels of assistance may be difficult, because the large bilateral donors
    will also be expected to provide a substantial amount of new funding to
    support the participation of the multilateral institutions and smaller
    bilateral creditors. If these additional resources for the multilaterals and
    smaller bilateral creditors (including other developing countries) are not
    forthcoming, then the future aid from these sources may be compromised,
    which could lower the amount of total donor resources provided to the HIPC
    recipients.

    As discussed, the enhanced HIPC Initiative assumes strong economic growth
    projections for most countries that receive debt relief. Shortfalls in these
    growth projections will lower the amount of revenue these countries will be
    able to contribute toward their future debt service. If these countries are
    to remain debt sustainable, this shortfall will need to be made up through
    increased donor assistance or other means of adjustment. Without such
    adjustment, countries will no longer be debt sustainable, requiring
    additional debt relief, or accumulation of arrears. For illustrative
    purposes, we analyze the effect of a shortfall in projected export earnings
    that is made up through an increase in grants and concessional loans so that
    imports and domestic spending, including poverty reduction activities,
    remain the same as in the original HIPC projections. We consider this to be
    a reasonable assumption because, although this additional concessional
    borrowing results in higher levels of debt and debt ratios, it will preserve
    fairly robust economic growth levels and poverty reduction for the recipient
    country. If instead, policymakers choose to adjust to these lower levels of
    export earnings by reducing imports, lowering domestic spending, raising tax
    revenue, or using a combination of these approaches, they could avoid
    incurring debt ratios that will rise as much, although this choice would
    likely result in lower economic growth and lower expenditures on poverty
    reduction. The relationship between a decline in export growth and an
    increase in donor assistance for Tanzania is highlighted in table 4.

     In millions of U.S. dollars

                  New assistance − loans   New assistance − loans
                  and grants                     only
                             Debt/export                    Debt/export
                  Assistance in 2017/18   Debt   Assistance in 2017/18   Debt
                             (percent)                      (percent)
     Base casea   $19,767    137          $7,333 $19,767    137          $7,333
     With 1
     percentage
     point export 22,864     200          9,365  23,013     236          11,013
     decrease
     With 2
     percentage
     point export 25,648     280          11,178 25,935     358          14,298
     decrease

    Note: Assistance is in millions of 1999 net present value dollars, and debt
    is in millions of 2017/18 net present value dollars.

    aThe "base case" refers to the data contained in the projections made by the
    IMF and the World Bank.

    Source: GAO analysis of IMF and World Bank data.

    According to Tanzania's debt sustainability analysis, its export earnings
    are projected to grow by 9.2 percent a year on average for 19 years, after
    receiving debt relief. At the end of that projection period, its
    debt-to-export ratio (in net present value terms) will be about 137 percent,
    and donors were assumed to have provided almost $20 billion in assistance.
    However, if the growth in Tanzania's export earnings were to be 1 percentage
    point lower over this period (to an average increase of 8.2 percent a year),
    donor assistance would have to grow by almost 16 percent over the period, or
    an additional $3.1 billion, for Tanzania to maintain debt sustainability. As
    shown in table 4, the impact of this assistance on Tanzania's future debt
    levels is substantial, reaching a debt-to-export ratio of 200 percent by the
    end of the projection period.

    The additional assistance may be provided as concessional loans or a
    combination of concessional loans and grants. The left side of the table
    assumes that the new assistance is provided using the relative proportions
    between loans and grants, assumed within Tanzania's base case. The right
    side of table 4 assumes that the additional assistance would be all
    concessional lending. The assumption of all lending may be more realistic.
    For example, in response to a decline in export earnings during 1998, Uganda
    increased its borrowing, mainly from multilateral institutions, to avoid a
    financing gap in its balance of payments. In both cases, Tanzania's total
    debt ratios will rise, with the increase 36 percentage points greater when
    the assistance is assumed to be all lending.

    The impact of a 2-percentage point decrease in export earnings (to an
    average increase of 7.2 percent a year) is even more substantial. Under such
    a scenario, donors will be expected to provide about $5.9 billion in
    additional assistance to Tanzania. Under the assumption that the additional
    assistance would be a mix of loans and grants, Tanzania's debt-to-export
    ratio is projected to more than double over the base case projection. If the
    additional assistance were to be all loans, this ratio would be more than
    2.6 times greater than the base case and would be at a level that would
    exceed Tanzania's debt-to-export ratio (324) prior to receiving HIPC
    assistance.

    Linking Debt Relief and Poverty Reduction Creates Tension Between Quick Debt
    Relief and Comprehensive Strategies

    In order to receive full debt relief under the enhanced HIPC Initiative,
    countries are expected to prepare comprehensive strategies for reducing
    poverty; however, the preparation of these strategies is time consuming,
    with their success dependent on countries reaching widespread agreement on
    sensitive and complex issues. Nongovernmental organizations and some donor
    governments raised the concern that, in order to receive debt relief
    quickly, countries may "shortcut the quality" of their strategies and limit
    the extent of participation, especially from the civil society of the
    country. To counter these concerns, some recipients and nongovernmental
    organizations have suggested separating the link between the timing of debt
    relief and the preparation of these strategies, recognizing that recipient
    countries are likely to be monitored under World Bank and IMF programs for
    many years. However, the World Bank, the IMF, and the U.S. Treasury argue
    that these concerns are mitigated because some countries do not have to
    prepare a full poverty reduction strategy in order to qualify for debt
    relief, and countries will receive a significant amount of interim debt
    relief after they qualify for the initiative.

    We found that preparing a comprehensive, "country-owned" poverty reduction
    strategy poses many challenges for recipient countries, particularly when
    preparing them within the relatively short time frames of the initiative.
    Preparing the poverty reduction strategy is costly and time consuming
    because it (1) addresses numerous social and economic policies, (2) is to
    show the impact of government programs on poverty, and (3) depends on
    collecting and analyzing an extensive amount of data. In September 1999, the
    World Bank reported that no country had fully and systematically applied a
    strategy focused on achieving poverty outcomes. In May 2000, a Bank official
    said that such a strategy is untested. World Bank and IMF staffs guidance
    says that most countries should be able to prepare a poverty reduction
    strategy within 2 years. However, although Uganda is considered by the
    staffs to be at the forefront of these efforts and has prepared a
    comprehensive strategy and progress report, it has been working on a
    strategy for about 5 years. Moreover, according to the staffs, to prepare a
    full poverty reduction strategy in line with their guidance, Uganda needs to
    provide additional estimates of the cost of poverty reduction programs and
    strengthen the links between expenditures on poverty reduction and
    indicators of poverty.

    Tackling the numerous and complex factors that cause poverty is difficult
    because it involves many economic and social policies. We found that
    coordinating all of these policies is particularly challenging within short
    time frames. Poverty is complex and defined broadly because of the
    following:

    � Poverty stems from many social and economic problems such as weak economic
    growth, low education levels, limited access to health services, limited
    property rights that restrict the ability of the poor to gain physical and
    financial assets, and social exclusion.

    � Poverty affects a significant number of people. According to their interim
    poverty reduction strategies, 50 percent or more of the populations of
    Bolivia, Tanzania, and Mozambique are estimated to live below each country's
    poverty line.

    � Poverty varies based on factors such as gender, geographic area, and
    indigenous group and thus reflects inequality in economic opportunity and
    income distribution. According to the interim poverty reduction strategies
    from three countries--Bolivia, Mozambique, and Uganda--poverty levels were
    higher in rural areas than in urban areas and higher among women than men.38

    � Poverty is influenced by factors that may be connected and mutually
    reinforcing. For example, Uganda's participatory poverty assessment
    describes the following cycle of poverty: Poor health leads to decreased
    household income due to spending on health care and reduced productivity due
    to the inability to work. This in turn leads to lower food availability,
    poor nutrition, further poor health, low income and productivity, and
    worsening poverty. Also, some factors, such as theft and other forms of
    insecurity, may be both a cause and a result of poverty.

    According to World Bank and IMF documents, such as progress reports and
    Executive Board minutes, a multifaceted approach is needed to reduce
    poverty, given the high incidence and the numerous and diverse causes of
    poverty. According to these documents, reducing poverty requires the
    following:

    � Rapid, sustainable growth that includes the poor. According to the U.N.
    Economic Commission for Africa, for sub-Saharan Africa to cut poverty in
    half by 2015, average (real) annual GDP growth of at least 8 percent is
    required.39

    � Actions targeted at the specific causes of poverty. The interim strategies
    developed by five countries (Bolivia, Mauritania, Mozambique, Tanzania, and
    Uganda) for use in HIPC decision-making address numerous economic and social
    actions that are intended to generate growth and contribute to poverty
    reduction. The coordination of so many activities and the preparation of the
    poverty strategies can tax already limited government resources. For
    example, in Tanzania, donor officials told us that preparing such a
    comprehensive strategy along with other documents required by donors has
    involved numerous key government officials who also have many other
    concurrent responsibilities.40

    � Good governance. According to World Bank and IMF documents, good
    governance requires responsive, transparent (open), and accountable
    institutions as well as sound management of public resources. However, many
    poor countries have weak, inefficient, and sometimes corrupt institutions
    that resist reform. Redressing these problems continues to involve reforms
    to reduce corruption and improve countries' judicial systems, revenue
    collection, and financial management.

    � Active civil society participation. World Bank and IMF staffs,
    nongovernmental organizations such as Oxfam and World Vision, the U.N.
    Development Program, and some governments see the participation of civil
    society, especially the poor, as a way to identify the needs of the poor and
    monitor government activities. However, this participation also presents
    operational challenges, such as determining who will represent civil
    society, that take time to resolve.

    The World Bank and IMF staffs' guidance calls on recipients to describe in
    their poverty reduction strategies how their public actions will affect
    poverty goals, but the impacts are not clearly established in many areas
    either by the donors or the recipients nor are they described in the
    guidance. While such connections are considered key elements of the poverty
    reduction strategy, World Bank and IMF staffs recognize there are wide
    disparities in the cost-effectiveness of government expenditures for poverty
    reduction efforts in developing countries. In addition, World Bank and IMF
    staffs have reported that there are little country-specific data
    demonstrating how rapidly the indicators for some key social sectors can be
    expected to change. Furthermore, there is limited evidence showing which
    actions have the greatest impact for achieving poverty reduction goals.
    Determining which activities to prioritize and the expected time frames for
    reducing specific causes of poverty can thus take a considerable amount of
    dialogue and analysis.

    A 1999 IMF staff study found that there is little empirical evidence to show
    that public spending alone improves health and education indicators, or
    outcomes.41 However, this study showed that the allocation of spending
    within the subsectors of health and education could successfully contribute
    to positive outcomes. For example, shifting spending toward primary and
    secondary education improves enrollment and retention rates through grade 4.
    Furthermore, shifting health spending toward primary care has a favorable
    effect on infant and child mortality rates.

    According to the World Bank and IMF staffs' guidance, preparing credible
    poverty reduction strategies depends on collecting and analyzing data;
    however, this takes time, resources, and expertise. For example, a poverty
    assessment relies on collecting and analyzing an extensive amount of data to
    describe the nature, extent, and major causes of poverty in ways that can be
    used later to monitor progress. World Bank and IMF staffs consider success
    in this first step as essential to ensure the development of an effective
    poverty reduction strategy. However, such an exercise takes resources and
    expertise, and weaknesses in poor countries' capacity to collect and analyze
    data may limit this effort. In 1999, the World Bank reported that, in
    Mozambique, it took 2 years after the national household surveys to get
    results and that lags of this nature are not uncommon.42 In September 1999,
    the IMF's Executive Board noted that the poor quality of data on social
    spending and indicators has inhibited the design and implementation of
    effective social programs.43 The Board saw an urgent need for country
    authorities to identify weaknesses in data and data collection and to make
    data improvements in collaboration with the World Bank, other international
    agencies, and civil society. The World Bank and the IMF are strongly
    encouraging donors to increase their technical and financial support in this
    area. In November 1999, a group of developing countries and donor agencies
    said that global efforts to fight poverty and promote better lives for
    millions of the world's poor would be more effective if developing countries
    had better statistics and that the HIPC Initiative was hastening the need
    for good quality statistical information.44 They said that too often,
    outdated, missing, or unreliable information led to badly informed
    decisions, which waste resources and incur high financial and human costs.
    They agreed to launch a strategy to ensure adequate funding and support for
    national statistical systems.

    In the four countries we visited--Bolivia, Nicaragua, Tanzania, and
    Uganda--government officials, with technical and financial support from
    donors and others, were undertaking actions to improve their capacity to
    gather and analyze data and monitor indicators. Uganda--which is considered
    ahead of most countries in this effort--is trying to gather information
    directly from the poor to develop a broader set of indicators to define
    poverty, such as physical and social isolation and powerlessness, in all of
    its 45 districts. Thus far, with donor technical and financial support,
    Uganda has collected data from nine districts. Tanzania is currently
    planning to undertake a household budget and labor force survey−the
    survey is estimated to cost $1.5 million and take approximately 1 year.

    to Achieve

    Having countries take ownership of the strategies with the support of donors
    is considered by the World Bank, the IMF, and nongovernmental organizations
    such as Oxfam to be critical to the effective preparation and implementation
    of the poverty reduction strategy; however, there is a tension between the
    time needed to build country ownership and to prepare a poverty reduction
    strategy within the initiative's deadlines. Moreover, operational issues
    take time to resolve. For example, it is not clear how to define or achieve
    ownership at the country level, to define the amount and nature of civil
    society participation, or to ensure that the donors will align their funding
    with the priorities outlined in these strategies. The point at which
    "ownership" is achieved is not clearly defined because it reflects country-
    and context-specific circumstances and can be built slowly over time through
    an iterative process of increasing levels of participation. Although the
    World Bank and the IMF expect civil society participation in developing the
    strategies, they have not set criteria for determining a sufficient or
    effective level and quality of civil society participation. They want the
    strategies to be owned by the countries and therefore want each country to
    determine a sufficient level of participation. Nonetheless, officials from
    some donor governments, multilateral organizations, and nongovernmental
    organizations told us they were concerned that countries' desire to receive
    debt relief as soon as possible could affect the level, quality, and impact
    of civil society participation. Several representatives from nongovernmental
    organizations such as Catholic Relief Services and Jubilee 2000 told us that
    they want meaningful, widespread civil society participation but are
    concerned that this could delay debt relief.

    While difficult to measure, participation is increasingly seen as important
    for greater effectiveness. According to a World Bank staff paper, the
    absence of sufficient "commitment" in many of the projects the Bank finances
    occurs because stakeholders (including civil society) do not understand
    fully the commitment they are being asked to make.45 If stakeholders who
    must implement and sustain the project do not fully understand what is
    expected of them, little will be accomplished. Moreover, the paper reported
    that attempts to bypass powerful stakeholders, such as political leaders,
    often resulted in opposition from them; this opposition usually compounded
    the problem of getting anything useful accomplished. For example, the paper
    stated that the main reason for not making more progress in resolving
    problems in project implementation in Mozambique was the failure to engage
    the ministers (the political level) in the participatory process. Absence of
    the full range of stakeholders, especially politicians with the power to
    affect change, limits effectiveness.

    The World Bank sourcebook defines participation as "a process through which
    stakeholders influence and share control over development initiatives and
    the decisions and resources which affect them." Stakeholders include those
    directly affected by the project or strategy, such as the poor, as well as
    those who are indirectly affected, such as the borrower governments at the
    national and local level, nongovernmental organizations, private sector
    organizations, and donors. However, we found that countries face challenges
    in determining which groups should represent civil society. This can be
    especially difficult in countries that lack a democratic or representative
    tradition and thus have few existing means for getting citizen or
    nongovernmental organizations' input or for electing representatives. These
    concerns are magnified when the process is to involve the poor or groups
    that have traditionally been excluded, such as women and indigenous
    populations. There is also concern that government officials will not
    support a participatory process if it is perceived as diluting their power,
    alienating influential constituencies, or done simply to get HIPC debt
    relief.

    If these issues are overcome and civil society representatives are to
    participate in developing the poverty reduction strategy, a process for
    getting their input within the initiative's time frames must be established.
    According to the World Bank staff paper, some of the poorest people live in
    countries characterized by weak governments and civil strife. Others also
    said that in order to involve the poor, representatives and governments must
    overcome deficiencies in communication and high illiteracy rates.46
    Furthermore, to involve the poor who live in rural and outlying areas,
    representatives must also overcome poor roads. Moreover, efforts must be
    made to educate civil society and their representatives about important
    issues and build their organizational and financial capacity to participate.
    In Tanzania, nongovernmental organizations historically delivered services
    by, for example, funding schools or health clinics. They are now beginning
    to focus on advocacy and have organized themselves into working groups that
    study specific issues related to poverty and provide input to the
    government.

    It is also challenging and potentially controversial to determine a
    sufficient and effective level of participation by civil society in the
    process. For example, in 1997 the government of Bolivia conducted a
    "national dialogue" to involve civil society in its effort to build support
    for its new economic and social priorities. Although government officials
    said they considered that effort to have been quite worthwhile, some
    nongovernmental organizations and donors that we talked with disagreed. They
    told us the dialogue consisted of a 1-day meeting in which the government
    selected whom to invite, involved little regional participation, gave little
    advance notice regarding the agenda to the invitees, provided little
    background information, and used the meeting to present its views. One
    nongovernmental organization representative characterized this effort as
    having been more a "regional monologue than a national dialogue." In 1998,
    the United Nations reported that, according to a recent survey,
    70 percent of Bolivians felt that their opinions did not count at all in the
    political system's decision-making process.47 Additionally, according to the
    Bolivian government and nongovernmental organizations, there was little
    follow-up after the national dialogue to ensure that actions were
    undertaken. In light of this experience, the public met with some suspicion
    the government's plans for a new dialogue as part of the HIPC Initiative. To
    overcome the previous criticisms and involve civil society in preparing its
    poverty reduction strategy, the government is convening a second national
    dialogue that is to involve more participants and regions, provide extensive
    background papers prepared by the government and others, and establish a
    mechanism to follow up on commitments made during the dialogue. The process
    is to culminate in a poverty reduction strategy. (See app. VIII for
    additional information on Bolivia's national dialogue.)

    Consulting with civil society increases civil society's awareness of
    government strategies, can change resource allocations, and can alert the
    government to the priorities of the poor; however, it does not guarantee
    consensus. According to World Bank and IMF staffs, the results of Uganda's
    consultation with the poor had a direct effect on budget allocations. In
    response to the high priority placed by poor communities on the availability
    of safe water, the government has significantly shifted its spending toward
    improving water quality. Uganda's consultation with the poor also brought to
    the government's attention factors related to poverty that the government
    previously had not considered, such as the poor's physical and social
    isolation, sense of powerlessness, and concerns regarding security. However,
    reasonable people can disagree on the best use of the resources for reducing
    poverty, given their individual circumstances. Thus, the evidence is not
    clear as to what extent consultation increases country ownership of, or
    widespread agreement on, the strategy. The involvement of civil society in
    the process does not ensure that (1) consensus on priorities can be reached
    quickly, easily, or at all; or (2) that the government will accept civil
    society's views. Stakeholders have different levels of power and conflicting
    priorities; how these are resolved affects how people view the strategy.
    Given the countries' high levels of poverty, we believe that civil society,
    government, and donors can probably reach agreement on broad poverty
    reduction goals such as improved health, education, and economic growth.
    However, the challenge will be reaching agreement on how to allocate the
    limited available resources among these goals, all of which have large
    financing requirements. For example, to reduce rural poverty, some may
    advocate funding agricultural extension services, whereas others may wish to
    increase spending on education or health care. The challenge of reaching
    agreement on resource allocations is further complicated by the disparities
    in income levels and living conditions that exist between regions and
    sectors of society.

    The effectiveness of the strategies is also influenced by the extent to
    which donors agree with and are willing to align their contributions with
    the countries' priorities. Field representatives of donors may support the
    concept of a recipient-led strategy but may not be able to reallocate their
    aid to fund the recipients' priorities due to the earmarking of spending by
    their governments. While some donors may expect that resources from debt
    relief will be spent mainly on certain social needs such as health and
    education, recipients may prioritize their efforts to reduce poverty
    differently. Considerations about the best use of limited resources become
    even more complicated when several needs are equally pressing, such as
    reducing the high incidence of child mortality or improving poor water
    quality.

    Reduction Strategies

    Given the vulnerabilities and debt problems of poor countries, some creditor
    governments, the U.N. Secretary General, and nongovernmental organizations
    have urged creditors to quickly provide debt relief under the initiative. In
    September 1999, the Development and Interim Committees of the World Bank and
    the IMF urged the speedy implementation of the enhanced initiative so that
    as many countries as possible could qualify for assistance under the
    initiative by the end of the year 2000.48 Some U.N. organizations and
    nongovernmental organizations stress that delaying debt relief adversely
    impacts countries' growth by diverting scarce resources from development
    needs to debt payments. Some assert that, with debt payments absorbing a
    large share of budgetary and foreign exchange resources, poor governments
    have turned to foreign donors, which further prolongs debt problems. They
    are also concerned that the conditions countries must meet in order to
    receive debt relief under the initiative may delay the receipt of debt
    relief and, in some cases, may hurt rather than help the country. However,
    the World Bank and the IMF argue that these concerns are mitigated because
    countries begin to receive a significant amount of debt relief when they
    qualify for the initiative (and before they prepare a full poverty reduction
    strategy) and that conditions are needed to ensure that governments
    undertake reforms and use resources effectively.

    Officials from nongovernmental organizations, donor governments, and
    multilateral organizations have also raised the concern that countries'
    efforts to receive debt relief quickly may decrease the quality of the
    poverty reduction strategy as well as the level, quality, and type of civil
    society participation. However, World Bank and IMF staffs project that the
    preparation of a strategy should take up to 2 years, which for most
    countries is within the initiative's time frames.49 They also note that the
    strategies are to last beyond the HIPC Initiative and to be reviewed and
    improved upon as more experience is gained in implementing these strategies.
    The World Bank and the IMF Executive Boards have said the strategies should
    be developed and owned by the countries--to increase the likelihood that the
    strategy will be implemented--and reflect countries' unique circumstances
    and capacities. Thus, the Boards have not defined specific criteria for
    judging key aspects of the strategies, such as a sufficient level or type of
    civil society participation. This has created some confusion about what
    recipients must do to receive debt relief. Given the high priority that
    recipient governments place on debt relief and future loans, they want to
    make sure that strategies meet the Boards' evolving expectations. To help
    communicate and meet the Boards' expectations, World Bank and IMF staffs and
    others are helping the recipients prepare the strategies.

    Because recipient countries will be highly dependent on concessional
    financing and monitored under World Bank- and IMF-supported programs for the
    foreseeable future, officials from some nongovernmental organizations have
    said that HIPC debt relief should not be conditioned on the preparation of
    poverty reduction strategies and/or compliance with IMF programs. They seek
    to ensure that the quality of the strategies and the level of civil society
    participation will not be compromised in order to meet the initiative's time
    frames. Also, countries may have the incentive to quickly reach their
    completion point because debt relief only becomes irrevocable at that point.
    Prior to that, creditors may revoke debt relief due to recipients'
    unsatisfactory performance. On the other hand, the World Bank, the IMF, and
    the U.S. Treasury argue that these concerns are mitigated because some
    countries do not have to prepare a full poverty reduction strategy in order
    to qualify for debt relief and countries will receive interim debt relief
    after they qualify for the initiative. World Bank and IMF staffs estimated
    that for four countries--Mauritania, Mozambique, Tanzania, and Uganda--the
    reduction in debt service expected during the interim period is at least 70
    percent of the debt service reduction expected with full debt relief.50
    Also, the staffs said that poverty reduction strategies are to be updated
    every 3 years and, thus, weaknesses in a country's initial poverty reduction
    strategy--such as limited civil society participation--could be addressed in
    subsequent iterations. According to World Bank and IMF staffs, creditors
    agreed in 1999 to increase the amount of HIPC debt relief if the link
    between debt relief and poverty reduction were strengthened and thus may
    resist weakening this link. Moreover, the World Bank and the IMF see the
    receipt of debt relief as a catalyst that should motivate countries to
    undertake difficult reforms and begin preparing the poverty reduction
    strategies.

    Bilateral and Multilateral Creditors Face Financing Challenges

    As a group, bilateral and multilateral creditors are expected to provide
    roughly equal shares of HIPC debt relief that is estimated to total over
    $28 billion51 (in net present value terms); however, many creditors,
    especially the multilateral and smaller bilateral creditors, have said they
    are having difficulty securing their share of the necessary financing. For
    example, an underlying premise of the initiative is that debt relief is
    supposed to be additional to the assistance that donors and creditors would
    otherwise provide to low-income countries. Difficulties in financing the
    initiative could delay debt relief and ultimately undermine the success of
    the initiative.52

    Although bilateral creditors are expected to provide about $13 billion (net
    present value terms) of HIPC debt relief, the estimated cost of providing
    this relief varies between creditors, and some have not secured the full
    financing to fund their obligations. Our review indicates that, for four of
    the seven leading industrial countries (France, Germany, Italy, and Japan),
    the estimated cost of providing debt relief is close to the face value of
    the debt. For Canada, the United Kingdom, and the United States, the
    estimated cost of debt relief is less than the face value of the debt
    because these countries have already budgeted/provisioned for the
    probability of nonrepayment of the loan. For example, it is expected to cost
    the United States about
    $346 million (in net present value terms) to forgive about $3.8 billion (in
    nominal terms) in debt owed by 22 potentially eligible countries under the
    enhanced HIPC Initiative. In addition to funding the costs of debt relief,
    large bilateral creditors also face challenges in providing continued aid
    flows and in contributing to help multilateral and smaller bilateral
    creditors meet their share of HIPC debt relief. Bilateral creditors have
    pledged over $2.5 billion to assist multilateral creditors.

    Although most multilateral institutions have expressed support for the
    overall goal of the HIPC Initiative, many have yet to overcome difficulties
    in being able to provide their full share (about $14 billion) of debt
    relief. These difficulties stem from legal, technical, and financial
    restrictions that have made it problematic to obtain the needed financing
    from internal and external sources. Of the four major multilateral
    institutions--the World Bank, the IMF, the African Development Bank Group,
    and the
    Inter-American Development Bank--all but the IMF have large financing gaps
    that they are working to fill from internal and external sources. Some
    smaller multilateral institutions have raised the concern that providing
    debt relief under the initiative threatens their financial integrity.

    The success of the enhanced HIPC Initiative hinges on significant bilateral
    support. Bilateral creditors are expected to provide about 47 percent
    ($13.2 billion in net present value terms) of the HIPC debt relief, with
    about 87 percent of the bilateral total anticipated from a group of key
    bilateral creditors, known as the Paris Club.53 (See fig. 7.)

    Sources: Data from the U. S. Treasury, the IMF, and the World Bank.

