Developing Countries: Status of the Heavily Indebted Poor Countries Debt
Relief Initiative (Chapter Report, 09/30/1998, GAO/NSIAD-98-229).

In response to a call from leaders of the major industrialized nations
for a comprehensive approach to the debt problems of the poorest
countries, the World Bank and the International Monetary Fund proposed
the Heavily Indebted Poor Countries Debt Initiative in 1996. Creditors,
including the United States, are concerned that some poor countries,
even after receiving debt relief through existing mechanisms, will still
have debt burdens too large for them to repay. The Initiative's goal is
to bring countries' debts to levels that are sustainable, meaning that
in the future indebted countries can make debt payments in time and
without rescheduling. As a condition of receiving debt relief, countries
must undertake economic and social reforms. This report (1) describes
the implementation of the Initiative and (2) assesses the Initiative's
potential to achieve its stated goal.

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

 REPORTNUM:  NSIAD-98-229
     TITLE:  Developing Countries: Status of the Heavily Indebted Poor
	     Countries Debt Relief Initiative
      DATE:  09/30/1998
   SUBJECT:  International organizations
	     Multinational corporations
	     International economic relations
	     Foreign economic assistance
	     International cooperation
	     Debt
	     Foreign loans
	     Foreign technical aid
	     Developing countries
	     Foreign aid programs
IDENTIFIER:  Heavily Indebted Poor Countries Debt Initiative
	     Heavily Indebted Poor Countries Debt Initiative Trust Fund

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GAO/NSIAD-98-229

Cover
================================================================ COVER

Report to the Chairman, Subcommittee on International Economic
Policy, Export and Trade Promotion, Committee on Foreign Relations,
U.S.  Senate

September 1998

DEVELOPING COUNTRIES - STATUS OF
THE HEAVILY INDEBTED POOR
COUNTRIES DEBT RELIEF INITIATIVE

GAO/NSIAD-98-229

Developing Countries

(711288)

Abbreviations
=============================================================== ABBREV

  DSA - Debt sustainability analysis
  ESAF - Enhanced Structural Adjustment Facility
  GDP - gross domestic product
  HIPC - heavily indebted poor country
  IBRD - International Bank for Reconstruction and Development
  IDA - International Development Association
  IMF - International Monetary Fund
  NGO - nongovernmental organization
  ODA - official development assistance
  UNCTAD - U.N.  Conference on Trade and Development

Letter
=============================================================== LETTER

B-280827

September 30, 1998

The Honorable Chuck Hagel
Chairman, Subcommittee on International Economic
 Policy, Export and Trade Promotion
Committee on Foreign Relations
United States Senate

Dear Mr.  Chairman:

This report responds to your request that we describe the
implementation of the Heavily Indebted Poor Countries Debt Initiative
and assess the initiative's potential to achieve its stated goal.

We are sending copies of the report to the Secretaries of the
Treasury and of State, the President of the World Bank, the Managing
Director of the International Monetary Fund, and other interested
parties.  Copies will also be made available to others on request.

Please contact me at (202) 512-4128 if you or your staff have any
questions concerning the report.  Major contributors to this report
are listed in appendix VIII.

Sincerely yours,

Benjamin F.  Nelson, Director
International Relations and Trade Issues

EXECUTIVE SUMMARY
============================================================ Chapter 0

   PURPOSE
---------------------------------------------------------- Chapter 0:1

In response to a call from the leaders of the major industrial
nations for a comprehensive approach to the debt problems of the
poorest countries, the World Bank and the International Monetary Fund
(IMF)\1 proposed the Heavily Indebted Poor Countries (HIPC) Debt
Initiative in 1996.  The initiative reflects concerns of creditors,
including the United States, that, even after receiving debt relief
through existing mechanisms, some poor countries will have debt
burdens that remain too large relative to their ability to pay.  The
stated goal of the HIPC initiative is to bring countries' debts to
levels that are sustainable, meaning that in the future they can make
debt payments on time and without rescheduling.  As a condition of
receiving debt relief, countries undertake economic and social
reforms.  Expressing concern about whether the HIPC initiative could
realistically be expected to solve these poor countries' debt
problems and whether they are likely to need further debt relief in
the future, the Chairman of the Subcommittee on International
Economic Policy, Export and Trade Promotion, Senate Committee on
Foreign Relations, asked GAO to review the HIPC initiative.  As
requested, this report (1) describes the implementation of the HIPC
initiative and (2) assesses the initiative's potential to achieve its
stated goal.  Because it is still relatively early in the
implementation of the HIPC initiative, this report presents a
preliminary assessment of its likely effects.

To conduct its assessment, GAO obtained access to World Bank and IMF
officials and information through the Department of the Treasury, and
through the staff of the U.S.  members of these institutions' Boards
of Executive Directors.\2 GAO discussed the development and
implementation of the HIPC initiative with, and obtained data from,
officials of U.S.  government agencies; other creditors, including
France, Germany, the United Kingdom, the Paris Club,\3 the African
Development Bank, and the Inter-American Development Bank;
governments and private sector institutions in three HIPC recipient
nations--Burkina Faso, Cï¿½te d'Ivoire, and Uganda; U.N.
organizations; and nongovernmental organizations (NGO) in the United
States and abroad.  GAO analyzed data and internal reports on the
design and implementation of the HIPC initiative, as well as data on
prior debt relief and restructuring efforts.  GAO conducted its
assessment based on the implementation of the HIPC initiative through
August 1998.

--------------------
\1 The World Bank 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 Enhanced Structural Adjustment Facility (ESAF).

\2 The Board of Executive Directors of the World Bank is responsible
for policy decisions affecting the Bank's general operations and for
the approval of all loans.  The IMF's Executive Board is the IMF's
primary decisionmaking body.  Each board comprises 24 executive
directors who represent member countries.

\3 The Paris Club is an informal group of creditor countries that
meets, as needed, to negotiate debt rescheduling and relief efforts
for public or publicly guaranteed loans.  In addition to the 18
countries that regularly participate in the Paris Club, other
countries are invited to the negotiations on an ad hoc basis if they
hold a significant share of the debt being discussed.

   BACKGROUND
---------------------------------------------------------- Chapter 0:2

Addressing the debt burdens of very poor countries, in the context of
the broad range of development needs they face, constitutes a
substantial challenge.  The World Bank and the IMF have classified 40
countries as heavily indebted poor countries.\4 Thirty-two of these
countries are in sub-Saharan Africa.  (See app.  I for a list of
countries.) Eighty-three percent of these countries are classified by
the United Nations as being in its lowest category of human
development, based on life expectancy, literacy, and per capita
national income.  Most receive substantial amounts of development
assistance from governments, multilateral organizations, and NGOs.
In 1994, foreign assistance represented about 16 percent of national
income, using a weighted average, for 36 of these countries for which
data is available.  Some of the 40 countries, moreover, have recently
emerged from--or continue to be engaged in--conflict or civil unrest.

Since the early 1980s many poor countries have had increasing
difficulty servicing their debt.  Despite several debt relief
efforts, the total amount of money owed to external creditors by the
40 countries increased from an average of $122 billion for 1983-85 to
$221 billion for 1993-95 (in 1997 dollars).  For 1993-95, 73 percent
of this debt was medium- and long-term debt owed to official
creditors (governments and multilateral financial institutions).  The
remaining 27 percent was medium- and long-term debt owed to
commercial creditors and short-term debt such as trade financing.  Of
the total debt, 45 percent was owed to governments (bilateral
creditors)\5 and 28 percent was owed to international financial
institutions (multilateral creditors).  By the mid-1990s, much of
this debt was not being repaid.  During 1993-95, for example, HIPC
countries paid about 41 percent of their scheduled debt payments,
with the remainder being rescheduled or in arrears.\6

Debt relief efforts since the 1980s have been undertaken primarily by
bilateral and commercial creditors.  Some bilateral creditors have
individually forgiven debt owed by poor countries with, for example,
the United States forgiving about 37 percent of the debt owed to it
by these countries.  More often, bilateral creditors have worked
together to offer debt relief on increasingly concessional terms, up
to 67 percent of eligible debt (Naples terms), through the Paris
Club.  Multilateral creditors have 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 ratings.

The HIPC initiative is the first coordinated effort to include all
creditors in addressing poor countries' debt problems.  Participating
creditors include bilateral governments, the major multilateral
creditors such as the World Bank and the IMF, and over 20 other
multilateral development institutions, including the African
Development Bank, the Inter-American Development Bank, and the
International Fund for Agricultural Development.  (See app.
III.)

The World Bank and the IMF made a preliminary determination that 20
of the 40 countries might eventually receive relief based on the
initiative's specific criteria concerning income, indebtedness, and
reform efforts underway.  The World Bank and the IMF currently
estimate that the HIPC initiative will provide about $8.2 billion in
debt relief in 1996 present value\7 terms, for 20 countries.  As of
August 1998, the World Bank and the IMF had made specific eligibility
decisions for eight countries, with six countries--Bolivia, Burkina
Faso, Cï¿½te d'Ivoire, Guyana, Mozambique, and Uganda--deemed eligible
for relief under the HIPC initiative, and two countries--Benin and
Senegal--deemed ineligible because their debts are considered
sustainable.  One country--Uganda--has completed the HIPC
initiative's process.

The HIPC framework outlines a two-stage process, with each stage
lasting up to 3 years.  During stage one, a country must implement
IMF- and World Bank-supported programs of economic reform, after
which eligibility for HIPC debt relief is assessed.  At that time,
the World Bank and the IMF determine whether (1) existing debt relief
mechanisms, such as those offered by the Paris Club, are sufficient
to bring a country's debt to a point considered sustainable or (2)
the country requires additional relief.  In making this
determination, they decide whether the ratio of a country's debt (in
present value terms) to the value of its exports will be greater than
a target ratio set for that country.\8

According to the framework, the target debt-to-export ratio is
generally set between 200 and 250 percent.\9 The lower the target
level set for a particular country, the greater the amount of debt
relief required to reach the target.  For example, lowering the ratio
of a particular country's debt to its exports from 300 percent to 200
percent requires more debt relief than lowering it from 300 percent
to 250 percent.  The target set for each country is based on factors
affecting the vulnerability of the country's economy, such as the
percentage of government revenue required for debt service and
whether export earnings are dependent on just a few commodities.

If the World Bank and IMF Boards determine that existing debt relief
mechanisms are insufficient to make debt levels sustainable and other
principal creditors agree, the debt reduction amounts are decided and
the country enters the second stage of the HIPC initiative.  During
this stage, the country receives some debt relief from bilateral and
commercial creditors and financial support from multilateral
institutions.  The country must agree to continue implementing
economic reform programs supported by the IMF and the World Bank and
social reforms agreed to with the World Bank.  If the country has met
the IMF and World Bank requirements, it receives final debt relief
under the HIPC initiative at the end of stage two.  Official
creditors have agreed to share the amount of relief by providing
equal percentage reductions of debt owed them (after the full use of
existing debt relief mechanisms) and commercial creditors are
expected to provide relief comparable to bilateral creditors.

Establishing a comprehensive framework for debt relief required
resolving differences among creditors.  Some creditors were concerned
about the cost of providing debt relief and about the issue of "moral
hazard"--whether the prospect of debt relief would discourage
countries from undertaking needed reforms or from pursuing
responsible borrowing policies.  Key issues negotiated in developing
the HIPC initiative included how sustainable debt burdens would be
determined, the nature of required reforms, whether debt stocks would
be reduced, and how creditors would share in providing relief.
Setting a range of values for the primary indicator of whether debts
were sustainable, and announcing the framework would be implemented
flexibly, left many key decisions to be made in the process of
implementing the initiative.  Also, some aspects of design, most
notably how the shares of debt relief would be divided among
creditors, were decided after the basic framework was announced.
(See app.  IV for additional information on the framework.)

--------------------
\4 In 1996, the World Bank classified 41 countries as heavily
indebted poor countries.  In 1998, the number of countries was
reduced to 40 because Nigeria was no longer given this
classification.

\5 According to the U.S.  Treasury, as of August 1998, 31 heavily
indebted poor countries owed the United States approximately $6.8
billion in outstanding debt.  (See app.  II.)

\6 If Sudan and Somalia, two of the countries with the largest amount
of unpaid debt and that are not part of the HIPC initiative's current
cost estimates, are not included, GAO estimates that the 38 remaining
countries paid an average of 43 percent of their debt service owed
during 1993-95.

\7 The amount of debt can be reported in terms of nominal (face)
value and present value, also termed "net present value" in HIPC
documents.  Much of the debt of poor countries is contracted on
concessional terms.  The present value of debt is a measure that
takes into account the degree of concessionality.

\8 In this report, discussions of debt-to-export ratios refer to the
present value of debt, unless otherwise noted.

\9 Under certain conditions, for countries with very open economies
and strong efforts to generate fiscal revenues, the target may be
based on the ratio of debt to government revenue.  This fiscal
indicator can lead to debt-to-export targets below 200 percent.

   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

The HIPC initiative will help reduce participating poor countries'
debt burdens, in some cases, substantially; however, many will remain
vulnerable to future debt problems even with sound economic policies.
The implementation of the HIPC initiative reflects compromise among
the major official creditors on issues such as countries' eligibility
and the total amount of debt relief to be provided.  In recognition
of countries' economic vulnerabilities, creditors have generally
agreed on relief amounts that are at or close to the upper bounds of
what the negotiated framework allows.  Nonetheless, in order to avoid
further debt problems, countries receiving debt relief through the
HIPC initiative are assumed to maintain strong economic performance
and continue to receive large amounts of donor assistance.  In most
cases this assistance includes balance-of-payments support.  The HIPC
initiative projections assume that countries will maintain
sustainable debt levels in part through strong export growth.  These
export growth assumptions may be optimistic for some countries.
Since many HIPC recipients rely upon a few commodities for their
export earnings, they are particularly vulnerable to economic events
such as a decline in the price or output of a primary export.

   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4

      IMPLEMENTATION OF THE HIPC
      INITIATIVE HAS INVOLVED
      EXTENSIVE NEGOTIATION
-------------------------------------------------------- Chapter 0:4.1

The implementation of the HIPC initiative has involved significant
negotiation among the major creditors on issues such as a country's
eligibility, the amount of debt relief to be provided, and the way in
which debt relief is to be shared among creditors.  Creditors have
generally agreed to provide relief at the upper end of what the
negotiated framework provides for five of the first six countries.
The total estimated amount of debt relief has increased in part due
to creditors' decisions as they have implemented the HIPC initiative.
The amount of relief could further increase if, for example,
countries that were not included in previous estimates become
eligible.

         COMPROMISE ON AMOUNT AND
         TIMING OF DEBT RELIEF
------------------------------------------------------ Chapter 0:4.1.1

Despite considerable debate on the amount and timing of debt relief
to be provided, the World Bank and IMF Boards, in conjunction with
principal creditors, have generally implemented the HIPC initiative
to provide debt relief at the upper bounds of the negotiated
framework.  This is specifically evident in low debt-to-export
targets--which increase the amount of debt relief provided--and
shortened second stages of the initiative's implementation--which
provide debt relief sooner and can increase relief amounts in some
cases.  For five of the first six countries, target debt-to-export
ratios have been set close to or below the lower end of the target
range--205 percent or lower.\10

Countries have expressed different views during the implementation of
the HIPC initiative about the extent to which debt-to-export ratios
above the lower end of the target range should be used, in part
reflecting concerns about costs.  The higher relief amounts agreed to
reflect concerns that these countries face significant economic risks
such as declines in the price or production of their primary exports.

Five of the first six countries approved for relief under the HIPC
initiative have been given a shortened second stage despite some
countries' belief that the second stage of the HIPC initiative--the
period between eligibility and completion--should last 3 years.
According to HIPC documents, this shortened period reflects the
strong reform records of the early qualifiers (Bolivia, Burkina Faso,
Guyana, Mozambique, and Uganda), which have completed successive ESAF
programs and World Bank programs and received a Paris Club
stock-of-debt operation\11 on Naples terms.  A shorter period between
the initiative's decision point and the completion point means that
countries will receive final HIPC debt relief sooner and may get more
relief under certain conditions.  In the case of Guyana, GAO
estimated that the decision to set the completion point in 1998
rather than the year 2000 (which would have been 3 years between the
two stages) resulted in a projected increase in the initiative's
assistance of about 68 percent, or $103 million in present value
terms.

--------------------
\10 The fiscal indicator has led to debt-to-export ratios below 200
percent for two countries--Cï¿½te d'Ivoire and Guyana.

\11 For the Paris Club, a stock-of-debt 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.

         CREDITORS' SHARES OF DEBT
         RELIEF
------------------------------------------------------ Chapter 0:4.1.2

Determining how creditors will share in providing debt relief has
involved significant negotiation since the September 1996
announcement of the HIPC framework.  After much negotiation, in July
1997 the creditors broadly endorsed a proportional burden-sharing
approach under which bilateral and multilateral creditors are
expected to provide debt relief in proportion to their exposure after
the use of traditional debt relief mechanisms, including those
offered by the Paris Club.  Bilateral and multilateral creditors are
to provide equal percentage reductions on the remaining debt owed to
them, with Paris Club creditors agreeing to provide up to 80 percent
relief on eligible debt.

The creditors each determine how they will provide the relief.
Creditors may provide relief through several means, such as
rescheduling debt payments at lower interest rates, buying back the
debt, converting loans into grants, reducing the debt, making debt
service payments as they come due, and/or lending new funds on
concessional terms to be used to make debt service payments.  A
creditor's decision about how it will provide debt relief to a
particular recipient may be influenced by many factors, such as the
amount of outstanding debt and the impact of providing debt relief on
the creditor's future budgets.

Multilateral creditors have said that they will not forgive debt
outright because to do so may endanger their preferred creditor
status.\12 They have stated they intend to provide debt relief in
ways that maintain their preferred creditor status such as making
countries' debt payments for them as they come due.  Much of the debt
relief provided by the World Bank will be financed through a special
HIPC Trust Fund.  Relief through the HIPC initiative is provided on
debt owed to the International Development Association (IDA), but the
funding for the Trust Fund is provided mainly from income of the
International Bank for Reconstruction and Development (IBRD).\13 (See
app.  IV for additional information on the sources of funding for the
Trust Fund).  The IBRD has contributed about $750 million from its
income to this Trust Fund to buy back or repay debt owed to IDA.\14

The IMF is participating in the HIPC initiative through special ESAF
grants that are deposited into an escrow account to meet debt service
payments owed to the IMF under a predetermined schedule.  The IMF is
funding its contribution through its own trust fund financed from
bilateral (member) contributions and the ESAF reserve account.

--------------------
\12 The preferred creditor status derives from the debtors'
traditional practice of servicing debt owed to the World Bank and the
IMF before servicing debt owed to other lenders.  The articles of
agreement (charters) of these institutions do not address preferred
creditor status or debt forgiveness.

\13 The World Bank has two organizations that lend to governments:
the IDA lends to poor countries at highly concessional rates, and the
IBRD lends to middle-income countries at market rates.

