The International Monetary Fund (IMF ) and the World Banks International Development Association (IDA) have agreed that Ethiopia has made sufficient progress and taken the necessary steps to reach its completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Ethiopia becomes the thirteenth country to reach this point.
Total debt service relief under the enhanced HIPC Initiative from all of Ethiopias creditors amounts to approximately 3,3 billion US dollar in nominal terms.
This assistance is equivalent to a reduction in net present value (NPV2) terms of 1,3 billion dollar agreed at the decision point, plus a topping-up of the assistance in an amount equivalent to 0,7 billion dollar in NPV terms, approved at the completion point.
The exceptional additional assistance under the topping up framework has been granted on account of exogenous factors – particularly changes in the discount rate and exchange rate since the decision point – that have fundamentally changed Ethiopias economic circumstances.
These circumstances have thereby adversely affected its debt sustainability, raising the NPV of debt-to-exports ratio at end-2002-03 substantially above the 150 percent threshold established under the enhanced HIPC framework.
Further, the track record of the Ethiopian authorities in policy and reform implementation has been strong, and the authorities have borrowed prudently despite being adversely affected by a severe drought and lower coffee prices.
Including topping-up of the HIPC Initiative assistance, multilateral creditors would provide debt relief amounting to about 1,3 billion dollar in NPV terms, of which 60,9 million is from the IMF and 0,8 billion from the World Bank (equivalent to 1,3 billion dollar in nominal terms).
Bilateral and commercial creditors would provide debt relief amounting to 0,7 billion in NPV terms. In addition, most Paris Club creditors have indicated their intention to provide additional relief beyond the HIPC Initiative estimated to total about 300 million dollar in NPV terms).
Resources made available by debt relief under the HIPC initiative are being allocated to pro-poor expenditure programs. In 2001-02 and 2002-03, poverty-targeted spending has increased by 259 million dollar (3,3 percent of GDP), substantially more than HIPC relief, reflecting the resumption of donor assistance and a reduction in military spending.
Background
Ethiopia is a landlocked country located in the Horn of Africa. With a per capita GDP of about 100 dollar (one fifth of the sub-Saharan average), Ethiopia is among the poorest countries in the world. Recent national household surveys find 44 percent of the people below the basic needs poverty line.
Following the overthrow of the socialist-oriented Derg regime in 1991, the Ethiopian government has with the support of the Fund and the World Bank been implementing reforms aimed at raising real GDP growth and reducing poverty, while maintaining macroeconomic stability.
Real GDP growth averaged about 5 percent per year during 1991-92 – 2001-02, while inflation has been relatively contained. These positive developments were achieved despite the border war of 1998-2000 with Eritrea, and the continued decline in coffee prices since 1997/98.
Steps Taken to Reach the Completion Point Under the Enhanced HIPC Initiative
The approval of irrevocable debt relief for Ethiopia under the enhanced HIPC Initiative underscores recognition by the international community of its satisfactory progress in implementing sound macroeconomic and structural policies.
Upon reaching its decision point under the enhanced framework of the HIPC Initiative in November 2001, Ethiopia committed to undertake work in the following areas in order to reach the completion point and receive irrevocable debt relief under the enhanced framework:
(i) Completion of a full PRSP (fattigdoms-reducerende strategi) through a participatory process and its satisfactory implementation for at least one year;
(ii) Preservation of a stable macroeconomic environment; and
(iii) Implementation of key structural reforms and social (particularly health and education) measures.
The HIPC Initiative
In 1996, the World Bank and the International Monetary Fund launched the HIPC Initiative to create a framework for all creditors, including multilateral creditors, to provide debt relief to the worlds poorest and most heavily indebted countries, and thereby reduce the constraint on economic growth and poverty reduction imposed by the debt build-up in these countries. The Initiative was modified in 1999 to provide three key enhancements:
1) Deeper and broader relief. External debt thresholds were lowered from the original framework. As a result, more countries became eligible for debt relief and some countries became eligible for greater relief.
2) 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.
3) 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, 27 countries – two-thirds of the HIPCs – have reached their decision points and are receiving debt relief from all sources that will amount to more than 51 billion US dollar over time, and an average NPV stock-of-debt reduction of nearly two-thirds.
Of these 27, thirteen countries have now reached their completion points. They are Benin, Bolivia, Burkina Faso, Ethiopia, Guyana, Mauritania, Mali, Mozambique, Nicaragua, Niger, Senegal, Tanzania and Uganda.
1. The completion point under the HIPC Initiative is when creditors commit irrevocably to and fully deliver debt relief. The decision point, which precedes the completion point, is when debt relief is committed and begins on an interim and voluntary basis.
2. 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 countrys debt stock. Whenever the interest rate on a loan is lower than the market rate, the resulting NPV of debt is smaller than its face value, with the difference reflecting the grant element.
3. The 27 countries are: Benin, Bolivia, Burkina Faso, Cameroon, Chad, Democratic Republic of Congo (DRC), Ethiopia, The Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Madagascar, Malawi, Mauritania, Mali, Mozambique, Nicaragua, Niger, Rwanda, São Tome & Príncipe, Senegal, Sierra Leone, Tanzania, Uganda and Zambia.
Kilde: www.worldbank.org
