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

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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 Kï¿½hler, 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.

ï¿½ 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.

ï¿½ 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

 Cï¿½te 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 Cï¿½te 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

ï¿½ maintain a stable macroeconomic environment as called for under
IMF-supported programs and

ï¿½ 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

ï¿½ extent, nature, and causes of poverty;

ï¿½ key obstacles to reducing poverty;

ï¿½ long-term poverty reduction goals and outcomes;

ï¿½ policies and reforms for achieving these goals and their expected costs;

ï¿½ way the strategy is integrated into the country's macroeconomic framework;

ï¿½ intermediate indicators that will measure progress toward achieving
long-term goals;

ï¿½ process for involving civil society and others; and

ï¿½ 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:

ï¿½ 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.

ï¿½ 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.

ï¿½ 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

ï¿½ 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:

ï¿½ 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

ï¿½ 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

ï¿½ 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.

ï¿½ 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.

ï¿½ 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.

ï¿½ 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.

ï¿½ 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.

ï¿½ 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.

ï¿½ 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

ï¿½ 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.

ï¿½ 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, Cï¿½te 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 Corporaciï¿½n 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         Sï¿½o Tomï¿½ 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         Cï¿½te 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,

ï¿½ 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.

ï¿½ Loans from other multilateral financial institutions.

ï¿½ 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,

ï¿½ 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

ï¿½ the United Kingdom's Export Credit Guarantee Department provides
guarantees, insurance, and reinsurance against loss to exporters of United
Kingdom goods.

ï¿½ Commercial loans − loans offered by the private sector (e.g., banks)
at market rates.

ï¿½ 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
 Cï¿½te 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
 Sï¿½o Tomï¿½ and
 Prï¿½ncipe          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, Cï¿½te
 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
 Corporaciï¿½n 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    Lomï¿½, 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,        Lomï¿½, 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
 Estabilizaciï¿½n
 Monetaria)
 Conseil de l'Entente
 (Council of the     Abidjan, Cï¿½te  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.

ï¿½Non-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.

ï¿½ 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.

ï¿½ 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.

ï¿½ 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

 Romï¿½n 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

ï¿½ 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;

ï¿½ strengthen civil society trust in this approach;

ï¿½ prioritize the use of resources for poverty reduction; and

ï¿½ 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

ï¿½ the impact of structural adjustment and macroeconomic policies on poverty;

ï¿½ human rights and participation, including a mechanism for civil society to
monitor resource allocations;

ï¿½ urban development, including education, health, employment, and
productivity; and

ï¿½ 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:

ï¿½ 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

ï¿½ 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).

ï¿½ 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).

ï¿½ The face value of debt after debt relief was determined. Again, we assumed
that there is no interest subsidy (step 4).

ï¿½ 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).

ï¿½ 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.

ï¿½ 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 fï¿½r 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 Lomï¿½
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, Cï¿½te 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.
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