\14 The World Bank's Board of Executive Directors has recommended
that an additional $100 million of IBRD income be transferred to the
HIPC Trust Fund.

         TOTAL ESTIMATED RELIEF
         AMOUNTS CAN CHANGE
------------------------------------------------------ Chapter 0:4.1.3

The actual amount of debt relief to be provided under the HIPC
initiative depends on creditors' decisions during implementation as
well as actions taken by debtor countries to implement required
reforms.  Since reaching agreement on the basic terms of the HIPC
framework in September 1996, creditors have made several changes that
have contributed to an increase in the estimated amount of relief
from $5.6 billion to $8.2 billion (in 1996 present value terms).
Much of the increase was due to a change calling for exports to be
calculated using an average of 3 years of data rather than
1 year.  This was done to provide a more stable measure of exports.
In a period of increasing exports, this change results in countries
receiving increased relief under the HIPC initiative.  The change
increased the total estimated amount of HIPC debt relief by about $1
billion, according to HIPC documents.  About $600 million of the
increase was due to a change in the eligibility criteria that allowed
at least two additional countries (Cï¿½te d'Ivoire and Guyana) to
qualify for the HIPC initiative.  Advocates for the expansion of the
eligibility criteria were concerned that certain countries with very
open economies, and thus relatively low debt-to-export ratios, were
improperly characterized as having a sustainable debt burden under
the HIPC initiative.  Much of the remaining increase in projected
debt relief was due to revisions to methodologies and
country-specific analyses, most significantly, increased estimates of
the amount of the potential relief for the Democratic Republic of
Congo.

The amount of total HIPC debt relief could further increase if
countries that were not included in previous estimates, such as
Liberia, Somalia, and Sudan, establish the track records of reform
needed to qualify for HIPC debt relief.  Including these countries
would increase the total amount of relief under the HIPC initiative,
and debt relief for Sudan, in particular, could increase the
estimates greatly.  The World Bank and the IMF made a preliminary
estimate that HIPC debt relief for Sudan could be about $4.5 billion.
Conversely, if countries included in the estimates do not undertake
required reforms and thus do not receive HIPC relief, the total
amount of relief could decrease.

      THE HIPC INITIATIVE WILL
      HELP COUNTRIES, BUT MANY
      WILL REMAIN VULNERABLE TO
      FUTURE DEBT PROBLEMS
-------------------------------------------------------- Chapter 0:4.2

The HIPC initiative will provide benefits to recipient countries;
however, many will remain vulnerable to future debt problems, even
with sound economic policies.  In conjunction with existing debt
relief mechanisms, such as relief from Paris Club creditors, the HIPC
initiative will reduce countries' debts by varying amounts, some
substantially.  Reductions in the amount of recipient country
resources that are used to pay debt service will also vary and are
difficult to determine due to prior arrears and the use of donor
resources in some cases to help make debt payments.  The limited
evidence for the particular debt targets in the HIPC initiative
suggests that reducing debt-to-export ratios to near 200 percent is
not likely to provide countries with a "cushion" to protect against
adverse economic events.  Strong export growth and substantial donor
assistance are important to the HIPC initiative's projections of debt
burdens being sustainable.  For some countries, those export growth
projections may turn out to be overly optimistic.  If export earnings
are lower than expected, financial support from bilateral and
multilateral donors is assumed to increase.  This assumption has been
questioned by many parties, including some governments and NGOs,
given the budgetary pressures of major donor countries.  The HIPC
initiative has also focused attention on the limited capacity of
recipients to manage their debt, with improvements in debt management
considered critical to avoiding future debt problems.

         DETERMINING THE
         SIGNIFICANCE OF THE HIPC
         INITIATIVE'S DEBT RELIEF
         IS COMPLEX
------------------------------------------------------ Chapter 0:4.2.1

The HIPC initiative will reduce the total amount of debt owed, in
present value terms, by varying amounts for the first six recipient
countries.  For example, the present value of HIPC debt relief for
these countries ranges from 6 percent of debt for Cï¿½te d'Ivoire to 57
percent for Mozambique, with the average reduction 22 percent.
However, HIPC debt relief is only one of several factors that
contribute to estimated declines in recipient countries' debt
burdens, as measured by debt-to-export ratios.  GAO's analysis
indicates that the amount of projected reduction in countries' debt
burdens attributable to the HIPC initiative's relief and the amount
attributable to other factors varies greatly across the first six
qualifiers for the HIPC initiative.  For example, GAO estimates that,
for Uganda, 77 percent of the reduction in the debt-to-export ratio
between 1995 and April 1998 (Uganda's completion point under the
initiative) is due to export growth, with 18 percent attributable to
HIPC debt relief and 5 percent attributable to a combination of other
debt relief and changes in borrowing.\15 In contrast, for Guyana, 56
percent of the reduction can be attributed to a combination of other
debt relief and changes in net borrowing, 22 percent is due to HIPC
relief, and 22 percent is due to export growth.

Determining how much countries' actual debt service payments will be
reduced by HIPC relief is complicated by the fact that some have
experienced substantial arrears.  For example, the HIPC initiative
will reduce Mozambique's scheduled debt service payments by 42
percent from the obligations that remain after Paris Club relief on
Naples terms.  However, Mozambique was paying only about 30 percent
of its debt service originally due during 1995-98.  According to IMF
data, Mozambique's projected average annual debt service of $98.7
million during 2000-03 will be about 13 percent less than its average
annual debt service paid during 1995-98.

A further complexity in assessing the effect debt relief may have on
a country's finances is that a substantial portion of the countries'
debt service is financed through donor and creditor resources.  This
is most clearly evident in the case of Uganda.  Since 1995, bilateral
donors have provided funds directly to service Uganda's multilateral
debt, with payments averaging $45 million per year in 1996 and 1997.
HIPC debt relief is expected to reduce Uganda's annual debt service
by about $30 million per year but, according to Ugandan officials,
they will need to continue to receive $15 million per year in
assistance from bilateral donors, in addition to other aid flows the
country was receiving, to remain in as strong a position after HIPC
relief as before.  Ugandan officials told GAO they hoped some of that
assistance would be channeled into social sector aid, such as
education, although an IMF official noted that these funds were
approved by donor governments for debt relief and shifting them into
other types of aid may not be straightforward.

--------------------
\15 Data available from HIPC documents does not allow GAO to separate
out changes in debt-to-export ratios due to debt relief from
mechanisms other than the HIPC initiative, such as unilateral debt
forgiveness, from changes due to borrowing (new borrowing net of
payment of principal on existing debt).

The analysis is sensitive to the initial year chosen.  GAO chose 1995
as the base year for this analysis in order to capture the effects of
Naples terms on countries' debt burdens.

         EVIDENCE FOR DEBT RELIEF
         TARGETS LIMITED
------------------------------------------------------ Chapter 0:4.2.2

The limited analytical evidence that is available for the debt
targets used in the HIPC initiative suggests that countries with
debt-to-export ratios near the bottom of the 200-250 percent range
may still have debt burdens that are unsustainable.  World Bank and
IMF officials cited two internal World Bank studies as support for
their debt-to-export targets, but GAO believes that these studies may
be of limited relevance for determining target levels of debt for
HIPC countries for two reasons.  First, their analysis was based
primarily on middle-income countries rather than poor countries and,
second, they examined debt levels at which countries began to
experience debt servicing problems, not when they might emerge from
such problems.  Other World Bank reports have suggested that
debt-to-export ratios above 200 percent indicate potential debt
problems in poor countries, and a 1996 World Bank document notes that
the debt-to-export threshold of 200 percent only indicates that at
this level a country is likely to have difficulty servicing its debt.

The export-based indicators have been criticized by some analysts as
narrow, in part because they do not directly consider the overall
economic capacity of a country or the particular level of demand for
government expenditures.  The addition of fiscal, or government
revenue, criteria for determining debt sustainability under the HIPC
initiative has done little to satisfy critics.  Only a few countries
are considered likely to meet the fiscal criteria.  Moreover, the
World Bank and the IMF have stated that the choice of the debt target
under the fiscal criteria, a 280-percent debt-to-government revenue
ratio, was somewhat arbitrary.  World Bank and IMF documents note
that if this ratio were set much lower than 280 percent, the overall
cost of the HIPC initiative would rise substantially.

         PROJECTIONS OF DEBT
         SUSTAINABILITY ASSUME
         STRONG EXPORT GROWTH AND
         SUBSTANTIAL AID FLOWS
------------------------------------------------------ Chapter 0:4.2.3

The economic forecasts used in analyses for the initiative generally
assume a steady growth in export revenues for HIPC countries.  This
assumption is an important element in the initiative's expectation
that recipients will have a sustainable debt burden.  Exports have
grown for most of the recipient countries in recent years.  However,
projections in HIPC documents assume significantly greater export
growth in the years ahead.  For example, the first six countries
deemed eligible for HIPC debt relief had annual average growth rates
in exports of 4.5 percent between 1985 and 1995.  HIPC documents
project that in years after they receive relief under the HIPC
initiative, their annual export growth will average 7.8 percent, a
75-percent increase over the previous period.

Most of the countries that have been approved for debt relief under
the HIPC initiative are dependent on just a few primary commodities
for a majority of their export earnings.  For this reason, their
export earnings are considered to be particularly vulnerable to
adverse economic events.  A significant fall in the price or output
of a country's primary export could bring the debt ratios to levels
that once again exceed the HIPC initiative's target levels for debt
sustainability.  For example, about 66 percent of Uganda's export
earnings in 1995 derived from one commodity, coffee, whose world
price was near a 10-year high.  According to HIPC documents, a
20-percent drop in the international price of coffee would raise
Uganda's debt-to-export ratio by 30-40 percentage points.  World Bank
and IMF officials have cited increases in Uganda's export earnings
(1995/96 and 1996/97) as evidence that the HIPC initiative's
assumptions of countries' increased exports are reasonable when
countries undertake necessary reforms.  However, Uganda's most recent
export data (1997/98) underlines concerns about the volatility of
exports, with Uganda's exports declining about 23 percent.  Poor
weather conditions and the resulting decline in coffee exports are
cited as the reason for projected increases in Uganda's
debt-to-export ratio from 1997/98 through 1999/2000.

A key element in the HIPC initiative's projection of debt
sustainability is that countries receiving debt relief will continue
to get substantial foreign aid well into the future.  This aid
includes not only support for development projects within countries,
but also concessional financing, including balance-of-payments
support.  For example, macroeconomic projections done by World Bank
and IMF staff at Uganda's April 1998 completion point show that, with
its HIPC debt relief of $347 million in present value terms, Uganda
will continue to require donor assistance to meet its external debt
and balance-of-payments needs until 2006.

Future donor flows to potential recipients depend, of course, on many
factors.  However, the assumption that donor support to recipients
will continue at current levels and even increase under adverse
conditions has been questioned by some governments and NGOs, given
that net concessional lending from governments and multilateral
institutions to poor countries has declined since 1990.  Officials
from the U.S.  Treasury, other governments, and NGOs have raised
questions about whether governments will simultaneously provide debt
relief, increased concessional financing, and substantial
contributions to replenish the international financial institutions,
particularly in light of their own budget constraints.

         MANY POTENTIAL RECIPIENTS
         HAVE LIMITED DEBT
         MANAGEMENT CAPABILITY
------------------------------------------------------ Chapter 0:4.2.4

HIPC countries vary greatly in the degree to which they have the
technical and governance requirements for effective debt management.
According to the World Bank and the IMF, almost every country
classified as a HIPC has in recent years received a substantial
amount of technical assistance aimed at debt management.  Most of
this assistance has been concentrated on information management--on
improving accounting systems for recording and tracking financial
obligations.  Two early qualifiers for the HIPC initiative, Uganda
and Bolivia, stand out as countries that have relatively
well-developed capabilities for tracking and managing debt.  Uganda,
for example, has been using debt data management software developed
by the United Nations since the 1980s.  However, the capacity of some
HIPC countries to accurately track their financial obligations is
still weak.  This has resulted in situations where various agencies
within a government engage in external borrowing with no central
control over, or even complete knowledge of, total debt amounts,
according to officials from countries GAO visited.

Even with a system of basic debt data management in place, analyzing
how debt and debt reduction can affect a country's overall
macroeconomic situation poses a challenge most participants in the
HIPC initiative cannot meet, according to officials from the United
Nations and recipient governments.  This is due both to a lack of
accessible modeling techniques and limited technical expertise.
World Bank and IMF staff have developed very complex software
spreadsheets to conduct debt sustainability analyses for countries
potentially receiving debt relief under the HIPC initiative.  World
Bank and IMF officials acknowledged early in the HIPC initiative
process the need for a uniform, documented standard for simulating
debt reduction exercises so that countries could participate fully in
analyzing their debt situations.  The World Bank set as a priority
the development of such a model to be made available to interested
countries.  However, as of August 1998, this software was not
generally available for countries' use.

   RECOMMENDATION
---------------------------------------------------------- Chapter 0:5

GAO is making no recommendations in this report.

   AGENCY COMMENTS AND GAO'S
   EVALUATION
---------------------------------------------------------- Chapter 0:6

The Department of the Treasury and the IMF provided written comments
on a draft of this report and the Department of State and the World
Bank provided oral comments.  These organizations pointed out areas
where, although they did not disagree with the findings of the
report, they believed more discussion was needed about the overall
economic vulnerability of recipient countries and the role of various
creditors in prior debt relief efforts.  GAO agrees that additional
information may enhance an understanding of issues related to HIPC,
and has expanded its discussion of these issues.  In addition, the
IMF stated that the initiative was not intended to replace existing
mechanisms, including the ESAF program, for providing resources to
these countries.  Also, the World Bank stated that the report's
conclusion that many countries will remain vulnerable to debt
problems could be viewed as an implicit recommendation for increasing
debt relief amounts.

GAO agrees that countries participating in the HIPC initiative have
economic situations that are vulnerable overall and that the
initiative is just one of many programs that provide support.
Moreover, existing mechanisms such as ESAF and donor aid exist to
support these countries in the case of economic downturns.  GAO's
analysis, however, shows that HIPC recipients will generally continue
to need balance-of-payments support to meet debt servicing and other
external financing obligations even under economic assumptions that
may prove optimistic.  Thus, less favorable conditions will require
that these countries receive additional financing beyond that
projected.  While GAO's analysis concludes that recipient countries
remain vulnerable to debt problems, it is not recommending greater
relief.  Debt relief under the initiative will benefit participants,
but the recognition that some countries may once again experience
debt problems after receiving HIPC relief highlights the limitations
of the initiative and should prove useful in future discussion among
those responsible for policy decisions in this area.

Additional information on agency comments, and GAO's response, is
presented in the text of this report.  Written comments from the
Department of the Treasury and the IMF are reprinted in appendixes VI
and VII.  The Department of the Treasury, the Department of State,
the IMF, and the World Bank also provided technical comments and
other suggestions that have been incorporated in the report as
appropriate.

INTRODUCTION
============================================================ Chapter 1

The debt problems of many of the world's heavily indebted lowest
income countries continue to be a challenge for the international
community.  Most of these countries' debt is owed to official
creditors consisting of other governments (bilateral) and
international financial institutions (multilateral).  Despite debt
relief efforts undertaken largely by bilateral and commercial
creditors since the 1980s, the overall debt burden of the poor
countries has increased.  The debt burdens are of concern for two
reasons:  they may hamper economic development in debtor countries
and they involve the lenders and debtors in a time-consuming pattern
of rescheduling debt, providing new loans, and supplying donor
assistance.  To address the growing debt burden, in September 1996
governments around the world agreed to the Heavily Indebted Poor
Countries (HIPC) Debt Initiative developed by the World Bank and the
International Monetary Fund (IMF).\1

The initiative was intended to build on existing debt relief efforts
and bring together all of a country's creditors to provide debt
relief in conjunction with policy reforms to allow countries to exit
from the rescheduling process.  Establishment of the HIPC initiative
involved resolution of differences among creditors concerning the
need for expanded debt relief.

--------------------
\1 The World Bank 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 Enhanced Structural Adjustment Facility (ESAF).

   POOR COUNTRIES' DEBT BURDENS
   HAVE GROWN
---------------------------------------------------------- Chapter 1:1

Despite repeated efforts to relieve the debt burden of developing
countries, the total amount of money owed to external creditors by
the 40 countries classified by the World Bank and the IMF as heavily
indebted poor countries\2 increased from an average of $122 billion
for 1983-85 to $221 billion for 1993-95 (nominal value, in 1997
dollars).  (See app.  I for a list of countries.) Figure 1.1 shows
the composition of this debt among three categories of medium- and
long-term debt, as well as short-term debt.\3

   Figure 1.1:  Composition of
   External Debt for 40 HIPCs,
   1983-85 and 1993-95 Nominal
   value, in billions of 1997
   dollars

   (See figure in printed
   edition.)

Source:  GAO calculations based on World Bank data.

Although total external debt increased substantially between these
periods, the amount of medium- and long-term debt owed to private
financial institutions (commercial creditors) decreased.  Because
these countries are seen as high credit risks, they have had limited
access to private sector financing.  For 1993-95, 73 percent of total
external debt was medium- and long-term debt owed to official
creditors, with the majority of that amount owed to bilateral
creditors.  The remaining 27 percent was medium- and long-term debt
owed to commercial creditors and short-term debt such as trade
financing.  Of the total debt, 45 percent was owed to governments
(bilateral creditors) and 28 percent was owed to international
financial institutions (multilateral creditors).  According to the
U.S.  Treasury, as of August 1998, 31 of the 40 countries had
outstanding debt of approximately $6.8 billion to the United States.
(See app.  II for the amount owed by each country.)

By the mid-1990s, much of the debt owed by the 40 countries was not
being paid.  According to the World Bank, heavily indebted poor
countries made roughly 50 percent of their scheduled debt payments
during 1994.  We estimated that, during 1993-95, HIPC countries paid
about 41 percent of their debt service owed.\4 Although the largest
share of the debt during the later period was owed to bilateral
creditors, a majority of the debt service paid was to multilateral
institutions, due to these institutions' requirement that countries
fully service their debt before receiving new lending.
Significantly, the share of long- and medium-term debt service paid
to multilateral creditors increased from 29 percent to 52 percent of
the total, while the share paid to commercial creditors decreased
from 44 percent to 22 percent.  (See fig.  1.2.)

   Figure 1.2:  Composition of
   Debt Service Paid by 40 HIPCs,
   1983-85 and 1993-95 Nominal
   value, in billions of 1997
   dollars

   (See figure in printed
   edition.)

Source:  GAO calculations based on World Bank data.

--------------------
\2 In 1996, the World Bank classified 41 countries as heavily
indebted poor countries.  In 1998, the number of countries was
reduced to 40 because Nigeria was no longer included in this
classification.

\3 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.  Although the
percentage of total debt that is short-term debt increased modestly
between the two periods shown, its composition shifted sharply.
According to our analysis, interest arrears accounted for 19 percent
of short-term debt for 1983-85, and 66 percent for 1993-95.

