Debt Relief for Heavily Indebted Poor Countries: Issues for Congress

Debt Relief for Heavily Indebted Poor Countries:
Issues for Congress
Updated April 18, 2006
Martin A. Weiss
Analyst in International Trade and Finance
Foreign Affairs, Defense, and Trade Division

Debt Relief for Heavily Indebted Poor Countries:
Issues for Congress
In recent decades, the rapid growth in poor country debt has emerged as a key
foreign policy concern. Many analysts believe that this debt burden is an impediment
to economic growth and poverty reduction. Others contend that for the poorest
countries, other factors such as weak political and economic institutions, are a greater
impediment to growth than the debt burden.
There have been many efforts to help reduce poor country debt. In 1988 a group
of major creditor nations, known as the Paris Club, agreed for the first time to cancel
debts owed to them instead of refinancing them on easier terms as they had done
previously. In 1996, the International Monetary Fund (IMF), the World Bank, and
the regional development banks agreed to allow a portion of debts owed to them by
a select group of countries to be cancelled. This effort is known as the Debt Relief
Initiative for Heavily Indebted Poor Countries (HIPC). In June 2005, the Group of
Eight (G8) nations agreed to further deepen debt relief and proposed 100%
cancellation of all multilateral debt for countries that have finished the HIPC
program. Several pieces of legislation (H.R. 1130 and S. 1320) also have been
introduced that could extend debt relief to an even larger group of countries. As
introduced, the G8 proposal raises four possible concerns:
!Scope of Debt Cancellation — The proposed agreement is limited
to the IMF, the World Bank, and the African Development Bank.
Several other development banks are major creditors and are not
included in the proposal.
!No Net New Assistance — The proposed agreement specifies that
HIPC countries that receive debt reduction will have their total
assistance flows reduced by the amount of debt forgiven. This
money will then be reallocated among all low-income countries.
!Funding is Not Assured — The agreement promises that G8
countries will compensate the development banks for any debt relief
they provide. However, future contributions to the development
banks are not guaranteed.
!Future Commitments are Unspecified — The agreement commits
G8 members to cover the cost of debt relief for countries that may
later enter the HIPC process. Depending on which, if any, countries
are added, the potential cost of debt relief may rise significantly.
No congressional appropriations are required at this time to implement the G8
proposal. However, additional U.S. funds may need to be appropriated in the future
to fund higher levels of HIPC debt relief.
This report will no longer be updated. For information on the current status of
the G8 debt relief proposal, see CRS Report RS22534, The Multilateral Debt Relief
Initiative, by Martin A. Weiss.

In troduction ......................................................1
Background ......................................................2
The Economic Debate over Debt Relief................................4
Debt Overhang: Theory.....................................4
Debt Overhang: Evidence...................................5
U.S. Bilateral Debt Relief...........................................6
Multilateral Debt Relief: The Heavily Indebted Poor Countries Program.....10
Eligibility ...................................................10
HIPC Stages.................................................11
Decision Point...........................................11
Completion Point.........................................11
Financing HIPC Debt Relief....................................12
HIPC Trust Fund.........................................12
IMF Gold...............................................13
Current Status of HIPC........................................13
The 2005 G8 Proposal for 100% HIPC Debt Forgiveness.................14
Key Details of the Agreement...................................17
Potential Concerns............................................18
No Net Resource Gain.....................................18
Limited Debt Cancellation..................................18
Multilateral Development Bank Compensation is Not Guaranteed...18
Future Cost May Rise.....................................19
Proposed Legislation..........................................20
Multilateral Debt Relief Act of 2005..........................20
Jubilee Act of 2005.......................................20
Appendix 1: World Bank Debt and Poverty Ratings.....................22
Appendix 2: U.S. Debt Reduction Agreements FY1990-FY2005...........25
Appendix 3: HIPC External Debt Profile..............................29
Appendix 4: Non-HIPC Countries Eligible for 100% World Bank Grant
Assistance ..................................................31

Table 1. External Debt as a Percentage of GDP (Period Average)............3
Table 2. Summary of the HIPC Program..............................12
Table 3. HIPC Countries and Their Status.............................14
Table 4. World Bank Debt Categories................................22
Table 5. World Bank Debt Ratings...................................23

