International action to help indebted poor countries

SUMMARY OF:

Commission communication (COM(1999) 518 final) on EU participation in the debt relief initiative for highly indebted poor countries

WHAT IS THE AIM OF THE COMMUNICATION?

It outlines the Heavily Indebted Poor Countries (HIPC) Initiative which was initiated by the World Bank, the International Monetary Fund (IMF) and other multilateral, bilateral and commercial creditors, which has the strong support of the European Union (EU).

KEY POINTS

• The purpose of the HIPC initiative is to provide a comprehensive approach to debt reduction.
• The initiative introduces a system under which poorer countries can apply for debt reduction. It is designed to help those countries that cannot reach a sustainable debt burden through traditional mechanisms of rescheduling and debt reduction alone.
• Countries seeking debt reduction under the scheme submit themselves to a 2-stage process:
• To qualify for Stage 1 debt relief, countries must:
  • normalise their relations with multilateral banks* and reach an agreement on possible arrears;
  • adopt adjustment and reform programmes supported by the IMF and the World Bank and establish a proven track record in implementing them; and
  • adopt a poverty reduction strategy.
• Once this has been achieved, the remaining debt is analysed to determine whether a country's external debt commitments are sustainable and whether it is eligible for aid under the HIPC Initiative. This is known as the ‘decision point’.
• During this first phase the applicant countries continue to be eligible to benefit from ‘traditional’ debt relief, agreed by the Paris Club*.
• In order to reach ‘completion point’ under Stage 2, and benefit from full assistance, the country must:
  • establish a further track record of good performance;
  • implement key agreed structural policy reforms;
  • maintain financial stability; and
  • adopt and implement a prescribed poverty reduction strategy for at least 1 year.
• There is no fixed timetable for the completion of the 2 stages.
• In 2005, the HIPC Initiative was supplemented by the Multilateral Debt Relief Initiative (MDRI). This provides for 100 % relief on eligible debts by the IMF, the World Bank, and the African Development Fund (AfDF), for countries completing the HIPC Initiative process. In 2007, the Inter-American Development Bank (IaDB) also approved additional debt relief to HIPCs in the Western Hemisphere.
• By October 2016, debt reduction packages under the HIPC initiative had been approved for 36 countries, 30 of them in Africa, with USD 76 billion in debt relief being allocated. 3 additional countries are currently eligible for HIPC Initiative assistance.

BACKGROUND

• The initiative was launched at the G7 summit in Lyon, France in 1996, and was revised and strengthened in 1999 following the G7 summit in Cologne, Germany.
• In this 1999 communication, the European Commission (EC) confirmed its support for the initiative and pledged donations in particular to African, Caribbean and Pacific countries.
• The EU plays a dual role, participating both as creditor and donor, providing debt relief as well as direct donations.
• For more information, see:
  • ‘Heavily Indebted Poor Country (HIPC) Initiative’ on the World Bank's website
  • ‘Debt Relief under the Heavily Indebted Poor Countries (HIPC) Initiative’ factsheet on the International Monetary Fund's website

* KEY TERMS

MAIN DOCUMENT

Communication from the Commission to the Council, the European Parliament and the Economic and Social Committee on a Community participation in the debt relief initiative for highly indebted poor countries (HIPC) (COM(1999) 518 final, 26.10.1999)

last update 07.12.2016