\4 If Sudan and Somalia, two of the countries with the largest amount
of unpaid debt and that are not part of the HIPC initiative's current
cost estimates, are not included, we estimate that the 38 remaining
countries paid an average of 43 percent of their debt service owed
during 1993-95.

   POOR COUNTRIES' DEBT BURDENS
   ARE A CONCERN
---------------------------------------------------------- Chapter 1:2

Addressing the debt burdens of very poor countries, in the context of
the broad range of development needs they face, constitutes a
substantial challenge.  Thirty-two of the 40 countries classified by
the World Bank and the IMF as heavily indebted poor countries are in
sub-Saharan Africa.  Eighty-three percent of these countries are
classified by the United Nations as being in its lowest category of
human development, based on life expectancy, literacy, and per capita
national income.  Most receive substantial amounts of development
assistance from governments, multilateral organizations, and
nongovernmental organizations (NGO).  We estimated that in 1994
foreign assistance represented about 16 percent of national income,
using a weighted average, for 36 of these countries for which data is
available.  Some of the 40 countries, moreover, have recently emerged
from--or continue to be engaged in--conflict or civil unrest.

Although countries may incur external debt as part of their
development strategy, development experts, including officials from
the World Bank, the United Nations, and NGOs, have cited several
reasons why debt burdens of some poor countries are a concern.  Some
development experts believe that debt levels above a certain
threshold amount relative to a country's economic capacity may, in
and of themselves, limit economic growth.  This has been termed the
"debt overhang effect." This effect reflects the view that if a
country has substantial debt obligations, the debt will discourage
current investment in the debtor country, due to a concern that
future income may be highly taxed to pay debt.  Other experts
question whether debt overhang constitutes a serious obstacle to
investment in HIPC countries, in light of additional impediments to
investment, such as weak financial institutions and inadequate
physical infrastructure, these countries face.  Nonetheless, many
experts agree that high debt payments constitute a drain on a
country's budget, potentially lowering the amount of money available
for health and education spending and, for many countries, requiring
further loans or grants.  For the poorest countries, this can mean an
increasing percentage of new aid will go to service existing debt
rather than to aid in development.  Finally, rescheduling and
financing debt payments have been time-consuming for both creditors
and debtors.  For example, according to Department of State data,
potential recipients of HIPC debt relief have concluded about 100
debt negotiations with the Paris Club\5 over the last 10 years.\6

--------------------
\5 The Paris Club is an informal group of creditor countries that
meets, as needed, to negotiate debt rescheduling and relief efforts
for public or publicly guaranteed loans.  In addition to the 18
countries that regularly participate in the Paris Club, other
countries are invited to the negotiations on an ad hoc basis if they
hold a significant share of the debt being discussed.

\6 Each Paris Club rescheduling requires numerous meetings and work
to prepare for the negotiations.  Also, after concluding an agreement
at the Paris Club, the debtor country must then negotiate a separate
agreement with each creditor.

   PRIOR DEBT RELIEF EFFORTS HAVE
   NOT SUBSTANTIALLY REDUCED POOR
   COUNTRIES' OVERALL DEBT LEVELS
---------------------------------------------------------- Chapter 1:3

Debt relief efforts since the 1980s have been undertaken primarily by
bilateral and commercial creditors.  However, these prior efforts
have not resulted in a substantial reduction in the overall debt owed
by poor countries.  Some efforts aimed at poor countries have
actually increased debt levels by, for example, converting interest
payment arrears into new debt.  Other mechanisms have left the debt
of poor countries largely unaffected, notably the Baker and Brady
plans\7 of the 1980s.  These plans focused on resolving the
commercial debt problems of middle-income countries by essentially
providing funds for countries to buy back part of their commercial
bank debt.

Two instruments have been used to reduce the commercial bank debt of
some heavily indebted poor countries.  Sixteen countries have
received $11.8 billion of debt reduction since 1989, although about
one third of this reduction has been for one country, Cï¿½te d'Ivoire.
These instruments are the Debt Reduction Facility\8 of the
International Development Association (IDA), the part of the World
Bank that lends to poor countries on highly concessional terms, and,
more recently, officially supported debt and debt service reduction
programs (Brady operations).  According to World Bank data, through
the Debt Reduction Facility, 16 countries had retired about $4.2
billion of principal and interest arrears owed to commercial banks,
as of December 1997.  In May 1997, Cï¿½te d'Ivoire also received debt
reduction through the second mechanism, when Cï¿½te d'Ivoire reached an
agreement with commercial creditors that resulted in debt reduction
of $4.1 billion.  The restructuring agreement helped Cï¿½te d'Ivoire to
clear unpaid interest owed to commercial creditors and ensure that
commercial creditors would provide relief at least comparable to that
offered by official creditors.

Bilateral creditors have forgiven some debt and renegotiated debt
payments by lowering interest rates or extending due dates.  Some
bilateral creditors have individually forgiven debt owed by poor
countries, but these amounts have not been large relative to the
total bilateral debt owed.  For example, between 1990 and 1997, the
United States forgave $2.3 billion, or 37 percent, of the $6.1
billion of debt we estimate was owed by the 40 HIPC countries as of
the end of fiscal year 1989.  According to an Organization for
Economic Cooperation and Development report, since 1989 France has
forgiven over $10 billion in official development assistance (ODA)
debt owed by countries in sub-Saharan Africa.  According to the
German government, Germany has forgiven or pledged to forgive about
$5 billion in ODA debt owed by poor countries.  More often, bilateral
creditors have worked together to offer debt relief to poor countries
by rescheduling debt payments on concessional terms or reducing debt
through the Paris Club.  To qualify for Paris Club relief, countries
must be in imminent default\9 and reach an agreement with the IMF on
a reform program.  The Paris Club conditions its debt relief on
countries' implementation of economic and structural reforms under
IMF-supported lending programs, such as the ESAF.\10 Disbursement of
relief is then conditioned on satisfactory implementation of the
reform program, generally lasting 3 years.

Since 1988, the Paris Club has treated debt\11 owed by poor countries
on increasingly concessional terms.  In many cases these efforts did
not significantly reduce debt but instead mainly focused on helping
countries meet debt payments within the short term by altering
payment due dates or interest rates, rather than on forgiving debt.
Some debtors sought repeated rescheduling.  In 1988, the Paris Club
became the first group of creditors to offer countries the option of
reducing the amount of debt.  Under the most recent terms of the
Paris Club adopted in 1994, called "Naples terms," countries could
receive up to a 67-percent reduction in eligible debt under a
stock-of-debt operation.\12 Naples terms broadened the range of
eligible debt, elaborated procedures for reducing a country's debt,
allowed for a reduction in the amount of debt owed, and were intended
to allow the countries to stop rescheduling debt in the future.

Multilateral creditors generally have not rescheduled or reduced debt
owed them because of their belief that forgiving or reducing debt
would diminish assurances of repayment on new lending.  Multilateral
development banks were also concerned that forgiving debt would hurt
their credit ratings.  Instead, multilateral creditors have relied on
increased concessional lending and relief from bilateral creditors to
enable countries to continue servicing their multilateral debt.\13
Since the 1990s, there has been growing recognition that some poor
countries were having increasing difficulty servicing their
multilateral debt.  For example, during a Paris Club restructuring of
Uganda's debt in the mid-1990s, some creditors concluded that debt
relief from bilateral creditors would not sufficiently ease the
country's debt burden because most of Uganda's debt was owed to
multilateral creditors.  Moreover, creditors and others were
concerned that a greater percentage of new lending was being used to
service existing debt rather than for development purposes.  These
recognitions contributed to the industrialized nations' call for a
new approach to address the debt of heavily indebted poor countries,
including that owed to multilateral creditors.

--------------------
\7 The Baker plan, initiated by then-U.S.  Treasury Secretary James
A.  Baker III and announced at the meeting of the World Bank and the
IMF in October 1985, was the first concerted international effort to
address the commercial bank debt owed by developing countries.  The
Baker plan emphasized policy reform and increased finance.  It
achieved limited success because commercial banks and official
lenders were unwilling to supply sufficient new funding.  The Brady
plan, launched in March 1989 by then-U.S.  Treasury Secretary
Nicholas F.  Brady, was the first comprehensive program that went
beyond restructuring of debt to offer reduction of debt.  It offered
commercial banks a menu of options, including new money and debt
buybacks, that would reduce their outstanding loans to developing
countries.  Creditors, including multilateral institutions, were to
lend funds to help finance the buybacks.  Since the inception of the
plan, nearly one-half of the total commercial bank debt of developing
countries, primarily middle-income countries, has been rescheduled.

\8 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 (IBRD), the part of the World Bank that lends to
middle-income countries at market rates.

\9 According to the State Department, "imminent default" is defined
as a situation evidenced by the probability that, without debt
relief, a country will be unable to meet its scheduled external
obligations.  A state of imminent default is determined by the Paris
Club in close consultation with the IMF and is necessary before the
Paris Club will agree to reschedule or reduce a country's debt.

\10 ESAF gives highly concessional loans for balance-of-payments
support, that is, to help countries cover their trade deficit or
service their debt.  Specific ESAF programs of economic adjustment
and reform reflect individual country circumstances.  According to
the IMF, they are intended to raise domestic savings rates; secure
macroeconomic stability; liberalize and open economies to foreign
trade; reduce government intervention and promote well-functioning
markets; reorient government spending and restructure revenues; and
mobilize external resources by, in part, reducing debt burdens.

\11 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.  The Paris Club generally has not reduced
concessional debt, such as ODA debt, or recently incurred
nonconcessional debt because a majority of countries have already
granted extensive reduction of ODA debt.  The Paris Club requires
members to reschedule any remaining ODA debt.

\12 For the Paris Club, a stock-of-debt 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.

\13 One mechanism to deal with multilateral debt--the Fifth Dimension
Program--provided funding from IDA to enable some poor countries to
pay interest on debt owed to the IBRD; it was not intended to address
debt owed to IDA.  In the past 10 years, the program has disbursed
more than $1.5 billion to help 20 countries make interest payments on
some of their debt owed to the IBRD.

   HIPC INITIATIVE EXPANDS ON
   PRIOR EFFORTS
---------------------------------------------------------- Chapter 1:4

The HIPC initiative is the first coordinated effort to include all
creditors, most notably the multilaterals, in addressing the debt
problems of heavily indebted poor countries.  Participating creditors
include bilateral governments; the major multilateral creditors such
as the World Bank and the IMF; and over 20 other multilateral
development institutions, including the African Development Bank, the
Inter-American Development Bank, and the International Fund for
Agricultural Development.  (See app.  III.) According to the World
Bank, over the past 2 years the Boards of the World Bank and the IMF
have met about 30 times each, and about
25 multilateral development banks have been meeting every 6 months
under the chairmanship of the World Bank to coordinate the
implementation of the HIPC initiative.

In 1996, the World Bank and the IMF made a preliminary determination
regarding which of the 40 countries might eventually receive relief
based on the HIPC initiative's specific criteria concerning income,
indebtedness, and reform, and identified 20 countries as potential
recipients.  As of August 1998, the World Bank and the IMF estimated
that the creditors would provide debt relief through the initiative
to 20 countries, worth about $8.2 billion in 1996 present value\14
terms.  Specific eligibility decisions have been made for eight
countries, with six countries deemed eligible for relief under the
HIPC initiative.  One country--Uganda--has completed the process.

The HIPC initiative builds on prior debt relief efforts, most notably
those of the Paris Club.  The HIPC initiative's goal is to bring
countries' debts to levels that are considered sustainable, meaning
the countries can make debt payments without incurring loan arrears
or requiring debt rescheduling.  The basic HIPC framework establishes
eligibility criteria based on a country's per capita income,
indebtedness, and track record of reform.  As shown in figure 1.3,
implementation of the initiative involves two stages.  Each stage can
last 3 years and can be shortened in some cases.

   Figure 1.3:  Process for
   Implementing the HIPC
   Initiative

   (See figure in printed
   edition.)

Sources:  World Bank and IMF.

Eligibility for HIPC debt relief is assessed at the end of stage one,
following the successful completion of World Bank- and IMF-supported
programs.  At this point (termed the decision point), the Boards of
Executive Directors of the World Bank and the IMF\15 determine
whether (1) existing debt relief mechanisms are sufficient to bring a
country's debt to a point considered sustainable or (2) the country
requires additional debt relief.  The determination of whether debt
is sustainable is based mainly on a World Bank and IMF assessment of
whether the projected ratio of a country's debt (in present value
terms) to the value of its exports will be greater than a target
value that is set within the range of 200-250 percent.\16 Lowering
the target level increases the amount of debt relief required to
reach the target.  For example, lowering the ratio of a country's
debt to its exports from 300 percent to 200 percent requires more
debt relief than lowering it from 300 percent to 250 percent.  The
target level is based on factors affecting the vulnerability of the
country's economy, such as the percentage of government revenue
required for debt service and whether export earnings are generated
by a few commodities.  Under certain conditions, for countries with
very open economies and strong efforts to generate fiscal revenues,
the target may be based on the ratio of debt to government revenue.
This fiscal indicator can allow debt-to-export targets below 200
percent.

If the Boards determine that existing debt relief mechanisms are
insufficient to make debt levels sustainable and other principal
creditors agree, the country enters the second stage of the HIPC
initiative.  During this stage, the country receives some debt relief
from bilateral and commercial creditors and financial support from
multilateral institutions.  Paris Club creditors have agreed to
provide relief up to 80 percent of debt service during the second
stage.  Multilateral creditors may also provide relief as part of
their total commitment under the HIPC initiative during this second
stage.  The country must agree to continue implementing economic
reform programs supported by the IMF and the World Bank and social
reforms agreed to with the World Bank.  If countries are judged to
have met the requirements of these programs, they receive the
remaining relief at the end of this stage, called the completion
point.

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 mechanisms, including those offered
by the Paris Club.  Paris Club creditors have said they will limit
relief to up to 80 percent of a country's eligible debt.  In
exceptional cases, they may negotiate expanded terms.  Commercial
creditors are expected to provide relief comparable to bilateral
creditors.  Creditors will each decide how they will provide their
share of debt relief to specific countries and which debt will be
eligible for relief.  Creditors may choose to provide relief through
various means, such as rescheduling debt payments at lower interest
rates, making debt service payments for countries as they come due,
converting loans into grants, reducing debt, and/or lending new funds
on concessional terms to be used to make debt service payments.  The
international financial institutions have said that even under the
HIPC initiative they will not forgive debt outright because to do so
may endanger their preferred creditor status.\17 Instead, they will
use other means.  (The HIPC framework is described in more detail in
app.  IV.)

Establishing a comprehensive framework for debt relief required
resolving fundamental differences among creditors.  For example,
prior to 1995, both the World Bank and the IMF maintained that
extraordinary debt relief mechanisms, including debt relief by
multilateral creditors, were not necessary except for a handful of
countries.  Some creditors were concerned about the cost of providing
debt relief and about the issue of "moral hazard"--that the prospect
of debt relief would discourage countries from undertaking needed
reforms and maintaining or strengthening responsible borrowing
policies.  In June 1995, the leaders of the Group of Seven
countries\18 called for the IMF and the World Bank to develop a
comprehensive approach to assist heavily indebted poor countries with
multilateral debt burdens.  Shortly thereafter, a World Bank task
force report called for a facility to pay multilateral debt service
for a select group of countries.  The World Bank and the IMF prepared
subsequent analyses, and NGOs worked to influence the terms of the
evolving framework.

Key issues being negotiated during the design process of the HIPC
initiative included how unsustainable debt burdens would be
determined (with implications for eligibility and relief amounts),
the type and length of reforms, whether debt stocks would be reduced,
and how creditors would share in providing debt relief.  The
resulting September 1996 framework reflects creditors' compromise
views.  However, the use of a range of values of the primary debt
sustainability indicator, as well as the announced intention to
implement the framework flexibly, left many key decisions to be made
during implementation of the initiative.  And some aspects of design,
most notably how the shares of debt relief would be divided among
creditors, had not yet been decided.

The introduction of the HIPC initiative has prompted suggestions for
alternative approaches to address the debt burdens of poor countries.
Alternatives include fairly straightforward modifications to the HIPC
initiative, such as increasing levels of relief, expanding
eligibility, and accelerating implementation.  Some suggestions call
for more fundamental modifications of the HIPC framework and even
question the basic structure of the HIPC initiative.  Our report does
not address the viability of different alternatives or compare them
to the HIPC initiative.  According to creditors, debtors, and NGOs,
negotiating the design of the HIPC initiative has been a very
challenging process, and there is a reluctance to significantly
modify the HIPC framework.

--------------------
\14 The amount of debt can be reported in terms of nominal (face)
value and present value, also termed "net present value" in HIPC
documents.  For the heavily indebted poor countries, the nominal
value of the external debt is not a good measure of their debt
burdens because a significant part of the debt is contracted on
concessional terms.  The present value of debt is a measure that
takes into account the degree of concessionality.  It is defined as
the sum of all future debt-service obligations (interest and
principal) on existing debt, discounted at the market interest rate.
Whenever the interest rate on a loan is lower than the market rate,
the resulting present value of debt is lower than its face value,
with the difference reflecting the grant portion.  According to World
Bank data, the present value of external debt at the end of 1995 for
40 HIPC countries was $171 billion compared with a nominal value of
external debt of $215 billion.

\15 The Board of Executive Directors of the World Bank is responsible
for policy decisions affecting the Bank's general operations and for
the approval of all loans.  Five of the 24 executive directors are
appointed by the 5 member governments having the largest number of
shares (France, Germany, Japan, the United Kingdom, and the United
States).  The other executive directors are elected by and represent
countries grouped into self-formed constituencies.  The IMF's
Executive Board is the IMF's primary decisionmaking body, which
comprises 24 executive directors who represent IMF member countries.

\16 In this report, discussions of debt-to-export ratios refer to the
present value of debt, unless otherwise noted.

\17 The preferred creditor status derives from the debtors'
traditional practice of servicing debt owed to the World Bank and the
IMF before servicing debt owed to other lenders.  The articles of
agreement (charters) of these institutions do not specifically
address preferred creditor status or debt forgiveness.

\18 The Group of Seven consists of seven major industrialized
countries that consult on general economic and financial matters.
The seven countries are Canada, France, Germany, Italy, Japan, the
United Kingdom, and the United States.

   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:5

The Chairman of the Subcommittee on International Economic Policy,
Export and Trade Promotion, Senate Committee on Foreign Relations,
asked us to review the HIPC initiative.  Specifically, we focused our
review on (1) the implementation of the HIPC initiative and (2) the
initiative's potential to achieve its stated goal.  This goal is to
reduce select poor countries' debt to sustainable levels; that is, to
allow certain poor countries to pay their international debts on time
and without further rescheduling.