    The Group of Seven countries' (Canada, France, Germany, Italy, Japan, United
    Kingdom, and the United States) share of the bilateral total is estimated at
    roughly $6.5 billion in net present value terms. Our review focused
    primarily on these seven leading industrialized countries. Our review of
    these countries indicates that providing debt relief will result in
    budgetary costs for each country.54 The impact on their budgets in providing
    debt relief varies based on several key factors: the amount of outstanding
    loans, the method used to value loans, the method used to budget for debt
    relief, the options used to provide debt relief, and the constraints imposed
    by certain legal requirements. (See apps. IX and X for a detailed discussion
    on these factors for the seven leading industrialized countries.) Table 5
    provides information that specifically relates to the enhanced HIPC
    Initiative as well as general information regarding the Group of Seven
    countries' treatment of debt relief. All members of the Group of Seven
    countries have indicated that they will provide debt relief beyond the
    enhanced HIPC terms. In addition, according to the IMF, Australia, Belgium,
    Netherlands, Norway, Spain, and Switzerland have also announced that they
    would be willing to provide debt relief beyond the enhanced HIPC terms.

                                             Dollars in millions

                    France        Japan       Germany      United      Italy        United      Canada
                                                           States                  Kingdom
     Total
     nominal
     claims -- 40$13,033      $11,200       $6,586       $6,210     $4,311       $3,092       $771
     countries
     HIPC debt as
     a percent of
     G-7 GDP (40 0.9%         0.3%          0.3%         0.08%      0.4%         0.2%         0.1%
     HIPCs)
                 100%
                 non-ODA;                                100%                    100%         100%
                 pre-cutoff   100% non-ODA; 100%         non-ODA;                non-ODA;     non-ODA;
                 date debt;   pre-cut -off  non-ODA;     pre-and    100%         pre-and post pre-and
                 debt stock   date debt;    pre-cutoff   post cutoffnon-ODA;     cutoff date  post-cutoff
                 reduction    type of       date debt;   date debts;pre-cutoff   debts; debt  date debts;
                                                         debt stock date         stock        debt stock
     Percentage  − 90%  relief is to  debt stock   reduction  debt;debt    reduction    reduction at
     and type of at           be decided.   reduction at at         stock        − 90%  completion
     debt relief;completion                 completion   completion reduction at at           point.
     debt relief point and                  point.       point.     completion   completion
     in addition 10% over                                           point.       point and
     to enhanced time.                                                           10% over
     HIPC                                                                        time.

                              100% all ODA  100% all ODA            100% all ODA ODA debt has ODA debt has
                                                         100% all                been written been written
                 100% all ODA                            ODA                     off          off
     Total
     estimated   $8,000       $8,000        $5,689       $3,771     $3,000       $2,720
     cost of debtNominal      Nominal       Nominal      Nominal    Nominal      Nominal      $665 NPV
     relief                                              $346 NPV

                                                                                 Non-ODA      Non-ODA
                                                                                 loans are    loans are
                                                                                 discounted   discounted
                                                                                 based on     based on
     Method for                                          Loans are               probability  country
     valuing     Loans are    Loans are     Loans are    discounted Loans are    of default.  credit
     loans and   valued at    valued at     valued at    based on   valued at                 ratings.
     loan        face value.  face value.   face value.  country    face value.
     guarantees                                          credit
                                                         ratings.
                                                                                 ODA loans
                                                                                 were valued  ODA loans
                                                                                 at zero for  were valued
                                                                                 HIPCs.       at zero for
                                                                                              HIPCs.

                                            Has a direct Has a                   Has a direct
     Debt relief Has a direct Has a direct  impact on    direct     Has an       impact on    Has a direct
     impact on   impact on    impact on     national     impact on  indirect     national     impact on
     national    national     national      budget; no   national   impact on    budget;      national
     budget;     budget; no   budget with   direct       budget;    national     indirectly   budget; no
     national    impact on    regard to ODA impact on    indirectly budget and   impacts      impact on
     debt        national     grants.       national     impacts    national     national     national
                 debt.                                   national   debt.                     debt.
                                            debt.                                debt.
                                                         debt.

                 Parliament's Parliament's                                       Cabinet
                 approval is  approval is                           Parliament's approval is
                 required for required when              Congress'  approval is  required for
                 Paris Club   bilateral     Parliament's approval isrequired for bilateral    Parliament's
                                                         required                debt relief.
     Legal       and          debt          approval is  for Paris  change in    ECGD is      approval is
     constraints bilateral    rescheduling  required for Club and   Paris Club   restricted   required for
                 debt relief. and grant     bilateral               option and                bilateral
                 A budget     provision for debt relief. bilateral  for          in the       debt relief.
                 ceiling is   debt relief                debt       bilateral    amount of
                 set by       agreement is               relief.    debt relief. debt relief
                 parliament.  concluded.                                         it can
                                                                                 provide.

    Legend

    ECGD = Export Credits Guarantee Department
    G-7 = Group of Seven industrialized countries
    NPV = Net present value
    ODA = Official development assistance

    Note: GDP as of 1998 and 1999 in millions of U.S. dollars. World Development
    Indicators database, July 1, 1999 and Standard & Poor's DRI electronic
    database, May 8, 2000.

    Sources:

    France: French Treasury data as of December 31, 1998.
    Japan: Japan Ministry of Finance data as of December 31, 1998.
    Germany: German Treasury data as of January 31, 2000.
    United States: U.S. Treasury data as of December 31, 1998.
    United Kingdom: United Kingdom Treasury data as of December 31, 1999.
    Italy: Italian Treasury data as of December 31, 1999.
    Canada: Canadian Treasury data as of March 31, 1999.

    The amount of outstanding loans influences the cost of debt relief. Table 5
    shows that, in nominal terms, the exposure of the Group of Seven countries
    to the 40 potential HIPC recipients ranges from $771 million for Canada to
    about $13 billion for France. The Group of Seven countries' total
    outstanding loans to the 40 heavily indebted poor countries represents about
    50 percent of the total bilateral exposure in nominal terms.55 The U.S.'
    exposure is about $6 billion, or about 6 percent of bilateral exposure.

    Some Group of Seven countries are more exposed than others because some
    countries, such as the United Kingdom and Canada,56 wrote off all of their
    official development assistance debt to the heavily indebted poor countries
    and now extend new official development assistance in the form of grants.57
    Other countries, such as France and Germany, wrote off a large part of the
    official development assistance debt they were owed.

    The costs of debt relief are influenced by the methods countries use to
    value their loans. Our review indicates that the Group of Seven countries
    use different accounting methods to value their direct loans and loan
    guarantees.

    � Four of the seven countries (France, Germany, Italy, and Japan) value
    their loans at face value. Under this method, no provision is made for the
    nonrepayment of loans. Thus, the cost of HIPC debt relief for these
    countries can be as much as the full face value of the debt being relieved.

    � The three remaining countries (Canada, the United Kingdom, and the United
    States) apply risk-based discounting methods (based on country credit
    rating) that lower the value of the loans below their face value. These
    methods budget for the likelihood that a portion of the loan may not be
    repaid. Different types of loans, such as concessional official development
    assistance and non-concessional loans, are sometimes valued differently. Two
    countries (the United Kingdom and Canada) budget fully for concessional
    official development assistance loans. In other words, their official
    development assistance loans were valued at zero at the time of
    disbursement, meaning they did not expect to be repaid, and therefore relief
    entails no additional budgetary cost. In the case of the United States,
    official development assistance loans are assumed to have a 30-percent grant
    element. This means that, in determining the cost of debt reduction, the
    official development assistance loans' face value is reduced by the grant
    element.

    The cost of debt relief is also influenced by the accounting and budgeting
    rules that individual governments apply, as shown in table 5.

    � For the United States, the cost of providing debt relief is the difference
    between the net present expected value of the loan before debt relief is
    provided and the net present expected value of the loan after debt relief.
    For the countries eligible for HIPC debt relief, this means that the current
    estimated cost of debt relief is much less than the face value of the debt.
    Since the United States had already recognized the cost of lending to these
    countries, the current costs to the United States to forgive 100 percent of
    pre- and post-cutoff date debt58 is estimated at about $346 million in net
    present value terms, although the nominal value of these loans is about $3.8
    billion. Thus, under this approach, the estimated budgetary cost to the
    United States is about 9 cents on average per $1 of outstanding debt.

    � For France and Japan, the cost of debt relief is equal to the face value
    of the debt that is being canceled. For example, since France and Japan had
    carried their loans at face value, it is expected to cost each country a
    total of about $8 billion to provide debt relief, or $1 per each dollar of
    outstanding debt.

    � For Germany, the cost of debt relief is defined in terms of the revenue
    forgone due to nonrepayment of a direct loan or additional spending needed
    to compensate the export credit agencies for loan guarantees made by the
    government. The maximum budgetary impact is about
    90 percent of the face value of the commercial credits that are guaranteed
    by the government.59

    � For Italy, the government's cost of debt relief is not necessarily
    100 percent of the debt that is forgiven. Debt relief has a direct impact on
    the implementing federal agencies' budgets in the amount of the debt that is
    forgiven and an indirect impact on the national budget. The Italian Treasury
    is not required to reimburse its federal agencies immediately at the time of
    debt cancellation nor is it required to provide 100 percent debt relief. It
    restores the funds when the agencies are in need of the money.

    � Both the United Kingdom and Canada have already written off their official
    development assistance loans to potential HIPC recipients. At the time of
    cancellation, most of the forgiveness had no impact on their budgets, since
    the loans were fully budgeted for at the time of disbursement. An exception
    was those official development assistance loans in which borrowers were
    expected to repay part of the interest. In contrast, the cancellation of
    non-official development assistance debt will result in budgetary outlays
    for these two countries to cover the costs of export credit guarantees.

    Additionally, the options that creditors choose, through the Paris Club
    framework, to provide debt relief can affect the budgetary impact. In
    recognizing the legal and budgetary constraints of creditors, the options
    enable creditors to spread their costs over time. The two main options that
    creditors choose for the treatment of non-official development assistance
    debt are debt reduction (a cancellation in the stock of eligible debt) and
    debt-service reduction (a reduction in interest rate). In the case of the
    enhanced HIPC Initiative, most of the Group of Seven countries have chosen
    to cancel the stock of eligible debt. The stock of debt will be irrevocably
    reduced by bilateral and multilateral creditors when countries reach their
    completion points.60 Although official development assistance debts are not
    generally treated in the Paris Club, forgiveness of this debt will be
    largely linked to the treatment of non-official development assistance
    debt.61

    Under the enhanced HIPC Initiative, France62 and the United Kingdom63 are
    expected to write off 90 percent of the recipients' stock of debt at the
    completion points and to spread the remaining portion over time. The largest
    impact on France's budget will occur at each country's completion point, and
    the United Kingdom's Export Credits Guarantee Department has already
    provisioned for the Paris Club agreed upon portion of the debt relief that
    will be provided. It is anticipated that Japan will reschedule its official
    development assistance loans over 40 years and provide grant aid to
    recipients when their payments fall due.64 Under its approach, Japan will
    require budgetary resources gradually over time, with the cost of debt
    relief spread over 4 decades. On the other hand, Italy and Germany have
    decided to write off the recipients' stock of debt at the time the countries
    reach their completion points and become entitled to irrevocable debt
    relief. While the United States and Canada are expected to write off their
    loans at countries' completion points, the impact on the U.S. budget, based
    on the Office of Management and Budget's rules, will occur at countries'
    decision points, and Canada has already realized the budgetary impact.

    Finally, six of the seven major industrial countries (except for the United
    Kingdom) need legislative authorization to provide debt relief or forgive
    debt.65 For example, the U.S. Congress must authorize debt relief and
    appropriate funds in advance to cover the costs.66 While the U.S.
    administration has said it would like to forgive all of the eligible debt
    HIPC recipients owed to the United States, Congress has not authorized this
    action. Congress has appropriated about one-third ($110 million) of the
    estimated $346 million needed to forgive this debt. Some major Paris Club
    members, such as Canada and Germany, have indicated that they will provide
    more debt relief than called for under the enhanced HIPC Initiative and have
    requested and obtained the legislative authority to do so.67

    It is not yet clear to what extent non-Paris Club creditors68 and commercial
    creditors are willing and able to provide debt relief under the enhanced
    HIPC Initiative. Debtor countries, based on a Paris Club agreement, are
    required to seek comparable terms with their non-Paris Club creditors.
    However, in the past many debtor countries have found it extremely difficult
    to mobilize non-Paris Club creditor governments to provide debt relief on
    comparable terms with the Paris Club. While the IMF, the World Bank, and the
    debtor countries have been making efforts to ensure full participation and
    burden sharing since the original HIPC Initiative, so far only a few HIPC
    recipient countries have secured comparable treatment from non-Paris Club
    creditors. At its spring 2000 meeting, the International Monetary and
    Financial Committee of the IMF reaffirmed the importance of the principle of
    full participation in the HIPC Initiative by all creditors. In this respect,
    it called on all bilateral creditors to play their part while recognizing
    the need for flexibility in exceptional cases.

    The majority of the debts owed to non-Paris Club creditors have been
    outstanding for many years and have typically not been rescheduled or repaid
    over the years. As such, the value of these claims reflects the accumulation
    of interest arrears and late interest charges. If comparable treatment were
    provided by non-Paris Club creditors, this would result in significant costs
    to these creditors since they would have to first provide relief under
    Naples terms,69 which have already been offered through the Paris Club.
    While non-Paris Club creditors constitute, on average, only about one-fourth
    of all bilateral debt, some non-Paris Club creditors have claims outstanding
    to a large number of potential HIPC recipients. For example, China is
    exposed to 17 potential recipients with claims totaling over $1 billion, and
    Libya has exposure to 12 potential recipients with claims totaling over $1
    billion as well.

    In addition, some small non-Paris Club bilateral creditors are significantly
    exposed to one or more recipients and may face particularly difficult issues
    in providing their share of HIPC debt relief. For example, forgiveness of
    debt could result in balance-of-payments problems for creditors such as
    Costa Rica and Guatemala, which have loans outstanding to Nicaragua, a
    potential HIPC recipient. The debt owed by Nicaragua to these countries is
    recorded as part of their balance-of-payments reserves and thus will result
    in a reduction in these reserves, perhaps necessitating an IMF program to
    make up the shortfall. Assistance from other bilateral creditors is being
    sought to avoid this eventuality.

    Further, most of the potential HIPC recipients are African countries that
    also owe debt to their neighboring countries, which may also find it
    difficult to absorb the costs of debt forgiveness. For example, Tanzania,
    which is a HIPC recipient, is also a creditor with exposure to Uganda.
    According to the IMF, given the difficulties debtor countries are
    encountering in obtaining such agreements, efforts by all sides will need to
    be intensified in order to reach more satisfactory outcomes. Larger
    bilateral creditors may be asked to contribute financing to help non-Paris
    Club bilateral creditors and, as will be discussed in the next section, to
    help multilateral creditors provide their share of debt relief.

    Commercial creditors have already provided debt relief for a number of
    countries before the HIPC Initiative. This relief was usually in the form of
    commercial bank debt reduction operations or debt buyback operations
    financed with the support of the International Development Association Debt
    Reduction Facility and bilateral donors.70 Partly due to these initiatives
    and the low level of access to financing from commercial creditors by
    potential HIPC recipients, commercial debt constitutes only about 8 percent
    of the total net present value of claims on these countries. Those
    commercial debts that have already been subject to restructuring agreements
    are typically being serviced. Commercial creditors are expected to provide
    about $800 million, or 3 percent, in debt relief under the enhanced HIPC
    Initiative.

    As previously discussed, for HIPC recipients to maintain a sustainable level
    of debt they must continue to receive financial assistance from donors. In
    June 1999, the leading industrial countries said they will strive to
    gradually increase the volume of official development assistance and to put
    special emphasis on countries best positioned to use it effectively. To ease
    future debt burdens and facilitate sustainable development, they agreed to
    increase the share of grant-based financing in the official development
    assistance they provide to the least-developed countries.

    Between 1992 and 1997, total official development assistance from
    Development Assistance Committee member countries of the Organization for
    Economic Cooperation and Development71 to developing countries and
    multilateral institutions fell steadily from 0.33 percent of their combined

    gross national products to a record low of 0.22 percent.72 Official
    development assistance from the Group of Seven industrialized countries fell
    by 29 percent in real terms between 1992 and 1997. According to a recent
    OECD report,73 there was a small increase in aid flows to developing
    countries from donors in 1998.74 However, the increase reflected temporary
    factors and did not signal a reversal of the declining trend in aid flows
    during the 1990s. According to the report, much of the increase was due in
    part to the timing of contributions to multilateral agencies and to other
    factors such as the Asian crisis. Some of the rise in aid flows, however,
    reflects the commitment by some countries such as the United Kingdom and New
    Zealand to increase their aid flows. Of the Group of Seven countries, only
    the United Kingdom and Canada have indicated that they will increase their
    official development assistance budgets.75 The United Kingdom has pledged to
    increase its official development assistance budget by 28 percent in real
    terms over 3 years, and Canada has recently announced small increases for
    the next 2 years.

    Financing Gaps

    As shown in table 6, three of the four largest multilateral creditors--the
    African Development Bank Group, the Inter-American Development Bank, and the
    World Bank--face considerable financing gaps. The financing gaps of these
    institutions stem in part from their goal of maintaining sufficient
    resources to continue their existing lending levels, some of which, they
    state, cannot be generated through internal sources. The IMF has identified
    the means to provide its full share of HIPC debt relief and awaits the
    fulfillment of government pledges and approval to use the full amount of
    investment income on the profits from off-market gold sales.

     1999 U.S. dollars, net present value
                      Estimated
     Institution      amount of     Identified financing   Potential financing
                      HIPC debt                            sources
                      relief
                                                           For IDA shortfall:

                                                           IBRD net income

                                                           Donor funding
                      $6.3 billion                         provided for debt
                      of which                             relief in the
                                                           context of
                      5.7 billion                          subsequent IDA
                      − IDA                          replenishments

     World Bank       0.6 billion   $2.1 billion           Donor contributions
                      − IBRD                         to the World Bank
                                                           component of the
                                                           HIPC Trust Funda

                      for 32                               For IBRD shortfall:
                      countries
                                                           IDA resources

                                                           Donor contributions
                                                           to the World Bank
                                                           component of the
                                                           HIPC Trust Fund
                                    PRGF-HIPC Trust:
                      $2.3 billion
                      − HIPC  Earnings on the        Authorization to use
                                    investment of profits  the remaining 5/14
                      $3.5 billion  from off-market gold   of the earnings on
                      −       sales                  the investment of
                                                           profits from
     IMF              PRGF-HIPC     SCA-2 contributions    off-market gold
                      Trust
                                                           sales
                                    Nonreimbursement of
                                    General Resources
                      for 32        Account for
                      countries     administration costs   Member contributions
                                    Member contributions
                                    $320 million from      Contributions to
                      $2.2 billion  internal sources ($263 HIPC Trust Fund
     African                        million left)
     Development
     Bank Group
                      for 29                               Additional internal
                      countries     $83 million in pledges resources of $50
                                    with HIPC Trust Fund   million
                                                           According to a staff
                      $900 millionb                        proposal:

     Inter-American                 $180 million from      External sources
     Development Bank               internal sources       − 40 percent
                      for 4
                      countries                            Internal sources
                                                           − 60 percent

    Legend

    IBRD = International Bank for Reconstruction and Development
    IDA = International Development Association
    PRGF = Poverty Reduction and Growth Facility
    SCA-2 = Special Contingency Account-2

    Note: Estimates exclude debt relief for Ghana, Liberia, Somalia, and Sudan.

    aDonors have pledged about $2.5 billion to the HIPC Trust Fund to provide
    support for debt relief to be undertaken by multilateral creditors (excludes
    contributions specifically for the World Bank and the IMF). This includes
    734 million euros from the European Union and $600 million from the United
    States.

    bEstimate does not include debt relief of $200 million under the original
    HIPC Initiative.

    Sources: GAO analysis of World Bank, IMF, African Development Bank Group,
    and Inter-American Development Bank data.

    To help multilateral creditors provide their share of debt relief under the
    initiative, the World Bank established and administers the HIPC Trust Fund.
    The Trust Fund receives contributions from participating multilateral
    development banks and bilateral creditors that are to be used primarily to
    help other multilateral development banks, such as the African Development
    Bank Group, to finance their share of HIPC debt relief after they have fully
    utilized other sources of financing. The Trust Fund has also received
    funding from the International Bank for Reconstruction and Development net
    income transfers and contributions from a number of bilateral donors
    specifically to support World Bank debt relief. The banks have stressed that
    the means used to provide debt relief through the Trust Fund should
    accommodate constraints specific to these institutions, such as policies
    against debt restructuring or forgiveness. As of May 2000,
    22 governments had made pledges or contributions to the Trust Fund totaling
    about $2.5 billion. (See app. XI for a list of contributors to the HIPC
    Trust Fund.)

    The World Bank--the largest multilateral creditor--is expected to provide
    $6.3 billion (in net present value terms) in enhanced HIPC debt relief for
    32 countries. The bulk of this relief ($5.7 billion) is for the credits made
    by the International Development Association, which provides concessional
    financing to its poorest member countries. The remaining $600 million in
    debt relief will be for loans made by the International Bank for
    Reconstruction and Development (which provides market-based loans to its
    member countries) to Cameroon, C�te d'Ivoire, and Honduras. As of May 15,
    2000, the World Bank had identified about $2.1 billion (in net present value
    terms) --the majority of which is International Bank for Reconstruction and
    Development net income--that could be used to fund debt relief.

    The World Bank is exploring several options for fully financing its share of
    debt relief, including donor contributions to the World Bank component of
    the HIPC Trust Fund, resources provided by donors for World Bank debt relief
    in the context of International Development Association replenishments.76
    Additional transfers from the International Bank for Reconstruction and
    Development represent another potential source of financing. According to
    the World Bank, its component of the HIPC Trust Fund will not have
    sufficient resources to fully fund debt relief when it needs to commit to
    providing this relief. As such, the World Bank will provide debt relief to
    these countries by forgiving a portion of future International Development
    Association debt service obligations as they fall due (instead of canceling
    its share of each country's debt at the completion point). The International
    Development Association will be reimbursed by the Trust Fund on a "pay as
    you go" basis annually, subject to the availability of resources to do so.
    The World Bank currently projects that its component of the HIPC Trust Fund
    will have enough resources to reimburse the International Development
    Association for the costs of debt relief through 2005. Beyond that point,
    additional funding will be needed to reimburse the International Development
    Association--roughly
    $500 million per year. According to the World Bank, any shortfalls in such
    funding would correspondingly reduce the International Development
    Association's lending capacity.

    Also, additional funding will be needed in the short term to cover the costs
    of debt relief provided on International Bank for Reconstruction and
    Development debt. According to the World Bank, such debt will not be written
    off for financial integrity reasons.77 In addition, resources in the Trust
    Fund that came from International Bank for Reconstruction and Development
    net income cannot be used to finance International Bank for Reconstruction
    and Development debt relief because this would result in the Bank paying
    itself. Thus, the World Bank is seeking funding from other sources. Several
    donors have already committed $10 million to the World Bank component of the
    HIPC Trust Fund to support debt relief to be undertaken by the World Bank
    and, according to the World Bank, other donors have indicated their intent
    to provide contributions for this purpose. To the extent that donor
    resources are not available when the debt relief is to be provided, the
    International Development Association will provide this relief primarily in
    the form of refinancing through new grants and credits.78 The World Bank
    intends to seek donor reimbursement for any such costs during the next
    replenishment discussions of the International Development Association.

    The IMF has identified financing to meet most of its share of HIPC debt
    relief ($2.3 billion in net present value terms) from internal
    resources--including the earnings on the investment of profits from
    off-market gold sales--and contributions from its members. According to the
    IMF, full financing will be realized if the members provide the resources
    they pledged and the U.S. Congress authorizes the U.S. Executive Director at
    the IMF to approve the use by the IMF of all of the earnings on the
    investment of profits from off-market gold sales. Therefore, unlike the
    other major multilateral creditors, the IMF has a clearly identified means
    for closing its remaining financing gap.

    The internal resources provided by the IMF to fund debt relief comes from
    two sources: (1) non-reimbursement of fees that the Poverty Reduction and
    Growth Facility normally owes to the IMF's General Resources Account for
    administration of the facility, which is worth approximately $65 million a
    year from 1999 to 2004;79 and (2) the investment income on the profits from
    off-market gold sales of up to 14 million ounces. These transactions are
    considered "off-market" because the gold never enters the commercial market.
    In November 1999, the U.S. Congress authorized the U.S. Executive Director
    of the IMF to support the IMF's off-market sale of up to 14-million troy
    ounces of gold and to use 9/14 of the earnings on the investment of profits
    from off-market gold sales to be used solely for debt relief under the HIPC
    Initiative. From December 14, 1999, through April 5, 2000, the IMF had
    revalued about 12.9-million troy ounces of gold through seven
    off-market transactions with Brazil and Mexico.80 With the seventh
    transaction, the IMF declared its gold transactions for poor country debt
    relief completed. The profits from these off-market sales are in the IMF
    Poverty Reduction and Growth Facility-HIPC Trust earning interest. However,
    the interest on the last 5/14 of the profits from the revalued gold are not
    available to the IMF for debt relief until Congress authorizes the U.S.
    Executive Director at the IMF to support the IMF's use of these funds.
    According to the IMF, if it cannot use all of these earnings, it will
    experience a financing shortfall beginning in early 2001.

    The IMF has pledges worth $1.4 billion (net present value terms) from
    bilateral sources to help finance the IMF's share of HIPC debt relief and
    resources to the IMF's Poverty Reduction and Growth Facility. The U.S.
    Congress authorized the use of the U.S. share of a special contingent, or
    reserve, account (SCA-2) at the IMF, worth about $440 million for debt
    relief.81 This contribution by the United States is the largest bilateral
    contribution towards the IMF's debt relief. In addition to the United
    States, many other countries also pledged resources from their share of the
    SCA-2 account, with other countries having pledged direct bilateral
    contributions to the Poverty Reduction and Growth Facility-HIPC Trust. If
    all of these pledges are fulfilled, the IMF will have received contributions
    from 93 of its 182 members.

    The African Development Bank Group--the third largest multilateral creditor
    in the initiative--is expected to provide debt relief of $2.2 billion (in
    net present value terms) to 29 countries. It has identified $320 million
    from its own resources for this purpose, and the institution is considering
    contributing an additional $50 million of its own resources, in response to
    a call from the international community to increase its funding efforts. Of
    this $370 million in potential internal resources, about $313 million
    remains after accounting for debt relief provided to Uganda and Mozambique
    under the initial HIPC Initiative. In addition to these internal resources,
    the African Development Bank Group has approximately $83 million in
    donor-provided resources through the World Bank's HIPC Trust Fund. After
    accounting for these resources, the African Development Bank Group has a
    substantial financing shortfall remaining.