Debt Relief for Heavily Indebted Poor
Countries: Issues for Congress
At the June 2005 Group of Eight (G8)1 finance ministers meeting, member
nations agreed on a financing plan for 100% debt relief for countries that complete
the International Monetary Fund (IMF) and World Banks’ Heavily Indebted Poor
Countries (HIPC) debt relief program. If the proposal is fully implemented, 18
countries that have completed the HIPC program would receive complete and
immediate forgiveness of their multilateral debts, approximately $40 billion. An
additional 20 countries are eligible for debt relief, but are currently implementing
pre-requisite economic reforms. If all of the 38 HIPC-eligible countries receive debt
cancellation, total debt relief would be approximately $55.6 billion. According to the
proposal, creditor nations will provide additional funding for the World Bank and the
African Development Bank (AfDB) to fund their debt relief. IMF debt relief will be
funded by the remaining proceeds of a 1999 sale of IMF gold reserves.
To date, the Bush Administration has not requested new funds to contribute
toward the U.S. share of the G8 debt relief proposal. Congress, however, is currently
considering appropriations for the World Bank and the AfDBs’ concessional lending
facilities and, although none of this funding has been specifically earmarked for
HIPC, it appears that the administration would like to use some of this funding for
the increased debt relief. There are also two pieces of legislation (H.R. 1130 and S.
1320) that if enacted would allow for higher levels of debt relief than is provided for
in the G8 proposal.
This report addresses the HIPC debt burden and the various debt relief
initiatives, both bilateral and multilateral, that have been implemented and proposed.
Following a brief background and a discussion of the economic literature on debt
relief, this report addresses: (1) previous U.S. debt relief initiatives; (2) multilateral
debt relief through the HIPC program; (3) the June 2005 G8 proposal for 100% debt
cancellation; and (4) congressional action.

1 The Group of Eight nations are the United States, the United Kingdom, Japan, France,
Germany, Canada, Italy, and Russia. Russia, not normally included in the finance
ministerial meetings, was included during the June 2005 meetings. For this report, the term
G8 refers to country meetings including Russia, the term G7 refers to meetings of the
remaining seven.

In recent decades, the rapid growth in poor country debt has emerged as a key
foreign policy concern. As early as 1967, the United Nations Conference on Trade
and Development (UNCTAD) argued that debt service payments in many poor2
nations had reached “critical situations.” Since then, and notably in the last ten
years, there has been pressure exerted on national bilateral creditors and multilateral
lenders (such as the International Monetary Fund or the World Bank) by non-
governmental organizations (NGOs) and several Western nations for creditors to
cancel all debts owed to them by the poorest and least developed countries. In a
speech to the United Nations in 2002, UK Chancellor of the Exchequer Gordon
Brown challenged developed nations to help build “a virtuous circle of debt relief,
poverty reduction and sustainable development for the long term” for the world’s3
poorest countries. According to U.S. Secretary of the Treasury John Snow, debt has
been “locking these poorest countries into poverty and preventing them from using
their own resources [for development].” Requiring repayment of the debt is, he
added, “morally wrong.”4
Much of the recent debt relief momentum has been spurred by the Jubilee
(formerly the Jubilee 2000) debt campaign. Initially launched in 1996, the Jubilee
campaign’s mission is to convince major creditor nations to cancel the unpayable5
debts of the poorest countries under a fair and transparent process. The international
campaign is spearheaded primarily by various Catholic and Protestant organizations
that have had longstanding involvement in debt relief issues and includes numerous
high-profile supporters such as Sir Bob Geldof, an Irish rock singer and activist, and
Bono, lead singer of the Irish band U2.
Debt relief proponents often maintain that poor country debt is illegitimate, or
according to Bono, “immoral and unjust.”6 This claim rests on the so-called “odious
debt” argument. Odious debt is normally considered to be debt which benefits ruling
elites in a borrowing country (through graft and corruption) but has little or no benefit
for the general population. Debt critics question whether successor regimes should
be obligated, under international law, to repay money that was stolen, wasted, or
otherwise used in ways having little benefit for their people. Although the odious
debt concept has gained popularity in the NGO community, it has not been endorsed
by any international legal or financial body. Moreover, there is almost no likelihood
that debts incurred through World Bank or IMF projects could be legally determined
to be odious, since they were undertaken for nominally development-related projects.

2 William Easterly, “Debt Relief: Think Again,” Foreign Policy, November 2001.
3 Speech given by Gordon Brown at the United Nations General Assembly Special Session
on Children, May 10, 2002. Speech is available at
[ Press/2002/press_46_02.cfm].
4 Quoted in Paul Blustein, “Debt Cut Is Set for Poorest Nations — Deal Would Cancel $40
Billion in Loans,” The Washington Post, June 12, 2005.
5 More information on the Jubilee campaign is available at [].
6 Quoted in One Campaign Press Release, June 11, 2005. The press release is available at
[ node/76].