To describe the implementation of the HIPC initiative, we met with
and obtained information from government officials of the United
States, HIPC recipient countries, and other creditor countries; and
officials from multilateral organizations and NGOs.  We met with
officials at the Department of State, the U.S.  Agency for
International Development, the Department of the Treasury, the World
Bank, and the IMF.  As an agency of the United States, we have no
direct authority to review the operations of multilateral
institutions.  However, we obtained access to World Bank and IMF
officials and information through the staffs of the U.S.  members of
their Boards of Executive Directors.  We also obtained information
from and interviewed officials of other creditor organizations, such
as the Paris Club secretariat, the African Development Bank, and the
Inter-American Development Bank.

To obtain the views of other creditor nations on the implementation
of the HIPC initiative, we met with officials from France, Germany,
and the United Kingdom, including their representatives to the World
Bank and the IMF and officials from their finance ministries,
development ministries, and other government organizations.  We met
with and obtained data on debt and development from representatives
of the Organization for Economic Cooperation and Development; and
U.N.  organizations, including the U.N.  Development Program, the
U.N.  Conference on Trade and Development (UNCTAD), and the U.N.
Children's Fund.  We also met with and obtained information from
academic experts and NGOs, including Oxfam, the European Network on
Debt and Development, Debt Relief International, Jubilee 2000, the
Center of Concern, the Catholic Fund for Overseas Development, and
the Heritage Foundation.

To obtain information from recipient countries about the
implementation of the HIPC initiative, we interviewed officials in
Burkina Faso, Cï¿½te d'Ivoire, and Uganda.  We selected recipient
countries likely to represent a range of experiences under the HIPC
initiative.  Within the recipient countries we visited, we discussed
concerns about the HIPC initiative with officials of relevant
government bodies (for example, the prime minister's office and the
ministries of finance, trade, and planning), World Bank and IMF field
staff, U.S.  embassy and aid officials, local representatives of
other donor countries and the European Union, business
representatives, and local academics.

To assess the initiative's potential to achieve its stated goal, we
met with officials from the U.S.  government, other creditor
governments, recipient governments, multilateral organizations, and
nongovernmental organizations.  We examined analytical papers and
studies of debt issues from the World Bank and the IMF.  Based on
information from these studies as well as other sources, we conducted
analyses of the HIPC initiative's economic underpinnings and issues
that arose during implementation.  Within the recipient countries we
visited (Burkina Faso, Cï¿½te d'Ivoire, and Uganda), we discussed
concerns about the HIPC initiative with officials of relevant
national and local government bodies (for example, the prime
minister's office and the ministries of finance, trade, and
agriculture), World Bank and IMF field staff, U.S.  embassy and aid
officials, local representatives of other donor countries and the
European Union, nongovernmental organizations, business
representatives, and local academics.

We performed our review from July 1997 to August 1998 in accordance
with generally accepted government auditing standards.

   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 1:6

The Department of the Treasury and the Department of State commented
that the report should provide greater context concerning the extent
of prior debt relief efforts, particularly the efforts of bilateral
creditors through both the Paris Club process, and unilaterally.  We
have expanded the report's discussion of the debt relief efforts of
bilateral creditors.

IMPLEMENTATION OF THE HIPC
INITIATIVE REFLECTS COMPROMISE
============================================================ Chapter 2

The implementation of the HIPC initiative has involved significant
negotiation among the major creditors on issues such as the
eligibility of a country, the amount of relief to be provided, and
the way in which relief is to be shared among creditors.  As of
August 1998, the Boards of the World Bank and the IMF had determined
that six countries are eligible for assistance under the HIPC
initiative and have agreed upon the amount and timing of relief for
these countries.  For five of these six countries, the Boards agreed
to provide relief at the upper end of what the negotiated framework
allows.  Bilateral and multilateral creditors have agreed to share
the debt relief by providing an equal percentage reduction of the
debt owed them (after the full use of existing debt relief
mechanisms) and to individually determine how they will provide the
relief.  The total amount of relief to be provided depends on
creditors' decisions as they implement the HIPC initiative, such as
the number of countries deemed eligible, as well as debtors' actions
to establish the necessary track record of reform.  Since
implementation began, creditors have made some modifications to the
HIPC framework that have expanded eligibility and contributed to
increased estimates of relief.  The amount of HIPC debt relief could
increase further if, for example, countries that were not included in
previous estimates become eligible.  Conversely, if countries
included in the estimates do not undertake required reforms and thus
do not receive relief under the HIPC initiative, the amount of relief
provided could decrease.

   COUNTRIES DEEMED ELIGIBLE FOR
   ASSISTANCE UNDER THE HIPC
   INITIATIVE
---------------------------------------------------------- Chapter 2:1

As of August 1998, the Boards of the World Bank and the IMF had
determined that six countries (Bolivia, Burkina Faso, Cï¿½te d'Ivoire,
Guyana, Mozambique, and Uganda) were eligible for assistance under
the HIPC initiative and had agreed upon the amount and timing of debt
relief for these countries.\1 (See table 2.1.) One
country--Uganda--has completed the process.  Projected relief for the
six countries represents about $3 billion, or about 36 percent of the
total projected HIPC debt relief of $8.2 billion (in 1996 present
value terms), as of August 1998.

For two additional countries--Benin and Senegal--the Boards of the
World Bank and the IMF determined that debt relief from bilateral
creditors on Naples terms would be sufficient to bring their debt to
sustainable levels.  Thus, they were not deemed eligible for relief
through the HIPC initiative.

                               Table 2.1

                 Status of First Eight Countries Under
                          the HIPC Initiative

                                                              Debt-to-
                                                                export
                                  Decision  Completion    target ratio
Country                              point       point    (in percent)
------------------------------  ----------  ----------  --------------
Completion point reached and final assistance provided
----------------------------------------------------------------------
Uganda                           Apr. 1997   Apr. 1998     202; actual
                                                                   196

Decision point reached and assistance committed by World Bank and IMF
----------------------------------------------------------------------
Bolivia                         Sept. 1997  Sept. 1998             225
Burkina Faso                    Sept. 1997   Apr. 2000             205
Guyana                           Dec. 1997        Dec.           107\b
                                                1998\a
Cï¿½te d'Ivoire                    Mar. 1998   Mar. 2001           141\b
Mozambique                       Apr. 1998    mid-1999             200

Debt judged sustainable\c
----------------------------------------------------------------------
Benin                            July 1997
Senegal                          Apr. 1998

Totals/ranges
----------------------------------------------------------------------
8                                            1-3 years         107-225
----------------------------------------------------------------------
\a Guyana's completion point is likely to be delayed until early 1999
due, according to an IMF official, to an increased fiscal deficit
that delayed Guyana's new ESAF and subsequent review by the IMF
Board.

\b Eligible under fiscal criteria of debt-to-government revenue;
present value of debt-to-export target chosen to meet present value
of debt-to-revenue target of 280 percent.

\c Countries whose debt burdens are deemed sustainable will receive a
Paris Club stock-of-debt operation on Naples terms but are not
eligible for additional assistance under the HIPC initiative.  Benin
received Naples terms from the Paris Club creditors in October 1996.
Senegal received Naples terms from the Paris Club in June 1998.  The
World Bank and IMF Boards do not consider the Paris Club's operations
up to and including Naples terms as part of the assistance provided
under the HIPC initiative.  As such, the costs for these operations
are not included in the total estimated costs of the HIPC initiative.
Paris Club relief above Naples terms is included in the HIPC
initiative cost estimates.

Sources:  World Bank and IMF.

--------------------
\1 The Boards have held preliminary discussions on the eligibility of
Mali and Guinea-Bissau.  According to the World Bank and the IMF,
Mali is expected to reach its decision point in September 1998, and
Guinea-Bissau will need to be reassessed after the end of the recent
conflict.

   RELIEF GENERALLY PROVIDED AT
   HIGH END OF HIPC FRAMEWORK
   LIMITS
---------------------------------------------------------- Chapter 2:2

Despite considerable debate on the amount and timing of debt relief
to be provided, the World Bank and IMF Boards, in conjunction with
principal creditors, have generally implemented the HIPC initiative
to provide debt relief at the upper bounds of the negotiated
framework.  According to HIPC initiative documents, this is in
response to the vulnerabilities facing recipient countries.  This is
specifically evident in lower end debt-to-export targets, which
increase the amount of relief provided.  In recognition of countries'
track records of reforms, the Boards have also generally shortened
the second stage of the HIPC initiative, which provides debt relief
sooner and can increase relief amounts in some cases.  For five of
the six countries deemed eligible to date, the expected debt relief
amount is at or near the upper levels agreed to under the HIPC
framework (Bolivia has a debt-to-export target of 225 percent).
Nonetheless, in several cases, the cost of providing debt relief
under the HIPC initiative has been a factor in determining the amount
of debt relief to be provided.

      LOWER END OF TARGET RATIOS
-------------------------------------------------------- Chapter 2:2.1

For five of the six countries for which target debt-to-export levels
have been set, the target debt-to-export ratios are near or below the
lower end of the 200-250 percent range under the HIPC framework.  Two
countries have been deemed eligible with debt-to-export ratios
substantially below 200 percent (Cï¿½te d'Ivoire and Guyana), based on
fiscal criteria that compare debt to government revenue rather than
exports.  The highest debt-to-export ratio set to date is 225 percent
for Bolivia.

Some creditor countries have stated that the target should normally
be at or near the bottom of the range; others have maintained that
the full range should be used.  The United States supports a target
of 200 percent or lower.  According to HIPC documents, for the
countries deemed eligible to date, the lower ratios reflect concern
about countries' significant economic vulnerabilities, such as
dependence on a small number of exports and the resulting potential
for volatility in export earnings.  World Bank and IMF staff expect
country-specific targets to be clustered more toward the bottom half
of the 200-250 percent range.  In the case of Burkina Faso, some
countries argued for a lower ratio because of the uncertainty of the
economic projections, particularly of future export prices.  Other
countries supported a higher range, noting that worker remittances\2
were large in Burkina Faso and provided a cushion against possible
risks.

For some countries deemed eligible, such as Bolivia and Uganda, the
potential cost of debt relief appears to have influenced their target
ratios.  In the case of Bolivia, while countries ultimately agreed to
a target debt-to-export ratio of 225 percent, several supported a
target of 200 percent while others supported a target in, or possibly
above, the upper end of the 215-235 percent range.  The target agreed
to--225 percent--reflects, in part, concern about staying within the
Paris Club's limit on the amount of debt the Paris Club will reduce
as well as the decision to limit the cost that Bolivia's largest
multilateral creditor, the Inter-American Development Bank, might
incur in providing HIPC debt relief.  The target set for Bolivia also
reflects that the country is one of the least vulnerable of the
potential HIPC recipients.  The target debt-to-export ratio of 202
percent set for Uganda reflects, in part, the decision to stay within
the Paris Club's limit and within the terms of the burden-sharing
arrangement multilateral and bilateral creditors had agreed to.

--------------------
\2 "Worker remittances" refer to wages earned in another country and
sent back to the home country.

      SHORTENED SECOND STAGE
-------------------------------------------------------- Chapter 2:2.2

As previously mentioned, implementation of the HIPC initiative
involves two stages, each of which generally lasts 3 years.  The
Boards have shortened the length of the second stage for five of the
six countries for which completion dates have been set (Bolivia,
Burkina Faso, Guyana, Mozambique, and Uganda); four of these
countries (Bolivia, Guyana, Mozambique, and Uganda) were given about
a 1-year period.  The actual length of the second stage could be
longer if, for example, countries do not satisfactorily complete the
required reforms.  Countries' views have differed significantly
regarding the appropriate length of the track record of reform
required for gaining HIPC debt relief.  Some countries--such as the
United States and Germany--have generally stressed that a longer time
frame is important for ensuring a country's commitment to critical
reforms but have agreed to shortened second stages in some cases.
Others, such as the United Kingdom, have stated that an overall
reform period of 6 years is generally too long; they have supported
efforts to give some recipients credit for their track records by
reducing the length of the second stage.  According to HIPC
documents, the five countries with shortened periods are among the
strongest performers of the potential HIPC debt relief recipients,
and the shortened period reflects these countries' past track records
of good policy performance, including completion of successive ESAF
and World Bank programs, and receipt of Naples terms from the Paris
Club.  Nonetheless, members of the Boards have debated the length of
the second stage for these countries.  There was considerable
discussion about whether Uganda should have a second stage at all.
According to HIPC documents, the remaining countries will likely
require a 3-year period between the two stages--the decision point
and the completion point.

A shorter period between the decision point and the completion point
means that countries will receive final HIPC debt relief sooner and
may get more relief under certain conditions.  In the case of Guyana,
the decision to set the completion point in 1998 rather than the year
2000 (which would have been 3 years between the two stages) resulted
in a projected increase in HIPC assistance of about 68 percent, or
$103 million in present value terms.

   DETERMINING CREDITORS' SHARES
   OF RELIEF AMOUNTS HAS INVOLVED
   EXTENSIVE NEGOTIATION
---------------------------------------------------------- Chapter 2:3

Significant negotiations have occurred on the question of how
creditors will share the amount of debt relief to be provided through
the HIPC initiative.  When the HIPC initiative was announced in
September 1996, creditors had not agreed on their shares of HIPC
assistance, but Paris Club creditors had agreed to reduce up to 80
percent of the remaining eligible debt.  The World Bank and the IMF
had proposed an approach under which bilateral creditors would give
debt relief up to 90 percent of eligible debt to a country first,
with multilateral creditors providing the remainder required for the
country to reach debt sustainability.  Multilateral creditors sought
to limit the type and amount of debt reduction they would provide
because they were concerned that it would endanger their financial
integrity and preferred creditor status.

Bilateral creditors rejected the approach proposed by the
multilaterals.  The Paris Club creditors committed to provide relief
up to 80 percent of the eligible debt countries owed them, and stated
that, in exceptional cases, they may negotiate terms that expand the
amount of relief they are to provide.  They stated that multilateral
creditors should contribute simultaneously with the bilateral
creditors and provide a greater share of the total HIPC relief
because (1) bilateral creditors had already provided debt relief and
(2) servicing multilateral debt was a key part of poor countries'
debt burdens.  Furthermore, according to a U.S.  government
official's summary of the Paris Club's position, the preferred
creditor status is essentially a political judgment; it does not
imply that the multilateral creditors should not provide debt relief.
Nonetheless, one of the tenets of the HIPC initiative is to ensure
the preferred creditor status of multilateral creditors.

After much negotiation, in July 1997 creditors endorsed a broad
burden-sharing arrangement, termed the "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 application of existing debt relief mechanisms,
including Naples terms.  Using the proportional burden-sharing
approach, World Bank and IMF staff determine how much debt relief the
bilateral and multilateral creditors, as a group, are to provide a
particular country.  Within the Paris Club, bilateral creditors
determine how much of this amount they will individually provide.
The World Bank and the IMF determine the share of the debt relief
each multilateral creditor is to provide, based on the share of debt
owed to them by the recipient.

Applying the proportional burden-sharing approach continues to
involve negotiation among the creditors when they determine the
specific relief amount for each recipient.  Although creditors agreed
to provide the same percentage of debt reduction, the dollar amounts
of this relief will vary by creditor because creditors are owed
different amounts of debt.  For example, in the case of Burkina Faso,
bilateral and multilateral creditors agreed to provide debt relief
valued at about 14 percent of what they are owed.  For bilateral
creditors, this amounted to about $21 million in debt relief.  For
multilateral creditors, the same percentage reduction amounted to
about $94 million.

In some cases, poor countries' debt levels are so high that the
burden-sharing terms agreed to under the HIPC framework will not
provide enough relief to reach the target debt-to-export ratio.  This
was, for example, the case for Mozambique.  To reach the 200- percent
target debt-to-export ratio, under the terms of the HIPC initiative
burden-sharing approach, bilateral creditors were to provide $916
million in debt relief to Mozambique.  To provide this relief,
bilateral creditors would have to exceed the cap they had agreed
to--that they would provide relief equivalent to up to 80 percent of
eligible debt.  The 80-percent reduction of debt would have provided
only $553 million in debt relief.  To address the $363 million
shortfall, bilateral creditors agreed to provide exceptional amounts
of relief beyond those terms, which has been termed "deep relief."
However, even after Paris Club creditors agreed to extend their terms
and provide relief equivalent to 86 percent of eligible debt, a
financing gap of $116 million remained.  Individual bilateral
creditors and donors as well as the World Bank and the IMF
subsequently agreed to use various mechanisms, such as increasing the
amount of debt relief or contributing funds, to finance the remaining
gap.  The agreement for Mozambique entailed significant negotiations
among creditors because of the amount of relief needed to bring the
debt-to-export ratio to the target level of 200 percent--Mozambique
alone represents approximately half of the debt relief promised thus
far.

   CREDITORS PROVIDE DEBT RELIEF
   IN DIFFERENT WAYS
---------------------------------------------------------- Chapter 2:4

Creditors each determine how they will provide their share of the
relief.  Creditors may choose to provide relief through several
means, such as rescheduling debt payments at lower interest rates,
buying back the debt, making debt service payments as they come due,
converting loans into grants, reducing the debt, and/or lending new
funds on concessional terms to make debt service payments.  A
creditor's decision about how it will provide debt relief to a
particular recipient may be influenced by many factors, such as the
amount of outstanding debt, the impact of providing debt relief on
the creditor's future budgets, the financial policies governing the
creditor institution, and the needs of the recipient country.

Multilateral creditors have said that they will not forgive debt
outright; rather, they intend to provide debt relief in ways that
maintain their preferred creditor status.  According to the World
Bank and the IMF, most of the multilateral development banks have
obtained the institutional approval to participate in the HIPC
initiative and defined the means they will use to provide relief,
such as buying back debt or paying debt service through the HIPC
Trust Fund or similar self-administered trust funds, rescheduling
current payments or arrears on concessional terms, and refinancing on
grant terms.  The World Bank's participation in the HIPC initiative
is to be funded solely from the Bank's own resources.  Debt relief
provided by the World Bank under the HIPC initiative is taking place
primarily through contributions to the HIPC Trust Fund from IBRD
income.  The Trust Fund provides relief on debt owed to IDA, either
through buying back some of its concessional debt or providing an
unconditional commitment to pay debt service owed to IDA as it
becomes due.  Some of this relief may be advanced during the second
stage when the World Bank could provide part of its lending program
in the form of IDA grants instead of IDA credits, which are funded
through general IDA resources.\3 The IBRD has contributed about $750
million from its income to the HIPC Trust Fund to buy back or repay
debt owed to IDA.  The executive directors have recommended the
approval of another transfer of $100 million from IBRD income to the
Trust Fund.  The HIPC Trust Fund has been specifically set up to keep
the IDA and IBRD aspects of the World Bank's operation at arm's
length.\4

The HIPC Trust Fund also receives contributions from other
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, to finance their share
of HIPC debt relief.\5 The multilateral development 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
August 10, 1998, 16 governments had made pledges or contributions to
the HIPC Trust Fund totaling about $204 million.  Also, nine
countries proposed additional contributions totaling $92 million to
relieve multilateral debt through reallocation of their excess
resources in the World Bank's Interest Subsidy Fund, which was set up
in 1975 with donor contributions to subsidize the interest rates on
IBRD loans to the poorest IBRD borrowers.  (See app.  IV for a list
of contributors to the HIPC Trust Fund.)