    The African Development Bank Group expects that donor contributions will
    finance its remaining obligation under the initiative. Thus far, the
    European Union has pledged 670 million euros82 that would help finance the
    African Development Bank Group's share. However, according to the African
    Development Bank Group, the European Union has made this contribution
    contingent upon fair burdensharing by other donors, most notably the United
    States. The African Development Bank Group projects that without further
    donor assistance, currently available resources will be exhausted in the
    year 2000. As of May 1, 2000, the African Development Bank Group had not
    formally committed to participate in the enhanced HIPC Initiative. According
    to a proposal for the African Development Bank Group's participation in the
    enhanced HIPC Initiative considered at an informal Board meeting in May
    2000, the institution cannot commit to providing adequate debt relief unless
    adequate resources are identified. According to the African Development Bank
    Group, entering into debt relief commitments without sufficient funds could
    put the institution at risk by undermining its financial integrity and could
    potentially jeopardize future development assistance.

    The Inter-American Development Bank--the fourth largest multilateral
    creditor in the initiative--is projected to provide about $900 million (in
    net present value terms) of additional debt relief for four
    countries--Bolivia, Guyana, Honduras, and Nicaragua. About 75 percent of the
    Inter-American Development Bank relief is for two countries, Bolivia and
    Nicaragua. As of May 12, 2000, the institution had not decided on the method
    for financing and delivering debt relief, but a staff paper outlined a
    possible approach. Under this approach, external resources would fund
    approximately
    40 percent of the institution's total relief, with the remainder provided
    through internal resources. The institution has thus far identified
    $180 million in internal resources, but the external resources have yet to
    be secured. The staff paper cautioned that the impact of using so much of
    its internal resources to provide debt relief could result in a shortfall in
    new concessional lending starting after 2008. According to the staff paper,
    in the absence of a replenishment, this shortfall could result in the
    institution having no concessional resources available for lending for four
    consecutive years, 2009-2012.

    In addition to the four major multilateral institutions, there are 23
    smaller multilateral institutions that are expected to participate in the
    financing of the HIPC Initiative (see app. IV). These institutions cover a
    diverse set of countries across much of the world. However, these
    institutions generally share the characteristic of having a relatively small
    number of client countries in their portfolios (certainly in comparison to
    the four major multilateral institutions), and therefore their exposure to
    HIPC recipients can represent a significant portion of their outstanding
    loan balances. For example, the Central American Bank for Economic
    Integration lends to only five countries, with its lending to Nicaragua and
    Honduras (both of which are potential HIPC recipients) representing about 50
    percent of its total equity. Although the Central American Bank for Economic
    Integration has raised approximately $230 million through its own resources,
    the total cost of its participation in the initiative is estimated to be
    $495 million (in net present value terms). According to the Central American
    Bank for Economic Integration, providing that much debt relief from internal
    sources will reduce its equity by almost half, having a large, negative
    effect on the financial integrity of the institution. The Bank is soliciting
    support from the donor community to assist in its participation in the HIPC
    Initiative.

    At the meeting of 17 multilateral institutions in April 2000, only 8
    reported that the decision-making bodies of these institutions had confirmed
    their participation in the enhanced initiative. Institutions, such as the
    East African Development Bank and the Corporaci�n Andina de Fomento (Andean
    Development Corporation) told us that they support the initiative but cannot
    afford to participate. They are also looking for support from the donor
    community to assist them.

    Conclusions

    The HIPC Initiative represents a step forward in the international
    community's efforts to relieve poor countries of their heavy debt burdens,
    and it does so by seeking to include all creditors and providing significant
    debt relief to recipient countries. Elements of the current
    initiative--especially its goals and financing--have required and continue
    to require much negotiation among the various creditors and recipients;
    however, unless strong, sustained economic growth is achieved, the
    initiative will not likely provide recipient countries with a lasting exit
    from their debt problems. This should not be seen, however, as a reason to
    abandon efforts to provide debt relief to eligible countries. Heavily
    indebted poor countries continue to carry unsustainable debt burdens that
    are unlikely to be lessened without debt relief, but participants and
    observers may need to have a more realistic expectation of what the
    initiative may ultimately achieve.

    Although countries that receive full debt relief under the enhanced HIPC
    Initiative are likely to have their debt reduced significantly, our analysis
    shows that the decline in debt service will only "free up" resources for
    poverty reduction if the recipients borrow these resources. As such,
    recipients' debt levels will rise faster than they would without borrowing
    for increased spending on poverty reduction. In order for countries to
    remain debt sustainable, the World Bank and the IMF assume that countries
    will achieve continuous, strong economic performance, supported by their
    effectively using their resources and by donors continuing to provide
    assistance for 20 years or more following debt relief. Deviations from these
    assumptions may jeopardize a country's ability to pay its future loan
    obligations. For example, if actual growth in export earnings is lower than
    projected, countries may not be able to pay their debt obligations unless
    donor flows (loans and grants) increase. However, any additional borrowing
    will increase these countries' total debt levels over what was originally
    forecast following debt relief.

    Under the initiative, there is a tension between quick debt relief and
    comprehensive poverty reduction strategies, with concerns raised that
    recipients' desire for quick debt relief may adversely affect the quality of
    their strategies and the level of civil society participation. As long as
    the initiative links debt relief to poverty reduction strategies, this
    tension is likely to continue. To counter these concerns, some have called
    for de-linking the timing of debt relief and the preparation of these
    strategies. However, others argue that debt relief under the initiative is a
    catalyst that should motivate countries to begin preparing their strategies
    for reducing poverty and that concerns are mitigated by the provision of
    significant interim relief. Moreover, the call for strengthening the link
    between debt relief and poverty reduction was part of the political
    compromise that gave rise to the enhanced initiative in 1999 and was
    motivated by concern over recipient countries' continuing economic
    vulnerability.

    Many creditors, especially the multilateral and smaller bilateral creditors,
    report they are having difficulty securing their share of the necessary
    financing. In addition to funding the direct costs of debt relief, large
    bilateral creditors also face challenges in providing continued aid flows
    and in contributing to help multilateral and smaller bilateral creditors
    meet their share of HIPC debt relief. Such difficulties could undermine the
    success of the initiative, since debt relief is supposed to be additional to
    the assistance that donors and creditors would otherwise provide to
    low-income countries. Despite the challenges in implementing and financing
    the initiative, poor countries continue to carry unsustainable debt burdens
    that are unlikely to be lessened without debt relief.

    Human Development Indicators for
    38 Countries

    Table 7 in this appendix shows the human development indicators measured and
    reported by the United Nations Development Program for
    38 of the 40 countries that may be eligible to receive debt relief under the
    enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Data were not
    available for Liberia and Somalia. The indicators include life expectancy,
    adult literacy, school enrollment, and gross national product (GNP) per
    capita. The human development index (shown in the last column of the table)
    measures the overall achievements in a country in three basic dimensions of
    human development--longevity, knowledge, and standard of living. It is
    measured by life expectancy, educational attainment (adult literacy and
    combined primary, secondary, and tertiary enrollment), and adjusted income.
    A higher index indicates a higher level of human development. Using this
    index, 174 countries were then ranked from 1 to 174, with 1 indicating the
    highest level of human development and
    174 indicating the lowest. The rank for each country is shown in the first
    column of table 7. The human poverty index concentrates on deprivations in
    three essential elements of human life already reflected in the human
    development index. It shows the percentage of a country's population living
    in poverty as defined in note "a" to the table.

    The data for the United States, the aggregate data for the countries
    classified as medium development and low development, and the aggregate data
    for the world are given at the end of the table to provide points of
    comparison.

                                                         School                 Human
     Rank (human                   Life      Adult     enrollment    GNP per   poverty      Human
     development    Country     expectancy literacy      ratio       capita     index    development
       index)                  (in years)  rate (in       (in       (in U.S.     (in    index value
                                           percent)                 dollars)
                                                       percent)               percent)a
                 Countries
                 classified as 66.6        75.9       64            $1,280    25.3      0.66
                 medium human
                 development
     99          Guyana        64.4        98.1       64            800       10.2      0.70
     110         Vietnam       67.4        91.9       62            310       28.7      0.66
     112         Bolivia       61.4        83.6       70            970       21.1      0.65
     114         Honduras      69.4        70.7       58            740       24.8      0.64
     121         Nicaragua     67.9        63.4       63            410       28.1      0.62

     123         S�o Tom� and  64          75         57b           290       N/A       0.61
                 Principe
     128         Myanmar       60.1        83.6       55            N/A       32.3      0.58
     133         Ghana         60          66.4       42            $390      36.2      0.54
     134         Cameroon      54.7        71.7       43            620       38.1      0.54
     135         Congo         48.6        76.9       68            670       32.3      0.53
     136         Kenya         52          79.3       50            340       28.2      0.52
                 Countries
                 classified as 50.6        48.5       39            274       44.9      0.42
                 low human
                 development

     140         Lao People's  53.2        58.6       55            400       38.9      0.49
                 Dem. Rep.

     141         Congo, Dem.   50.8        77d        39            110       N/A       0.48
                 Rep. of the
     142         Sudan         55          53.3       34            290       36.8      0.48
     143         Togo          48.8        53.2       61            340       38.4      0.47
     147         Madagascar    57.5        47e        39            250       N/A       0.45
     148         Yemen         58          42.5       49            270       49.2      0.45
     149         Mauritania    53.5        38.4       41            440       47.5      0.45
     151         Zambia        40.1        75.1       49            370       38.4      0.43
     153         Senegal       52.3        34.6       35            540       49.6      0.43
     154         C�te d'Ivoire 46.7        42.6       40            710       46.8      0.42
     155         Benin         53.4        33.9       42            380       50.9      0.42

     156         Tanzania, U.  47.9        71.6       33            210       29.8      0.42
                 Rep. of
     158         Uganda        39.6        64         40            330       40.6      0.40
     159         Malawi        39.3        57.7e      75            210       42.2      0.40
     160         Angola        46.5        45         27            260       N/A       0.40
     161         Guinea        46.5        37.9       28            550       50.5      0.40
     162         Chad          47.2        50.3       29            230       52.1      0.39
     164         Rwanda        40.5        63         43            210       N/A       0.38c
                 Central
     165         African       44.9        42.4       26            320       53.6      0.38
                 Republic
     166         Mali          53.3        35.5       25            260       52.8      0.38
     168         Guinea-Bissau 45          33.6       34            230       51.8      0.34
     169         Mozambique    45.2        40.5       25            140       49.5      0.34
     170         Burundi       42.4        44.6       23            140       46.1      0.32
     171         Burkina Faso  44.4        20.7       20            250       59.3      0.30
     172         Ethiopia      43.3        35.4       24            110       55.8      0.30
     173         Niger         48.5        14.3       15            200       65.5      0.30
     174         Sierra Leone  37.2        33.3       30f           160       57.7      0.25
     3           United States 76.7        99b        94            $29,080   N/A       0.93
                 World         66.7        78         63            $5,257    N/A       0.71

    Legend

    N/A = Not available

    aThe human poverty index is calculated using the following measures of
    deprivation. For developing countries, deprivation in longevity is
    represented by the percentage of people not expected to survive to age 40;
    deprivation in knowledge is represented by the percentage of adults who are
    illiterate; and deprivation in living standard is represented by a composite
    of three variables--the percentage of people without access to safe water,
    the percentage of people without access to health services, and the
    percentage of moderately and severely underweight children under 5 years
    old.

    bU.N. Human Development Report Office estimate.

    cUnited Nations Children's Fund, The State of the World's Children 1999 (New
    York: Oxford University Press, 1999).

    dData cited refer to a year or period other than that specified in the
    column heading, differ from the standard definition, or refer to only part
    of the country. U.N. Human Development Report Office estimate based on
    national sources. United Nations Children's Fund, The State of the World's
    Children 1998. (New York: Oxford University Press, 1998).

    eData cited refer to a year or period other than that specified in the
    column heading, differ from the standard definition, or refer to only part
    of the country. U.N. Human Development Report Office estimate based on
    national sources.

    f United Nations Educational, Scientific and Cultural Organization,
    Correspondence on Gross Enrollment Ratios, Nov. 1997.

    Source: United Nations Development Program, Human Development Report, 1999
    (New York: United Nations).

    Type of Debt Incurred by Poor Countries

    Poor countries incur two major types of debt--concessional and
    nonconcessional. Concessional debt has below market interest rates, whereas
    nonconcessional debt has market-based rates.

    Official development assistance, or official aid, can be a grant or a loan
    with at least a 25-percent grant element, for the promotion of economic
    development or basic human needs. The loan portion is offered at a low
    interest rate and over a long repayment period, for example,

    � the U. S. Department of Agriculture sells agricultural commodities to
    low-income countries with repayment periods of 10 to 30 years and low
    interest rates, under its Public Law 480 program.

    Other concessional debt has a below market interest rate, as shown in
    table 8.

                                                                Grant      Grant
                                 Interest                       element,   element,
                                 rate/       Maturity Grace     using a    using a
     Institution   Lending arm   service     (in      period for10-percent 5.25-percent
                                 charge (in  years)   principal discount   discount
                                 percent)             (in years)ratea (in  ratea (in
                                                                percent)   percent)
                                 0 interest
     World Bank    International Service
     Group         Development   charge of   35-40    10        81.3       60.1
                   Assistance
                                 0.75

     International Poverty
     Monetary      Reduction and 0.5         10       5-        74.4       51.7
     Fund          Growth
                   Facility

     African       African       0 interest
     Development   Development   Service     50       10        83.8       64.4
     Bank Group    Fund          charge of
                                 0.75

     Inter-AmericanFund for      1 during
     Development   Special       grace       Up to 40 Up to 10  76.5       51.0
     Bank          Operations    period 2
                                 thereafter

    a"Grant element" is a measure of a loan's concessionality. It is calculated
    as the difference between the nominal, or face, value of a loan and the net
    present value of all scheduled principal and interest repayments, discounted
    at a market interest rate. The grant element is often expressed as a
    percentage of the loan's face value. For these loans, we use the Special
    Drawing Right interest rate as the discount rate (5.25 percent, which
    represents the July − December 1998 average Commercial Interest
    Reference Rates, or CIRR--the method used by the World Bank and IMF staffs
    in analyzing countries' debt profiles under the HIPC Initiative) to
    calculate the grant element. For example, a country may borrow $100 from the
    International Development Association, and the net present value of all
    future loan repayments is $40. This is equivalent to the country's receiving
    a grant of $60 and a loan of $40 repayable at a market interest rate. Two
    methods for measuring concessionality are cited here. The distinction is
    important because the degree of concessionality seems higher under one
    method--the Development Assistance Committee (DAC) of the Organization for
    Economic Cooperation and Development method that uses a standard 10-percent
    discount rate--than under the second method--the CIRR--which is a better
    measure of a country's debt burden. In other words, as shown in table 8 for
    World Bank loans, a country may think it has to pay about $19 for debt
    service when calculated using the DAC but actually has to pay about $40, as
    calculated under the CIRR method.

    Source: GAO analysis of World Bank, IMF, African Development Bank Group, and
    Inter-American Development Bank documents.

    Various creditors offer nonconcessional loans. Table 9 shows the
    nonconcessional loans offered by four major multilateral institutions.

                                                                    Grace
     Institution    Lending arm       Finance       Maturity (in    period for
                                      charges       years)          principal
                                                                    (in years)
                                      Average cost
                                      of borrowing +
                                      0.75% + 1%
                    International     front-end fee
     World Bank     Bank for          + 0.75%       12-20
     Group          Reconstruction    commitment    (amortization   3-5
                    and Development   charge per    period)
                                      year for
                                      undisbursed
                                      amountsa
                                      Special
                                      Drawing Right
     International  General           interest ratec
     Monetary Fund  Resources         + charge to   1-10            0
                    Accountb
                                      increase
                                      reserves

     African                          Financial
     Development    African           charges that  12-20           Up to 5
     Bank Group     Development Bank  reflect the
                                      cost of funds
                                      Cost of
     Inter-American                   borrowing +
     Development    Ordinary Capital  0.5% + credit Varies          Varies
     Bank           Account           commission of
                                      0.75% per year

    aThe International Bank for Reconstruction and Development interest rate is
    a "market-based" rate derived from the average cost of borrowing plus 0.75
    percent. The weighted average interest rate for fiscal year 1999 was 6.63
    percent. A portion of the finance charges may be waived based on an annual
    determination. For most of the past 10 years, a portion of the interest and
    commitment charges has been waived.

    bThe General Resources Account is used for most transactions between member
    countries and the IMF.

    cThe Special Drawing Right (SDR) interest rate is a composite interest rate
    derived as a weighted average of the 3-month interest rates of the IMF's
    five largest members (the United States, Japan, Germany, the United Kingdom,
    and France). As of May 1, 2000, this rate was 4.29 percent.

    Source: World Bank, IMF, African Development Bank Group, and Inter-American
    Development Bank documents.

    � Loans from other multilateral financial institutions.

    � Export credits − Loans for the purpose of trade that may be extended
    by the government or the private sector. If extended by the private sector,
    they may be supported by government guarantees. For example,

    � the U.S. Export-Import Bank finances the exports of U.S. manufactured
    goods through buyers' credits, project finance, suppliers' credit, and small
    business credits and

    � the United Kingdom's Export Credit Guarantee Department provides
    guarantees, insurance, and reinsurance against loss to exporters of United
    Kingdom goods.

    � Commercial loans − loans offered by the private sector (e.g., banks)
    at market rates.

    � Short-term credit − trade financing with a maturity of 1 year or
    less.

    Amount and Type of Debt Owed to the United States by 40 Heavily Indebted
    Poor Countries, End of 1998

                              U.S. dollars in millions

          Country        Concessional    Nonconcessional   Guarantees   Total
                            loans             loans
     Angola            $38.0           $7.0                $0         $45.0
     Benin             0               0                   0          0
     Bolivia           32.3            43.1                13.9       89.4
     Burkina Faso      0               0                   0          0
     Burundi           0               0                   0          0
     Cameroon          0               54.8                8.3        63.1
     Central African
     Republic          0               8.8                 0          8.8
     Chad              0               0                   0          0
     Congo, Democratic
     Republic          449.1           1,678.9             0          2,128.0
     Congo, Republic   32.1            27.4                0          59.6
     C�te d'Ivoire     90.1            231.6               40.8       362.5
     Ethopia           92.0            2.2                 0          94.2
     Ghana             0               8.1                 9.1        17.2
     Guinea            103.8           22.9                0          126.7
     Guinea-Bissau     0               0                   0          0
     Guyana            32.8            5.6                 0          38.4
     Honduras          0               86.5                57.4       143.9
     Kenya             36.5            39.0                36.5       112.1
     Lao, PDR          0               0                   0          0
     Liberia           252.3           67.2                0          319.5
     Madagascar        2.8             38.0                0          40.8
     Malawi            0               0                   0          0
     Mali              0               0                   0          0
     Mauritania        0               6.6                 0          6.6
     Mozambique        0               53.0                0          53.0
     Myanmar           2.6             0                   0          2.6
     Nicaragua         28.9            88.2                2.1        119.2
     Niger             0               12.7                0          12.7
     Rwanda            0               0                   1.3        1.3
     S�o Tom� and
     Pr�ncipe          0               0                   0          0
     Senegal           0               17.4                0          17.4
     Sierra Leone      65.4            0                   0          65.4
     Somalia           207.4           249.6               0          457.0
     Sudan             507.5           766.7               0          1,274.2
     Tanzania          0               21.4                4.0        25.4
     Togo              0               0                   0          0
     Uganda            0               0.9                 0.9        1.8
     Vietnam           130.1           0                   0          130.1
     Yemen             98.6            2.5                 0          101.1
     Zambia            134.2           158.4               0          292.6
     Total 22          $1,066.1        $2,566.8            $137.8     $3,770.8
     Total 40a         $2,336.6        $3,698.9            $174.3     $6,209.8

    a The Treasury has requested funding to provide debt relief to 22 countries
    of the 40 potential HIPC recipient countries. Of the remaining 18 countries,
    4 countries are not likely to qualify as heavily indebted poor countries
    (Angola, Kenya, Vietnam, and Yemen); 4 countries have outstanding debt to
    the United States but are not likely to qualify within the next few years
    (Liberia, Myanmar, Somalia, and Sudan); and 10 countries have no
    understanding debt to the United States, as shown in the last column of the
    table.

    Source: Preliminary data from the U. S. Treasury.

    Multilateral Institutions Participating in the HIPC Debt Initiative

    Table 10 shows the multilateral institutions with outstanding claims on the
    40 heavily indebted poor countries. The institutions were expected to
    provide debt relief under the HIPC Initiative, but several, such as the East
    African Development Bank and the Central American Bank for Economic
    Integration, have said they support the initiative's goal but will not be
    able to finance debt relief. The institutions are listed by the amount of
    debt relief they were expected to provide, from highest to lowest.

                              U.S. dollars in millions

                                         Outstanding debt
                                            (claims)
                                                           Of which     Debt
                                                    Net     arrears    relief
         Institution      Headquarters  Nominal   present    (net       (net
                                         value
                                                  value     present    present
                                                            value)     value)
                         Washington,
     World Bank Group    D.C., United   $39,247  $20,300  $746       $6,300
                         States
     International
     Development                        36,919   17,925   328        5,700
     Association
     International Bank
     for Reconstruction                 2,327    2,376b   418        600
     and Development

     International       Washington,
     Monetary Fund       D.C., United   8,192    6,218    1,660      2,300
                         States
     African Development Abidjan, C�te
     Bank                d'Ivoire       10,275   6,929    997        2,200

     Inter-American      Washington,
     Development Bank    D.C., United   3,812    2,844    N/A        1,100
                         States

     European Investment Brussels,
     Bank/European Union Belgium;       2,373    1,811    209        638
                         Luxembourg
     Central American
     Bank for Economic   Tegucigalpa,   853      920      N/A        392
     Integration         Honduras
     International Fund
     for Agricultural    Rome, Italy    1,237    689      33         219
     Development
     Arab Bank for
     Economic DevelopmentKhartoum,      437      398      222        176
     in Africa           Sudan
     Organization of
     Petroleum Exporting
     Countries Fund for  Vienna,        533      488      153        145
     International       Austria
     Development
     Islamic Development Jeddah, Saudi
     Bank                Arabia         405      489      35         112
     Asian Development   Manila,
     Bank                Philippines    892      434      N/A        103
     Corporaci�n Andina
     de Fomento −  Caracas,
     Andean multilateral Venezuela      178      185      N/A        77
     development bank
     Arab Fund for
     Economic and Social Safat, Kuwait  451      738b     317        64
     Development
     Caribbean Community Port of
     Multilateral        Spain,         108      101      N/A        54
     Clearing Facility   Trinidad
     Central Bank of WestDakar,
     African States      Senegal        229      194      1          48
     West African
     Development Bank    Lom�, Togo     183      183      8          43
     Fund for the
     Financial           Santa Cruz de
     Development of the  la Sierra,     55       50       N/A        24
     River Plate Basin   Bolivia
     Caribbean           St. Michael,
     Development Bank    Barbados       51       34       N/A        18
     Bank of Central
     African States      Dakar,
     (Banque des Etats deSenegal        51       54       18         16
     l'Afrique Centrale)
     Nordic Investment   Helsinki,
     Fund                Finland        96       44       N/A        14
                         Abu Dhabi,
     Arab Monetary Fund  United Arab    122      160a     N/A        11
                         Emirates
     Economic Community
     of West African
     States Fund for
     Cooperation,        Lom�, Togo     42       54a      9          11
     Compensation and
     Development
     East African        Kampala,
     Development Bank    Uganda         10       11a      N/A        7
     Nordic Development  Helsinki,
     Fund                Finland        33       32       N/A        3
     Central American
     Fund for Monetary
     Stabilization (Fondo
     Centroamericano de                 N/A      3        N/A        2
     Estabilizaci�n
     Monetaria)
     Conseil de l'Entente
     (Council of the     Abidjan, C�te  10       11a      N/A        2
     Entente)            d'Ivoire
     Eastern and Southern
     African Trade and   Nairobi,       1        1        N/A        1
     Development Bank    Kenya
     Total                              $69,878  $43,370  $4,409     $14,080

    Legend

    N/A = Not available.

    Note: Figures include Ghana, Liberia, Somalia, and Sudan.

    aFor these institutions, the net present value of these claims is greater
    than the nominal value, because the interest rate used to discount in 1998
    was lower than the interest rate charged on these claims.

    Source: World Bank documents, including Updates on Costing the Enhanced HIPC
    Initiative (Washington, D.C.: World Bank, Dec. 1999).

    Conditions Eight Countries Are Expected to Meet to Reach HIPC Milestones

    Table 11 describes the conditions eight countries are expected to meet in
    order to reach their milestones under the enhanced HIPC Initiative. These
    milestones are the entry (decision) point and exit (completion) point. The
    eight countries have either reached their decision points under the
    initiative or are expected to reach this point by September 2000. These
    conditions are contained in documents describing the reforms countries
    agreed to undertake for the HIPC Initiative as well as targets and actions
    they agreed to meet under their existing World Bank- and International
    Monetary Fund (IMF)-supported programs. In addition to these conditions,
    countries are also to receive satisfactory assurances that creditors will
    provide debt relief. Countries agree to not impose or intensify restrictions
    on international trade or payments.

                        Poverty     Macroeconomic  Foreign         Financial  Public Social
        Country        reduction    stability and exchange    Tax    sector   sector sector    Governance/  Privatization
                       strategy         public     system   reform  reform   reform  reform  anticorruption
                                      finances     reform
     Bolivia
     Before decision
     point −  Prepare interim
     reached Jan.   strategy        X                              X         X               X              X
     2000
     Before
     completion     Prepare full    X                       X                X
     point          strategy
     Guineaa
     Before decisionPrepare interim
     point          strategy        X                              X         X               X
                    Prepare full
     Before         strategy
     completion     Prepare one
     point −  progress report X                              X                 X       X
     possible areas on
                    implementation
     Hondurasa
     Before decisionPrepare interim
     point          strategy        X                                                        X              X
                    Prepare full
                    strategy
     Before
     completion     Prepare one     X                              X                         X              X
     point          progress report
                    on
                    implementation
     Mauritania
     Before decision
     point −  Prepare interim
     reached Jan.   strategy        X             X                X         X       X                      X
     2000
                    Prepare full
                    strategy
     Before
     completion                     X             X         X      X                 X       X              X
     point
                    Successfully
                    implement for
                    at least 1 year
     Mozambique
     Before decision
     point −  Prepare interim
     reached April  strategy        X                              X         X
     2000
     Before
     completion     Prepare full    X                                        X       X       X              X
     pointb         strategy
     Nicaraguaa
     Before decisionPrepare interim
     point          strategy        X                              X         X       X       X              X
                    Complete
     Before         strategy
     completion
     point −                  X                              X                 X       X              X
     tentative
                    Implement
                    strategy
     Tanzania
     Before decision
     point −  Prepare interim
     reached April  strategy        X
     2000
     Before
     completion     Prepare full    X                       X                X       X       X              X
     point          strategy
     Uganda
     Before decision
     point −  Prepare
     reached Jan.   contents of     X                                        X       X
     2000           strategy
     Before
     completion
     point          Finalize        X
     −reached strategy
     May 2000

    aInformation for Guinea, Honduras, and Nicaragua is based on preliminary
    HIPC documents and is therefore subject to change.

    bWorld Bank and IMF staffs note that, in assessing Mozambique's performance
    before the completion point, due consideration will be given to the damage
    caused by the floods in January and February 2000.

