The International Monetary Fund (IMF) and the World Banks International Development Association (IDA) have agreed that Burundi has taken the steps necessary to reach its decision point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative.
Burundi becomes the 28th country to reach its decision point under the enhanced HIPC Initiative and now qualifies for interim debt relief under the Initiative.
In total, the debt relief to Burundi under the enhanced HIPC Initiative will be approximately 826 million US dollar in Net Present Value (NPV) terms, equivalent to 91,5 percent of the NPV of Burundis debt after traditional debt relief.
Over time, this debt relief will lower the small central African countrys debt service payments by about 1,5 billion dollar (ca. 9 mia. DKR) in nominal terms.
IDAs share of enhanced HIPC assistance to Burundi amounts to 424,8 million US dollar in NPV terms (equivalent to 773 million dollar in nominal terms), which will be delivered through a 90 percent reduction in debt service on IDA credits from 2005-39.
The IMF will provide assistance of 27,8 million dollar in NPV terms, which will be delivered through an average annual reduction in debt service payments of about 50 percent through 2015. Under the enhanced HIPC Initiatives burden sharing approach, Burundi’s other creditors will provide the remainder of the Initiatives debt relief.
As established under the enhanced HIPC Initiative framework, Burundi will reach its completion point when it completes a number of agreed measures that are described in the decision point document.
Agustin Carstens, Acting Chair of the IMF Executive Board, said:
– Burundi has made good progress in strengthening macroeconomic policy performance and deepening the structural reform agenda. The authorities have taken important steps to solidify the peace and bring the political transition process to a successful conclusion.
– Burundis external debt situation will remain difficult even after HIPC debt relief, and strong economic policies, prudent debt management, and continued donor support on highly concessional terms will be needed to ensure a sustainable external debt in the medium term.
Pedro Alba, the World Bank Country Director for Burundi said:
– Burundi has made significant progress in the implementation of its economic program. However, many challenges remain. More than half of the population lives in extreme poverty conditions, and the economy is extremely vulnerable to external shocks. The HIPC decision point is an important step towards getting a debt relief which will enable the country to invest in pro-poor programs, as outlined in the interim Poverty Reduction Strategy Paper.
Background
Burundi is a small landlocked country with a population of 7,3 million and with a nominal per capita GDP of 83 US dollar in 2003. Some 68 percent of the population in 2002 was estimated to be living below the poverty line.
In terms of social welfare indicators, Burundi is the fourth least developed country in the world, mainly due to decades of violence which caused a long period of economic decline.
In August 2000, a peace and reconciliation accord was signed, and a transition government and parliament were established in 2002. The political transition is now drawing to a close. A new constitution was approved in a national referendum in February 2005, communal elections were successfully conducted in June 2005 and parliamentary elections were held in July 2005.
The new parliament is to elect a new President who will be inaugurated in late August 2005.
The HIPC Initiative
In 1996, the World Bank and IMF launched the HIPC Initiative to create a framework in which all creditors, including multilateral creditors, can provide debt relief to the world’s poorest and most heavily indebted countries, and thereby reduce the constraints on economic growth and poverty reduction imposed by the debt-service burdens in these countries. The Initiative was modified in 1999 to provide three key enhancements:
– Deeper and Broader Relief. External debt thresholds were lowered from the original framework. As a result, more countries have become eligible for debt relief and some countries have become eligible for greater relief;
– Faster Relief. A number of creditors began to provide interim debt relief immediately at the “decision point.” Also, the new framework permitted countries to reach the “completion point” faster; and
– Stronger Link Between Debt Relief and Poverty Reduction. Freed resources were to be used to support poverty reduction strategies developed by national governments through a broad consultative process.
To date, 28 HIPC countries have reached their decision points, of which 18 have reached completion point.
Countries begin receiving debt relief on an interim basis until the completion point is reached.
The Net Present Value (NPV) of debt is the discounted sum of all future debt service obligations (interest and principal). It is a measure that takes into account the degree of concessionality of a country’s debt stock. Whenever the interest rate on a loan is lower than the prevailing market rate, the resulting NPV of debt is smaller than its face value, with the difference reflecting the grant element.
Nominal terms means the actual dollar value of debt service forgiven over a period of time.
To reach the completion point, Burundi is to continue its commitment to the economic program supported by the IMFs Poverty Reduction and Growth Facility (PGRF), complete and satisfactorily implement a Poverty Reduction Strategy for one year, and to implement an agreed set of key structural and social reforms as well as measures in the areas of public expenditure and debt management, demobilization, governance, and infrastructure.