The IMF is participating in the HIPC initiative through special ESAF
grants at the completion point that are deposited into an escrow
account to meet debt service payments owed to the IMF under a
predetermined schedule.  The IMF is funding its contribution through
its own trust fund financed from bilateral (member) contributions and
the ESAF reserve account.  To finance these grants, several countries
have contributed or made investments for the benefit of the ESAF-HIPC
Trust totaling approximately $46.5 million, as of June 1998.  In May
1998, the IMF transferred about $54.5 million to the ESAF-HIPC Trust
for fiscal year 1998 and expects to make a similar payment on a
quarterly basis to the ESAF-HIPC Trust for fiscal year 1999.  The IMF
Board has authorized the transfer of up to an additional $332.5
million from the ESAF Trust Reserve Account to meet the IMF's
commitments under the HIPC initiative.

Although all creditors will forgo future revenue to provide debt
relief, bilateral creditors use different methods to budget for the
cost of debt relief.  Some creditors, including the United States,
adjust for the probability of debtor countries not fully repaying
their debt in the budgeting process.  The United States has a complex
methodology of estimating the market value of outstanding debt owed
to it.  For U.S.  budgetary purposes, the cost of debt relief
reflects the difference between the estimated market value of the
loan before reduction compared to the value afterwards.  Other
creditors value the loan at face value at the time of initial
approval.  Thus, providing debt relief means they must budget for the
face value of the debt when the debt is relieved.

--------------------
\3 Most HIPC recipients are projected to continue receiving high
levels of assistance from IDA.  Thus, the present value of these
countries' debt to IDA will continue to rise during and after
participation in the HIPC initiative.  To mitigate the rise in the
present value of debt to IDA during the period between the decision
and the completion points, the World Bank will provide a portion of
normal credits as grants on a selective basis.  By providing grants
in place of normal IDA credits, the present value of debt owed to IDA
is reduced.  Because IDA credits have roughly a 70-percent grant
element, replacing those credits with grants reduces the present
value of the country's future debt service by an amount equal to
about 30 percent of the grant.  This reduction in present value also
would count as part of the World Bank's contribution toward HIPC
relief, provided that the grants are fully disbursed prior to the
completion point.  Therefore, where IDA operations in qualifying
countries have a financing package consisting of a grant portion and
a credit portion, the grant portion would be disbursed first.  The
portion of IDA assistance represented by grants would vary based on
the countries' projected debt-to-export ratios--higher ratios mean
higher proportions of grants.

\4 While IDA does not incur a cost for providing HIPC debt relief
since it is still getting fully repaid by the HIPC Trust Fund and
borrowers, the level of IBRD resources available for alternative uses
may be affected.  These resources may not, for example, be available
for lowering the interest rates charged to middle-income borrowers.
The IBRD also transfers resources to IDA separate from the HIPC Trust
Fund.  Between fiscal years 1995 and 1998, these transfers averaged
$380 million annually.

\5 Since donors' contributions to the HIPC Trust Fund will finance
some of the relief provided on debt owed to the African Development
Bank, the actual cost to the African Development Bank of providing
HIPC debt relief is lower than the amount of relief granted to HIPC
recipients on the debt they owe to the African Development Bank.

   ESTIMATED AMOUNT OF RELIEF
   DEPENDS ON DECISIONS MADE BY
   CREDITORS AND DEBTORS
---------------------------------------------------------- Chapter 2:5

Estimates of the amount of relief to be given to countries under the
HIPC initiative will continue to be influenced by decisions creditors
make as the HIPC initiative is implemented as well as actions taken
by debtor countries to establish the necessary track records of
reform.  The $8.2 billion estimate (in 1996 present value terms)
depends on decisions, such as how many recipient countries
participate in the HIPC initiative, what debt-to-export targets are
established, what amount of time participants have to establish their
qualifications for HIPC debt relief, and countries' economic
conditions.  Therefore, the actual amount of relief to be provided
under the HIPC initiative may be higher or lower than estimated.  For
example, the actual relief provided could be lower if fewer countries
participate than anticipated or if target debt-to-export ratios are
set higher than the 200 percent assumed in the projections.  On the
other hand, slower than projected growth in a country's exports could
substantially increase the amount of relief provided by the HIPC
initiative.  World Bank and IMF staff estimated that weaker export
growth (2 percentage points lower annually for each country from 1995
onward) could increase the amount of relief provided under the HIPC
initiative by about $1 billion in 1996 present value terms.

The amount of relief provided also could increase if more countries
become eligible.  For example, since implementation of the HIPC
initiative began, the Boards have agreed to modifications to the HIPC
framework that have increased the number of countries eligible to
receive relief and may raise the amount of relief for other
countries.  The changes contributed to increases in the projected
amount of relief from $5.6 billion in June 1996 to $8.2 billion in
August 1998 in 1996 present value terms.\6 According to HIPC
documents, these changes reflect the desire of some countries to make
the plan more inclusive, concerns about the quality of available data
on worker remittances, and updated information.  A World Bank
official said modifications to the HIPC framework respond directly to
concerns of debtor countries and help to mitigate the countries'
vulnerabilities.  Some countries have expressed concern about
increased costs and cautioned that eligibility decisions should not
be made before the financial implications of the agreed-to
modifications are assessed.  For example, expanding the eligibility
criteria to specifically take into account government spending
(fiscal criteria) allowed countries such as Cï¿½te d'Ivoire and Guyana
to become eligible for the HIPC initiative and raised projected HIPC
relief by about $600 million in present value terms.  Advocates for
the expansion of the eligibility criteria were concerned that certain
countries with very open economies, and thus relatively low
debt-to-export ratios, were improperly characterized as having a
sustainable debt burden under the HIPC initiative.  According to a
World Bank official, the fiscal criteria reflect the Boards' desire
to maintain the original framework while allowing some flexibility in
addressing the debt problems of very open economies.  Moreover, the
fiscal criteria may increase further the number of countries eligible
for assistance.  Additionally, changes to country-specific analyses
and an increase in the potential assistance offered by the HIPC
initiative for post-conflict countries, particularly the Democratic
Republic of Congo (formerly Zaire), contributed about $1 billion to
increased estimates of HIPC debt relief.  According to HIPC
documents, the increase for the Democratic Republic of Congo is based
primarily on new projections that include slower growth in the volume
of mineral exports and lower world prices as well as increased debt
due to a buildup of late interest and arrears.  The World Bank and
the IMF caution that any estimates for post-conflict countries are
subject to significant change.

Changes made in 1997 in the way the amount of exports is calculated
also have increased the projected amount of HIPC relief.  The first
change involved agreement that exports would be calculated using an
average of
3 years of data, rather than 1 year as assumed in the first cost
estimates of the HIPC framework.  According to HIPC documents, this
change was a compromise between the desire to obtain a recent actual
measure for a country's export capacity and the desire to smooth out
export fluctuations by providing a longer-term base.  While this
change in methodology may seem like a small refinement, it increased
the total estimated amount of HIPC debt relief by about $1 billion,
according to HIPC documents.

A second change involved the evaluation of worker remittances.  These
were originally intended to be added to exports but are no longer
included due to limited data quality and availability.\7 When worker
remittances are not included, the estimated amount of export earnings
available for servicing the debt is lowered.  Thus, the exclusion of
worker remittances increases a country's debt-to-export ratio.  The
resulting higher ratio allowed at least one country--Burkina Faso--to
become eligible and increased projected relief by about $130 million,
according to the World Bank and the IMF.

The amount of HIPC debt relief provided will also be influenced by
the actions taken by debtor countries to establish the necessary
track record of reform.  If countries included in the estimates do
not undertake required reforms and thus do not receive HIPC relief,
the amount of relief could decrease.  On the other hand, the total
projected amount of debt relief could increase if countries that were
not included in the estimates--such as Liberia, Somalia, and
Sudan--establish the necessary track records of reform and become
eligible for relief through the HIPC initiative.  At the end of 1996,
in present value terms, Sudan had $15.6 billion of outstanding
debt--one of the highest debt levels among potential HIPC recipients.
According to preliminary estimates from the World Bank and the IMF,
if Sudan qualifies for HIPC debt relief, reducing its debt-to-export
ratio to
200 percent would require about $4.5 billion in HIPC debt relief.
Providing debt relief to Sudan through the HIPC initiative could,
thus, significantly increase the cost of the initiative relative to
current estimates.  Undertaking the steps necessary to qualify some
countries--such as Liberia, Somalia, and Sudan--for the HIPC
initiative will involve significant efforts and resources because
they have not established the necessary 3-year track record of
reform.  Further, some of these countries have significant unpaid
debt, including debt owed to official creditors.  For example,
clearing unpaid debt for Sudan, which had arrears of about $6 billion
as of year-end 1996, will involve significant financial resources.
The IMF reported that Sudan made scheduled payments to the IMF in
1997 and has begun to reduce its arrears to the IMF but has increased
its unpaid debt owed to other external creditors.

--------------------
\6 These estimates include only debt relief that is additional as a
result of the HIPC initiative.  They do not include the bilateral
debt relief provided to debtor countries as a result of Paris Club
reduction on Naples, or previous, terms and comparable reductions by
other creditors.  In addition, these estimates do not include relief
provided by all commercial creditors.  Although commercial creditors
are expected to provide relief under the HIPC initiative, for the
countries deemed eligible to date, only two have had significant
commercial debt (Cï¿½te d'Ivoire and Uganda).  The commercial debt
relief of these two countries was provided prior to their HIPC
decision points and thus is not considered HIPC assistance or
included in the estimate of HIPC relief provided.

\7 When worker remittances make a significant contribution to a
country's debt-servicing capacity they will be considered in
vulnerability analyses.

   CONCLUSION
---------------------------------------------------------- Chapter 2:6

In agreeing to the HIPC initiative, the IMF and the World Bank Boards
established a broad framework for debt relief but left many of the
specifics regarding the extent of that relief and how it would be
carried out still to be determined.  Different creditor country
perspectives on matters ranging from burden sharing to required
reform track records have required extensive negotiation during the
implementation phase.  For the first six countries to qualify for
relief, the Boards have decided on relief amounts at the upper end of
the framework as agreed to, and with shortened reform periods for
five countries.  The extent to which those decisions establish a
precedent for future relief remains to be seen, especially with
respect to reform periods, since the early qualifiers have relatively
strong reform records.  The costs of debt relief have influenced
design and implementation decisions.  The amount of relief that will
be provided through the HIPC initiative is not yet known and is
dependent on eligibility, timing, and relief amount decisions still
to be made.

   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 2:7

The World Bank commented that substantial effort was put forth by
creditors in the design and implementation of the HIPC initiative and
that an expanded discussion of how the initiative is being financed
would be useful.  We agree and have expanded our discussion of these
issues, including how the HIPC Trust Fund is being financed, and
included a listing of the multilateral institutions providing relief
through the HIPC initiative (see app.  III).

THE HIPC INITIATIVE WILL HELP
COUNTRIES, BUT MANY WILL REMAIN
VULNERABLE TO FUTURE DEBT PROBLEMS
============================================================ Chapter 3

The HIPC initiative will provide benefits to recipient countries;
however, many will remain vulnerable to future debt problems, even
with sound economic policies.  In conjunction with existing debt
relief mechanisms, such as relief from Paris Club creditors, the HIPC
initiative will reduce countries' debts by varying amounts, some
substantially.  Reductions in the amount of recipient country
resources that are used for debt service will also vary and are
difficult to determine due to prior arrears and the use of donor
resources in some cases to help make debt payments.  The limited
evidence for the particular debt targets in the HIPC initiative
suggests that reducing debt-to-export ratios to near 200 percent is
not likely to provide countries with a "cushion" to protect against
adverse economic events.  Strong export growth and substantial donor
assistance are important to the HIPC initiative's projections of
sustainable debt burdens.  For some countries, those export growth
projections may turn out to be overly optimistic.  If export earnings
are lower than expected, financial support from bilateral and
multilateral donors is assumed to increase.  This assumption has been
questioned given the budgetary pressures of major donor countries.
The HIPC initiative has also focused attention on the limited
capacity of some countries to manage their debt.  Improvements in
debt management are considered necessary for them to avoid future
debt problems.

   DEBT RELIEF FROM THE HIPC
   INITIATIVE VARIES; REDUCTION IN
   DEBT SERVICE PAID DIFFICULT TO
   DETERMINE
---------------------------------------------------------- Chapter 3:1

The HIPC initiative will reduce the total amount of debt owed, in
present value terms, by varying amounts for the first six recipient
countries.  This is because their initial debt and export levels vary
widely.  The present value of debt relief for these countries due to
the HIPC initiative ranges from a low of 6 percent of debt for Cï¿½te
d'Ivoire to a high of 57 percent for Mozambique, with the average
reduction 22 percent for the first six participants.\1 (See table
3.1.)

                                    Table 3.1

                       Measures of Proposed HIPC Initiative
                       Debt Relief for First Six Countries

                                                                         Average
                                                          Percent        percent
               Debt-to-   Debt relief                reduction in   reduction in
                 export      (present   Debt relief       present   debt service
           target ratio     value, in  (nominal, in      value of     over first
Country       (percent)     millions)    millions)\        debt \       4 years\
---------  ------------  ------------  ------------  ------------  -------------
Bolivia             225          $448          $600            13           13.5
Burkina             205           115           200            14           10.5
 Faso
Cï¿½te                141           345           800             6            3.2
 d'Ivoire
Guyana              107           253           500            25           26.9
Mozambiqu           200         1,442         2,900            57           42.1
 e
Uganda      202 (actual           347           650            19           24.7
                   196)
--------------------------------------------------------------------------------
Sources:  HIPC documents and our analysis.

Our analysis indicates that the amount of projected reduction in
countries' debt burdens since 1995 attributable to the HIPC
initiative relief--as measured by the debt-to-export ratio--and the
amount attributable to other factors vary greatly across the first
six HIPC qualifiers.\2 For example, we estimated that, for Uganda, 77
percent of the reduction in this ratio between 1995 and April 1998
(Uganda's completion point under the HIPC initiative) is due to
export growth, with 18 percent attributable to the HIPC initiative
debt relief and 5 percent attributable to a combination of other debt
relief and net borrowing.\3

In contrast, for Cï¿½te d'Ivoire, 58 percent of the reduction can be
attributed to other debt relief and net borrowing combined, 39
percent to export growth, and 3 percent to the HIPC initiative.\4
(See app.  V for information on the determinants of debt reduction
for the first six countries.)

The HIPC initiative is expected to reduce debt service obligations by
varying amounts for the countries for which preliminary projections
are available, although the reduction in how much countries will
actually pay to service their debt is difficult to determine.  Table
3.1 shows estimated reductions in debt service owed by HIPC
recipients, based on HIPC documents and our analysis.\5 The effective
reduction from the HIPC initiative on the debt service actually paid
by participants is hard to gauge for several reasons.  First, some
countries experienced substantial arrears in servicing their debt
prior to receiving debt relief.  The IMF has estimated how
Mozambique's debt service payments will be affected by debt relief.\6
The scheduled annual debt service payments are expected to be
dramatically reduced by the combination of the HIPC initiative and
existing Paris Club (Naples terms) debt relief.  The HIPC initiative
itself will reduce scheduled debt service payments in 2000-03 by 42
percent (from $170.5 million to $98.7 million per year) from the
obligations remaining after the Paris Club relief.  (See table 3.2.)

                                    Table 3.2

                     Annual Average Debt Service Payments for
                              Mozambique, 1995-2003

                              (Dollars in millions)

      2000-03 (scheduled debt service)                     1995-98
--------------------------------------------  ----------------------------------
                                 After Paris
Without   After Paris Club              Club
debt        (Naples terms)    (Naples terms)         Scheduled            Actual
relief              relief   and HIPC relief      debt service      debt service
--------  ----------------  ----------------  ----------------  ----------------
$486                $170.5             $98.7            $375.3            $113.2
--------------------------------------------------------------------------------
Source:  IMF data.

However, Mozambique was paying only about 30 percent of its scheduled
annual debt service in 1995-98 ($113.2 million of $375.3 million).
Thus, the projection is that the scheduled debt service payment of
$98.7 million in 2000-03 will only be about 13 percent less than the
annual debt service of $113.2 million Mozambique was actually paying
in 1995-98, prior to relief.

A second complexity in assessing the effect of debt relief on a
country's finances is that a substantial portion of the debt service
paid by these countries is financed through donor and creditor
resources.  Thus, it is very difficult to determine how a reduction
in debt service owed--or even debt service paid--by HIPC recipients
will affect the net flow of resources to a recipient country, and we
were generally unable to make that determination.  This is most
clearly evident in Uganda's recent experience.  In 1995, Uganda
established a Multilateral Debt Facility through which bilateral
donors, primarily Denmark, the Netherlands, Norway, and Sweden,
channeled resources directly to pay Uganda's multilateral debt
service.  Payments to this facility averaged $45 million per year in
1996 and 1997.  In contrast, HIPC initiative debt relief is reducing
Uganda's annual debt service burden by an average of around $30
million per year.  (Because the relief is being "front loaded" at
Uganda's request,\7 debt service in the first 5 years will be reduced
by about $39 million annually and by about $20 million annually in
subsequent years.) According to Ugandan officials, they would need to
continue to receive $15 million per year in assistance from these
bilateral donors, in addition to other aid flows that were being
received, to be in as strong a position after the HIPC initiative
relief as before.  This assumes that the Facility would continue to
be funded at the same level.  Ugandan officials told us that they
hoped some of the future assistance would be channeled into social
sector aid, such as education, although an IMF official noted that
these funds were approved by donor governments for debt relief and
shifting them into other types of aid may not be straightforward.

--------------------
\1 Characterizing the percent reduction of the value of the debt owed
under the HIPC initiative is complicated by the use of the concept of
present value and the different means through which creditors provide
debt relief.  For example, nominal debt relief as presented in table
3.1 is calculated as the reduction in future nominal debt service.

\2 This analysis is sensitive to the initial year chosen.  1995 is
chosen as the base year for this analysis in order to capture the
effects of Naples terms on countries' debt burdens.

\3 Data available from HIPC documents does not allow us to separate
out changes in debt-to-export ratios due to debt relief under prior
mechanisms, such as Naples terms, from changes due to net borrowing
(new borrowing net of payment of principal on existing debt).

\4 In the case of Cï¿½te d'Ivoire, the 6 percent reduction in debt due
to HIPC relief represents a reduction in the present value of debt,
whereas the 3 percent represents the HIPC initiative's share of the
total reduction over the period indicated in the debt-to-export
ratio.