    Sources: World Bank and IMF documents.

    Methodologies Used to Analyze the Debt Sustainability of Potential
    Recipients of HIPC Debt Relief

    We addressed a number of methodological issues in evaluating the debt
    sustainability of potential recipients of HIPC debt relief. The HIPC
    documents that we analyzed presented detailed economic projections by World
    Bank and IMF staffs and host country officials for countries that are
    reviewed for eligibility in the initiative (referred to as the "debt
    sustainability analysis"). We examined the debt sustainability analyses
    documents for seven countries: Bolivia, Honduras, Mauritania, Mozambique,
    Nicaragua, Tanzania, and Uganda.83 The documents provide projections over a
    20-year period for key macroeconomic variables as well as for countries'
    debt service and the net present value of the debt stock. The projection
    period provides a baseline scenario of how the economy would evolve over the
    long term, under certain assumptions. However, inconsistencies and gaps in
    the types of information reported in the debt sustainability analyses
    presented challenges in our analysis of the documents.

    We examined the implications of the World Bank and IMF staffs' and host
    country officials' projections contained within the debt sustainability
    analyses for key economic variables, including debt levels, GDP, government
    revenue, donor grant and loan assistance, exports, and debt relief for each
    of the seven countries' total debt, debt service, and external finance
    requirements. We also compared the nominal dollar growth rate projections
    for these variables--implicit in the HIPC documents--with historical data
    from the World Bank's Global Development Finance and the IMF's International
    Financial Statistics. We supplemented our analyses with information from IMF
    and World Bank officials. We reviewed with these officials the underlying
    methodology of the debt sustainability analyses, clarified areas of
    ambiguity, and asked country-specific questions. In situations where we had
    to make assumptions, we vetted these with IMF officials as well as among our
    own staff economists. We also met with U.S. Treasury and nongovernmental
    organization officials in the United States; and government, donor, and
    nongovernmental organization officials in four recipient countries--Bolivia,
    Nicaragua, Tanzania, and Uganda -- to help us clarify their understanding of
    "freed-up resources" and how this was applied under the HIPC Initiative.

    Our examination of the debt sustainability analyses required us to make
    projections for a number of variables, including the amount of borrowing
    countries would have to undertake after receiving debt relief to remain debt
    sustainable, the impact of a decline in exports on debt sustainability, and
    projections of future donor assistance. A brief description of the approach
    we used in each of these areas is described in the next paragraphs.

    According to the IMF, a country is externally viable if it is able to pay
    its external obligations with its own resources (tax revenues, external
    account surpluses, and nonconcessional borrowing), without recourse to donor
    assistance. If, after subtracting HIPC debt service relief, further external
    financing84 is required, then a country is not considered externally viable.
    Hence, the continued presence of a financing gap after HIPC debt service
    relief indicates that the country is not externally viable after HIPC debt
    relief. When the documents provided data separately for program grants and
    loans (i.e., external assistance used specifically to finance the
    balance-of-payments gap) from project assistance, we were able to directly
    determine if the country would become externally viable after receiving HIPC
    debt relief.

    When there was no separation in the data between program and project
    assistance after debt relief, we employed a financing gap analysis to
    identify the point of external viability for each country. The financing gap
    analysis measures the amount of continued external assistance that each
    country would require after accounting for identified sources of financing
    (including internal resources and assistance) in order to remain debt
    sustainable. If, after receiving HIPC debt relief, a country continues to
    require concessional external assistance to close its remaining financing
    gap, it is not considered externally viable.

    To determine what a country's external financing needs would be if the
    country did not choose to spend resources equivalent to the amount of
    resources "freed up" for spending on poverty reduction, we focused on each
    country's pre-HIPC debt relief external financing requirements. From those
    external financing requirements we subtracted the annual HIPC debt service
    relief that they are projected to receive and the additional debt service
    the country would incur had it borrowed the equivalent amount of "freed-up"
    resources for poverty spending.85

    Export Growth Assumptions

    If the growth rate in export earnings declines from its projected level (as
    contained in HIPC documents), the country will generate a lower amount of
    foreign exchange earnings than projected in subsequent years. This would
    impact the country's requirement for external financial assistance, its
    stock of debt, and its debt burden. To estimate these effects, we assume
    that the annual shortfall in foreign exchange earnings from a fall in
    exports will be replaced by increased donor assistance (loans and grants).86

    The projections of donor assistance are based on the data given in the debt
    sustainability analysis for each country. Assistance includes official
    grants and loans for both program and project purposes.87 We calculated the
    net present value of the loan and grant components, generally from the year
    2000 to 2018 for each country. We then compared these debt sustainability
    analysis-based projections of donor assistance (in net present value terms)
    to net present value projections we calculated based on historic data on
    donor assistance for the same country. The data for the historic-based
    projections of assistance are from the World Bank Global Development Finance
    1999. We developed three approaches for comparing the debt sustainability
    analysis-based projections to both high and low versions of historical
    projections assuming (1) constant nominal levels for historical assistance,
    (2) constant real levels of historical assistance (2 percent nominal growth
    rate),88 and (3) growth of nominal assistance at each country's 1990s
    historic assistance growth rates. These approaches yielded very similar
    results.

    In our examination of the debt sustainability analyses, we confronted
    several challenges that derived from the reporting decisions made within
    these documents. While recognizing that there are differences in data
    availability across countries and that different World Bank/IMF teams
    prepare each debt sustainability analysis, the absence of consistency as
    well as gaps in information provided make comparisons across countries very
    difficult. Addressing inconsistencies in the types of information reported
    and gaps in the presentation of some key variables would assist future
    analysis and improve the transparency of these documents.

    We found considerable variation in the form and substance of the data
    presented in the IMF and World Bank debt sustainability analyses we
    reviewed. Although there was uniformity in the general types of tables
    presented within these documents, the specific variables included within
    these tables varied from country to country. In many cases, data for key
    economic variables such as IMF purchases, loan disbursements, or government
    revenue either were not provided or could not be easily deduced. For
    example, although the dollar amount of total debt after relief, annual
    exports, and government revenue were all available for other countries, in
    the case of Uganda, this information was not directly reported and had to be
    deduced from other data. Projected annual information for key variables was
    not available for Mozambique, Mauritania, or Tanzania, and instead the data
    were reported as averages over certain periods of time (e.g., 2008-2017).89
    The breakout of future external financing between program and project
    assistance was available for only two countries, Uganda and Tanzania. The
    absence of this information in the documents of the other countries made our
    calculations of external viability more challenging.

    Critical information that we derived from the debt sustainability analyses
    is not presented explicitly within HIPC documents. In some of the decision
    point documents, the actual amount of debt relief a country would receive is
    not explicitly presented and had to be deduced from other data provided. In
    addition, the amount of borrowing that each country would need after debt
    relief in order to remain debt sustainable is not reported and required a
    complex methodology for us to derive. Finally, although the documents
    discuss the resources that debt relief would contribute to poverty reduction
    activities, they do not mention that these are financial resources that each
    country would have to borrow.

    Information on Selected Elements of Poverty Reduction Strategies

    This appendix provides information on selected elements of the poverty
    reduction strategies to further illustrate the challenges countries face in
    developing the strategies and the numerous causes of poverty that were
    discussed in chapter 3. Reducing poverty takes time and effort. This
    appendix discusses (1) the multiple definitions and measurements of poverty,
    (2) the numerous causes of poverty, and (3) the use of decentralization and
    citizen participation as ways to reduce poverty in Bolivia and Uganda.

    Multidimensional

    Poverty is defined broadly because it can combine economic considerations
    with those of living conditions and quality of life. Countries use both
    national and international definitions to define poverty and a variety of
    indicators to measure various socioeconomic sectors such as health and
    education. Poverty can derive from numerous and mutually reinforcing
    factors, such as disease, natural disasters, war, weak economic systems, and
    governance. It can affect a significant portion of the population and can be
    concentrated in specific regions and ethnic groups and on women.

    The reduction of poverty has been a priority goal of international
    development. Targets set by the United Nations and the World Bank to address
    poverty include reducing (1) the number of people living in global poverty
    by half between 1993 and 2015, (2) the proportion of malnourished children
    by half between 1995 and 2005 and by half again by 2015, and
    (3) global adult illiteracy (ages 15-24) by three fourths between 1990 and
    2015.90

    According to the U.N. Development Program, poverty can be defined as the
    inability to satisfy minimum food and nonfood needs, the lack of minimally
    adequate income or expenditures, or the lack of essential human capabilities
    such as being literate or adequately nourished.91 In addition, countries can
    use their own national standards that can differ between countries and
    change as a country's per capita income grows. They can also use the
    international poverty line jointly agreed to by the United Nations and the
    World Bank that is calculated as one person living on $1 per day.

    The countries that we analyzed used a variety of indicators to assess their
    levels of poverty. According to a U.N. Development Program survey, the
    majority of countries use both non-monetary and monetary definitions of
    poverty. Table 12 shows which measures of poverty countries that we analyzed
    use, whether they have estimated the rates of poverty, and whether they have
    set targets for reducing poverty.

    a"Extreme poverty" is defined as indigence or destitution, usually specified
    as the inability to satisfy even minimum food needs.

    b"Overall poverty" is defined as a less severe level of poverty, usually the
    inability to satisfy essential nonfood as well as food needs.

    �Non-income definition of poverty.

    ♦Plan under development, according to country authorities.

    Source: Overcoming Human Poverty Report 1998, U.N. Development Program (New
    York: United Nations, 1998).

    In Tanzania, poverty is indicated by the national poverty line of $0.65 a
    day and by the definition that it is "a state of deprivation, prohibitive of
    a decent human life." Bolivia uses a nonincome definition of poverty and
    describes it as the inability to satisfy basic needs as a result of lack of
    opportunities to obtain sufficient income, reduced access to public
    services, high vulnerability, and social exclusion. Countries also use a
    variety of poverty monitoring indicators that measure socioeconomic areas
    such as infant mortality, maternal mortality, mortality for children under 5
    years old, and life expectancy and other factors including the percentage of
    the population with access to safe water and the number of children in
    primary school (enrollment rates).

    Uganda provides an example of the challenges countries face in relying on
    indicators as a means for monitoring reductions in poverty. Although Uganda
    has achieved substantial improvements in some indicators, many others remain
    low and some critical ones have in fact deteriorated, according to World
    Bank and IMF staffs. The most notable success has been in primary education,
    where the net primary school enrollment rate increased from 56 percent in
    1995/96 to 94 percent in 1998/99. Improvements were also realized with
    regard to access to clean water, literacy rates, and the prevalence of
    stunting (generally caused by malnutrition) among small children. However,
    life expectancy at birth has declined from 47 years in the early 1990s to 42
    years in 1998, with Uganda now having one of the shortest life expectancies
    in Africa, according to the U.N. Development Program. (See app. I.) This
    decline in life expectancy is directly related to the estimated 10 percent
    of the population that is infected with the HIV/AIDS virus.

    The causes of poverty are numerous and often involve mutually reinforcing
    factors that can vary significantly between different countries, according
    to the United Nations. Some of these factors, for example, include the lack
    of productive resources to generate material wealth, illiteracy, the
    prevalence of diseases such as HIV/AIDS, weak and/or discriminatory economic
    and political systems, natural disasters such as drought and floods, and
    man-made calamities such as war. According to the U.N. Development Program,
    human poverty is the result of a whole set of intersecting
    inequalities--social, political, and economic. Poverty is thus caused by
    more factors than simply a shortage of income, as the following examples
    illustrate.

    � According to Bolivia's interim poverty reduction strategy paper, poverty
    is caused by economic, social, and cultural factors such as limited access
    to health services, limited property rights that restrict the ability of the
    poor to gain physical and financial assets, and social exclusion. In
    Bolivia, the poor lack property rights to accumulate both physical and
    financial assets, and this has led the poor to be more vulnerable to factors
    such disease, economic shock, natural disaster, conflict, or discrimination.

    � In a Ugandan study that included the views of the poor,92 in addition to
    low income, consumption, education levels, and health status, the poor said
    poverty is also caused by previously unconsidered factors such as lack of
    security (that is, living in areas prone to conflict) and vulnerability to
    risks such as droughts and poor harvests.

    � In Tanzania, low economic growth has been the main reason for continuing
    high poverty, while other factors such as the insufficient funding of the
    social sector are also an issue. Although social sector spending has
    gradually recovered in Tanzania after a fiscal crisis in the mid-1990s,
    according to its Public Expenditure Review, compared to the actual
    requirements for the sectors to provide basic social services to all
    Tanzanians, the current allocations are inadequate to meet their needs.

    Portions of a Country

    Poverty can also affect a significant portion of a country's population and
    be concentrated in specific regions and ethnic groups or be rooted in gender
    inequalities. Bolivia's interim poverty reduction strategy estimated that in
    1992, 70 percent of households lived below the national poverty line. In
    1998, the U.N. Development Program reported that 94 percent of Bolivia's
    rural households lived in poverty, as opposed to about 50 percent of
    households in urban areas. In Nicaragua, 44 percent of the population is
    estimated to live under its poverty line, while Mozambique's interim poverty
    reduction strategy estimated this proportion to be 70 percent.

    Women in these countries also suffer from poverty disproportionately
    compared to men. According to the United Nations, compared to men, women
    have a higher incidence of poverty, their poverty is more severe, and their
    incidence of poverty is increasing. In addition to lower income levels,
    women also suffer from compounding problems of low status, incidences of
    violence against them, and lower levels of education and health care. For
    example, of the 900 million illiterate adults in the world, two-thirds of
    them are women. In Tanzania, literacy rates for women are
    62 percent compared to the male literacy rate of about 82 percent, according
    to the U.N. Development Program.

    Poverty Reduction Strategies

    Countries may choose a number of strategies to reduce poverty. In addition
    to undertaking many economic and social actions, some countries have been
    focusing on the importance of decentralization of government services as a
    means to improve efficiency of service delivery and increase civil society
    involvement. The process of decentralization may seek to transfer political
    decision-making power from the federal to subordinate levels, improve
    efficiency in the provision of services, and promote accountability at the
    local level. The experience of developing countries demonstrates some of the
    advantages of decentralization as well as the difficulties of pursuing this
    method. Both Bolivia and Uganda have pursued decentralization for several
    years, including efforts to transfer responsibilities to district
    governments from the federal level and to build citizens' participation in
    planning and monitoring government activities.

    According to Bolivia's interim poverty reduction strategy, decentralization
    is an important tool for both reducing poverty and enhancing equality since
    this approach makes it possible to focus on local needs, encourages good
    governance, and generates a desire for communities to begin having a say in
    the development of their region.93 According to Bolivian government
    officials, decentralization and popular participation in Bolivia have
    achieved some benefits, such as reducing distortions in the allocation of
    resources (resources were not previously allocated based primarily on need)
    and increasing citizens' involvement in identifying priority needs. World
    Bank staff reported that decentralization has increased efficiency and local
    accountability, and popular participation has helped to make many
    municipalities more autonomous and responsive to civil society.94 However,
    the government and the Bank also noted that additional improvements are
    needed for decentralization to be effective in reducing poverty.

    Decentralization seeks to transfer political power to municipal governments,
    promote fiscal responsibility through the handling of local public finances,
    and achieve greater efficiency in the provision of social services.
    According to the Bolivian government, such considerations led to
    administrative decentralization and popular participation laws in the
    mid-1990s that sought to decentralize political and economic
    decision-making, transfer the administration of key public services and
    resources to the local level, promote citizens' participation, and improve
    the allocation of resources at the local level. The U.N. Development Program
    stated that the main objective of the Popular Participation Law is to
    improve the quality of life of men and women through a more equitable
    distribution of public resources and decision-making authority.95 The U.N.
    Development Program also said that it is the first Bolivian law that
    recognizes, promotes, and institutionalizes participation processes at the
    local level. According to the United Kingdom's aid organization, for the
    first time these laws have put significant resources into local hands,
    offering the potential for more demand-driven development and greater local
    ownership and accountability.96

    Bolivia's interim poverty reduction strategy stated that, in the 5 years
    these laws have been implemented, several improvements have been made. For
    example, some urban areas were getting more resources on a per capita basis
    than poorer rural areas. The allocation of public resources has been
    improved due to these laws. Also, civic participation has become much more
    extensive, with the inclusion of about 14,000 local community organizations
    and 311 "vigilance committees" that help identify the communities'
    priorities and monitor government activities as well as the removal of
    several mayors for mishandling public funds. Municipal investment in basic
    social services has also increased in recent years.

    Despite these gains, Bolivia's interim poverty reduction strategy noted that
    efforts are needed to improve equity, municipal administration, basic social
    services, and civil participation. World Bank staff identified problems
    implementing the government's decentralization strategy as key constraints
    in strengthening institutional capacity at the local level and improving the
    quantity and quality of basic services to the population. The staff also
    said that failure to address these problems would limit progress in the
    fight against poverty. To address the problems, the government's strategy
    proposed allocating more resources to regions with high levels of poverty
    and increasing the efficiency of social services. In order to help meet
    local demands, the processes of participatory planning are to be
    strengthened and implemented through municipal development plans, annual
    operating plans, and municipal institutional development plans. These plans
    are to be subject to public monitoring and evaluation.

    In Bolivia, officials from the government and vigilance committees of two
    municipalities--Punata and Colomi--told us that, with technical assistance
    from the U.S. Agency for International Development, they have prepared plans
    that describe and prioritize the communities' needs through a process that
    involves public participation and approval. Priorities are graded from A to
    E, with A being the highest priority. Excerpts from the city of Punata's
    annual operating plan are outlined in table 13.

     Community     Problem                Proposed        Number of   Priority
                                          project         families
     Chirusi Kollo
     "A"           Health                 Health center   55          C

     Rom�n Calle   Low production         Irrigation      53          A
                                          system
     Pucara        Morbidity/mortality    Drinking water  100         A
     Jorge Rojas
     Tardio        Morbidity/mortality    Sewage system   263         A
     Leon Rancho
     Centro        Sale of goods          Local road      150         B
     Junta Vecinal
     #2 (Gral      Dust                   Pave roads      400         B
     Pando)
     Capilla       Sale of goods          Local road      280         B
     Junta Vecinal
     #4                                   Household gas   155         E
     Junta Vecinal
     #11           Morbidity/mortality    Drinking water  350         A
     Vintu Cancha  Morbidity/mortality    Drinking water  120         A

     Tajamar B     Low production         Irrigation      48          A
                                          system
     Junta Vecinal                        Completion of
     #3            Lack of road           avenue          510         B
     Chirusi                              Irrigation
     Grande        Low production         system          95          A
     Tajamar                              Irrigation
     Centro        Low production         system          50          A
     Laguna Centro Morbidity/mortality    Drinking water  48          A

     Pampa Grande  Community enhancement  Chapel          290         E
                                          restoration
     Saca Saca     Community enhancement  Sports fields   85          E

    Source: GAO translation of document provided by government officials from
    the city of Punata, Bolivia.

    Table 13 shows that the highest priority projects are for irrigation and
    drinking water, second-tier priorities include access roads, and the lowest
    priorities are for community enhancements like chapel restoration and
    playing/sports fields. Officials said the vigilance committees have worked
    to ensure that the communities' priorities are included in municipal plans
    and to exercise public oversight of the government's implementation of these
    plans.

    Decentralization, including active civil society participation, is a crucial
    element of the Ugandan government's poverty reduction strategy.97 District
    government officials in Uganda told us that while decentralization and
    greater civil participation have achieved the benefits of improved service
    delivery and government accountability, increased government expenditure and
    greater transparency, accountability, and capability are needed to improve
    the local governments' ability to manage resources.

    According to a HIPC document, the government's antipoverty programs will
    increasingly be implemented at the local government level, because local
    governments (including local councils) are considered to be in the best
    position to assess local needs and to respond quickly and effectively to
    changing poverty conditions.98 District government officials we spoke with
    in Uganda said that most of the priority services in rural areas--such as
    education, health, safe and reliable water, agriculture extension services,
    resettlement of displaced persons (important to districts bordering on
    countries in conflict), and land management--are now the responsibility of
    the local government. They said that the Ugandan government turned to
    participation as a means of letting local people decide their priorities and
    translate them into actions that reduce poverty.

    For decentralization to be effective, the transfer of responsibilities and
    resources to the districts should be accompanied by efforts to build
    technical, operational, and administrative capacity at the local level.
    Donor governments, the World Bank, and others are undertaking efforts to
    improve local governments' capacity in 20 of Uganda's 45 districts, as shown
    in figure 8.

    Source: Ministry of Local Government, Uganda.

    Despite these efforts and those of the Ugandan government, 25 districts are
    likely to need technical assistance from donors to further build local
    capacity to plan, budget, execute, and monitor projects and services.

    To build budgeting and programming capacities at the local level, the
    central government extended its medium-term budget framework to include all
    district governments. The government, the IMF, the World Bank, and others
    have been providing technical assistance in budget preparation, execution,
    and monitoring to district governments in order to improve their capacity to
    control and monitor expenditures and to assess the impact of district
    spending.

    The Ugandan government has also sought to enhance accountability in the use
    of resources by implementing an integrated fiscal management system and
    strengthening systems that enable citizens to monitor government
    performance. Uganda's poverty reduction strategy notes that good governance
    involves making public expenditure transparent and efficient. This includes
    "bottom-up" accountability, meaning that communities hold local government
    and service deliverers accountable through local councils. To increase
    transparency, the amount of funding disbursed by the central government to
    districts for education is posted on many school notice boards so that
    citizens and others can monitor the receipt and use of funds. District
    government officials in Uganda told us that local citizen committees help
    oversee the use of resources, which increases accountability and democracy.
    Members of a school management committee that includes parents, teachers,
    and administrators told us they monitor expenditures, the quality of
    education, and students' test results. They said this has become
    particularly challenging because Uganda's program to provide free primary
    education to most students doubled the school enrollment rate over a very
    short period. Also, to increase the transparency in the use of money from
    the Poverty Action Fund--set up to channel savings from debt relief and
    other funds into priority spending areas--notices are published in the
    newspaper indicating the amounts disbursed to each district. Expenditures
    and outcomes are reviewed quarterly by the government, donors, and
    representatives of civil society.

    District government officials we spoke with in Uganda said that
    decentralization is a continuous process whose benefits--such as widespread
    service improvements and citizen empowerment-- are mainly long term. The
    initial implementation is expensive as capacity is built and local
    governments and councils are established. They said decentralization
    motivates the government to be more accountable and requires
    open-mindedness and government officials willing to share power because
    citizens' sense of ownership and questioning of authority increase.

    Officials also said that while decentralization has increased the quality of
    services delivered and citizens' sense of empowerment, the districts have
    not received enough funding from the central government--the local
    governments' major source of revenue--to carry out all of the
    responsibilities they have been given. In part this reflects Uganda's
    decision to transfer responsibilities before building sufficient local
    capacity. Government officials said that they were concerned that other
    countries that worked to build capacity first never actually decentralized.
    The officials said that significant resources are needed to build local
    government's capacity to manage human resources and finances.

    Representatives of nongovernmental organizations in Uganda told us that the
    main issue is building civil society capacity, especially at the local
    level, to (1) participate in identifying and executing projects and (2)
    monitor the level, use, and impact of government borrowing and expenditures.
    They said that local capacity needs to be strengthened if decentralization
    is to succeed. In their view, there has been much discussion of civil
    society participation at the national level, but it has not yet translated
    into greater activity or ownership at the local level. They told us that
    local governments need to be made aware of the importance of local civil
    society participation and that it takes a lot of energy and resources to
    build civil society and government capacity. They also said that grants from
    donors are needed to finance efforts to build local governments' and civil
    society's capacity because Uganda does not have sufficient funding.

    Civil Society Participation in Bolivia

    In 1997, the government of Bolivia conducted a "national dialogue" to
    involve civil society in its effort to build support for its new economic
    and social priorities. Although government officials said they considered
    that effort to have been quite worthwhile, nongovernmental organizations and
    donors that we talked with disagreed. They told us the dialogue consisted of
    a 1-day meeting in which the government selected whom to invite, involved
    little regional participation, gave little advance notice regarding the
    agenda to the invitees, provided little background information, and used the
    meeting to present its views. One nongovernmental organization
    representative characterized this effort as having been more a "regional
    monologue than a national dialogue." In 1998, the United Nations reported
    that, according to a recent survey, 70 percent of Bolivians felt that their
    opinions did not count at all in the political system's decision-making
    process. Additionally, there was little follow-up after this dialogue to
    ensure that actions were undertaken. In light of this experience, the drive
    for a new dialogue as part of the HIPC Initiative was met with some
    suspicion.

    To overcome the previous criticisms and involve civil society in preparing
    its poverty reduction strategy, the government is convening a second
    national dialogue that is to involve more participants, provide background
    papers prepared by the government and others, and establish a mechanism to
    follow up on commitments made during the dialogue. To involve more
    participants, the consultation process involves 27 meetings, lasting 1-2
    days each, at rural, urban, and regional levels, as shown in figure 9.
    Figure 10 describes the results expected from this process.

    Poverty Reduction Strategy

    Source: Government of Bolivia.

    in Developing the Poverty Reduction Strategy

    Source: Government of Bolivia.

    The process is to culminate in a national dialogue in July 2000 and a full
    poverty reduction strategy shortly thereafter.

    According to the government of Bolivia, the goals of the national dialogue
    are to

    � transform initiatives into state policies aimed at promoting growth and
    reducing poverty on the basis of agreements reached between the government,
    the opposition, and civil society;

    � strengthen civil society trust in this approach;

    � prioritize the use of resources for poverty reduction; and

    � institute a participatory body in charge of following up on and monitoring
    commitments made in the course of the national dialogue.

    A steering council and secretariat composed of government and civil society
    representatives are to oversee the national dialogue process. Meeting
    participants include representatives from local, regional, and central
    governments and civil society. Bolivia's interim poverty reduction strategy,
    which contains a brief analysis of poverty and a conceptual framework that
    could guide discussions, and other documents prepared by the participants
    are to be used in the discussions.

    Two other ongoing efforts are trying to achieve greater civil society
    involvement in the national dialogue. First, the Catholic Church in Bolivia
    is sponsoring a dialogue that it hopes will mobilize civil society
    participation, facilitate inclusion in setting poverty-reduction goals, and
    generate independent conclusions that will be integrated into the national
    dialogue. The church is sponsoring workshops in all nine Bolivian regions
    and a national dialogue to discuss

    � the impact of structural adjustment and macroeconomic policies on poverty;

    � human rights and participation, including a mechanism for civil society to
    monitor resource allocations;

    � urban development, including education, health, employment, and
    productivity; and

    � rural development, including education, health, land ownership, and
    productivity.

    The Catholic Church, which a recent U.N. poll identified as the most
    respected and credible institution in Bolivia, opted to not become a member
    of the steering committee in order to remain independent, according to U.N.
    Development Program officials. The church will participate in the national
    dialogue as a regular "invitee."

