Debt Relief for Low-Income Countries and the HIPC Initiative

Since the onset of the debt crisis in the early 1980s, many heavily indebted poor countries (HIPCs), continue to have difficulty in paying their external debt-service obligations, largely because of exogenous factors, imprudent debt-management policies, and the lack of sustained adjustment or implementation of structural reforms. The international community over the past decade has implemented a wide range of traditional mechanisms designed to provide needed external finance and alleviate the debt burden of these countries. The traditional mechanisms, along with sound economic policies, are sufficient to reduce their external debts to sustainable levels. For the others, the Bretton Woods institutions have jointly proposed and put in place the HIPC Debt Initiative; the goal is reduce the debt burdens of all eligible HIPCs to sustainable levels. In the context of the initiative, Paris Club creditors are willing to provide debt reduction in net present value terms of up to 80 percent on eligible debt, on a case-by-case basis. Other nonmultilateral creditors would be expected to provide debt relief on at least comparable terms. Multilateral creditors, in accordance with their charters, are expected to take action to reduce the burden of their claims on a given country to achieve a sustainable debt position. Despite the initiative, many HIPCs will continue to need concessional external assistance given their high levels of poverty and limited domestic resources. Moreover, many face serious infrastructural problems, and some also need to address problems of governance, particularly as they influence investor confidence. The initiative establishes a new paradigm for international action. Its implementation should eliminate debt as an impediment to economic development and growth and enable HIPC governments to focus on the difficult policies and reforms required to remove the remainig impediments to achieving sustainable development.