\5 HIPC documents provide projections for average annual debt service
reductions due to HIPC initiative relief for Guyana, Mozambique, and
Uganda.  For Bolivia, we assumed that HIPC debt relief will be
provided to both smooth out and reduce the debt service-to-export
ratio to 20 percent, as indicated in HIPC documents.  For the two
remaining countries (Burkina Faso and Cï¿½te d'Ivoire), we estimated
this value, assuming relief under the HIPC initiative is spread
evenly over 20 years.  The reductions in annual debt service are
generally similar to the estimated reductions in the present value of
debt.

\6 In response to criticism that HIPC initiative debt relief would
not actually reduce the amount of debt service Mozambique was paying,
the IMF publicly issued the information used in our report.

\7 "Frontloading" debt relief means that countries use more of their
debt relief to service their debt in the short term rather than to
buy back their debt in later years.  Countries request frontloading
if, for example, they have large debt payments due in the short term.

   HIPC RECIPIENTS WILL NEED
   STRONG ECONOMIC PERFORMANCE AND
   CONTINUED ECONOMIC ASSISTANCE
---------------------------------------------------------- Chapter 3:2

Countries receiving debt relief through the HIPC initiative will need
to maintain strong economic performance and, in most cases, continue
to receive large amounts of donor assistance in order to service
their debt.  The limited analytical evidence that exists for the debt
targets used in the HIPC initiative suggests that countries with
debt-to-export ratios near the bottom of the 200-250 percent range
may still have unsustainable debt burdens.  The HIPC initiative's
projections assume that, after completing the HIPC initiative,
countries will maintain sustainable debt levels in part through
strong export growth.  In addition, for most countries, substantial
donor assistance is expected to continue, including
balance-of-payments support.  Finally, the HIPC initiative analysis
assumes that, if adverse economic events do occur, such as a
significant decrease in the price of a key commodity, the countries'
needs for financing will be met with increased donor assistance.

      LIMITED ANALYTICAL BASIS FOR
      DEBT REDUCTION TARGETS
-------------------------------------------------------- Chapter 3:2.1

There is no strong analytical evidence supporting the decision
concerning the HIPC initiative's target range of the debt-to-export
ratio.  The World Bank and the IMF have provided limited support for
the conclusion that debt at the 200-percent debt-to-export ratio was
sustainable, and no analysis to support ratios in the upper end of
the target range (250 percent).  World Bank reports have suggested
that debt-to-export ratios above 200 percent indicate potential debt
problems in poor countries, and a 1996 World Bank document noted that
a debt-to-export threshold of 200 percent indicates that at this
level a country is likely to have difficulty servicing its debt.

World Bank and IMF officials cite two internal World Bank studies as
support for their stated debt-to-export ratios.\8 We believe these
studies have limited relevance for determining the HIPC initiative's
target ratios for two reasons.  First, their analysis was based
primarily on middle-income countries and, second, they examined debt
levels at which countries began to experience debt servicing
problems, not when they might emerge from such problems.  One study,
done in 1990, analyzed 1980-87 data on 111 countries to determine at
what level of debt relative to exports countries began to experience
problems servicing their debt.  The study found that countries that
did not experience debt servicing problems generally had
debt-to-export ratios below 200 percent.  However, 30 percent of the
countries that did experience debt service problems had
debt-to-export ratios below 200 percent throughout the period.  The
second study, dated in 1996, examined approaches for predicting when
countries would have problems with debt service.  It concluded, based
on examining Mexico's ability to service debt at the height of its
1984-89 debt crisis, that a debt-to-export ratio above 198 percent
could yield debt servicing problems.

Debt-to-export ratios at or slightly above 200 percent are in the
upper part of the range the World Bank uses to classify countries as
moderately indebted.\9 Our analysis shows that a number of countries
classified as moderately indebted have subsequently experienced debt
servicing problems.  Of the 11 countries classified by the World Bank
in 1991 as moderately indebted low-income countries, four (Benin,
Central African Republic, Mali, and Togo) have subsequently had their
debt rescheduled through the Paris Club.

In addition to the concerns over the particular levels of the debt
sustainability indicators under the HIPC initiative, there is a
concern that the indicators are narrow.  A particular concern is that
the focus on export-based indicators does not directly consider the
overall economic capacity of a country or the particular level of
demand for government expenditures.  For example, critics have argued
that the export-based indicators do not reflect the extent to which
governments' social spending needs vary across potential recipient
countries.  A related concern is that since export revenues generally
accrue to the private sector, they are not necessarily indicative of
resources available to these governments.  A recent study
commissioned by the IMF to evaluate its ESAF programs cited the above
concerns in suggesting that, in general, a more appropriate measure
of a country's debt burden would be the ratio of debt to its overall
national income.

The addition of fiscal, or government spending, criteria for
determining debt sustainability has done little to satisfy critics.
To qualify for debt relief under the HIPC initiative's fiscal
criteria requires that three conditions be met:  a country's present
value of debt-to-government revenue ratio must exceed 280 percent, a
country's exports-to-GDP ratio must exceed 40 percent, and a
country's government revenues-to-GDP ratio must exceed 20 percent.
These conditions are likely to be met by just a few countries.  The
World Bank and the IMF have not provided any economic justification
for these particular levels.  They have stated that the 280 percent
debt-to-government revenue ratio is somewhat arbitrary.  The HIPC
initiative documents note that if this ratio were set much lower than
280 percent, the overall cost of the HIPC initiative would rise
substantially.

Some debt experts have questioned the statement in HIPC documents
that the HIPC initiative debt relief will reduce countries' debts to
a point that will significantly diminish any debt overhang effect.
Whether debt overhang constitutes a serious obstacle to investment in
HIPC countries has been debated during the HIPC initiative's
implementation, with some officials and analysts doubting its
significance and others continuing to cite reduction of debt overhang
as a primary benefit of the HIPC initiative.  Several analysts
maintain that high debt levels do deter investment in HIPC countries
but some also question whether the levels of debt reduction under the
initiative will significantly reduce that effect.  Some experts have
observed that the way debt burdens are measured under the HIPC
initiative--in present value terms--may not correspond to investors'
perceptions about how high a country's debt burden is.  Although
present value is a useful way of comparing different debt burdens
when the degree of concessionality of the debt varies widely,
investors are more likely to look at debt in nominal terms, according
to one debt expert.  He noted that, beyond the creditors, the concept
of present value is not widely understood.  Since the present value
of concessional debt is generally lower than its nominal value,
countries will generally be left with debts that are higher in
nominal than in present value terms.

--------------------
\8 John Underwood, "The Sustainability of International Debt," Draft
(Washington, D.C.:  World Bank, Mar.  1990).  This study used a
present value measure of debt levels, using broad assumptions about
the degree of concessionality of the outstanding amount of nominal
(face value) debt.  Also, Daniel Cohen, "The Sustainability of
African Debt," Policy Research Working Paper 1621 (Washington, D.C.:
World Bank, Aug.  1996).  The analysis used a debt-to-gross domestic
product (GDP) measure, which was then converted to a debt-to-export
ratio.  A description of the two studies is publicly available in
Stijn Claessens et al., "Analytical Aspects of the Debt Problems of
Heavily Indebted Poor Countries," in
Z.  Aqbal and R.  Kanbur, External Finance for Low-Income Countries
(Washington, D.C.:  IMF, 1997).

\9 The World Bank currently uses the ratio of the present value of
debt to exports, along with the ratio of the present value of debt to
gross national product, in classifying countries as severely,
moderately, or less indebted.  In 1991, the World Bank used nominal,
not present value, debt-to-export ratios in making these
classifications, along with three other indicators.  The range of
debt-to-export ratios used for moderately indebted countries was
165-275 percent, which the Bank has indicated is equivalent to a
present value of debt to exports of 132-220 percent, under its
assumptions about average concessionality of debt.

      PROJECTIONS OF
      SUSTAINABILITY ASSUME STRONG
      EXPORT GROWTH AND
      SUBSTANTIAL AID FLOWS
-------------------------------------------------------- Chapter 3:2.2

The economic projections in HIPC initiative analyses generally assume
a steady growth in export revenues for HIPC countries.  This
assumption is an important element in the initiative's expectation
that HIPC recipients will have a sustainable debt burden.  As exports
grow, the indicators of indebtedness steadily improve, for a given
level of debt.  Exports have grown for most of the HIPC recipient
countries in recent years.  However, projections in HIPC documents
assume significantly greater export growth in the years ahead.  The
first six countries deemed eligible for debt relief under the HIPC
initiative had annual average growth rates in exports of 4.5 percent
between 1985 and 1995.  (See table 3.3.)

                               Table 3.3

                 Comparison of Historical and Projected
                    Growth Rates in Exports for Six
                               Countries

                              (In percent)

                                                          Increase (or
                                                          decrease) in
                                             Projected       projected
                                          growth rate,   growth rates,
                        Annual average           after     compared to
                          growth rate,      completion      historical
Country                    1985-1995\a         point\b    growth rates
----------------------  --------------  --------------  --------------
Bolivia                            3.2             7.6             134
Burkina Faso                       5.5             9.4              69
Cï¿½te d'Ivoire                      2.5             7.4             200
Guyana                             9.2             5.8             -37
Mozambique                         6.1             8.5              39
Uganda                             0.3             8.2           2,800
Average                            4.5             7.8              75
----------------------------------------------------------------------
\a Exports are 3-year averages.

\b Projection period represents an average of 18 years after each
country's completion point.

Sources:  Our analysis of World Bank data and HIPC documents.

HIPC documents project that in years after they receive relief under
the initiative, these same countries will achieve an average annual
growth in exports of 7.8 percent, a 75-percent increase over the
previous period.  Most of the countries that have been approved for
relief under the HIPC initiative are dependent on a few primary
commodities for a majority of their export earnings.  (See table
3.4.)

                               Table 3.4

                Measures of Export Vulnerability for Six
                                 HIPCs

                                    Percent share of exports, 1995
                                --------------------------------------
                                                            Three main
Country                               Main product            products
------------------------------  ------------------  ------------------
Uganda                                          66                  72
Bolivia                                         12                  32
Burkina Faso                                    39                  55
Cï¿½te d'Ivoire                                   31                  49
Mozambique                                      16                  22
Guyana                                          21                  50
Average, 24 HIPCs\a                             34                  51
----------------------------------------------------------------------
\a HIPC documents include vulnerability analyses for 24 countries,
known as the "reference group," potentially eligible for debt relief
under the HIPC initiative.

Source:  HIPC documents.

For this reason, their export earnings are considered to be
particularly vulnerable to adverse economic events.  For example, a
significant fall in the price or output of a country's primary export
could bring the debt ratios to levels that once again exceed the HIPC
initiative's target levels for debt sustainability.  In the case of
Uganda, approximately 66 percent of its export earnings in 1995
derived from one commodity, coffee, whose world price was near a
10-year high.  According to HIPC documents, a 20-percent drop in the
international price of coffee would raise Uganda's debt-to-export
ratio by 30-40 percentage points.  (Figures 3.1 and 3.2 illustrate
the historical volatility of the world prices of coffee beans and
also of cocoa beans, which are the main export commodity of Cï¿½te
d'Ivoire.) Moreover, Uganda's recent experience illustrates the
sensitivity of export earnings to variation in the amount produced.
World Bank and IMF officials have cited increases in Uganda's export
earnings (1995/96 and 1996/97) as evidence that the HIPC initiative's
assumptions of countries' increased exports are reasonable when
countries undertake necessary reforms.  However, Uganda's most recent
export data (1997/98) underlines concerns about the volatility of
exports, with Uganda's exports projected to decline about 23 percent.
Poor weather conditions in 1997/98 and the resulting decline in
coffee exports are cited in HIPC documents as the reason for
projected increases in Uganda's debt-to-export ratio in 1997/98
through 1999/2000.

   Figure 3.1:  World Price Trends
   for Coffee Beans, 1985-97

   (See figure in printed
   edition.)

Source:  DRI-McGraw Hill data.

   Figure 3.2:  World Price Trends
   for Cocoa Beans, 1985-97

   (See figure in printed
   edition.)

Source:  DRI-McGraw Hill data.

Similarly, a single commodity, cotton, accounts for 46 percent of
Mali's exports, and its top three commodities account for 76 percent.
According to HIPC documents, any one of three events would put Mali's
debt ratios at unsustainable levels through the projection period
(2017).  These events include (1) a drought similar to that
experienced by Mali in 1972-75 and 1983-85, (2) a 15-percent decline
in gold prices, or (3) a 20-percent decline in cotton prices.  In the
case of Burkina Faso, an important element in its projected increase
in exports is a steady 10-percent growth in gold exports.  However, a
recent sharp decline in the price of gold has substantially reduced
investment in this sector and, according to a World Bank official,
created considerable doubt regarding the likelihood that Burkina Faso
will achieve the projected increases in gold production.

A key element in the HIPC initiative's projection of debt
sustainability is that countries receiving debt relief will continue
to get substantial foreign aid well into the future.  This expected
assistance includes not just aid to support development projects
within countries but also concessional financing, including
balance-of-payments support.  For example, macroeconomic projections
done by the World Bank and IMF staff at Uganda's April 1998
completion point show that, with its HIPC initiative debt relief of
$347 million in present value terms, Uganda will continue to require
donor assistance to meet its external debt and balance-of-payments
needs until 2006.  The inclusion of balance-of-payment support by
donors within the HIPC initiative complicates the definition of debt
sustainability and the establishment of a proper target level, since
any level of debt could be considered "sustainable," given a
sufficient amount of donor support.

According to World Bank officials, if a HIPC recipient country that
is adhering to agreed-on reforms experiences circumstances that
result in debt servicing problems, increased donor flows to that
country will be forthcoming.  A World Bank official cited commitments
by some governments, for example, to provide the assistance Uganda
needs in order to meet debt servicing obligations after the HIPC
initiative relief, provided reforms continue.  Future donor flows to
potential HIPC recipients depend, of course, on many factors.
However, the assumption that donor support of HIPC recipients will
continue at current levels and will, under adverse conditions,
increase has been questioned, given that net concessional flows from
governments and multilateral institutions to poor countries have
declined since 1990.  Moreover, the World Bank observed in 1998 that
the future prospects for official concessional financing worldwide
are bleak due to fiscal pressures in Europe and Japan, the largest
donor by volume, and to continued public concern over spending on
foreign aid in the United States.  Additionally, officials from the
U.S.  Treasury, other governments, and NGOs have raised questions
about whether governments will simultaneously provide debt relief,
increased concessional financing, and substantial contributions to
replenish the international financial institutions, particularly in
light of their own budget constraints.  Officials we spoke to from
other governments, including France and Germany, noted that creditors
are likely to continue financially supporting countries, but the
amounts are uncertain due to costs and fiscal pressures.

   DEBT MANAGEMENT CAPABILITY IS
   LIMITED WITHIN MANY POTENTIAL
   HIPC RECIPIENTS
---------------------------------------------------------- Chapter 3:3

The HIPC initiative has focused international attention on the
limited debt management capacity of many poor countries.  This
limitation is a potential hindrance to their ability to emerge from
their debt problems and avoid future unsustainable debt levels.  Many
HIPC participants and debt experts have noted that assistance with
debt management has been a significant benefit of the initiative,
although some have expressed frustration that the pace of improvement
is slow.  HIPC countries vary greatly in the quality of their
capabilities for tracking and managing debt.  Few HIPC countries have
the capacity to analyze debt in a broader economic context, according
to developing country experts, which limits their ability to
participate fully in the analysis of their debt relief requirements
under the initiative and to avoid future debt problems.  Even for
countries with basic debt management systems in place, analyzing how
debt and debt reduction can affect their overall macroeconomic
situations poses a major challenge.

      DEBT DATA MANAGEMENT
-------------------------------------------------------- Chapter 3:3.1

According to the World Bank and the IMF, in recent years almost every
country classified as a HIPC has received a substantial amount of
technical assistance intended to improve its ability to manage debt.
Most of this assistance has been concentrated on information
management--on improving accounting systems for recording and
tracking financial obligations.  These efforts have resulted in
significant improvements in many HIPC countries.  They have been
largely organized by UNCTAD and the Commonwealth Secretariat,\10 both
of which have developed and installed debt management software and
provided extensive training.  In addition, these countries have
received significant support from several bilateral donors.

However, countries that are candidates for debt relief under the HIPC
initiative vary greatly in the degree to which they have in place the
technical and governance requirements for effective debt management.
Two early qualifiers for the initiative, Uganda and Bolivia, stand
out as countries that have relatively well-developed capabilities for
tracking and managing debt.  Uganda, for example, has been using the
UNCTAD debt data management software since 1985 and operating it
independently since 1993.  This capability constituted a major
challenge for the country, according to government officials, due in
part to destruction from
2 decades of civil war that included the burning of the Treasury
building.  In addition to increasing technical capacity, Uganda moved
on the constitutional front, in 1994 giving its parliament all powers
to contract new debt.  Similarly, according to government officials,
Burkina Faso established a centralized committee that would have to
approve any new government borrowing.

The capacity of some HIPC countries to accurately track their
financial obligations is still weak, however.  Many African
countries, especially, lack the capacity to maintain accurate loan
records and track the timing and amount of debt servicing
obligations.  This can result in situations where various agencies
within a government engage in external borrowing with no central
control over, or even complete knowledge of, total debt amounts,
according to officials from countries we visited.  For some HIPC
countries, initial examination of debt data has revealed
inconsistencies, according to an official from UNCTAD.  In some
countries, the division between different agencies of institutional
responsibilities for debt management and the inability to retain
skilled staff have created problems.  Due in part to concern about
countries' ability to manage their debt, under IMF-supported
programs, ceilings are to be negotiated on countries' new borrowing
on nonconcessional terms.  According to an IMF official, for heavily
indebted poor countries, the ceiling is generally understood to be a
low amount.  Following receipt of debt relief through the HIPC
initiative, Uganda has agreed to limit its nonconcessional borrowing
to $10 million annually for the next several years.

Burkina Faso and Cï¿½te d'Ivoire are two HIPC countries that are in the
earlier stages of receiving assistance with debt management.  At the
beginning of the HIPC initiative process, the government of Burkina
Faso was unable to project the effect of new debt on future debt
service.  The government asked a private consultant for assistance in
understanding and qualifying for the HIPC initiative.  Now, with the
support of the Swiss government, Burkina Faso is in the process of
implementing the UNCTAD debt management system.  However, according
to donor and recipient officials, improvements in debt management in
Burkina Faso are moving very slowly.  The country needs to develop
up-to-date and accurate debt data, install computer equipment and
software to replace the manual records currently being used, and
train staff to manage the financial management system before the
country can move much further.  In Cï¿½te d'Ivoire, manual records are
generally still used due to budgetary constraints, and the government
has yet to receive significant outside assistance on debt management.
UNCTAD recently completed a needs assessment, and expectations are
that Cï¿½te d'Ivoire will have the UNCTAD system by January 1999.  In
addition to computer hardware and software, training and other
related technical support are needed.

--------------------
\10 The Commonwealth Secretariat implements many programs of the
Commonwealth, a voluntary association of 53 developed and developing
nations who work together on a variety of global issues.