    Under the second effort, private sector representatives from nine regions
    are meeting to prepare strategies that highlight the important role of the
    productive sector--particularly small- and medium-sized industries,
    agriculture producers, and mining--in fighting poverty. Their goal is to
    bring the productive sector into the national dialogue.

    The new process of civil society participation appears to address some of
    the criticisms that were expressed because it seeks to obtain a wider range
    of views, provide more information for discussion, and establish a
    participatory mechanism to follow up on the commitments made during the
    national dialogue.

    How the United States Budgets and Accounts for Debt Relief

    Our review of the seven leading industrial countries indicates that
    providing debt relief results in additional budgetary costs for each
    country. However, the impact on their budgets in providing debt relief vary
    based on five key factors: the amount of outstanding loans, the method used
    to value loans, the method used to budget for debt relief, the options used
    to provide debt relief, and constraints imposed by certain legal
    requirements. This appendix provides detailed information on those five
    factors for the United States. For the United States, the cost of debt
    relief is lower than the face value of the debt because the value of the
    debt is discounted. It will cost the United States about $346 million (in
    net present value terms) to forgive $3.8 billion (in nominal terms), or an
    average of 9 cents per dollar of the outstanding debt owed by 22 countries
    under the enhanced initiative. However, the U.S. administration faces
    challenges in obtaining the full $346 million from Congress as well as in
    obtaining its proposed contribution of $600 million to the multilateral
    trust funds. This appendix also provides information on the amount of U.S.
    debt reduction provided to heavily indebted poor countries over the past 12
    years. Similar information for Canada, France, Germany, Italy, Japan, and
    the United Kingdom is provided in appendix X, and a summary was provided in
    chapter 4.

    As of December 31, 1998, the U.S.' exposure to the 40 heavily indebted poor
    countries was estimated by officials of U.S Treasury as $6.2 billion. The
    United States has outstanding claims with 30 of the 40 countries.99 Two
    countries, the Democratic Republic of the Congo (34 percent) and Sudan (21
    percent), accounted for about 55 percent of total U.S. claims (see
    app. II). U.S. official development assistance loans account for about
    38 percent of its total loans to the 40 HIPCs.100 The United States has

    proposed to cancel 100 percent of its pre- and post- cutoff date101
    non-official development assistance loans, as well as 100 percent of its
    official development assistance loans to 22 potentially eligible HIPC
    recipients.102 The U.S. Treasury estimates that the cost to fully cancel
    these loans is $346 million in net present value terms, or about $3.8
    billion in nominal terms.

    The major programs under which international debt is owed to the U.S.
    government are loans and loan guarantees made under the Export-Import Bank
    Act;103 loans under the Agriculture Trade Development and Assistance Act;104
    loans and loan guarantees under the Foreign Assistance Act;105 loans under
    the Arms Export Control Act;106 and loan guarantees under the Commodity
    Credit Corporation Charter Act.107 Most of the U.S.' international loans are
    associated with agriculture, defense, and export credits. Commercial bank
    loan guarantees by the U.S. government constitute only a small portion
    (about 3 percent) of total outstanding claims on the
    40 HIPCs. The U.S. claims on the 40 HIPCs represent about 6 percent of total
    bilateral creditors' claims and about 3 percent of total creditors'
    (bilateral and multilateral) outstanding claims.

    The budget costs of debt relief are influenced by the method the U.S.
    government uses to value its loans. The method used in valuing U.S.
    government international loans and loan guarantees is based on the Federal
    Credit Reform Act of 1990.108 The act requires U.S. agencies to value debts
    owed to the U.S. government on the basis of their net present value rather
    than their face value.109 Before new direct loans are obligated110 and loan
    guarantees are committed, agencies must calculate the cost of the credit to
    the U.S. government by estimating factors such as the likelihood of default,
    a loan's interest rate, and the repayment period (maturity). This cost is
    called the "subsidy cost." The subsidy cost is budgeted in net present value
    terms and is the estimated long-term cost to the government of a direct loan
    or a loan guarantee, excluding administrative costs. The net present value
    is calculated by discounting estimated future cash flows (disbursements by
    the government and payments to it) of each loan or guarantee, using a
    discount rate equal to the interest paid by the Treasury on loans of
    comparable maturity. The accounting standards and the budgetary treatment of
    federal credit programs are covered in the Statement of Federal Financial
    Accounting Standards Number 2111 and the Office of Management and Budget's
    (OMB) Circular Number A-11.

    The Federal Credit Reform Act of 1990 requires that funds be appropriated
    and budgeted in advance to cover the subsidy cost. 112 The unsubsidized or
    unappropriated portion of direct loans is financed with funds borrowed from
    the U.S. Treasury.113 The subsidy payment is combined with the unsubsidized
    portion to finance the direct loan. The direct loan is recorded on the
    balance sheet as an asset in the amount of the present value of its
    estimated net cash flows. With respect to loan guarantees, the estimated
    present value of the net cash outflows of the guarantee is appropriated to
    the program account before the guarantee can be made and is recognized as a
    liability on the balance sheet. The loan guarantee financing account holds
    the subsidy payment from the program account as a reserve against default
    claims.114 Based on OMB Circular Number A-11, agencies are required to
    reestimate the subsidy cost after the close of each fiscal year.

    As a result of the Federal Credit Reform Act of 1990, an Inter-Agency
    Country Risk Assessment System was created to ensure and encourage more
    effective and consistent risk assessment by U.S. agencies, including those
    agencies that issue foreign loans and loan guarantees.115 The
    Inter-Agency Country Risk Assessment System technical team established an
    indicator system that results in placing a country within 1 of 11 risk
    categories,116 from the most creditworthy to the least creditworthy. Among
    other things, agencies calculate the cost of country risk117 based on the
    assigned Inter-Agency Country Risk Assessment System ratings and
    corresponding risk premiums118 to arrive at the subsidy cost and thus the
    net present value of the loan.119

    The Inter-Agency Country Risk Assessment System's top eight country
    categories are assigned risk premiums and default rates, which vary by loan
    maturity. However, for the bottom three risk categories, a default rate is
    estimated for each category, which remains constant over all maturities.
    Most of the potential HIPC recipients are rated in the bottom three risk
    categories. The estimated present value of the loan for these last three
    categories is determined by multiplying the face value of the loan by a flat
    price, where the price is equal to one minus the estimated default rate. To
    estimate price for the last three categories, the Inter-Agency Country Risk
    Assessment team considers, among other things, the expected treatment by the
    Paris Club of official creditors. For example, if country A, which has the
    lowest rating, has an expected default rate of 93 percent, this means that
    the U.S. government expects, on average, to be repaid $0.07 per dollar of
    outstanding debt, on a net present value basis.120 Put another way, if
    country A borrows $100 million from the United States at the current
    Treasury rate, the U.S. government expects, on average, to be repaid
    $7 million on a net present value basis.121 Seven million dollars is the
    estimated net present value of the loan to the U.S. government, and the
    $93 million is the subsidy cost to the U.S. government, or the amount that
    is not expected to be repaid. As mentioned previously, agencies are required
    to reestimate the subsidy cost annually for each credit account. A
    reestimate could result in an increase or a decrease in the estimated net
    present value of the loan, thereby decreasing or increasing the expected
    cost to the U.S. government of extending the loan.122

    The Federal Credit Reform Act of 1990 substantially affects the way the
    U.S. government treats the cost of debt relief. The act makes it possible
    for the government to forgive several dollars in international loans and
    guarantees for only $1 in current budgetary cost. Since agencies must value
    their loans on the basis of their net present value, many outstanding loans
    to developing countries are reflected on the agencies' books at a
    substantial discount from their face value. Countries that are considered
    high risk will have loans that are valued at a deep discount, and thus the
    additional budgetary cost of forgiving these loans would be relatively low
    because the government would have already recognized the cost of lending to
    risky countries.123

    In addition, based on OMB Circular Number A-11, debt forgiveness is a
    "direct modification" of loans or guarantees.124 A direct modification is an
    action that alters the terms of existing contracts or results in the sale of
    loan assets.125 The act requires that any action by the government that
    changes the value of a direct loan or loan guarantee must be counted as a
    change in its cost.126 If the modification results in an increase in cost,
    the administration must request, and Congress must appropriate, funds before
    debt forgiveness can take place. Thus, debt relief creates new demands on
    the U.S. budget.

    The U.S. cost of providing debt relief is the difference between the net
    present expected value127 of the loan before debt relief is provided and the
    net present expected value of the loan after debt relief.128 The calculation
    of how much money must be appropriated to reduce or forgive a certain amount
    of debt is complex and depends on a number of factors, including the value
    of the debt (the likelihood of repayment by the debtor) and whether the loan
    is concessional or nonconcessional. For nonconcessional loans that were made
    to countries with a good repayment history, the cost to the United States
    would be much higher than for concessional loans to countries that do not
    have a good repayment history. Table 14 provides a simplified illustration
    of how the Treasury and OMB generally determine the cost of debt relief
    (subsidy cost) for a country.129

     U.S. Dollars in millions
     Steps Description of the loan                                      Value
     1     Total scheduled payments − face value                  $90.00
     2     Net present expected value before debt relief ($90 x 0.07)   6.30

     3     Face value of debt reduced ($90 x 0.90), assuming a          81.00
           90-percent reduction based on the enhanced HIPC terms
     4     Face value after debt relief ($90 - $81)                     9.00
     5     Net present expected value after debt relief ($9 x 0.07)     0.63
           Debt reduction cost or increased subsidy costs = net present
     6     expected value before debt relief minus net present expected $5.67
           value after debt relief ($6.30 - $0.63)

    Note: This illustration assumes a constant default rate that does not vary
    with maturity or interest rates.

    Source: GAO analysis of OMB and Treasury information.

    Based on the table, the following occurs:

    � Country A has total nonconcessional debt to the U.S. government of
    $90 million. The illustration also assumes that the U.S. Treasury borrowing
    rate is equal to the loan's interest rate, thus there is no interest subsidy
    or cost (step 1).130

    � An "F=" rating is assumed for country A, which is the lowest
    Inter-Agency Country Risk Assessment System rating. Based on the
    Inter-Agency Country Risk Assessment System rating, the expected default
    rate for this loan would be about 93 percent, which is constant and does not
    vary by maturity or interest rate. The expected repayment rate would be
    about 7 percent, or $0.07 to be repaid per dollar of net present value of
    outstanding debt. An expected repayment rate of
    7 percent (or the flat price) was used to derive the net present expected
    value of the loan before debt relief is granted to country A (step 2).

    � This illustration also assumed that country A would receive a 90-percent
    debt reduction, based on the proposed forgiveness under the enhanced HIPC
    Initiative. The face amount of the debt is multiplied by the percentage of
    debt reduction to derive the total stock of debt reduced (step 3).

    � The face value of debt after debt relief was determined. Again, we assumed
    that there is no interest subsidy (step 4).

    � To arrive at the net present expected value after debt relief, the face
    value after debt relief was multiplied by the flat price ($0.07) associated
    with the F= risk category (step 5).

    � Thus, the total debt reduction costs to the U.S. government is
    $5.67 million. This was determined by subtracting the net present expected
    value after debt relief from the net present expected value before debt
    relief (step 6).

    According to OMB and the U.S. Treasury, a multilateral debt reduction, such
    as under the enhanced HIPC terms, will result in an improvement in a
    country's Inter-Agency Country Risk Assessment System rating, due to both
    the reduction in debt burden and the adoption of the economic reforms
    necessary to reach the completion point. As a result, the U.S. government
    assumes that countries that are rated F= would experience an increase of
    2 steps, to the F rating. Such a change would affect the cost of debt relief
    to the U.S. government.

    � For example, country A's Inter-Agency Country Risk Assessment System
    rating of F= would be increased to F. As a result of the increase in rating,
    the net present expected value of the remaining 10 percent of country A's
    debt could be higher than the $0.63 million indicated in step 5. Based on
    the Inter-Agency Country Risk Assessment System rating, the expected
    repayment rate would increase from 7 percent (the F= rating expected rate of
    repayment) to 31 percent (the F rating expected rate of repayment). As a
    result, the net present expected value after debt relief would be about
    $2.79 million ($9 million x 0.31). In this case, the cost to the U.S.
    government for debt reduction would be less: the net present expected value
    before debt relief ($6.30 million) minus the net present expected value
    after debt relief ($2.79 million) results in a cost of
    $3.51 million versus $5.67 million, as indicated in step 6.

    The U.S. administration has decided to provide a stock of debt reduction131
    (a cancellation of principal, interest, and arrears, if any) to potentially
    eligible HIPC countries at the completion point, with interim relief
    beginning at the decision point. Under the enhanced HIPC Initiative, debt
    relief will be calculated based on actual data at the decision point; thus,
    the administration is expected to obligate budgetary authority on the date
    of the Paris Club agreement ("agreed minute") of each HIPC recipient's
    decision point. While the bulk of the debt relief will be provided at the
    completion point, the impact on the budget, based on OMB rules, will occur
    at each country's decision point.

    Credit reform provides for three accounts to handle credit transactions:
    program, financing, and liquidating. The program account receives
    appropriations for the subsidy cost of loans and for associated
    administrative expenses and is included in budget totals. When the direct
    loan is disbursed, the amount of the subsidy expense is charged to the
    agency's program account and paid to a financing account. At the same time,
    the financing account borrows the balance (the nonsubsidized or
    nonappropriated portion) from the U.S. Treasury. The financing account
    handles all cash inflows and outflows of direct loans obligated or
    guarantees committed after fiscal year 1991 (when the new system took
    effect). The liquidating account handles cash flows deriving from direct
    loans obligated or guarantees committed before fiscal year 1992. Most of the
    loans that are being forgiven under the enhanced HIPC Initiative were
    obligated or committed before fiscal year 1992, that is prior to October 1,
    1991.132 Figure 11 illustrates the budgetary and accounting treatment of
    providing debt relief on precredit reform loans, which results in a subsidy
    cost increase. The flowchart continues with the illustration of debt
    reduction for country A, as described previously. In addition, an
    explanation of the flowchart follows the chart.

    Direct Modification - Subsidy Cost Increase

    Source: Treasury and OMB.

    The following narrative provides an explanation of the flowchart:133

    1. As the flowchart shows, the agency provides Treasury's Office of
    International Debt Policy with loan schedule repayments for debtor country
    A.

    2. The Treasury calculates the net present value of the loans, estimates the
    cost of debt reduction at 90 percent, and provides information to OMB.

    3. OMB reviews the calculation of the subsidy cost estimate.

    4. The Treasury requests and receives budget authority for the increased
    subsidy from Congress ($5.67 million in net present value). The budget
    authority necessary to cover the increased subsidy cost must be available in
    the Debt Restructuring Program Account at the Treasury's Bureau of Public
    Debt before the debt relief can be provided.134

    5. The Treasury provides the increased subsidy ($5.67 million) to the Debt
    Reduction Financing Account at the agency level.

    6. The illustration assumes that the loans are precredit reform loans, which
    are being directly modified for the first time. As such, the Debt Reduction
    Financing Account will purchase the loans from the liquidating account where
    the loans are held.135 In the case of precredit reform loans, the agency
    will first write down the loans to the net present expected value, according
    to credit reform rules. (Both the Debt Reduction Financing Account and the
    Liquidating Account are maintained at the agency level.)

    7. The value of the existing loans is the estimate of the net present value
    of the remaining cash flows assumed for the direct loans. In country A's
    case, this net present expected value is $6.30 million, which is the
    remaining cash flow expected before the modification, or the amount before
    debt reduction takes place. The direct loan asset is transferred from the
    Liquidating Account, because it is a precredit reform loan, to the Debt
    Reduction Financing Account, where the loans are modified based on the terms
    of the debt reduction.

    8. Before the loan asset is transferred to the Debt Reduction Financing
    Account, the Debt Reduction Financing Account pays the Liquidating Account
    $6.30 million. To carry out this transfer, the financing account borrows
    $0.63 million from the Treasury and, together with the
    $5.67 million in subsidy cost it receives from the Treasury's Debt
    Restructuring Program Account, the Debt Reduction Financing Account makes a
    one-time payment to the Liquidating Account.

    9. All funds received by the Liquidating Account are transferred to the
    general fund of the Treasury. In this case, the amount transferred is $6.30
    million.

    10. The borrower receives a reduction in its stock of debt from a face value
    of $90 million to $9 million. (Funds transferred from the Debt Reduction
    Financing Account to an agency's regular financing account are used to pay
    back borrowing from Treasury.)

    11. When the borrower repays the loan, the Financing Account uses the loan
    repayments from the borrower to make principal and interest payments to the
    Treasury on the amount borrowed from the Treasury ($0.63 million in net
    present value terms). Once this debt to the Treasury has been satisfied, any
    remaining funds would be paid to a Treasury receipt account.

    The flowchart covers only a direct modification of precredit reform loans
    with increased subsidy costs. Loan guarantees are treated differently
    because they are a liability, not an asset, as in the case of direct loans.
    In that case, the Liquidating Account would pay the financing account
    because the financing account is acquiring a liability. The third party, the
    lender, has to be made whole for the total amount of the loan.136 The
    portion that is not forgiven (10 percent) becomes a direct loan between the
    U.S. government and the borrower. This new loan is also transferred to the
    financing account (as an asset of the government) to be repaid by the
    borrower.

    As previously discussed, the accounting and budgetary rules governing
    international loan valuation and debt forgiveness are embodied in the
    Statement of Federal Financial Accounting Standards Number 2 and OMB
    Circular Number A-11, which are based on the Federal Credit Reform Act of
    1990. Under this act, loans must be valued on a net present value basis, and
    the administration must seek, and Congress must also appropriate in advance,
    the estimated costs to the U.S. government of providing debt relief before
    such relief can take place.137 An appropriation by Congress is required for
    legislating debt reduction on a bilateral and multilateral (Paris Club)
    basis. The appropriated amount is the estimated costs to the U.S. Treasury
    of implementing the debt reduction initiative. The administration had
    requested approximately $346 million under the enhanced HIPC Initiative in
    fiscal year 2000; however, so far Congress has appropriated about one-third
    of the bilateral contribution (approximately $110 million).138

    In addition to the $346 million request for bilateral contribution, the
    administration has pledged approximately $600 million as part of its
    contribution to the multilateral trust funds. The $600 million has not
    received congressional authorization. Further, Congress authorized the use
    of about 333 million Special Drawing Rights (SDR), or about $440 million139
    by the IMF under the Second Special Contingency Account-2 at the IMF for
    debt relief.140

    The United States did not participate in Paris Club (multilateral) debt
    reduction activities until 1994. Prior to 1994, the United States
    participated through multilateral rescheduling options. However,
    unilaterally, the United States forgave about $2.7 billion in heavily
    indebted poor countries' debt between 1989 and 1991.141

    Under authority first granted by Congress in 1993, the United States began
    in 1994 to participate in Paris Club arrangements to reduce nonconcessional
    debt owed by developing nations with strong records of economic reform. This
    authorized the United States to cancel partial repayment on loans issued
    under the U.S. Agency for International Development housing and other credit
    programs; military aid loans; U.S. Export-Import Bank loans and guarantees;
    and, for Latin American nations, agriculture credits guaranteed by the
    Agriculture Department's Commodity Credit Corporation. All of these loans
    and loan guarantees are made on a nonconcessional basis. Since 1994, the
    United States has reduced nonconcessional debt through the Paris Club, on
    both Naples and the original HIPC terms, by about $784 million, resulting in
    budgetary costs of about $69 million.

    Six Industrial Countries' Methodologies for Budgeting and Accounting for
    Debt Relief

    Our review of the Group of Seven leading industrial countries (Canada,
    France, Germany, Italy, Japan, United Kingdom, and the United States)
    indicates that providing debt relief results in additional budget costs for
    each country.142 However, the impact on their budgets varies based on five
    key factors: the amount of outstanding loans, the method used to value
    loans, the method used to budget for debt relief, the option used to provide
    debt relief, and the constraints imposed by certain legal requirements.
    Chapter 4 provides a summary of this information. This appendix provides
    detailed information on those five factors for Canada, France, Germany,
    Italy, Japan, and the United Kingdom. Similar information for the United
    States was provided in appendix IX. These governments confront varying
    degrees of challenges to providing debt relief under the enhanced HIPC
    Initiative. For example, the Japanese government is currently deliberating
    whether to write off the stock of eligible non-official development
    assistance debt at HIPC countries' completion points. Current authorization
    allows Japan to grant interest rate reduction (a debt service reduction
    option, within the framework of the Paris Club), which could take many
    decades to achieve the net present value debt reduction called for by the
    enhanced HIPC Initiative.

    In addition to funding the costs of direct relief, large bilateral
    creditors, such as the Group of Seven industrialized countries, also face
    challenges in providing continued aid flows and in contributing to help
    multilateral and smaller bilateral creditors meet their share of debt relief
    under the enhanced HIPC Initiative. This appendix also provides information
    regarding the amount of funds that these seven countries have offered to
    contribute to the multilateral trust funds as well as their contribution
    over the past 12 years to debt relief initiatives, both bilaterally and
    through the Paris Club framework. The Group of Seven industrialized
    countries' total outstanding loans to the heavily indebted poor countries
    represent about 50 percent of bilateral creditors' exposure.143 Their share
    of the total estimated debt relief to be provided is about $6.5 billion in
    net present value terms, or roughly 25 percent of the total $28 billion in
    net present value terms. In addition, these seven countries have pledged at
    least
    $2.5 billion to multilateral trust funds or development banks under the
    enhanced HIPC Initiative.

    As shown in table 5, of the Group of Seven countries, Canada has the least
    exposure to the 40 heavily indebted poor countries, approximately
    C$1.2 billion, or US$771 million in nominal terms.144 Canada has indicated
    that it will go beyond the enhanced HIPC framework and provide
    100 percent cancellation of pre-and post-cutoff date, non-official
    development assistance debt to all potentially eligible countries. In
    addition, Canada has written off its official development assistance loans
    to the heavily indebted poor countries (with the exception of Myanmar)145
    and has extended official development assistance only in the form of grants
    since 1986.

    According to the Canadian Finance Ministry, Canada's debt initiative would
    provide more generous and timely debt relief to more countries than the
    heavily indebted poor countries. For example, Canada has written off
    Bangladesh's debt, and Haiti, which is not considered a heavily indebted
    poor country, may also qualify. The total cost of Canada's debt relief
    initiatives, under the traditional mechanisms, the enhanced HIPC Initiative,
    and the Canadian debt initiative, is estimated at approximately C$1 billion,
    or about US$665 million in net present value terms. The Canadian government
    has already set aside provisions to implement this debt relief plan.

    Canada provides loans and loan guarantees to foreign sovereigns through two
    principal venues: (1) the Export Development Corporation and
    (2) government guarantees to support Canadian Wheat Board sales. The Export
    Development Corporation is Canada's official export credit agency.146 It
    promotes Canada's exports abroad by guaranteeing and insuring payments to
    Canadian exporters in the case of default by foreign countries, as well as
    through direct lending. The government of Canada also guarantees the
    sovereign receivables of the Canadian Wheat Board under the Credit Grain
    Sales Program. Prior to 1986, the Canadian International Development Agency
    provided concessional loans as official development assistance.147
    Currently, the Canadian International Development Agency provides
    development assistance on a grant-only basis and is no longer offering loans
    as part of its development program.

    Canada determines the value of its nonconcessional loans based on country
    risk assessments.148 Nonconcessional loans are discounted using a rating
    system, which is established by the government and is based upon the
    assessment of country risk, including information from credit rating
    agencies, the Export Development Corporation, and other sources. For heavily
    indebted poor countries, the discount is based upon the amount of debt
    reduction that these countries are expected to receive at the Paris Club or
    under the Canadian debt initiative, which is usually between 80 and 100
    percent. As mentioned earlier, Canada has written off its official
    development assistance loans to the heavily indebted poor countries, with
    the exception of Myanmar. Official development assistance loans were valued
    at zero, meaning that official development assistance loans were fully
    budgeted at the time they were disbursed. At the end of each fiscal year,
    Canada reassesses the value of its foreign loans and guarantees, and the
    fiscal costs of any deterioration in their values are reflected in its
    public accounts' data.

    The costs of debt relief are influenced by the methods countries use to
    value their loans. With respect to non-official development assistance
    loans, all Paris Club debt reduction operations are provisioned for in an
    account for general allowances. Specific provisions were accumulated within
    the general allowances in previous years to reflect the cost of
    multilaterally agreed debt reductions. Therefore, there is no new budgetary
    impact for Paris Club debt reduction operations. The cost of debt
    forgiveness, over and above the percentage agreed to by the Paris Club, such
    as the Canadian debt initiative, resulted in additional impact on the
    budget. In 1999, the government had set aside $50 million to cover the
    expected cost of the Canadian debt initiative.

    In the past, whenever there has been a write-down of sovereign debt as part
    of a Paris Club agreement, the Canadian government has paid the Export
    Development Corporation the amounts that would otherwise have been paid by
    the debtor government. This policy is currently under review. The Export
    Development Corporation is an independently capitalized corporation, which
    undertakes loans on commercial terms. However, the Export Development
    Corporation's accounts are consolidated with those of the government of
    Canada at year-end, and the value of the loans, net of provisions, are
    reflected in the government's consolidated fiscal position.

    As mentioned previously, Canada has already written off nearly all of its
    official development assistance loans. Since Canada had fully budgeted for
    official development assistance loans to the heavily indebted poor countries
    at the time they were disbursed by the Canadian International Development
    Agency, the forgiveness of official development assistance loans did not
    result in additional impact on its budget when they were written off.

    In addition, the options creditors have chosen through the Paris Club
    framework to provide debt relief may affect the budgetary impact. In
    recognizing the legal and budgetary constraints of creditors, the options
    can enable creditors to spread their costs over time. Within the context of
    the Paris Club, creditors may chose options such as debt reduction (a
    cancellation of the stock of eligible debt)149 or debt service reduction
    (interest rate reduction)150 for the treatment of non-official development
    assistance debt.151 According to Ministry of Finance officials, while the
    choice has no differential budgetary effect on Canada since assets are
    valued on a current basis, Canada applies the debt reduction option for
    reasons of administrative simplicity. In addition, while Canada expects to
    provide interim relief beginning at a country's decision point, in
    accordance with the Paris Club procedures, 100 percent of the heavily
    indebted poor countries' debt (pre- and post-cutoff date) will be written
    off as each country reaches its completion point. Since Canada has already
    provisioned for the cost of debt relief beyond the enhanced HIPC terms,
    there is no additional budgetary impact of this forgiveness.

    Canada does not require additional legal authorization to provide debt
    relief within the context of the Paris Club. However, providing additional
    bilateral debt relief, such as the Canadian debt initiative, required
    parliamentary approval for the additional expenditure. The Canadian
    government has already received Parliament's authorization to provide
    bilateral debt forgiveness under the enhanced HIPC Initiative.