      ANALYZING THE ECONOMIC
      IMPACTS OF DEBT POSES A
      MAJOR CHALLENGE FOR HIPC
      RECIPIENTS
-------------------------------------------------------- Chapter 3:3.2

Even with a system of basic debt data management in place, analyzing
how debt and debt reduction can affect a country's overall
macroeconomic situation poses a challenge most HIPC participants
cannot meet, according to officials from the United Nations and
recipient governments.  This is due both to a lack of accessible
modeling techniques and limited technical expertise.  World Bank and
IMF staff have developed very complex and nonuniform spreadsheets to
conduct debt sustainability analyses for countries potentially
receiving debt relief under the HIPC initiative.  World Bank and IMF
officials acknowledged early in the HIPC initiative process that the
absence of a uniform, documented standard for simulating debt
reduction exercises would make it difficult for countries to
participate fully in analyzing their debt situations.  The World Bank
set as a priority the development of such a model to be made
available to interested countries.  According to World Bank and IMF
documents, this software was to be designed to be easily linked to
the debt data management software put in place by UNCTAD and the
Commonwealth Secretariat.  However, as of August 1998, this software
was not generally available for countries' use.  According to
officials at UNCTAD, restructuring and downsizing at the World Bank
has resulted in loss of the expertise needed to complete the software
and make it available.  According to a Bank official, versions of the
software are being tested in some countries.\11

Other efforts to assist countries in developing the capacity to
independently formulate their own debt strategy and debt
sustainability analysis include the program undertaken by Debt Relief
International, an NGO based in London, with funding from the
governments of Austria, Denmark, Sweden, and Switzerland.  The
program also intends to help governments maximize their ownership and
leadership of debt reduction and to demonstrate to the donor and
creditor community a high level of debt management.  The program is
thus driven by recipient countries' requests for it.  According to
Debt Relief International, it has received requests for assistance
from 16 heavily indebted poor countries.  The capacity and will to
closely monitor future borrowing after completing the HIPC initiative
is critical to avoiding further debt problems, according to debt
experts and some recipient country officials.

--------------------
\11 A consulting firm in Washington, D.C., has recently developed
computer software programs to assist policy makers in analyzing
alternative debt strategies.  An official from Debt Relief
International told us that the IMF and some HIPC countries are using
these programs.

   CONCLUSION
---------------------------------------------------------- Chapter 3:4

Despite receiving relief through the HIPC initiative and implementing
strong economic policies, many recipient countries will remain
vulnerable to future debt problems.  Although the HIPC initiative has
focused attention on the debt problems of poor countries and is
substantially reducing the debt burdens of some, an expectation that
all recipient countries that follow sound economic policies will
avoid future debt problems is unrealistic.  Projections that debt
burdens are sustainable for HIPC recipients assume that economic
conditions for these countries remain favorable and donors remain
committed to assisting these countries in meeting their development
goals and debt obligations.  These assumptions may prove to be
optimistic given the cyclical nature of many of these countries'
major exports and recent declines in donor assistance.  Furthermore,
the expectation that recipient countries will effectively track
existing debt and ensure that new debt is affordable may also prove
optimistic in some cases.

   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 3:5

The organizations commenting on our report emphasized that recipients
of debt relief through the HIPC initiative are and will remain
vulnerable to economic difficulties.  The IMF stated in particular
that the ESAF program, as well as other donor support, could be used
to help recipients facing economic shocks.  Our analysis points out,
however, that these countries will generally depend on support from
the IMF and other donors to service their debt and cover other
external financing needs, even under the HIPC initiative's assumption
of favorable economic conditions.  Their overall economic
vulnerabilities suggest that some are likely to need increased levels
of such external financing, even after debt relief.

The World Bank stated that the HIPC initiative recognizes the
vulnerability of recipient countries, and this is reflected in the
initiative's choice of debt relief targets near 200 percent.  The
World Bank also stated that the report's conclusion that many
countries remain vulnerable to debt problems could be viewed as an
implicit recommendation for increasing relief amounts.  Our
assessment that countries remain vulnerable to future debt problems
is based on our analysis of the relief targets used in the HIPC
initiative, the high concentration of these countries' exports, and
the reliance of these countries on donor flows for continued debt
support, separate from their development needs.  While our analysis
concludes that countries remain vulnerable to future debt problems,
we are not recommending greater relief.  We recognize that debt
relief under the initiative will benefit participants, but conclude
that some recipient countries may once again experience debt
problems.  This assessment highlights the limitations of the
initiative and should prove useful in future discussion among those
responsible for policy decision in this area.

In addition, the World Bank said that the initiative's export
projections derive from estimates made by the World Bank, the IMF,
and the recipient country and are higher than the historical average
due to the positive effect of sustained policy reform.  Our
conclusion that the initiative's export projections are optimistic is
based on analysis of countries' historical export growth rates and
the concentration of these countries' exports.  The cyclical nature
of the prices of some of the primary export commodities of HIPC
recipient countries is not accounted for in the underlying analyses
of the initiative.  Although sustained policy reform could improve
these countries' export prospects, changes in commodity prices and
outputs can be outside the influence of individual countries.  Our
report provides an example of this when poor weather conditions
resulted in declining coffee exports and increases in Uganda's
debt-to-export ratio in 1997 and 1998.

CHARACTERISTICS OF EXTERNAL DEBT
FOR 40 HEAVILY INDEBTED POOR
COUNTRIES
=========================================================== Appendix I

Table I.1 shows for each of the 40 countries classified by the World
Bank and International Monetary Fund (IMF) as a heavily indebted poor
country (HIPC), the country's total external debt, the percentage of
total external debt owed to various creditors, and the ratio of total
debt (in present value terms) to exports, as of the end of 1995.  The
countries are classified based on whether they are included in the
World Bank and IMF staffs' estimate of total relief to be provided
under the HIPC Debt Initiative of $8.2 billion, as of August 1998.
The Boards of Executive Directors of the World Bank and the IMF have
made decisions concerning eight countries (Benin, Bolivia, Burkina
Faso, Cï¿½te d'Ivoire, Guyana, Mozambique, Senegal, and Uganda).  The
remaining countries may move to another category if, for example,
their economic conditions change or more information becomes
available.  Countries classified as having sustainable debt burdens
(17) may receive debt relief under existing mechanisms, but they
currently are not deemed to need debt relief under the HIPC
initiative.  Countries classified as having unsustainable debt
burdens (20) are considered potential recipients for debt relief
under the HIPC initiative.  The three remaining countries--Liberia,
Somalia, and Sudan--are not included in HIPC initiative estimates.

                                    Table I.1

                     External Debt and Debt-to-Export Ratios
                                   for 40 HIPCs

                 Nominal external debt (end 1995)
    -----------------------------------------------------------
                           Composition (in percent)\a
                  ---------------------------------------------
                                                                 Present value of
Co         Total                                                    total debt to
un  (billions of                                                     exports (end
tr          U.S.              Multilater                 Short-          1995, in
y       dollars)   Bilateral          al  Commercial     term\b        percent)\c
--  ------------  ----------  ----------  ----------  ---------  ----------------
=================================================================================
Su         $93.1        49.9        23.7        15.3       11.1             318\d
 s
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 7
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Ch           0.9        19.2        78.4         0.2        2.2               199
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Co           6.0        55.3        12.0        15.3       17.5               464
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Ho           4.6        32.5        49.5         9.8        8.2               260
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To           1.5        35.3        55.5         3.6        5.7               356
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Vi          26.5        82.1         2.6         3.4       11.9               441
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=================================================================================
Un          99.3        42.5        35.8         9.4       12.4             529\d
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Bo           5.3        34.2        54.0         5.9        5.8               343
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Bu           1.2        14.4        84.2         0.1        1.2               459
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Et           5.2        42.0        46.7         7.7        3.6               541
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Gu           0.9        38.5        56.8         0.3        4.4             1,235
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Gu           2.1        51.4        38.5         2.9        7.2               268
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Ma           4.3        44.8        40.9         1.8       12.5               493
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Ma           3.1        47.3        50.0         0.1        2.6               392
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Ma           2.5        51.4        40.9         0.3        7.5               365
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Mo           5.8        67.2        26.2         1.8        4.9             1,059
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My           5.8        63.8        23.1         6.4        6.8               453
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Ni           9.3        59.0        16.5        10.4       14.1             1,654
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Ni           1.6        31.1        56.4         8.2        4.4               369
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Rw           1.0        13.6        83.0         0.2        3.3               345
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Sa           0.3        28.3        66.0           0        5.6             1,224
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Ta           7.3        38.8        41.8         5.6       13.7               540
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Ug           3.6        21.6        73.5         2.4        2.6               456
 a
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Za           6.9        39.9        50.0        2.53        7.6               417
 m
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=================================================================================
Ot          22.4        33.1        21.6        11.6       33.8           1,589\d
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Li           2.1        23.5        37.1         9.8       29.6               294
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So           2.7        42.5        35.6         1.4       20.6             1,702
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Su          17.6        32.8        17.6        13.4       36.3             3,339
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=================================================================================
To        $214.9        44.7        29.1        12.2       14.0               438
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 s
---------------------------------------------------------------------------------
\a A group's total type of debt as a percentage of the group's total
debt; that is, the group's total bilateral debt as a percentage of
the group's total debt.  Percentages may not total 100 due to
rounding.

\b According to our analysis, $20.3 billion, or approximately 67
percent, of the $30.2 billion in short-term debt is unpaid interest
arrears.

\c Exports are a 3-year average (1993-1995) and exclude worker
remittances.

\d The group's total present value of debt to total exports.

\e Sierra Leone was initially not expected to require assistance
under the HIPC initiative, when assessed prior to the conflict.  The
World Bank and the IMF note that it appears likely that Sierra
Leone's export base has deteriorated, but they do not yet have
sufficient information to assess whether Sierra Leone would require
HIPC assistance.

\f Formerly Zaire.

\g Exports for Myanmar are the average for 1993 and 1994.

\h Exports from Liberia are based on estimates reported for 1995 in
The World Factbook, 1997 published by the Central Intelligence
Agency.

\i Insufficient information.

\j Exports from Somalia are based on estimates reported for 1994 in
The World Factbook, 1997.

\k No allowance is made for the possible participation of Sudan in
HIPC.

Sources:  Our analysis, World Bank and IMF data.

ESTIMATED DEBT OWED TO THE UNITED
STATES BY 40 HIPCS
========================================================== Appendix II

According to estimates prepared by the U.S.  Treasury, as of August
1998, 31 of the 40 HIPCs identified by the World Bank and the IMF
owed outstanding debt to the United States totaling approximately
$6.8 billion.  (See table II.1.) The figures include outstanding
principal and interest arrears.  The Treasury's estimates are based
on debt figures as of year-end 1995.  In calculating the estimates
shown in table II.1, the Treasury assumed that concessional and
nonconcessional debt grew by 7 percent and 3 percent per year,
respectively, as a rough proxy for increased arrears and/or net new
lending.  This debt is broken down into three categories:
concessional, nonconcessional, and guarantees.

                                    Table II.1

                      Type of Debt Owed to the United States
                          by 40 HIPCs, as of August 1998

                              (Dollars in millions)

                            Concession          Non-
Country                             al  concessional    Guarantees         Total
--------------------------  ----------  ------------  ------------  ============
Angola                            $8.9          $9.6         $13.5         $32.0
Benin                                0             0             0             0
Bolivia                            6.1          10.9           0.5          17.5
Burkina Faso                         0             0             0             0
Burundi                              0             0             0             0
Cameroon                             0          62.4           6.1          68.5
Central African Republic             0          10.9             0          10.9
Chad                                 0             0             0             0
Congo                             31.1          14.9             0          46.0
Congo, Democratic Republic       436.2       1,937.8           8.7       2,382.7
 of\a
Cï¿½te d'Ivoire                     88.2         243.7          42.7         374.6
Equatorial Guinea                    0             0             0             0
Ethiopia                          85.5           2.6             0          88.1
Ghana                                0          83.5         355.8         439.3
Guinea                           113.9          11.1             0         125.0
Guinea-Bissau                        0             0             0             0
Guyana                            11.0          10.3             0          21.3
Honduras                             0          75.8          71.9         147.7
Kenya                             39.1         108.9          57.1         205.1
Lao People's Democratic              0             0             0             0
 Republic
Liberia                          200.2          63.2             0         263.4
Madagascar                           0          41.4             0          41.4
Mali                               4.1             0             0           4.1
Mauritania                           0           6.6             0           6.6
Mozambique                           0          65.6             0          65.6
Myanmar                            7.5             0             0           7.5
Nicaragua                         22.4          82.3           2.2         106.9
Niger                                0          16.2             0          16.2
Rwanda                               0             0           2.3           2.3
Sao Tomï¿½ and Prï¿½ncipe              0 0             0             0
Senegal                            5.4          20.5             0          25.9
Sierra Leone                      66.1          16.4             0          82.5
Somalia                          178.8         190.4             0         369.2
Sudan                            447.3         566.5             0       1,013.8
Tanzania                             0          37.0             0          37.0
Togo                                 0             0             0             0
Uganda                               0           1.6           3.6           5.2
Vietnam                          265.5             0             0         265.5
Yemen, Republic of               106.6             0          10.2         116.8
Zambia                           166.3         197.2             0         363.5
================================================================================
Total                         $2,290.2      $3,887.3        $574.6      $6,752.1
Percent of total                  33.9          57.6           8.5
--------------------------------------------------------------------------------
\a Formerly Zaire.

Source:  U.S.  Treasury.

MULTILATERAL INSTITUTIONS
PARTICIPATING IN THE HIPC DEBT
INITIATIVE
========================================================= Appendix III

Table III.1 lists the 25 multilateral institutions that have agreed
to provide debt relief under the HIPC Debt Initiative.

                                   Table III.1

                     Participating Multilateral Institutions

Multilateral institution                              Location
----------------------------------------------------  --------------------------
African Development Bank/African Development Fund     Abidjan, Cï¿½te d'Ivoire

Arab Bank for Economic Development in Africa          Khartoum, Sudan

Arab Fund for Economic and Social Development         Safat, Kuwait

Arab Monetary Fund                                    Abu Dhabi, United Arab
                                                      Emirates

Asian Development Bank                                Manila, Philippines

Banque Centrale des Etats d'Afrique de l'Ouest        Dakar, Senegal
(Central Bank of the West African States)

Caribbean Development Bank                            St. Michael, Barbados

Caricom Multilateral Clearing Facilities              Port of Spain, Trinidad

Central American Bank for Economic Integration        Tegucigalpa, Honduras

Conseil de l'Entente (Council of the Entente)         Abidjan, Cï¿½te d'Ivoire

Corporaciï¿½n Andina de Fomento (Andean multilateral    Caracas, Venezuela
development bank)

East Africa Development Bank                          Kampala, Uganda

Eastern and Southern African Trade and Development    Nairobi, Kenya
Bank

Economic Community of West African States, Fund for
Cooperation Compensation and Development              Lomï¿½, Togo

European Union, European Investment Bank              Brussels, Belgium;
                                                      Luxembourg

Fund for the Financial Development of the River       Santa Cruz de la Sierra,
Plate Basin                                           Bolivia

Inter-American Development Bank                       Washington, D.C., United
                                                      States

International Fund for Agricultural Development       Rome, Italy

International Monetary Fund                           Washington, D.C., United
                                                      States

Islamic Development Bank                              Jeddah, Saudi Arabia

Nordic Development Fund and Nordic Investment Bank    Helsinki, Finland

Organisation Arabe des Pays Exportateurs de Pï¿½trole   Kuwait City, Kuwait
(Arab Organization of Petroleum Exporting Countries)

Organization of Petroleum Exporting Countries, Fund   Vienna, Austria
for International Development

West African Development Bank                         Lomï¿½, Togo

World Bank                                            Washington, D.C., United
                                                      States
--------------------------------------------------------------------------------
Sources:  World Bank and IMF.

DESIGN OF THE HIPC INITIATIVE
FRAMEWORK
========================================================== Appendix IV

The HIPC framework combines debt relief with recipients' continued
economic and social reforms.  The framework was structured to be
flexible and applied on a case-by-case basis to address a country's
particular debt problems.  The framework is essentially implemented
in two stages, each of which generally lasts 3 years.  The first
stage leads to the decision point (determination of a country's
eligibility to participate in the HIPC initiative), and the second
stage culminates with the completion point (determination that a
country has fulfilled the conditions necessary to receive full debt
relief).  The key elements discussed during these stages are the
recipient's debt situation, the performance expected of the recipient
in the second stage, and the participation by all relevant creditors.
The timing of the decision point tends to coincide with the timetable
of the country's potential eligibility for a stock-of-debt operation
on Naples terms\1 from the Paris Club.

--------------------
\1 Under a Naples terms stock-of-debt operation, eligible countries
may receive up to a 67 percent reduction in eligible debt, in present
value terms.

   DECISION POINT
-------------------------------------------------------- Appendix IV:1

At the decision point, the Boards of Executive Directors of the World
Bank and the IMF determine whether a country is eligible to
participate in the HIPC initiative.  World Bank and IMF staff prepare
a summary document for each potential candidate that (1) outlines the
country's situation with respect to the HIPC initiative's eligibility
criteria, (2) proposes target debt-to-export ratios and key
performance criteria for the country to achieve at the completion
point, and (3) estimates the amount of assistance to be provided by
creditors.

The eligibility criteria address a country's track record of reform,
income, and indebtedness.  As stated in the HIPC framework, a country
is considered to have demonstrated a good track record of reform if
it has completed a 3-year IMF- and World Bank-supported program of
macroeconomic reform and structural adjustment and has a good
payments record to creditors.  A factor that would help a country to
be considered as reaching its decision point is if it has negotiated
a Paris Club stock-of-debt operation on Naples terms.  The Boards of
the World Bank and the IMF make judgments about whether this track
record has been established for each country.  In making this
determination, issues such as whether a country has gone off track
during the first 3-year period are considered.  To help countries
begin establishing the necessary track record, the Boards have
encouraged all countries that hope to receive assistance under the
HIPC initiative to start IMF- and World Bank-supported programs.

Regarding the criteria of income and indebtedness, the 40 countries
that potentially qualify for assistance under the framework are those
that are eligible for IMF assistance through the Enhanced Structural
Adjustment Facility (ESAF) and World Bank assistance from the
International Development Association (IDA) only--the part of the
World Bank that lends to poor countries on highly concessional
terms--and face an unsustainable debt situation even after the full
application of current debt relief mechanisms.  These mechanisms
include a stock-of-debt operation from the Paris Club on Naples terms
involving a 67-percent reduction of eligible debt in present value
terms and comparable action from other bilateral and commercial
creditors.  To assess a country's debt situation, staff from the
World Bank, the IMF, and the debtor country prepare a debt
sustainability analysis (DSA).  The DSA makes certain projections of
specific key economic information, such as a country's balance of
payments over a 20-year period.  Under the HIPC initiative, the
sustainability of a country's debt is assessed using the following
indicators:

  -- The ratio of the present value of debt to exports; the present
     value debt-to-export ratio should be expected to fall within a
     range of 200-250 percent, or below, by the completion point.

  -- The ratio of debt service to exports; the debt service-to-export
     ratio should be expected to fall within a range of 20-25
     percent, or below, by the completion point.

  -- Under some circumstances, for countries with very open economies
     and strong efforts to generate fiscal revenues, the ratio of the
     debt, in present value terms, to government revenue.  The World
     Bank and IMF Boards added these indicators to the framework in
     1997 to reflect their concern that countries with heavy debt
     burdens but large export sectors may receive less assistance
     than countries with similar debt burdens but less open
     economies.  For countries meeting openness and fiscal
     thresholds,\2 the present value debt-to-export target will be at
     a level that achieves a 280 percent ratio of the present value
     of debt to revenue at the completion point.

According to HIPC documents and World Bank and IMF officials, when
evaluating a country's debt burden, additional factors that can
affect how vulnerable a country's economy is are also taken into
account.  These factors include the amount of external debt service
relative to the government budget, the country's dependence on a
single or a small number of commodity exports, the amount of hard
currency reserves, and other relevant factors.  The DSA assumes the
recipient country will continue to follow sound economic and
financial policies such as macroeconomic stability, deeper structural
reforms, and health and education programs.

Based on the results of the DSA, a country's debt situation is
classified in one of three ways.

  -- Debt is considered sustainable after a country receives debt
     relief on traditional terms from bilateral and commercial
     creditors.  The country is not eligible for assistance under the
     HIPC initiative but may receive a stock-of-debt operation from
     the Paris Club.

  -- Debt is considered unsustainable after the full application of
     traditional debt relief mechanisms.  The country enters into the
     HIPC initiative's second 3-year phase.  During this phase, the
     international community (1) continues to provide exceptional
     support,\3 as the country proceeds with agreed-upon reforms,
     including up to an 80 percent reduction on eligible debt service
     from the Paris Club; and (2) commits to provide additional
     relief at the end of the second phase--the completion
     point--needed to achieve sustainability, if the country
     continues its sound performance.  At the completion point, the
     combination of the country's reform effort and creditors' debt
     relief is expected to reduce debt to sustainable levels.

  -- Debt is considered borderline after the full application of debt
     relief on traditional terms; that is, there is reasonable doubt
     about whether current terms would achieve debt sustainability.
     The recipient country has two options:  (1) receive Paris Club
     stock-of-debt operation on Naples terms and exit from the
     rescheduling process or (2) defer Paris Club stock-of-debt
     operation for 3 years and thus leave open the possibility of
     receiving assistance under the HIPC initiative.  Recipients are
     assured of additional action at the completion point if then
     needed to achieve debt sustainability.

Countries whose debt burdens are deemed to be either unsustainable or
borderline may receive assistance under the terms of the HIPC
framework.  They receive assistance during the second stage and final
assistance at the completion point.  In order to receive the debt
relief at the end of the program, the recipients must meet
performance criteria agreed to at the decision point and implemented
under IMF- and World Bank-supported programs.  The criteria center on
(1) macroeconomic indicators, such as budget deficits and inflation
rates; (2) progress on key structural reforms affecting trade,
financial, and enterprise sectors, and public expenditure management;
and (3) social reforms such as improving basic health care and
education and reducing poverty levels.  The conditions established
under the HIPC initiative are part of the conditions negotiated under
World Bank- and IMF- supported programs.  The IMF monitors a
country's macroeconomic developments, and the World Bank monitors
social reforms.

--------------------
\2 These are an export-to-GDP ratio of at least 40 percent and a
minimum threshold of fiscal revenue in relation to GDP of 20 percent.

\3 Exceptional support, such as the ESAF, allows a country to meet
its external obligations without experiencing arrears, debt
rescheduling, or debt cancellation.

   COMPLETION POINT
-------------------------------------------------------- Appendix IV:2

At the completion point, World Bank and IMF staff assess countries'
performance and use updated information on the economy to prepare a
new DSA and calculate new debt ratios.  According to the HIPC
framework, the Boards have discretion in determining whether
conditions have been met and whether recipients are entitled to debt
relief.  World Bank and IMF officials noted that the Boards need
flexibility if countries undertake positive actions but fall short of
numerical targets.

If countries do not meet the economic targets or if they do not
sufficiently implement the reforms agreed to at the decision point,
the Boards could decide to delay or terminate the assistance under
the HIPC initiative.  In the case of significant delays, enhanced
assistance would end, and the country would restart the decision
point process.  In the case of delays that did not have a significant
adverse impact on the original program objectives, the completion
point could be moved further out into the future.

If there is no significant delay in the implementation of the reform
program and if the debt-to-export ratio falls into the range
established at the decision point,\4 creditors provide the relief
promised at the decision point.  Debt relief provided at the
completion point is to be unconditional, thereby effectively removing
that portion of debt owed to creditors from the country's books.  As
discussed later, creditors provide debt relief through various means,
such as rescheduling debt payments, reducing the debt, and/or lending
new funds on concessional terms to meet future debt service payments.

--------------------
\4 If the actual ratio is higher than the projected ratios, the
creditors will review the actions needed to achieve debt
sustainability.  Conversely, if the ratio is lower than projected due
primarily to factors beyond the country's control (that is, higher
world commodity prices) then creditors' support could be reduced,
consistent with achieving the lower end of the original
debt-to-export target range.  If the lower ratio is due to a
country's strong performance, then creditors would implement their
initial commitments.  If the actual present value debt-to-export
ratio is within a 10-percentage point range of the target (higher or
lower) then no adjustment to creditor commitments is made.

   MEANS FOR PROVIDING DEBT RELIEF
-------------------------------------------------------- Appendix IV:3

Creditors have agreed that they will each choose how they will
provide debt relief to specific countries and which debt will be
eligible for relief.  Creditors provide relief through several means,
such as rescheduling debt payments at lower interest rates, buying
back the debt, converting loans into grants, reducing the debt,
making debt service payments as they come due, and/or lending new
funds on concessional terms to meet future debt service payments.
Because debt and debt relief are evaluated under the HIPC initiative
using the concept of present value, debt relief is considered to take
place when interest rates on current debt are reduced or when
scheduled debt service payments for concessional loans are moved
further into the future, even if the nominal, or face value, of the
debt owed is not reduced.

In July 1997, creditors broadly endorsed a burden-sharing formula,
termed the "proportional approach," under which bilateral and
multilateral creditors would provide an equal percentage reduction of
the remaining debt owed to them after the full use of existing debt
relief mechanisms, including Naples terms.  In calculating the amount
of relief to be provided by the creditors, World Bank and IMF staff
first determine the total amount of relief needed to lower the
recipient's debt-to-export ratio to the target level.  Staff then
determine the percentage reduction bilateral and multilateral
creditors would provide as a group to reach the relief amount.  This
percentage reduction must meet the bilateral creditors' limitation
that they will not provide debt relief beyond 80 percent of eligible
debt unless specifically negotiated for exceptional circumstances.
Applying the proportional approach continues to involve negotiation
among the creditors when they determine the specific relief amount
for each recipient.  Although creditors agreed to provide the same
percentage of debt reduction, the dollar amounts of this relief will
vary by creditor because creditors are owed different amounts of
debt.  For example, in the case of Burkina Faso, bilateral and
multilateral creditors agreed to provide debt relief valued at about
14 percent of what they are owed.  For bilateral creditors, this
amounted to about $21 million in debt relief.  For multilateral
creditors, the same percentage reduction amounted to about $94
million.

Multilateral creditors intend to provide assistance by either buying
back debt, paying debt as it comes due, rescheduling debt, or
refinancing on grant terms.  The World Bank's participation in the
HIPC initiative is to be funded solely from the Bank's own resources.
Debt relief provided by the World Bank under the HIPC initiative is
taking place primarily through contributions to the HIPC Trust Fund
from International Bank for Reconstruction and Development (IBRD)
income.  The Trust Fund provides relief on debt owed to IDA, either
through buying back some of its concessional debt or providing an
unconditional commitment to pay debt service owed to IDA as it
becomes due.  Some of this relief may be advanced during the second
stage when the World Bank could provide part of its lending program
in the form of IDA grants instead of IDA credits, which are funded
through general IDA resources.\5 The IBRD has contributed about $750
million from its income to the HIPC Trust Fund to buy back or repay
debt owed to IDA.  The executive directors have recommended the
approval of another transfer of $100 million from IBRD income to the
Trust Fund.  The HIPC Trust Fund has been specifically set up to keep
the IDA and IBRD aspects of the World Bank's operation at arm's
length.

The HIPC Trust Fund also receives contributions from other
participating multilateral development banks and bilateral creditors
that are to be used primarily to assist other multilateral
development banks, such as the African Development Bank.  As of
August 10, 1998, 16 governments had made pledges or contributions to
the Trust Fund totaling about $204 million.  Also, nine countries
proposed contributions totaling about $92 million to relieve
multilateral debt through reallocation of their excess resources in
the Bank's Interest Subsidy Fund, which was set up in 1975 with donor
contributions to subsidize the interest rates on IBRD loans to the
poorest IBRD borrowers.  (See table IV.1.)

                               Table IV.1

                  Bilateral Donor Contributions to the
                 HIPC Trust Fund, as of August 10, 1998

                         (Dollars in millions)

Country                                                         Amount
------------------------------------------------------  --------------
Contributions paid in                                           $139.6
Canada                                                             5.6
Denmark                                                           22.0
Greece                                                             1.0
Japan                                                             10.0
Luxembourg                                                         0.5
Netherlands                                                       38.0
Norway                                                            26.0
Sweden                                                            12.0
Switzerland                                                       14.0
United Kingdom                                                    10.5
Additional contributions pledged for 1998\a                      $64.0
Belgium                                                            8.0
Finland                                                           12.0
Italy                                                            To be
                                                            determined
Portugal                                                          15.0
Spain                                                             15.0
Switzerland                                                       14.0
Proposed contributions through reallocation of                   $92.3
 Interest Subsidy Fund resources
Australia                                                          5.3
Belgium                                                            3.7
Canada                                                            22.0
Denmark                                                            3.3
France                                                            20.7
Luxembourg                                                         0.1
Netherlands                                                       22.8
Norway                                                             4.4
United Kingdom                                              up to 10.0
======================================================================
Total                                                           $295.9
----------------------------------------------------------------------
\a Indonesia announced in fall 1997 that it would contribute $10
million.

Sources:  World Bank and IMF.

The multilateral development 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.  The IMF is participating in the
HIPC initiative through special ESAF grants at the completion point
that are deposited into an escrow account to meet debt service
payments owed to the IMF under a predetermined schedule.  The IMF is
funding its contribution through its own trust fund financed from
bilateral (member) contributions and the ESAF reserve account.  To
finance these grants, several countries have contributed or made
investments for the benefit of the ESAF-HIPC Trust totaling
approximately $46.6 million, as of June 1998.  In May 1998, the IMF
transferred about $54.5 million to the ESAF-HIPC Trust for fiscal
year 1998 and expects to make a similar payment on a quarterly basis
to the ESAF-HIPC Trust for fiscal year 1999.  The IMF Board has
authorized the transfer of up to an additional $332.5 million from
the ESAF Trust Reserve Account to meet the IMF's commitments under
the HIPC initiative.

Creditors may provide relief at any time during the HIPC initiative
process.  At the decision point, bilateral and commercial creditors
are assumed to provide debt relief on Naples terms (involving a
stock-of-debt operation up to a 67-percent reduction in present value
terms) to all debtors.  This is not counted as part of the relief
provided through the HIPC initiative.  After the decision point,
bilateral and commercial creditors provide flow rescheduling on
enhanced terms (up to a total of an 80-percent reduction in present
value terms) between the decision and completion points and may vary
the type or timing of their debt relief to meet a particular
recipient country's needs.  For example, for Bolivia and Uganda, both
the World Bank and the IMF intend to frontload the debt service
relief because Bolivia has substantial payment obligations early on
and because Uganda had a shortfall in export earnings due to
unfavorable weather conditions.  Creditors may also provide a portion
of their assistance before the completion point.  Such "interim
relief" is considered part of the creditor's total share of
assistance.

The case of Uganda illustrates how creditors may use various means to
provide debt relief under the initiative to a single country.  Our
analysis shows that creditors will use five different debt relief
mechanisms but rely primarily on paying debt service and buying back
debt.  (See table IV.2.)

                               Table IV.2

                Creditors' Mechanisms for Providing Debt
                    Relief to Uganda Under the HIPC
                               Initiative

                                         Present value
                                        of debt relief
                                          (millions of      Percent of
Mechanism                                1997 dollars)           total
--------------------------------------  --------------  --------------
Debt service payment                              $127            36.4
Debt buyback                                       117            33.5
Debt reduction                                      73            20.9
Grants                                              24             6.9
Concessional rescheduling                            8             2.3
======================================================================
Total\                                          $349\a           100.0
----------------------------------------------------------------------
\a During the final debt reconciliation process, claims of two
African-based multilateral creditors amounting to $8 million in
present value terms were discovered.  Their assistance under the HIPC
initiative would be about $1.6 million in present value terms.

Sources:  World Bank and IMF data.

--------------------
\5 Most HIPC recipients are projected to continue receiving high
levels of assistance from IDA.  Thus, the present value of these
countries' debt to IDA will continue to rise during and after
participation in the HIPC initiative.  To mitigate the rise in the
present value of debt to IDA during the period between the decision
and the completion points, the World Bank will provide a portion of
normal credits as grants on a selective basis.  By providing grants
in place of normal IDA credits, the present value of debt owed to IDA
is reduced.  Because IDA credits have roughly a 70-percent grant
element, replacing those credits with grants reduces the present
value of the country's future debt service by an amount equal to
about 30 percent of the grant.  This reduction in present value also
would count as part of the World Bank's contribution toward HIPC
relief, provided that the grants are fully disbursed prior to the
completion point.  Therefore, where IDA operations in qualifying
countries have a financing package consisting of a grant portion and
a credit portion, the grant portion would be disbursed first.  The
portion of IDA assistance represented by grants would vary based on
the countries' projected debt-to-export ratios--higher ratios mean
higher proportions of grants.

FACTORS AFFECTING CHANGES IN
COUNTRIES' DEBT-TO-EXPORT RATIOS
=========================================================== Appendix V

Several factors may cause a country's debt-to-export ratio to change.
As shown in table V.1, for the first six countries deemed eligible to
receive debt relief under the HIPC initiative the net declines in
their debt-to-export ratios from 1995 to their completion points are
due to four factors:  (1) net borrowing that tends to increase the
ratio; (2) assumed increase in exports that tends to decrease the
ratio since exports are assumed to be growing; (3) normal debt relief
mechanisms, including Paris Club Naples terms and comparable actions
by other bilateral and commercial creditors; and (4) relief under the
HIPC initiative.  Table V.1 presents estimates of how much of the
reduction in the debt-to-export ratios for the six countries is
attributable to these respective factors.  (Data available from HIPC
documents does not allow separation of the effect on debt-to-export
ratios of debt relief through existing mechanisms from the effect of
net new borrowing.) The debt-to-export ratios for 1995 are based on
World Bank-reported data.  These ratios at the completion point are
based on HIPC documents' projections of exports and net borrowing;
debt relief commitments or actions by some bilateral, multilateral,
and commercial creditors; and uncommitted but anticipated debt relief
from other creditors.\1

                                    Table V.1

                        Changes in Six Countries' Debt-to-
                       Export Ratios Due to Export Growth,
                          Normal Debt Relief and Net New
                       Borrowing, and Relief Under the HIPC
                                    Initiative

                                                      Amount of reduction and
       Debt-to-export ratio, present               percentage share of total (in
                  value\a                               parenthesis) due to
       ------------------------------              -----------------------------
                   Completion point
                 --------------------
                                        Amount of
                 Projection             reduction
                      after               between                Normal
                     normal              1995 and    Growth  relief and
Count                  debt      HIPC        HIPC        in         net     HIPC
ry       1995\b      relief    target      target   exports   borrowing   relief
-----  --------  ----------  --------  ----------  --------  ----------  -------
Ugand       456         249       202         260  200 (77)      13 (5)  47 (18)
 a\c             actual 243    actual
                                  196
Boliv     317\d         259       225          92   41 (45)     17 (18)  34 (37)
 ia
Burki       227         238       205          22  48 (221)      -59 (-       33
 na                                                                272)    (151)
 Faso
Cï¿½te      353\f         147     141\g         212   82 (39)    123 (58)    6 (3)
 d'Iv
 oire
 \e
Mozam     1,059         466       200         859  189 (22)    405 (47)      266
 bique                                                                      (31)
Guyan       268         143     107\g         161   35 (22)     90 (56)  36 (22)
 a
--------------------------------------------------------------------------------
\a Ratio of present value of debt to 3-year average of exports.
Completion point ratios use projected data as of the year prior to
the completion point.  Exports exclude worker remittances.

\b 1995 is selected as the base year because the figure for present
value of debt for that year does not incorporate any Naples terms
debt reduction.

\c Uganda is the only country for which actual export values are used
in calculating the completion point ratios.

\d For Bolivia, the present value of medium- and long-term debt for
1995.

\e All figures for Cï¿½te d'Ivoire refer to debt owed to official
creditors.

\f For 1996.

\g Target ratio of present value of debt to exports chosen to meet
fiscal criteria for present value of debt-to-revenue target of 280
percent.

Sources:  Our analysis of HIPC documents and World Bank data.

(See figure in printed edition.)Appendix VI

--------------------
\1 Uganda is the only country for which actual export values are used
in calculating the completion point debt-to-export ratios.  According
to HIPC documents, although contacted by Ugandan government
authorities, a number of non-Paris Club bilateral creditors have not
yet agreed to provide the levels of debt relief assumed in these
computations.

COMMENTS FROM THE DEPARTMENT OF
THE TREASURY
=========================================================== Appendix V

(See figure in printed edition.)

The following is GAO's comment on the Department of the Treasury's
letter dated September 18, 1998.

GAO COMMENT

1.  We agree that debtor activities are an important determinant of
the speed in which the HIPC initiative progresses.  Chapter 1
discusses the requirement that countries must first establish a track
record of reform before qualifying for relief under the initiative.
As discussed in chapter 2, the projected amount of relief does not
include estimates for Liberia, Somalia, and Sudan since these
countries have yet to establish the necessary track records of
reform.

(See figure in printed edition.)Appendix VII
COMMENTS FROM THE INTERNATIONAL
MONETARY FUND
=========================================================== Appendix V

(See figure in printed edition.)

(See figure in printed edition.)

MAJOR CONTRIBUTORS TO THIS REPORT
======================================================== Appendix VIII

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C.

Harold J.  Johnson
Celia Thomas
Thomas Melito
Bruce Kutnick
Cheryl Goodman
Claude Adrien
Rona Mendelsohn

OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C.

Mark Speight

DENVER FIELD OFFICE

Patricia Foley Hinnen
*** End of document ***