    Canada has contributed a total of C$215 million, or about US$143 million, to
    the multilateral trust funds.152 Of this total, C$150 million, or about
    $100 million, has already been provided to the HIPC Trust Fund at the World
    Bank. The remainder, C$65 million, or about $43 million, was provided to the
    Poverty Reduction Growth Facility/HIPC Trust at the IMF. Canada's total
    contribution also includes about $27 million to the World Bank HIPC Trust
    Fund as part of the Interest Subsidy Fund allocation.

    Since 1990, Canada has forgiven about C$600 million in official development
    assistance loans to several potential HIPC recipients.153 In addition, as a
    member of the Paris Club, Canada has participated in the debt reschedulings
    of several potential HIPC recipients since 1990.

    Of the Group of Seven industrialized countries, France has the highest
    exposure to the heavily indebted poor countries. As of December 31, 1998,
    France had claims outstanding on the 40 heavily indebted poor countries
    totaling about 11.2 billion euros, or about US$13 billion, according to
    officials of the French Ministry of Finance.154 Official development
    assistance loans account for about 34 percent of total claims. France has
    proposed to cancel 100 percent of its pre-cutoff date non-official
    development assistance claims and all official development assistance claims
    and estimates that its total costs for debt relief would be approximately
    French francs (FF) 42 billion, or about US$8 billion.

    Agence Francaise de Developpement, a public agency, manages the majority of
    official development assistance claims, and Banque de France and Natexis, a
    private bank, manages the rest. Non-official development assistance claims
    are provided in the form of direct loans by the French government to another
    government or as commercial claims, which are guaranteed by the French
    government. COFACE, a private company, manages the non-official development
    assistance claims of the French state and is paid a fee for its service.

    France's method for valuing its loans is based on the general principle in
    its accounting and budgeting system that loans are worth their face value.
    For example, if France lends FF200 million to one of the potential HIPC
    recipients, the loan is valued and recorded at the full FF200 million. The
    loans are not discounted based on risk, and provisions are not set aside, in
    case of default, when the loans are disbursed.

    When a loan is made to a given country, it has an impact on France's cash
    flow but only an indirect impact on its budget. The disbursement of the loan
    has no direct impact on the budget because the French government borrows the
    funds to issue the loan. The loan is recorded in a capital account, which is
    not a budget account. The capital account is subject to prior authorization
    by the French parliament, even if there is no impact on the budget. The
    capital account has an indirect effect on the budget because when a loan is
    made, there is a budgetary cost associated with the interest the French
    government pays on its own borrowing. The budgetary cost varies by the types
    of loans and the interest rates. In addition, interest repayments have a
    direct impact on the budget.

    The cost of debt relief is equal to the face value of the loan that is being
    reduced. For example, if a loan with a face value of FF100 million is
    cancelled, the impact on the budget is FF100 million. The treatment is the
    same for both official development assistance and non-official development
    assistance loans. According to French Ministry of Finance officials,
    France's budgetary treatment is governed by rules emanating from the
    Maastricht Treaty.155 Under the rules, when a decision is taken to cancel a
    loan, the direct impact on the budget is equal to the amount of debt that is
    cancelled when the final decision is made. For example, under the enhanced
    HIPC Initiative, the final decision will be made at the completion point.
    Therefore, the largest impact on the budget will occur at the completion
    point of each country and not at the decision point.156 Interim relief will
    impact the budget at the decision point, and will be provided through flow
    treatments during the interim period, for France's bilateral claims and for
    its multilateral claims through the European Development Fund.157

    The French government recently reported that its debt relief initiative, for
    debt relief beyond what is provided under the enhanced HIPC Initiative,
    would allow for debt write-offs in the form of annual cash grants from
    France to all eligible HIPC countries. The decision to provide grants rather
    than simply to write off the debt was intended to foster greater
    transparency in the post write-off period with the funds being used to
    finance social programs and to reduce poverty. In practice, this means that
    a vote from parliament will be required annually to provide grants to cover
    the debt falling due each year.

    The parliament sets a budget ceiling for the treatment of debt cancellation
    through the Paris Club, and the ceiling has been increased recently to
    3.1 billion euros (about $3.1 billion).158 In addition, according to French
    Ministry officials, debt reduction has no direct impact on the national debt
    because the national debt is measured on an aggregate basis with each
    component not separately valued.

    The French government has requested authorization from parliament to cancel
    principal, interest, and arrears, if any (debt stock reduction) at HIPC
    countries' completion points, as part of the 3.1 billion euros requested
    from Parliament. Therefore, the largest impact on France's budget will occur
    at countries' completion points. In addition, as mentioned previously, the
    bilateral portion of the debt relief beyond the enhanced HIPC terms will
    impact the budget annually as payments fall due after full HIPC treatment at
    the completion point.

    Some countries need legislative authorization to provide multilateral debt
    relief, that is, forgiveness of debt within the context of a Paris Club
    agreement. For France, if a debt reduction or cancellation is being
    provided, the debt reduction has to be authorized by the French parliament.
    For multilateral treatment of debt reduction, France complies with the rules
    of the enhanced HIPC Initiative as agreed in September 1999. When countries
    reach a completion point, France will grant debt reduction provided it has
    parliamentary authorization. In addition, in order to provide additional
    debt reduction on a bilateral basis, a parliamentary decision is also
    required. The authorization from parliament is also limited in size. The
    French Treasury is given a ceiling, and it must request new authorization
    from parliament when that ceiling is reached. As previously mentioned,
    France complies with the Maastricht Rule in its treatment of budgeting for
    the cost and the timing of providing for debt relief.

    France has pledged funds totaling about US$310 million to the multilateral
    trust funds. France will provide about $21 million directly to the World
    Bank HIPC Trust Fund as well as about $180 million through the European
    Development Fund and the European Union's budget. The European Development
    Fund and the European Union budget are expected to make a contribution to
    the World Bank HIPC Trust Fund in the amount of
    734 million euros (about US $734 million).159 Of the 734 million euros
    pledged to the World Bank HIPC Trust Fund, 680 million euros will be
    channeled primarily to the African, Caribbean, and Pacific countries and

    the rest to Latin American countries.160 France and Germany are the main
    contributors, with shares of about 25 percent each, compared to about
    12 percent each for Italy and the United Kingdom. The funds are already a
    part of the European Development Fund and have not yet been disbursed to the
    HIPC Trust Fund. France's contribution to the Trust Funds creates no new
    demand on its national budget, or the other members of the European Union,
    since this money was already part of the European Development Fund. In
    addition, France has pledged $110 million to the IMF's Poverty Reduction and
    Growth Facility/HIPC Trust.

    France has canceled about FF55 billion, or US$9.8 billion, of debt to the
    heavily indebted poor countries, which occurred primarily in two phases
    through the Paris Club: (1) 1988-89 and (2) 1994. Additional debt reductions
    resulted in smaller bilateral cancellation in 1988 and 1994 as well as in
    1991 and 1998, which are included in the FF55 billion total.

    As of January 31, 2000, Germany's total exposure to the 40 heavily indebted
    poor countries is estimated at deutsche marks (DM) 11 billion, or about
    US$6.6 billion in nominal terms (about $2.7 billion, or 41 percent, is
    official development assistance loans), according to Germany's Treasury
    officials.161 Under the enhanced HIPC Initiative, Germany is expected to
    provide
    100 percent reduction on pre-cutoff date, non-official development
    assistance claims as well as 100 percent cancellation of all official
    development assistance claims. Official development assistance to the least
    developed countries has been given only in the form of grants since 1978.
    The total cost to the German Treasury of providing debt relief is estimated
    at $5.7 billion.162

    The German Ministry of Economic Cooperation and Development provides
    official development assistance grants and loans as well as technical
    assistance to developing countries. Grants and loans are disbursed by a
    government-owned development bank (Kreditanstalt f�r Wiederaufbau), which
    also manages the loan portfolio. German commercial banks provide trade
    financing for exports and for investment in development projects. The German
    government, primarily through the Hermes export credit agency, guarantees
    some of the debt.

    The federal government values and records loans at face value. The loans are
    not rated and are not valued for budgetary purposes, meaning that funds are
    not budgeted at the time the loans are disbursed to cover expected defaults.
    The federal government guarantees, up to a maximum of 90 percent, repayment
    of commercial credits to exporters in the event of nonrepayments by debtor
    countries. The exporter incurs the loss of the
    10 percent, which the federal government does not guarantee. In the event of
    default, these claims would then become the asset of the federal government
    and subject to treatment in the Paris Club.

    In principle, the German federal budget is based on an annual expenditure
    and revenue cycle. International loans and guarantees are only budgeted when
    an expenditure or revenue arises. Therefore, the cost of debt reduction, or
    the impact on the budget, for official development assistance loans is
    defined in terms of the amount of revenue forgone--the value of the loans
    that is being forgiven. For commercial loans, the cost of debt relief is
    determined by the amount of expenditure required to indemnify or honor loans
    guaranteed by the government, which is generally up to a maximum of 90
    percent of the face value of loan guarantees. In the case of the enhanced
    HIPC Initiative, the German government will forgive
    100 percent of pre-cutoff date commercial credits. As a result, the
    parliament has agreed that the government would incur the cost of the
    10-percent portion of the loan guarantee that is usually borne by the
    exporters.

    Debt relief directly impacts the national budget and indirectly impacts the
    national debt. Debt reduction results in a reduction in revenues. No funds
    are earmarked for this purpose, therefore, if a budget deficit results, the
    deficit is financed by borrowing, which affects the national debt (debt held
    by the public). Loan valuation and, in consequence, treatment of debt relief
    are based on Germany's national accounting system.

    Germany anticipates providing a stock of debt reduction (a cancellation of
    principal, interest, and arrears, if any) at the countries' completion
    points for both official development assistance loans and nonconcessional
    credits. Interim relief, or flow rescheduling, will be provided at
    countries' decision points. However, full write-off or cancellation of the
    eligible debt stock at HIPC countries' completion point is contingent upon
    these countries satisfying the conditions set under the IMF and the World
    Bank poverty reduction strategy program. Thus, the majority of the relief
    will impact Germany's budget at countries' completion points.

    With respect to nonconcessional claims, the German government is authorized
    to grant partial debt forgiveness in the context of multilaterally agreed
    debt settlements. However, bilateral debt reduction, in addition to
    multilaterally agreed debt reduction, requires approval by a parliamentary
    committee.163 With respect to Germany's pledge to write off 100 percent of
    all HIPC countries' debt, parliamentary approval was secured in April 2000.
    Parliament also agreed in April that the government would incur the cost of
    the 10-percent commercial loan guarantee that is borne by exporters.

    As far as official development assistance claims are concerned, debts can be
    cancelled only if repayment would cause undue hardship for the debtor
    country (so stipulated by the German Federal Budget Act.) This law defines
    "undue hardship" as "requiring unjustifiable efforts on the debtor's part to
    settle his debt." As mentioned previously, under the enhanced HIPC
    Initiative, Germany will provide 100-percent debt cancellation of all
    official development assistance claims to the heavily indebted poor
    countries.

    Germany has pledged approximately DM150 million, or US $75 million, to the
    World Bank HIPC Trust Fund. Of this US$75 million, about $24 million has
    already been contributed to the HIPC Trust Fund. A further DM500 million, or
    US$250 million, represents Germany's share of the European Union's (European
    Development Fund and the European Union's debt cancellation as a HIPC
    creditor) pledge to the HIPC Trust Fund. With regard to the IMF, Germany
    will contribute DM500 million, or US$250

    million, by means of an interest-free loan of the Deutsche Bundesbank to the
    Poverty Reduction Growth Facility/HIPC Trust.164

    Since 1989, when concessional debt reschedulings were first introduced by
    the Paris Club, Germany has cancelled approximately DM4 billion, or
    US$2 billion, of non-official development assistance claims to the heavily
    indebted poor countries. In addition, since 1989, Germany forgave
    approximately DM3.8 billion, or about US$2 billion, in official development
    assistance claims primarily to the heavily indebted poor countries.

    As of December 31, 1999, Italy's exposure to the 40 heavily indebted poor
    countries is estimated at US$4.3 billion in nominal terms, with official
    development assistance loans comprising about 31 percent, according to an
    Italian Treasury official. Based on a new debt relief initiative that is
    currently under consideration by the Italian parliament, Italy anticipates
    providing 100-percent debt relief of pre-cutoff date, non-official
    development assistance debts of potentially eligible HIPC countries.165 In
    addition, Italy is expected to write off all (pre- and post-cutoff date)
    official development assistance loans to HIPC countries that have reached
    their completion points. The Italian government anticipates providing only
    official development assistance grants to the HIPC countries in the future.
    The total cost to the Italian government of providing debt relief is
    estimated at US$3 billion in nominal terms, which is based on the assumption
    that all eligible HIPC countries will reach their decision points.

    Italy provides loans and loan guarantees through three federal agencies.
    SACE is the insurer, which provides insurance (or guarantees) against
    political risks on export credits (for example, supplier and buyer credits).
    Mediocredito Centrale is a bank, which is the agent of the Italian
    government that is responsible for extending concessional (official
    development assistance) loans. Mediocredito Centrale has the authority to
    sign the financial agreement with the relevant counterpart of the recipient
    country, and the Ministry of Foreign Affairs signs the intergovernmental
    agreement on official development assistance. Mediocredito Centrale can
    cancel official development assistance credits if duly authorized by the
    Italian government. Simest provides interest subsidy (for example, interest
    stabilization from floating to fixed interest rate) for export credits to
    Italian exporters, which is funded from the national budget.

    Technically, loans are valued at face value. The loans or guarantees are
    recorded in the budgets of SACE and Mediocredito Centrale at face value. The
    loans are outside the national budget; therefore, when loans are disbursed
    or guarantees are called, they do not have a direct impact on the national
    budget. These agencies can request reimbursement from the Italian government
    (Treasury) if they are not repaid because the government has guaranteed
    repayment of the loans.

    At the time when the loans were disbursed, the Italian government did not
    budget for the cost of expected defaults of the heavily indebted poor
    countries because such costs were considered to be marginal. However, the
    government budgets for the expected defaults of emerging market countries.
    According to a Treasury official, the emerging market countries' loans are
    not discounted, and they are not recorded at less than face value. For
    example, when SACE prepares its budget, it includes assumptions concerning
    the expected repayments of the loans. Its assumptions of expected repayments
    are usually high with respect to emerging market countries and lower, as
    little as zero, for the poorest countries. According to the Italian Treasury
    official, under this financial scenario the Italian Treasury is providing
    the money needed to run the agency. It is providing the difference between
    "expected losses" and "income" generated during the year.

    In the past, the agencies did not establish provisions when the loans were
    made. However, under recent export credits legislation (Law 143/98), SACE
    has adopted a "provisioning" mechanism, by which for every loan guarantee
    extended since October 1999 a provision is established. The funds for
    provisioning (based on the risk associated with each specific recipient
    country) are supplied through the budget of the Italian government.

    Debt relief has a direct impact on each agency's budget and an indirect
    impact on the national budget. With respect to official development
    assistance loans, Mediocredito Centrale may be authorized by the Italian
    state to cancel official development assistance loans. For nonofficial
    development assistance claims, SACE issues supplemental/indirect guarantees
    of the Italian government, which guarantees reimbursement. Since the Italian
    state has made the decision to provide debt relief to all potentially
    eligible HIPC countries, and it did not budget for the likelihood of default
    or nonrepayment of these loans when they were disbursed, the cancellation of
    these debts will have an impact on the national budget. However, the Italian
    government is not required to reimburse its agencies immediately at the time
    of debt cancellation nor is it required to provide 100 percent
    reimbursement. It can restore the money when the agencies are in need of the
    funds. Debt relief will not have a direct impact on the national debt
    because the government did not borrow funds from the public specifically for
    this purpose.

    Under the enhanced HIPC Initiative, Italy anticipates providing full
    cancellation of principal and interest payments, and arrears, if any, at
    countries' completion points (debt stock reduction) as well as granting
    interim relief at decision points. The impact on the federal agencies'
    budgets will primarily occur at HIPC countries' completion points, but the
    impact on the national budget depends on when funds are needed by its
    federal agencies. According to an Italian Treasury official, the budget
    treatment of debt relief is based on the Italian national accounting system.

    The Italian government does not require authorization from its parliament to
    grant Paris Club debt relief under the debt service reduction option, which
    is a reduction in interest rates. However, since the Italian government has
    proposed to grant a reduction in the stock of debt and to provide further
    relief beyond the Paris Club agreement based on the enhanced HIPC
    Initiative, additional authorization must be provided by parliament.

    To date, Italy has pledged a total of about $258 million to the multilateral
    trust funds. About $138 million of this pledge is anticipated to flow
    directly from Italy to both the World Bank HIPC Trust Fund ($70 million) and
    to the IMF Poverty Reduction Growth Facility/HIPC Trust ($68 million). As
    part of the European Development Fund and the European Union's budget
    contribution, Italy's share is estimated at 12 percent of the approximately
    $1 billion, or about $120 million.166

    Between 1991 and 1999, Italy canceled bilateral official development
    assistance loans worth about $555 million to the HIPC countries. In
    addition, since about 1990, Italy has participated in debt reduction under
    the Paris Club terms for non-official development assistance loans and
    granted debt relief of approximately $500 million to heavily indebted
    countries.

    As of December 31, 1998, Japan's total exposure to the 40 heavily indebted
    poor countries was approximately US$11.2 billion, according to Japan's
    Ministry of Finance officials. Official development assistance loans account
    for almost 90 percent of Japan's total claims on the HIPC countries. Under
    its new debt reduction plan, which was announced on April 10, 2000, Japan
    agreed to forgive 100 percent of pre-cutoff date, non-official development
    assistance debt and 100 percent of (pre and post-cut off date) official
    development assistance debt owed by heavily indebted poor countries that
    reach their completion points.167 Japan estimates its total cost for debt
    relief at $8 billion.

    The Japan Bank for International Cooperation is responsible for
    administering the foreign loan and loan guarantee programs.168 The Ministry
    of Foreign Affairs, with the assistance of the Japan International
    Cooperation Agency, provides grant aid and technical assistance. Trade
    insurance is administered, implemented, and provided by the Ministry of
    International Trade and Industry.

    The government of Japan values its loan on a face value basis. When loans
    are disbursed, they are recorded at face value.

    The amount of debt relief that is provided is equivalent to the amount of
    the face value of the loan that is being forgiven. With respect to official
    development assistance claims, the Japanese government provides grant aid
    for debt relief. The grant aid for the official development assistance debt
    relief is drawn from the national budget through the Ministry of Foreign
    Affairs. The HIPC countries are required to spend this grant to purchase
    goods from countries that are members of the Organization for Economic
    Cooperation and Development/Development Assistance Committee countries.169
    In addition, debtor countries are required to provide the Japanese
    government with a list of imports, which is to ensure that the grant aid is
    not used to purchase so-called "unprofitable goods."170 However, official
    development assistance loans in yen are considered untied loans.

    With respect to the treatment of debt relief for non-official development
    assistance claims, the Japanese government is currently deliberating whether
    to write off HIPC countries' debts at their completion points. In past Paris
    Club debt reductions, Japan provided debt relief through a reduction in
    interest rate. If Japan were to choose the interest rate reduction option
    (with interest rate approaching zero) under the enhanced HIPC Initiative, it
    could take many decades to achieve the net present value reduction of 100
    percent pre-cutoff date debt. However, the impact on the implementing
    agency's budget (the Ministry of International Trade and Industry) would be
    gradual over time. According to the Ministry of Finance, this form of debt
    relief has an indirect impact on the national budget and a direct impact on
    the implementing agency's budget. In addition, according to Japan's Ministry
    of Foreign Affairs, once debt relief is extended to a country, it will be
    quite difficult to extend new loans to those countries in the future.
    Therefore, all future capital assistance will, in principle, have to be made
    in the form of grants.171

    As previously mentioned, the bulk of Japan's loans outstanding to the HIPC
    countries is official development assistance loans. With respect to official
    development assistance loans, the Japanese government will reschedule the
    loans over 40 years and provide grant aid for debt relief when it receives
    debt service payments from the HIPC countries. Based on this treatment of
    official development assistance loans, the impact on the national budget is
    expected to be limited in the short run since the debt relief will be spread
    out over 40 years. With regard to non-official development assistance
    claims, the Japanese government has not decided on how it will treat this
    debt. Non-official development assistance claims comprised only about 10
    percent of total claims outstanding, and only
    pre-cutoff date claims are eligible.

    According to an official of Japan's Ministry of Finance, Japan is not faced
    with any legal restrictions to granting any particular option of debt relief
    or write-off on its claims. The government does not require the Diet's172
    approval to reschedule debt or to grant debt relief through the Paris Club
    (multilateral agreement). However, Diet approval is required when the
    agreement for bilateral rescheduling and provision of grants for debt
    reduction is concluded.

    Japan's total pledge or contribution to the multilateral trust funds is
    estimated at approximately US$328 million. So far, Japan has contributed
    US$10 million to the HIPC Trust Fund at the World Bank and has pledged to
    make an additional contribution of $190 million. About $128 million will go
    to the IMF Poverty Reduction Growth Facility/HIPC Trust, of which
    $62 million has already been contributed.

    Between 1990 and 1998, Japan granted about US$2.4 billion in nominal terms
    of grant aid for debt relief of official development assistance claims to
    the least developed countries. In addition, Japan has provided debt
    reduction on a net present value basis within the framework of the Paris
    Club.173

    As of December 31, 1999, the United Kingdom had total commercial
    (non-official development assistance) claims outstanding of about 2 billion
    pounds (about US$3.1 billion) against the heavily indebted poor countries,
    according to the United Kingdom's Treasury.174 About 1.6 billion pounds
    (US$2.5 billion) of this total amount is pre-cutoff date claims.175 The
    United Kingdom will forgive all pre- and post-cutoff date debts of countries
    that participate in the enhanced HIPC Initiative.

    The United Kingdom's export credit agency, the Export Credits Guarantee
    Department,176 holds all non-official development assistance claims. Its
    primary function is to facilitate exports of goods and services by providing
    guarantees and insurance. The Export Credits Guarantee Department will incur
    an estimated cost of about 1.4 billion pounds in nominal terms, or about
    US$2.2 billion to write off claims, for which it had already provisioned.
    The United Kingdom Treasury will only fund the cancellation of the
    non-official development assistance debts over and above the levels of
    cancellation required under the HIPC Initiative. The face value of the
    remaining debt that the United Kingdom Treasury will fund is estimated at
    300 million pounds, or about $480 million, which represents new demands on
    the budget.177 The Department for International Development provides grants,
    loans, and technical assistance to developing countries and manages the loan
    portfolio. The Department for International Development has written off all
    its official development assistance loans to the HIPC countries since about
    1997 and has since been providing official development assistance only in
    the form of grants to these countries.178

    In terms of valuing non-official development assistance claims, the Export
    Credits Guarantee Department considers the potential recoverability of the
    loan. The Export Credits Guarantee Department performs a provision exercise,
    which assesses the debtor country's ability to repay the debt.179 It sets
    provisions for irrecoverable claims based upon current perceptions of risks,
    including an assessment of the debtor country's economic situation. The
    Export Credits Guarantee Department's provisioning is based on
    country-specific estimates of the probability of default, and not on country
    ratings per se. The Department's accounting system takes into account the
    different premiums and expected losses in discounting the loans. For
    accounting purposes, the Export Credits Guarantee Department has two
    accounts--Account 1 and Account 2.180 Account 1 is a reserve account, which
    is reflected on the balance sheet, and it handles guarantees issued for
    project business prior to April 1991 and guarantees issued by the Insurance
    Services Group of the Export Credits Guarantee Department. Account 2 covers
    guarantees issued for project business since April 1991. The Export Credits
    Guarantee Department performs a reestimate of its loan assets every year,
    and the account reserve is adjusted to reflect any change in estimates.

    As mentioned earlier, the United Kingdom has written off all of its official
    development assistance loans. However, official development assistance loans
    were valued at zero because they were fully budgeted for at the time they
    were disbursed.

    Based on the 1991 Export and Investment Guarantees Act, the Export Credits
    Guarantee Department must maximize recoveries and manage its assets and
    liabilities in a way that minimizes the cost to the taxpayers. In the past,
    and for most countries, this has been taken to mean that the Export Credits
    Guarantee Department can offer debt reduction only if the value of the
    claims after debt relief is greater than or equal to the
    risk-discounted value before debt relief. In other words, debt relief is
    granted under the condition that it will improve future collection rates.

    However, in the context of the HIPC Initiative, the Export Credits Guarantee
    Department is judged able to provide up to 100-percent debt relief within
    its statutory obligations if supported by a multilateral agreement. In order
    to fulfill the United Kingdom's bilateral commitment to relieve all the debt
    of HIPC countries, when the level of relief given through the multilateral
    process is less than 100 percent, the United Kingdom's Treasury will provide
    additional funds to the Export Credits Guarantee Department to make up the
    difference between the multilateral and bilateral levels of debt relief.
    This funding will be channeled through the Department for International
    Development's budget, which will be increased especially for this purpose.
    The Department for International Development will provide grants to
    countries to cover their scheduled debt.

    When the Department for International Development cancels official
    development assistance loans, it is effectively converting an outstanding
    loan into a grant. The Department for International Development's
    accountants record both the repayment of the outstanding loan and a grant
    issued to the debtor country. The impact on the Department for International
    Development's budget is neutral. The original cost to the Department was
    budgeted at the time that the debt was created, and cancellation results in
    no new demands on the Department for International Development's budget. As
    mentioned earlier, the United Kingdom has written off all its official
    development assistance loans. If interest payments were anticipated,
    however, the interest payments forgone (through debt cancellation) would
    have an impact on the Department for International Development's budget. The
    aid program would be reduced in proportion to the interest that is forgone
    on the debt that has been written off.

    While debt relief does not directly impact the national debt, the
    consolidated fund benefits each year from any revenue it receives from the
    Export Credits Guarantee Department. Therefore, debt relief will lessen the
    amount contributed to the consolidated fund.

    When a country reaches its decision point, the United Kingdom will provide
    interim relief of 100 percent of debt service between the decision point and
    the completion point. Only when the country reaches the completion point is
    the commitment to provide 100-percent debt relief irrevocable. This mirrors
    the operation of the multilateral process through the Paris Club. In that
    case, the relief provided through a flow rescheduling at the decision point
    is made final through the reduction in the stock of debt at the completion
    point. As mentioned previously, the United Kingdom's Export Credits
    Guarantee Department has already provisioned for most of the debt relief
    that it will provide under the enhanced framework. According to United
    Kingdom Treasury officials, the extra cost (bilateral portion of the debt
    relief) will be written off as principal and interest payments fall due over
    a 23-year period; therefore, the impact on the budget will occur gradually
    over this period.

    The extra costs of financing the commitment to provide 100-percent debt
    relief will be met from the (Treasury) reserve in the first year and from
    the Department of International Development's budget in subsequent years.
    The extra resources will therefore be voted as part of the United Kingdom's
    public expenditure process. Separate parliament approval for the
    100-percent relief proposal is not required. As previously mentioned, the
    Export Credits Guarantee Department is restricted in the amount that it can
    provide for debt relief. Based on its enabling act, it must maximize its
    return to the taxpayers.

    The United Kingdom has pledged a total of $359.3 million to the World Bank
    HIPC Trust Fund. It has made a contribution so far of about
    $36 million to this trust fund. The total amount pledged includes an
    expected $95 million share of the European Union's contribution from the
    European Development Fund, which is earmarked for the African, Caribbean,
    and Pacific countries. The United Kingdom has also made a contribution of
    $43.3 million to the World Bank HIPC Trust Fund, which is earmarked for use
    by the International Monetary Fund to provide relief for Uganda at the
    completion point.181

    Since 1992, the Department for International Development has provided about
    $513 million in debt relief to the heavily indebted poor countries. The
    Export Credits Guarantee Department did not participate in the loan
    write-off until about 1991-92. Since that time, the Export Credits Guarantee
    Department has written off debt to HIPC countries with a face value of
    372 million pounds.

    Bilateral Contributors to the HIPC Trust Fund

    Table 15 shows the amount and status of bilateral donor (government) pledges
    to the HIPC Trust Fund, as of May 31, 2000. Twenty-two countries have
    pledged about $2.5 billion to this Fund, which is used to help multilateral
    creditors provide their shares of HIPC debt relief to recipient countries.

     U.S. dollars in millions
                                                                          Overall
                              Contributions   Contributions  Total        contributions
     Donor      Contributions pledged prior   pledged during outstanding  and pledges to
                receiveda                     and after      announced    original and
                              to Sept. 1999
                                              Sept. 1999     pledges      enhanced HIPC
                                                                          Initiativesb

                                              EuropeanOthers
                                              Unionc
     Australia  $12                                                       $12
     Austria                                  $19            $19          19
     Belgium    4             $8              28             36           40
     Canada     102                                                       102
     Denmark    26                            16      $19    35           61
     Finland    15                            11             11           26
     France                   21              178            199          199
     Germany    24            24              171     48     219          243
     Greece     1                             9              9            10
     Ireland    15                            4              4            19
     Italy                                    92      70     162          162
     Japan      10                                    190    190          200
     Luxembourg 1                             2              2            3
     Netherlands131                           38             38           169
     New Zealand2                                                         2
     Norway     42                                                        42
     Portugal   15                            7              7            22
     Spain      15                            43      70     113          128
     Sweden     28                            20             20           48
     Switzerland30                                    30     30           60
     United
     Kingdomd   36            135             95      50     280          316
     United
     States                                           600    600          600
     Total      $509          $188            $733    $1,077 $1,974       $2,483

    Note: Figures are approximate. Some contributions are in the donor's
    national currency and in the form of a promissory note.

    aIncludes allocations from the Interest Subsidy Fund (ISF)--that was set up
    in 1975 with donor contributions to subsidize the interest rates on
    International Bank for Reconstruction and Development loans to the poorest
    of this Bank's borrowers--to the HIPC Trust Fund. Australia is retaining its
    surplus resources in the ISF (rather than transferring them to the HIPC
    Trust Fund) but has authorized the World Bank to use them to provide debt
    relief as necessary under the HIPC Initiative. There remains approximately
    $83 million in ISF surplus assets that have not been allocated.

    bMany donors have also provided debt relief through other initiatives and
    mechanisms including the Debt Reduction Facility for International
    Development Association-only countries that provides financing for
    commercial debt reduction efforts and specific country-held multilateral
    debt relief facilities. Most notably, additional debt service relief has
    also been provided to several Central American countries in the aftermath of
    Hurricane Mitch through the Central American Emergency Trust Fund. Bilateral
    donor funding to that trust fund to provide debt service relief to Honduras
    and Nicaragua include $2.7 million from Austria, $5.4 million from Canada,
    $10.9 million from Denmark, $13.2 million from Germany, $12 million from
    Italy, $12.8 million from the Netherlands, $15 million from Norway, $30
    million from Spain, $16.6 million from Sweden, $15.5 million from
    Switzerland,
    $16.3 million from the United Kingdom, and $25 million from the United
    States. These resources are not included in the table since HIPC debt relief
    is additional to these efforts.

    cFor illustration, the exchange rate is 1 euro equal to 1 U.S. dollar, and
    the attribution to member states is based on their respective contributions
    to the European Development Fund's Eighth Replenishment.

    dIn addition, the United Kingdom has contributed 31.5 million Special
    Drawing Rights to the HIPC Trust Fund for the IMF for debt relief to Uganda.

    Source: World Bank.

    Comments From the Department of the Treasury

    The following are GAO's comments on the Department of the Treasury's letter
    dated June 8, 2000.

    1. Although the Treasury agrees that there is reason to be concerned about
    potentially optimistic economic assumptions, the Treasury highlights the
    fact that growth levels are generally consistent with what countries
    experienced from 1990 to 1997. As we discuss in the report, since HIPC
    recipient countries rely on primary commodities for much of their export
    revenue, and the prices of such commodities fluctuate over time and decline
    in certain years, a sustained growth in export earnings in excess of 9
    percent over 20 years may be overly optimistic. For example, Uganda's growth
    rate has declined since 1997, and the projected growth rates of the seven
    countries we analyzed are considerably higher than what those countries
    experienced from 1978 to 1997.

    2. The Treasury states that our report is misleading when it argues that the
    initiative does not free up resources for increased spending because we
    imply that the interest rates HIPC recipients borrow at are unsustainable.
    We disagree with the characterization that our report is misleading. We
    report that the resources derived from debt relief can be used to increase
    spending on poverty reduction only if the country continues to borrow at the
    same level and below market terms as in the years prior to qualifying for
    debt relief. Furthermore, our analysis of countries' future debt burdens
    incorporates the level of grants and lending projected by World Bank and IMF
    staffs.

    3. The Treasury states that it is reasonable to expect that adjustments
    would be made in countries' expenditure and borrowing plans to avoid
    unsustainable increases in debt. However, this implies that good debt
    management practices will be utilized. We agree with this point. However, we
    note that although efforts are being undertaken to improve debt management,
    there has not been a history of strong management in this area. Moreover, we
    note that if policymakers adjust to lower levels of export earnings by
    reducing imports, lowering domestic spending, raising tax revenue, or using
    a combination of these approaches, this would likely result in lower
    economic growth and lower expenditures on poverty reduction.

    Comments From The International Monetary Fund

    The following are GAO's comments on the IMF's letter dated June 9, 2000.

    1. The IMF said that the report does not emphasize sufficiently that the
    borrowing to increase spending on poverty reduction is on highly
    concessional terms and that a larger share of the provision of aid is now in
    the form of grants. We disagree with the IMF's characterization. We report
    that, in order for recipient countries to have the funds that are expected
    to be spent on poverty reduction, these countries must continue to
    borrow--at the same level and below market terms as in the years prior to
    qualifying for debt relief under the initiative--given each country's
    projected amount of grants, loans, and revenue. Our analysis of countries'
    future debt burdens incorporates the level of grants and lending projected
    by World Bank and IMF staffs.

    2. The IMF said that current projections show that for six of the seven
    country cases analyzed, the debt ratios of these countries are projected to
    decline. The IMF said that lower than projected export growth could threaten
    future debt sustainability, in the absence of corrective policy actions or
    additional grants. They see the appropriate response to this as to monitor
    carefully future borrowing in response to economic developments to prevent
    the reoccurrence of debt problems. We believe this implies that good debt
    management practices will be utilized. We agree with this point but note
    that although efforts are being undertaken to improve debt management, there
    has not been a history of strong management in this area. Moreover, we
    report that a 20-percent decline in projected export earnings could more
    than double the debt-to-export ratio over what was originally forecast for
    the projection period. We consider it to be a reasonable assumption that the
    response to such a relatively small decline in export earnings would be an
    increase in concessional borrowing and grants in order to preserve what
    would be a fairly robust economic growth level with substantial progress on
    poverty reduction. If instead, policymakers adjust to these lower levels of
    export earnings by reducing imports, lowering domestic spending, raising tax
    revenue, or using a combination of these approaches, this would likely
    result in lower economic growth and lower expenditures on poverty reduction.

    3. The IMF said the report does not emphasize sufficiently the measures
    taken to reduce the tension between quick debt relief and comprehensive
    country-owned poverty reduction strategies or the strong wish of the
    international community to link the provision of debt relief to effective
    poverty reduction. The report discusses the measures taken to reduce the
    tension--interim poverty reduction strategies and interim debt relief. We
    also report that countries may have an incentive to reach the completion
    point quickly because only then does HIPC debt relief become irrevocable.
    Chapter 3 discusses the desire of the international community to link debt
    relief and poverty reduction. We have added similar wording to the executive
    summary.

    Comments From the World Bank

    GAO Contact and Staff Acknowledgments

    Thomas Melito, (202) 512-9601

    In addition to the name above, Cheryl L. Goodman, Bruce L. Kutnick, R.G.
    Steinman, Barbara R. Shields, Nima Patel Edwards, Katharine H. Woodward,
    Gezahegne Bekele, and Rona H. Mendelsohn made key contributions to this
    report.

    (711441)

    Table 1: Status of Implementation of the HIPC Initiative, Countries Grouped
    by Milestone Reached, as of May 3, 2000 (Debt
    expressed in net present value terms unless otherwise noted) 33

    Table 2: Estimated Debt Reduction for Seven Countries Under the
    HIPC Initiative 43

    Table 3: Key Economic Indicators for Seven Countries (Projected
    and Historic, Using Nominal Dollar Values) 51

    Table 4: Relationship Between a Decline in Export Earnings and
    Increases in Aid Flows - Tanzania 55

    Table 5: Seven Industrialized Countries' Participation in the
    Enhanced HIPC Initiative 72

    Table 6: Financing Challenges Facing Major Multilateral Creditors 82

    Table 7: Human Development Indicators of 38 Countries Potentially Eligible
    for Debt Relief Under the Enhanced HIPC
    Initiative, as of 1997 92

    Table 8: Concessional Loans Offered by Four Major Multilateral Institutions
    95

    Table 9: Nonconcessional Loans Offered by Four Major Multilateral
    Institutions 96

    Table 10: Multilateral Creditors' Outstanding Claims (end of 1998)
    on 40 Heavily Indebted Poor Countries and Estimated
    Amount of Debt Relief Under the HIPC Initiative, as of
    the End of 1999 100

    Table 11: Conditions Eight Countries Are Expected to Meet in
    Order to Reach HIPC Initiative Milestones (Monitored
    under World Bank- and IMF-supported programs) 103

    Table 12: Status of Six Selected Countries' Efforts to Define and
    Address Poverty 112

    Table 13: Examples of Projects Prioritized by the Communities
    for the Annual Operating Plan for 1997 of the City of
    Punata, Agreed Upon in Assembly, December 12, 1996 118

    Table 14: Country A's Debt Reduction at 90 Percent 134

    Table 15: Status of Bilateral Donor Pledges to the HIPC Trust
    Fund, as of May 31, 2000 166

    Figure 1: Composition of External Debt for 40 Heavily Indebted
    Poor Countries, 1995-97 (Nominal value, in billions of U.S. dollars) 26

    Figure 2: Process for Implementing the Enhanced HIPC Initiative 30

    Figure 3: Key Elements of the Poverty Reduction Strategy as
    Described in World Bank and IMF Documents 37

    Figure 4: Tanzania's Required Balance-of-Payments Financing
    With and Without HIPC-related Spending for Poverty
    Reduction, 2000/01-2017/18 46

    Figure 5: Uganda's Required Balance-of-Payments Financing With
    and Without HIPC-related Spending for Poverty Reduction, 2000/01-2014/15 48

    Figure 6: Tanzania's Total Debt With and Without Borrowing for
    Poverty Reduction, 2000/01-2017/18 50

    Figure 7: Creditors' Shares of HIPC Debt Relief 70

    Figure 8: Districts in Uganda with Capacity-building Programs
    Funded by Official Donors and Creditors (Shown by
    Shaded Areas) 120

    Figure 9: Bolivia's Process for Involving Civil Society in
    Developing the Poverty Reduction Strategy 124

    Figure 10: Results Expected from Bolivia's Process for
    Involving Civil Society in Developing the Poverty
    Reduction Strategy 125

    Figure 11: Illustration of U.S. Government International Debt
    Reduction Program Direct Modification - Subsidy
    Cost Increase 138

    1. The World Bank, supported by its 181 member governments, promotes
    economic growth and the development of market economies by providing
    financing on reasonable terms to countries that have difficulty obtaining
    capital. The Fund promotes international monetary cooperation and exchange
    rate stability and provides lending to member countries that experience
    balance-of-payments difficulties. For poor countries, the Fund also provides
    medium-term (10-year) loans on concessional (below market) terms. One
    hundred eighty-two governments are members of the Fund.

    2. For information on the original initiative, see Developing Countries:
    Status of the Heavily Indebted Poor Countries Debt Relief Initiative
    (GAO/NSIAD-98-229 , Sept. 30, 1998).

    3. The amount of debt relief is estimated using a "net present value"
    calculation that captures the concessional terms that underlie most of these
    countries' loans. The face, or nominal, value of the debt for these
    countries is significantly greater than the net present value.

    4. Such borrowing will be on concessional loan terms, which include a grace
    period of about
    5 to 10 years and fees and charges of 2 percent or less. In concluding that
    all of these resources will be borrowed, GAO's analysis has accounted for
    the amount of grants (money that does not have to be repaid) that donors are
    expected to provide and the recipients' own revenue.

    5. Creditors' shares of debt relief are determined using a "proportional
    approach," under which bilateral and multilateral creditors would provide
    debt relief together and provide equal percentage reductions of debt owed
    them after the full use of existing debt relief mechanisms. The World Bank
    and the Fund in collaboration with government authorities estimate the
    amount of debt relief the bilateral and multilateral creditors, as a group,
    are to provide a particular country.

    6. In 1996, the World Bank and the Fund classified 41 countries as heavily
    indebted poor countries. This included, for analytical purposes, 32
    countries with a 1993 gross national product per capita of $695 or less and
    1993 present value of debt to exports higher than
    220 percent or present value of debt to gross national product higher than
    80 percent. Also included were nine countries that received, or were
    eligible for, concessional debt rescheduling from bilateral creditors. In
    1998, Nigeria no longer met the criteria, and Malawi was added. In 1999, the
    number of countries was reduced to 40 because Equatorial Guinea no longer
    met the criteria for "low income" or "heavily indebted."

    7. GAO's analysis focused on seven of the eight countries in which a debt
    sustainability analysis from the World Bank and the Fund was available to
    GAO to analyze. Due to the limitations of time, GAO was unable to review the
    final country, Guinea.

    8. The shortfall in export earnings is assumed to be made up through an
    increase in grants and concessional loans so that imports and domestic
    spending, including poverty reduction activities, remain the same as in the
    original projections. This additional concessional borrowing results in
    higher levels of debt and debt ratios, while preserving fairly robust
    economic growth levels and poverty reduction. If instead policymakers choose
    to adjust to these lower levels of export earnings by reducing imports,
    lowering domestic spending, raising tax revenue, or a combination of these
    approaches, they could avoid incurring such high debt ratios, although it
    would likely result in lower economic growth and lower expenditures on
    poverty reduction.

    9. The World Bank Participation Sourcebook (Washington, D.C.: World Bank,
    1996).

    10. Of the $28 billion, multilateral creditors are expected to provide about
    $14 billion, bilateral creditors to provide about $13.2 billion, and
    commercial creditors to provide about
    $0.8 billion.

    11. These seven countries are Canada, France, Germany, Italy, Japan, the
    United Kingdom, and the United States. They are expected to provide about 50
    percent of the debt relief anticipated from bilateral creditors.

    12. According to the Fund, full financing will be realized if the members
    provide the resources they pledged and the U.S. Congress grants the Fund the
    authority to use the full earnings from the investment of profits from
    off-market gold sales. Therefore, unlike the other major multilateral
    creditors, the Fund has a clearly identified means for closing its remaining
    financing gap.

    13. The World Bank, supported by its 181 member governments, promotes
    economic growth and the development of market economies by providing
    financing on reasonable terms to countries that have difficulty obtaining
    capital. The Bank is the world's single largest official source of
    investment capital for developing countries. The IMF promotes international
    monetary cooperation and exchange rate stability and provides short-term
    lending to member countries that experience balance-of-payments
    difficulties. For poor countries, the IMF also provides medium-term
    (10-year) loans on concessional (below market interest rate) terms under its
    Poverty Reduction and Growth Facility, the successor to its Enhanced
    Structural Adjustment Facility. One hundred eighty-two governments are
    members of the IMF.

    The Development Committee, which is composed of 24 members who are usually
    ministers of finance or development, advises the World Bank's and IMF's
    Boards of Governors. The International Monetary and Financial Committee of
    the IMF (formerly the Interim Committee) is an advisory body made up of IMF
    governors or government ministers. The World Bank and the IMF operate under
    the authority of the Boards of Governors, the highest decision-making
    authorities. General operations of the World Bank and the IMF are delegated
    to smaller groups of representatives, the Boards of Executive Directors, who
    are responsible for making policy decisions and approving loans. Each Board
    comprises
    24 Executive Directors who are appointed or elected by one or more member
    countries.

    14. For more information on the original HIPC Initiative, see Developing
    Countries: Status of the Heavily Indebted Poor Countries Debt Relief
    Initiative (GAO/NSIAD-98-229 , Sept. 30, 1998).

    15. In 1996, the World Bank and the IMF classified 41 countries as heavily
    indebted poor countries. This included, for analytical purposes, 32
    countries with a 1993 gross national product per capita of $695 or less and
    1993 net present value of debt to exports higher than
    220 percent or net present value of debt to gross national product higher
    than 80 percent. Also included were nine countries that received, or were
    eligible for, concessional debt rescheduling from bilateral creditors. In
    1998, Nigeria no longer met the criteria, and Malawi was added. In 1999, the
    number of countries was reduced to 40 because Equatorial Guinea no longer
    met the criteria for "low income" or "heavily indebted."

    16. Christina Daseking and Robert Powell, From Toronto Terms to the HIPC
    Initiative: A Brief History of Debt Relief for Low Income Countries, IMF
    Working Paper 99/142 (Washington, D.C.: IMF, 1999).

    17. According to the 1999 IMF staff paper, the role of the export credit
    agencies has largely been to support domestic exports by providing loans to
    developing countries in the context of the unwillingness of the private
    sector to accept certain risks, especially political risks arising from
    uncertain conditions in borrower countries.

    18. Abdelhak Senhadji, Sources of Debt Accumulation in a Small Open Economy,
    IMF Working Paper 97/146 (Washington, D.C.: IMF, 1997).

    19. Ray Brooks et al., External Debt Histories of Ten Low-Income Developing
    Countries: Lessons from Their Experience, IMF Working Paper 98/72
    (Washington, D.C.: IMF, 1998).

    20. Percy S. Mistry, Resolving Africa's Multilateral Debt Problem (The
    Hague, the Netherlands: The Forum on Debt and Development, 1996).

    21. Existing, or current, mechanisms refer to debt relief offered prior to
    the HIPC Initiative, including the terms offered by the Paris Club and other
    bilateral and commercial creditors. Under "Naples terms" (the terms that
    existed just prior to the initiative), countries could receive up to a
    67-percent reduction in eligible debt under a stock-of-debt operation. This
    operation refers to the total refinancing of the outstanding balance of a
    country's eligible debt. The stock of eligible debt will be reduced, and the
    remainder will be rescheduled. The Paris Club generally limits the debt that
    is eligible to be rescheduled to nonconcessional debt, such as loans to
    support exports from the lending country and loans that were incurred before
    an agreed-upon cutoff date. This date corresponds to the first time that a
    country requests debt rescheduling/relief from the Paris Club. For many
    potential HIPC recipients, this date occurred in the 1980s and thus eligible
    debt was contracted before this time.

    22. Under certain conditions, for countries with economies very open to
    international trade and strong efforts to generate fiscal revenues, the
    target may be based on the ratio of debt (in net present value terms) to
    government revenue. The target ratio is now 250 percent, down from 280
    percent under the original initiative. The eligibility thresholds were also
    reduced from 40 percent to 30 percent for exports to gross domestic product
    and from 20 percent to 15 percent for government revenue to gross domestic
    product. Much of the debt of poor countries is contracted on concessional
    terms. The net present value of debt is a measure that takes into account
    the degree of concessionality.

    23. The four countries not expected to qualify were Angola, Kenya, Vietnam,
    and Yemen.

    24. These estimates do not include relief for Ghana, which indicated that it
    may not request HIPC debt relief, and for Liberia, Somalia, and Sudan
    because of the relatively poor data and uncertainty regarding the treatment
    of their large arrears. For Ghana, the estimated amount of debt relief was
    about $1 billion in net present value terms. Adding Liberia, Somalia, and
    Sudan increases the estimated amount of relief to about $36 billion in net
    present value terms.

    25. In February 2000, the then-Managing Director of the IMF emphasized the
    importance of increased exports for poor countries' economic growth by
    stating that "[T]he fact is that the international community is giving with
    one hand, but is taking away with the other. Governments have made the
    far-reaching decision--in the framework of the Bretton Woods
    institutions--to reduce by about one-half the debt of 35 or 40 heavily
    indebted poor countries through our HIPC Initiative. But those same
    governments have failed--in the framework of WTO [the World Trade
    Organization]--to launch a trade round, or even to take the very modest step
    of eliminating trade barriers to the exports of the poorest countries,
    especially HIPCs. And it is the latter measure that has the greater
    long-term potential, through its effects on export-led growth and income
    generation, for lifting the poor out of poverty. This failure, unless
    quickly reversed, would make a mockery of a decision on debt that is,
    otherwise, of historic dimensions."

    26. According to the World Bank and the IMF, to be effective and meet the
    expectations underlying the poverty reduction strategy approach, the
    strategies must be genuinely country owned and reflect the outcome of an
    open participatory process involving governments, civil society, and
    relevant international institutions and donors. See Poverty Reduction
    Strategy Papers--Status and Next Steps (Washington, D.C.: IMF and World
    Bank, Nov. 1999). "Civil society" refers to the nongovernmental segment of
    society and includes churches, community groups, trade unions, business
    associations, and organizations that advocate for specific causes, such as
    human rights and environmental protection.

    27. These projections are referred to within HIPC documents as the "debt
    sustainability analysis."

    28. Such borrowing will be on what are considered concessional loan terms,
    which include a grace period of about 5 to 10 years and fees and charges of
    2 percent or less. In concluding that all of these resources will be
    borrowed, GAO's analysis has accounted for the amount of grants (money that
    does not have to be repaid) that donors are expected to provide and the
    recipients' own revenue.

    29. See Developing Countries: Status of the Heavily Indebted Poor Countries
    Debt Relief Initiative. For example, as we reported, although Mozambique's
    debt stock was projected to fall by as much as half, the effect of this
    reduction on its actual debt service was expected to be less than 15
    percent.

    30. In June 1999, the leaders of the seven leading industrial countries and
    Russia said they will strive gradually to increase the volume of official
    development assistance and to put special emphasis on countries best
    positioned to use it effectively. To ease future debt burdens and facilitate
    sustainable development, they agreed to increase the share of grant-based
    financing in the assistance they provide to the least-developed countries.

    31. Since new borrowing is assumed to be concessional, with a 10-year grace
    period on principal repayment, the savings in financing requirements
    increase more rapidly after the time period covered by the World Bank and
    IMF staffs' debt sustainability analysis.

    32. Our analysis of the World Bank's and the IMF's projections have already
    accounted for the resources that the recipient country is expected to
    provide on its own behalf toward its external obligations. See appendix VI
    for a description of the assumptions used in our analysis.

    33. Such financing is considered "exceptional financing" by the IMF. The
    original goal of the IMF's program for low-income countries was to allow
    countries to end their need for such financing within 3 years of getting
    assistance. IMF staff said that in the mid-1990s this objective was modified
    to encourage low-income countries receiving their assistance to move toward
    external viability over time.

    34. An examination of the average annual growth rates of export earnings and
    gross national product of these seven countries for the period prior to debt
    relief (1978-97) shows a substantially lower level of growth for both
    factors. All of the export growth values are below 6 percent, and all of the
    gross national product growth values (nominal U.S. dollars) are below 8
    percent, with two of those growth levels negative over the 20-year period.

    35. See Developing Countries: Status of the Heavily Indebted Poor Countries
    Debt Relief Initiative.

    36. In the case of Tanzania, its export revenues are expected to rise
    rapidly over the next several years due to the recent exploitation of its
    gold resources. However, given the capital-intensive nature of the industry,
    the government of Tanzania will realize very little revenue from these
    increased exports for a considerable period. In order to attract investment
    in this sector, the government of Tanzania agreed to receive relatively low
    revenue while foreign investors are recouping their investment costs.

    37. According to our review of the debt sustainability analyses' projections
    of donor assistance for HIPC recipients, such assistance is expected to be
    on the low side of the donor assistance provided between 1990 and 1997 for
    five countries (Bolivia, Mauritania, Mozambique, Nicaragua, and Uganda), and
    in the middle and high range for Honduras and Tanzania, respectively. These
    projections do not assume IMF lending beyond the current program. Inclusion
    of IMF resources would raise the projected debt levels for the recipient
    countries.

    38. In 1998, the United Nations reported that poverty in Bolivia is
    primarily rural and concentrated in indigenous groups. In rural areas, 94
    percent of the households live in poverty, in comparison to about 51 percent
    of the households in urban areas. In addition, in 1999, the U.S. Agency for
    International Development reported that 88 percent of the poor in Bolivia
    are indigenous peoples.

    39. The Economic Commission for Africa and Africa: Accelerating a
    Continent's Development (Addis Ababa, Ethiopia: U.N. Economic Commission for
    Africa, May 1999).

    40. For example, in addition to preparing the poverty reduction strategy,
    the government of Tanzania helps to prepare documents for internal planning
    purposes and donors, such as public expenditure reviews; strategies for
    bilateral and multilateral assistance programs and projects; and
    sector-specific strategies focused on health, education, civil service
    reform, and other areas.

    41. Sanjeev Gupta, et al., "Does Higher Government Spending Buy Better
    Results in Education and Health Care?" IMF Working Paper 99/21 (Washington,
    D.C.: IMF, Feb. 1999).

    42. Building Poverty Reduction Strategies in Developing Countries
    (Washington, D.C.: World Bank, Sept. 1999).

    43. Concluding Remarks by the Chairman--Review of Social Issues and Policies
    in
    IMF-supported Programs; HIPC Initiative-Strengthening the Link between Debt
    Relief and Poverty Reduction; and Transforming the Enhanced Structural
    Adjustment Facility (Washington, D.C.: IMF, Sept. 1999).

    44. The strategy, called the "Partnerships in Statistics for Development in
    the 21st Century," is designed to improve the statistics in poor countries
    and initiate programs to improve the statistical capacity of countries that
    qualify for HIPC debt relief by the end of the year 2000. See IMF, OECD, UN
    and World Bank Experts Call for Better Statistics to Fight Poverty, IMF
    Press Release 99/55 (Washington, D.C.: IMF, Nov. 19, 1999).

    45. The World Bank Participation Sourcebook (Washington, D.C.: World Bank,
    1996).

    46. World Bank staff estimated that a thorough process of participatory
    consultation, such as that conducted for a participatory country assistance
    strategy or poverty assessment, could cost between $50,000 and $500,000.

    47. UNDP: Country Cooperation Frameworks and Related Matters − First
    Country Cooperation Framework for Bolivia (1998-2002) (New York: U.N.
    Development Program, DP/CCF/BOL/1, Feb. 2, 1998).

    48. In December 1999, the staffs of the World Bank and the IMF estimated
    that 22 countries could have their eligibility assessed by the end of the
    second quarter of the year 2000.

    49. Poverty Reduction Strategy Papers: Operational Issues (Washington, D.C.:
    IMF and World Bank, Dec. 1999).

    50. According to World Bank and IMF staffs, Bolivia is not expected to
    receive interim relief under the enhanced initiative.

    51. Of the $28 billion, multilateral creditors are expected to provide about
    $14 billion, bilateral creditors to provide about $13.2 billion, and
    commercial creditors to provide about
    $0.8 billion.

    52. A 1999 working paper of the International Monetary Fund, "From Toronto
    Terms to the HIPC Initiative: A Brief History of Debt Relief for Low-Income
    Countries," estimates that debt relief initiatives since 1988 have cost
    creditors at least $30 billion.

    53. The Paris Club meets, on an as-needed basis, to negotiate debt relief on
    sovereign debt. Over the past 12 years, the Paris Club has undertaken
    actions to reduce or cancel public debt owed to them by heavily indebted
    poor countries. Prior to 1988, the Paris Club generally engaged in
    rescheduling, but not reducing, debt. This solved immediate
    debt-servicing crises but offered no permanent relief.

    54. According to an Italian Treasury official, the costs of debt relief will
    have a direct impact on implementing agencies' budgets and an indirect
    impact on the national budget.

    55. As of the end of 1998, total nominal outstanding debt of the HIPC
    countries was about
    $213 billion. The bilateral exposure is approximately 50 percent.

    56. Canada has written off all official development assistance loans to the
    HIPC countries except for Myanmar (Burma). The official development loan to
    Myanmar was fully budgeted at the time of disbursement and would not result
    in additional impact on Canada's budget to participate in the HIPC
    Initiative.

    57. Other countries that have written off all or nearly all official
    development assistance loans to potential HIPC recipients include Denmark,
    the Netherlands, Norway, Sweden, and Switzerland.

    58. "Pre-cutoff date debt" refers to debt taken on by a debtor country
    before its first visit to the Paris Club, while "post-cutoff date debt"
    refers to debt taken on by the debtor after the first visit. Forgiveness of
    post-cutoff date debt stems from the U.S. administration's goal to offer
    relief beyond the terms called for in the enhanced HIPC Initiative.
    Implementation of this goal is subject to Congressional authorization and
    appropriation.

    59. Under the enhanced HIPC Initiative, Parliament has granted authority to
    the government to incur the cost of the 10-percent commercial loan portion
    that is generally borne by exporters.

    60. Interim relief, or flow rescheduling, will be provided at the decision
    point. A flow rescheduling in the Paris Club involves the creditor agreeing
    to delay receipt of payments falling due during an agreed period, and to
    reschedule such amounts for eventual repayment over the medium and long
    term. In the case of the enhanced HIPC Initiative, most of the debt stock is
    expected to be written off at the completion point.

    61. At their summit in Cologne, Germany, in June 1999, the Group of Seven
    countries called on all bilateral creditors to forgive all official
    development debt of qualifying countries and said that new official
    development assistance should preferably be extended in the form of grants.

    62. For France, the bilateral portion of the debt relief, the part beyond
    the Paris Club agreement, will impact the budget annually as maturities fall
    due after full HIPC treatment at completion points.

    63. The United Kingdom's Treasury will fund the bilateral portion (10
    percent) of the debt cancellation over a 23-year period.

    64. Official development assistance loans represent about 90 percent of
    Japan's outstanding loans to the heavily indebted poor countries. The
    Japanese government has not yet chosen an option for the treatment of its
    non-official development assistance loans.

    65. Two countries require legislative authorization to grant Paris Club
    agreed relief--the United States and France. In addition, only the United
    Kingdom does not need legislative authorization to grant bilateral debt
    relief, which is based on agreements reached outside of the Paris Club.

    66. For six of the Group of Seven countries, the loan valuation and
    budgetary treatment of debt forgiveness are covered in their respective
    accounting and budgetary rules. For the United States, the accounting and
    budgetary treatment of direct loans, guarantees, and debt forgiveness are
    covered in the Statement of Federal Financial Accounting Standards Number 2
    and the Office of Management and Budget's Circular Number A-11, which are
    based on the Federal Credit Reform Act of 1990. France's budgetary treatment
    of debt relief is based on rules emanating from the Maastricht Treaty, which
    created the European Union.

    67. Not all creditors that have announced their intention to provide debt
    relief beyond the enhanced HIPC terms have obtained legislative or cabinet
    authority to do so.

    68. Non-Paris Club creditors are governments that generally do not
    participate in regular Paris Club meetings to negotiate debt relief on
    government debt. However, the HIPC Initiative, as endorsed by the Boards of
    the World Bank and the IMF, stresses the full participation of all creditors
    in providing debt relief. Non-Paris Club creditors, in certain instances,
    may have a considerable amount of debt owed by potential HIPC recipients.

    69. Through the Paris Club, "Naples terms" offer indebted countries up to a
    67-percent reduction in the net present value of specific parts of their
    bilateral debt.

    70. The Debt Reduction Facility, established in 1989, is financed through
    (1) contributions from donor countries and (2) earnings from operations of
    the International Bank for Reconstruction and Development.

    71. The Organization for Economic Cooperation and Development provides
    member governments with a forum in which to discuss economic and social
    policies. The Development Assistance Committee consists of 23 industrialized
    countries.

    72. The United Nations has advocated that donor countries set a target level
    of aid equal to
    0.7 percent of their gross national products. In 1998, only the Netherlands,
    Denmark, Norway, and Sweden reached or surpassed the U. N. target.

    73. Development Co-operation Report 1999 (Paris: OECD, 1999).

    74. The increase was a measure of the net official development assistance
    from countries that are members of the Development Assistance Committee.

    75. According to OECD officials, Greece and Sweden also plan to increase
    their official development assistance budgets over the next 2 years.

    76. "Replenishments" refer to when donors contribute to the International
    Development Association. Such replenishments normally occur every 3 years,
    with the next replenishment expected to take effect in 2002.

    77. The World Bank does not consider the $3.6 billion available to the
    International Bank for Reconstruction and Development as a loan loss
    provision eligible to be used for HIPC debt relief. This is because the
    International Bank for Reconstruction and Development has not reserved
    resources specifically to provide HIPC debt relief. It determines the size
    of the loan loss provision based on the probability of lost revenue to the
    institution and the individual risks of each country with an outstanding
    International Bank for Reconstruction and Development loan. According to the
    financial statements of the International Bank for Reconstruction and
    Development, as of March 2000 the loan loss provision represents about 3
    percent of loans outstanding of $119.1 billion. The loan loss provision has
    never been utilized in International Bank for Reconstruction and Development
    history.

    78. In discussions with World Bank officials, they said that these
    transactions should not be considered "round tripping" of the same resources
    since (1) the decision to have the two institutions aid each other's
    participation in debt relief was made in different years, with the
    International Development Association assisting the International Bank for
    Reconstruction and Development since 1988 under the Fifth Dimension program,
    while the International Bank for Reconstruction and Development has assisted
    the International Development Association in providing debt relief since
    1996 under the HIPC Initiative and (2) the International Bank for
    Reconstruction and Development resources that will be used to provide debt
    relief on International Development Association credits are kept separately
    in the HIPC Trust Fund. Upon debt forgiveness by the International
    Development Association on the pay-as-you-go basis, the International
    Development Association will be reimbursed by the Trust Fund as long as
    there are sufficient funds available in the Trust Fund.

    79. The General Resources Account is used for most transactions between
    member countries and the IMF. These transactions include the receipt of
    quota subscriptions, purchases and repurchases, and the repayment of
    principal to the IMF's lenders. The assets held in this account include
    members' currencies, the IMF's own holdings of special drawing rights, and
    gold.

    80. The transactions were accomplished by agreement between the IMF and the
    two countries. For example, at the time that Mexico had a large repayment to
    the IMF due, it agreed to purchase a portion of the IMF's gold at the
    prevailing commercial price. The value of the gold purchased was exactly
    equal to its loan repayment. Mexico then repaid its loan with this newly
    purchased gold. Thus, the total gold stock of the IMF remained unchanged,
    but the portion of the gold represented by the transaction was revalued from
    the Special Drawing Right rate (approximately $47 per ounce) to the market
    rate (approximately
    $282 per ounce).

    81. The Special Contingent Account-2 (SCA-2) was established in 1990 to
    provide the IMF with additional liquidity as a safeguard against the risk of
    loss arising from currency purchases made in connection with 11 countries
    that experienced severe debt problems in the 1980s. This account was
    formally terminated in 1999 when its purpose was deemed no longer necessary.
    When it was terminated, the account contained about $1.4 billion. According
    to U.S. law, the U.S. contribution can only be used to fund debt relief and
    not to contribute to the Poverty Reduction and Growth Facility.

    82. As of May 30, 2000, 1 euro was equal to about $0.93.

    83. Our analysis focused on seven of the eight countries in which a debt
    sustainability analysis from the World Bank and the IMF was available to us
    to analyze. Due to the limitations of time, we were unable to review the
    final country, Guinea.

    84. External financing (or balance-of-payments financing) includes program
    grants concessional program loans, and any additional exceptional finance
    such as IMF disbursements and the remaining financing gap (sometimes
    referred to as "new borrowing" or "unidentified borrowing").

    85. The actual amount of borrowing may be less than the HIPC debt service
    relief if (a) the amount of program grants provided by donors is greater
    than projected, (b) the decision is made not to borrow all of it, and (c)
    the country becomes externally viable after receiving HIPC relief.

    86. This methodology implicitly assumes that GDP has declined because
    exports have decreased, but domestic spending remains the same because
    external loans and transfers have increased.

    87. Loans include disbursements (such as those from the IMF) and
    "balance-of-payments" financing such as international reserve buildup,
    unidentified new borrowing, and/or other exceptional financing.

    88. We used 2 percent because U.S. inflation is expected to grow at this
    rate over the projected period. Adding the 2-percent inflation rate means
    assistance will also grow at a rate of
    2 percent, thus maintaining a constant real level of assistance.

    89. According to the IMF, the use of averages instead of the full-time
    series is due to the difficulty of presenting large amounts of data in
    long-time series on one page.

    90. This means reducing global male and female poverty illiteracy rates to 8
    percent by 2015, according to the United Nations.

    91. Overcoming Human Poverty Report 1998, U.N. Development Program (New
    York: United Nations, 1998).

    92. Uganda Participatory Poverty Assessment: Key Findings (Kampala, Uganda:
    The Ministry of Finance, Planning, and Economic Development, 1999).

    93. Bolivia: Interim Poverty Reduction Strategy Paper (La Paz, Bolivia:
    Republic of Bolivia,
    Jan. 13, 2000).

    94. Bolivia: Implementing the Comprehensive Development Framework
    (Washington, D.C.: World Bank, May 21, 1999).

    95. UNDP: Country Cooperation Frameworks and Related Matters − First
    Country Cooperation Framework for Bolivia (1998-2002) (New York: U.N.
    Development Program, DP/CCF/BOL/1, Feb. 2, 1998).

    96. Bolivia: Country Strategy Paper 1998 (London: Department for
    International Development, Dec. 1998).

    97. In Uganda, the 1995 constitution mandates the decentralization of public
    services to districts, and the 1997 Local Governments Act details the
    responsibilities assigned to each level of government. As stated in the
    constitution, Uganda's principles include democratic elections;
    participatory decision-making; involvement of the underprivileged,
    especially women, youth, and the disabled; self-reliance; and
    accountability.

    98. Uganda--Enhanced Heavily Indebted Poor Countries Initiative--Second
    Decision Point Document (Washington, D.C.: IMF and World Bank, Jan. 19,
    2000).

    99. Of the 40 potential HIPC recipient countries, the Treasury has requested
    funding to provide debt relief to 22 countries. Of the remaining 18
    countries, 4 countries are not likely to qualify for HIPC debt relief
    (Angola, Kenya, Vietnam, and Yemen); 4 countries have outstanding debt to
    the United States but are not likely to qualify within the next few years
    (Liberia, Myanmar, Somalia, and Sudan); and 10 countries have no outstanding
    debt to the United States.

    100. Official development assistance can be a grant or a loan with at least
    a 25-percent grant element for the promotion of economic development or
    basic human needs. (See app. II.)

    101. Pre-cutoff date loans refers to loans made by a creditor before his
    first visit to the Paris Club to negotiate with a debtor, and post-cutoff
    date refers to loans made after the first visit to the Paris Club.
    Post-cutoff date loan cancellation refers to loans made by the U.S.
    government on or before June 30, 1999.

    102. The International Debt Relief Act (Title V of H.R. 3425, incorporated
    by reference into the Consolidated Appropriations Act, 2000) requires the
    President to cancel these debts subject to appropriations.

    103. Export-Import Bank Act, 12 U.S.C. sect.635 (et seq.).

    104. Agriculture Trade Development and Assistance Act, 7 U.S.C. sect.1701 (et
    seq.).

    105. Foreign Assistance Act of 1961, Public Law 87-195, as amended, 22
    U.S.C. sect. sect. 2181 and 2182.

    106. Arms Export Control Act, 22 U.S.C. sect.2751 (et seq.).

    107. Commodity Credit Corporation Charter Act, 15 U.S.C. sect. 714 (et seq.);
    and Agricultural Trade Act, 7 U.S.C. sect.sect. 5621 and 5622.

    108. Federal Credit Reform Act, 2 U.S.C.sect.661-661f.

    109. The act shifted the method of accounting for the budgetary cost of
    federal credit commitments made after September 30, 1991, from a cash-flow
    basis to a net-present value basis. Cash-flow accounting credits income as
    it is received and expenses as they are paid. Net present value records the
    current value of a single payment or of a stream of payments to be received
    in or made over a specified time period.

    110. A direct loan is a loan made by the government to a nonfederal
    government borrower. Loan guarantee means any guarantee, insurance, or other
    pledge with respect to the payment of all or part of the principal or
    interest on any debt obligation of a nonfederal borrower to a nonfederal
    lender. OMB Circular A-11, section 85.3 (d) (k) (1999).

    111. The accounting standards for federal credit are covered in the Federal
    Accounting Standards Advisory Board's Accounting for Direct Loans and Loan
    Guarantees, Statement of Federal Financial Accounting Standards, No. 2,
    August 23, 1993. Beginning with fiscal
    year 1992, this method of accounting for the budgetary cost of direct loan
    and loan guarantees became effective.

    112. OMB Circular Number A-11, (hereinafter OMB Circular No. A-11), section
    85.3, (1999).

    113. OMB Circular No. A-11, 85.6 (a) (1) (1999).

    114. The financing account and the program account were established pursuant
    to the Federal Credit Reform Act of 1990. The program account is a budget
    account that receives and obligates appropriations to cover the subsidy cost
    of a direct loan or loan guarantee and disburses the subsidy cost to the
    financing account. The financing account records all of the cash flows
    resulting from post-1991direct loans and loan guarantees. These accounts
    will be discussed further in this section of the report.

    115. OMB chairs the Inter-Agency Country Risk Assessment System, and other
    members include the Departments of State, Treasury, Defense, and
    Agriculture; the U.S.
    Export-Import Bank; the Overseas Private Investment Corporation; the Council
    of Economic Advisors; and the Federal Reserve.

    116. The 11 categories are A, B, C, C-, D, D-, E, E-, F, F-, and F= (read as
    "double minus").

    117. Country risk costs are the costs due to the risk that international
    loans or guarantees may not be fully repaid. It is one component, often the
    largest, of the subsidy cost in the Federal Credit Reform Act. See Credit
    Reform: U.S. Needs Better Method for Estimating Cost of Foreign Loans and
    Guarantees (GAO/NSIAD/GGD-95-31 , Dec. 19, 1994).

    118. Risk premiums reflect the probability of default for a country by loan
    maturity and are applied to scheduled payment streams to obtain loan
    repayment projections. See Credit Reform: U.S. Needs Better Method for
    Estimating Cost of Foreign Loans and Guarantees.

    119. The other component includes interest rate costs (or income) and fee
    income. See Credit Reform: U.S. Needs Better Method for Estimating Cost of
    Foreign Loans and Guarantees.

    120. Actual country ratings are considered classified information.

    121. If the loan is provided at the current Treasury rate, there is no
    interest subsidy or income.

    122. Reestimates that resulted in an increase in the subsidy cost are
    financed by permanent indefinite authority. OMB Circular No. A-11, section
    85.2 (1999). Permanent authority is available as a result of permanent
    legislation and does not require an annual appropriation. Indefinite budget
    authority is budget authority of an unspecified amount of money.

    123. 2 U.S.C. sect.661-661f.

    124. In addition, forbearance, reductions in interest rates, extensions of
    maturity, and prepayments without penalty are other examples of alterations
    to contract terms that are direct modifications. OMB Circular A-11, section
    85.3(n) (1999).

    125. Loans can also be "indirectly" modified. Examples include a new method
    of debt collection prescribed by law or a statutory restriction on debt
    collection. OMB Circular No. A-11, section 85.3(n) (1999).

    126. According to OMB officials, most of the HIPC loans that are being
    forgiven are pre-credit reform (or pre fiscal year 1992) loans; however,
    since they have been directly modified, their budgetary treatment becomes
    fully subject to the requirements of the 1990 act, and they are now
    accounted for on a net present value basis.

    127. This is the term OMB uses to characterize the value of the loan.

    128. The estimate of remaining cash flows before modification must be the
    same as assumed in the baseline of the President's most recent budget. The
    estimate of the remaining cash flows after modification must be the
    premodification cash flows adjusted solely to reflect the effects of the
    modification. OMB Circular A-11, section 8.56, 1999.

    129. Our simplifying assumptions include the assumption that the country is
    placed in one of the bottom three risk categories (F categories) and thus
    has a flat price. It also assumes that the U. S. Treasury borrowing rate is
    equal to the loan's interest rate, thus there is no interest subsidy or
    cost.

    130. If the loan's interest rate were less than the Treasury borrowing rate,
    then there would be an interest subsidy.

    131. Within the framework of the Paris Club, the two main options are debt
    reduction (a cancellation of principal and interest payments) and debt
    service reduction (a reduction in interest rate).

    132. The Federal Credit Reform Act of 1990 separates credit into credit
    obligated or committed before October 1, 1991 (the beginning of fiscal year
    1992) and credit obligated or committed on or after that date. For
    accounting purposes, the two groups of loans are treated differently.

    133. This illustration covers only a direct loan modification with increased
    subsidy cost.

    134. The Treasury is acting in two separate roles. Steps 1 and 2 involve the
    Treasury's Office of International Debt Policy acting in the role of a
    program agency, working to achieve policy goals. Step 4 involves the Bureau
    of the Public Debt, acting as a financing agent.

    135. If the loans have been treated before (that is, there was a Paris Club
    rescheduling), they would be held in the Debt Reduction Financing Account,
    and the additional subsidy would be used to pay back outstanding borrowing
    from the Treasury.

    136. The unobligated balances and permanent indefinite appropriations to the
    Liquidating Account will be used to make the payment. Outlays will be
    recorded in the Liquidating Account in the amount of the payment when made.

    137. Prior to the Federal Credit Reform Act, the administration did not
    require budget authority to provide debt reduction. Debt reduction was
    treated as a grant of authority to the President and did not require an
    appropriation.

    138. In addition, $37.4 million that remains unobligated from prior fiscal
    years will also be used for bilateral debt reduction under this program for
    a total of $147.4 million currently available.

    139. The exchange rate as of June 6, 2000, is SDR1.33 = US$1.

    140. In addition, the United States contributed $25 million to the Central
    American Trust Fund at the World Bank. This trust fund provides debt relief
    to those countries in Central America that were devastated by Hurricane
    Mitch. Two of the countries benefiting from this fund, Nicaragua and
    Honduras, are eligible for HIPC debt relief.

    141. The United States forgave about $10 billion in debt owed by three
    severely indebted middle-income countries, Egypt (1991), Poland (1991), and
    Jordan (between 1994 and 1997) to assist in economic reform and to further
    national security interests.

    142. According to an Italian Treasury official, debt relief has a direct
    impact on the implementing agencies' budgets and an indirect impact on the
    national budget.

    143. As of the end of 1998, total nominal debt outstanding of the 40 heavily
    indebted poor countries was estimated at $213 billion. Bilateral creditors'
    exposure is approximately half of this total.

    144. Seventeen of the 36 countries potentially eligible for HIPC debt relief
    have debts outstanding to Canada.

    145. The official development loan to Myanmar was fully budgeted at the time
    of disbursement and would not result in additional impact on Canada's budget
    to participate in the HIPC Initiative.

    146. The Export Development Corporation functions in a similar capacity to
    the U.S.
    Export-Import Bank.

    147. The Canadian International Development Agency is similar to the U.S.
    Agency for International Development.

    148. Canada's accounting treatment of asset (loan) valuation is embodied in
    its Financial Administration Act, which requires assets and liabilities to
    adhere to generally accepted accounting principles.

    149. This option involves a cancellation of part of the stock of eligible
    debt and a rescheduling of the remaining debt at market interest rates.

    150. This option involves a rescheduling or refinancing of the total
    eligible debt over a long period with interest rates below market rates.

    151. Official development assistance debt is not generally treated in the
    Paris Club. The treatment of official development assistance debt is largely
    linked to the treatment of non-official development assistance debt.

    152. In addition, Canada has contributed $5.4 million to the Central
    American Trust Fund at the World Bank. This trust fund provides debt relief
    to those countries in Central America that were devastated by Hurricane
    Mitch. Two of the countries benefiting from this fund, Nicaragua and
    Honduras, are eligible for HIPC debt relief.

    153. Since 1978, about C$900 million in official development assistance
    loans was granted to several potential HIPC recipients.

    154. The debt owed by the 40 heavily indebted poor countries represented
    about 0.9 percent of France's gross domestic product as of the end of 1998,
    also the highest proportion of the Group of Seven countries. The euro rate
    was about 1.17 to US$1 on January 4, 1999.

    155. The Maastricht Treaty created the European Union. The Treaty was
    approved in Maastricht by the heads of government of the 12 members of the
    European Community in 1991.

    156. There could be a debate as to whether the Maastricht Rule is the same
    as France's accounting rules. Eurostat (the accounting body of the European
    Union) is in charge of reviewing this issue and establishing a rule for all
    European Union countries.

    157. The origin of the European Development Fund is in the signing of
    international conventions between the member states of the European Union
    and 71 African, Caribbean, and Pacific states, known as the Lom�
    conventions. The aid these countries are granted by the European Community
    is for financing development projects and programs.

    158. The 3.1 billion euros will be used to cover Naples terms, and the
    original HIPC and enhanced HIPC reductions, including official development
    assistance. France had argued in Cologne for a fair burden-sharing
    arrangement because of the significant impact that debt relief would have on
    its budget. The decision was that debt relief would amount to about
    0.1 percent of France's GDP. The exchange rate used is 1 euro = US$1.

    159. The European Development Fund will make a contribution of about 1
    billion euros to the HIPC initiative, including 320 million euros for the
    cancellation of the European Development Fund's claims in the context of the
    HIPC Initiative.

    160. This contribution is contingent upon the participation of other
    creditors, especially the United States, to the HIPC Trust Fund.

    161. The debt owed by the 40 heavily indebted poor countries represented
    about 0.3 percent of Germany's gross domestic product as of the end of 1999.

    162. This includes an additional bilateral topping-up to 100 percent
    cancellation of debt worth approximately DM700 million, or US$350 million.

    163. This is the Budgetary Committee (roughly equivalent to the U.S.' Ways
    and Means Committee).

    164. Germany has also contributed $13.2 million to the Central American
    Trust Fund at the World Bank.

    165. The prior government proposal had requested 100 percent cancellation
    for eligible HIPC countries with annual per capita income below $300. This
    new proposal presented by the government in March calls for 100-percent debt
    cancellation for all eligible HIPC countries.

    166. Italy has also contributed $12 million to the Central American Trust
    Fund at the World Bank.

    167. Japan announced its plans for official development assistance debt
    relief prior to the Cologne Summit in June 1999.

    168. In March 1995, the Export-Import Bank of Japan and the Overseas
    Economic Cooperation Fund were merged and became known as the Japan Bank for
    International Cooperation.

    169. Based on the Organization for Economic Cooperation and Development
    terms and concepts, this form of aid would be considered "partially untied
    aid." Partially untied aid is official development assistance (or official
    aid) for which the associated goods and services must be procured in the
    donor country or among a restricted group of other countries. Partially
    untied aid is subject to the same disciplines as tied aid credits and
    associated financing.

    170. According to the Ministry of Finance, unprofitable goods include
    weapons, goods relating to military, or other things that do not contribute
    to increasing the productivity of heavily indebted poor countries.

    171. Vietnam, Myanmar, Kenya, and Ghana indicated that they may not accept
    the grant assistance for debt relief approach because they would like to
    continue to receive official development assistance in yen loan form in the
    future.

    172. The Diet is the legislative body, which is similar to the United
    Kingdom's parliament.

    173. Japan has not provided us with the amount of relief granted under the
    Paris Club framework.

    174. Of the 40 HIPC countries, 34 are indebted to the United Kingdom.

    175. Only three countries owe post-cutoff date debts: Ghana, C�te d'Ivoire,
    and Vietnam.

    176. The Export Credits Guarantee Department is a department of the
    Secretary of State for Trade and Industry. The Export Credits Guarantee
    Department derives its statutory authority from the Export and Investment
    Guarantees Act of 1991.

    177. The countries that will not be eligible for HIPC debt relief will
    receive a 67-percent reduction based on Naples terms.

    178. The cancellation of official development assistance loans is the result
    of the Retrospective Terms of Adjustment, a policy of aid loan write-off
    introduced by the British government following a resolution passed by the
    United Nations Conference on Trade and Development in 1978. The Conference
    had called for either the cancellation of aid loans or their availability on
    more concessionary terms.

    179. Based on the Export Credits Guarantee Department `s Annual Report
    1997/98, provisions are estimated according to the following categories of
    risk: political, buyer, specific political risk provision, and specific
    buyer risk provisions.

    180. Account 1 is a liquidating account and appears similar to the U. S.
    government's Liquidating Account, which was established as part of the
    Federal Credit Reform Act of 1990.

    181. In addition, the United Kingdom contributed $16.3 million to the
    Central American Trust Fund at the World Bank.
    *** End of document. ***