Nonetheless, many agree that high levels of debt are a major burden for the poorest
countries and that any effort to promote economic growth and reduce poverty needs
to address the HIPC debt burden.
The poor country debt burden is indeed staggering. For the 38 International
Development Association (IDA)7 countries that have been designated as the most
Heavily Indebted Poor Countries, total external debt rose from $19.7 billion in 1975
to a peak of $222 billion in 1995, a major increase over other developing countries.8
Table 1 compares debt as a percentage of gross domestic product (GDP) for three
tiers of poor countries: HIPCs, other IDA countries, and other lower middle income
countries.9 (See Appendix 1 for information on the World Bank debt and poverty
classification systems.)
Table 1. External Debt as a Percentage of GDP (Period Average)
Country category1980-19841985-19891990-19941995-2000
HIPC 38% 70% 120% 103%
Other IDA countries21%33%38%33%
Other lower-, middle-22%30%27%26%
income countries
Source: World Bank.
In the 1980s and early 1990s, as the debts of the poorest countries increased
rapidly compared to other low-income countries, several debt relief efforts were
introduced. In 1988, a group of major creditor nations, known as the Paris Club,10
agreed for the first time to cancel debts owed to them instead of refinancing them on
easier terms as they had done until then.
In 1996, the International Monetary Fund, the World Bank, and the regional
development banks agreed to allow a portion of debts owed to them to be cancelled

7 The International Development Association (IDA) is the World Bank’s concessional
lending facility, and provides grants or loans to the 81 poorest countries at below market
rates. Eligibility for IDA assistance is determined by a country’s “relative poverty,” defined
as Gross National Product (income) per person below an established threshold, currently
US$825 per year.
8 World Bank, Global Development Finance, 1999.
9 The World Bank defines a lower middle income country as one with a per capita gross
national income (GNI) of between $826 and $3,255.
10 The Paris Club comprises 19 permanent members, all major international creditor
governments: Austria, Australia, Belgium, Canada, Denmark, Finland, France, Germany,
Ireland, Italy, Japan, Netherlands, Norway, Russia, Spain, Sweden, Switzerland, United
Kingdom and the United States. Other creditors are allowed to participate in negotiations
on an ad-hoc basis. See CRS Report RS21482, The Paris Club and International Debt
Relief, by Martin A. Weiss.

as well, and created the Debt Relief Initiative for Heavily Indebted Poor Countries
(HIPC). At the meeting of the G8 finance ministers on June 11, 2005, member
nations extended debt relief and committed themselves to cancelling permanently all
remaining multilateral HIPC external debt, providing up to $55 billion in additional
debt relief. According to the proposal, the 18 countries that have completed the
HIPC program would receive immediate debt relief (worth $40 billion at face value).
Countries that are in the middle of the program, or have not yet begun, would receive
total debt relief upon completion of the program. If the remaining 20 countries
complete the HIPC program, total debt relief could exceed $55 billion.
There are several root causes of the HIPC debt burden. A 1999 IMF study
concluded that the rise in HIPC debt had its origins in weak macroeconomic policies,
a lack of economic structural reform, and poor debt management practices on the part
of debt-stressed countries, as well as adverse trade shocks and political factors such
as war, famine, and social strife.11 The debt problem was compounded by the
willingness of creditor nations and multilateral institutions to provide loans and
accept risks that the private sector would not. William Easterly, formerly a World
Bank economist and currently a professor at New York University, points out that
between 1979 and 1997, the IMF and World Bank provided more financing to HIPCs
than other countries of their income level, despite HIPC countries’ often poor
economic policies.12
The Economic Debate over Debt Relief
Among economists, the likely success of debt relief in spurring meaningful
economic reform or make substantial inroads against poverty is often questioned.
Critics maintain that money to fund debt relief must be transferred from other
resources and there is a risk that donors will take all or some of these resources from
other parts of their foreign assistance budgets. If this occurs, overall resources for
promoting development may not increase, or may increase by less than the amount
of debt relief provided. Moreover, many analysts argue that there are foreign aid
activities, such as additional investments in the legal, financial, education, or public
health systems that may have a greater impact on promoting economic growth and
providing resources for poverty reduction activities than debt relief. A second
problem is determining whether the actual debt load is itself so big as to impede
growth and development. Advocates of debt relief argue that such a “debt overhang”
must be relieved if a country is to resume growth.
Debt Overhang: Theory. Most debt relief is grounded in the “debt
overhang” theory which holds that the accumulation of a large stock of debt will
frighten off potential lenders and investors. It originated in the 1980s and was based

11 Christina Daseking, and Robert Powell, “From Toronto Terms to the HIPC Initiative: A
Brief History of Debt Relief for Low Income Countries,” International Monetary Fund
Working Paper WP/99/142, 1999.
12 William Easterly, “How Did Heavily Indebted Poor Countries Become Heavily Indebted?
Reviewing Two Decades of Debt Relief,” World Development, October 2002, vol. 30 (10),
pp. 1677-1696.

on the largely positive economic growth that several heavily indebted countries
experienced following a 1989 debt relief initiative known as the “Brady Plan,” named
after then-U.S. Treasury Secretary Nicholas Brady.13 The theory suggests that if
investors expect a country’s debt level to impair its ability to repay its loans, they will
not invest out of a concern that the government may resort to distortionary measures,
such as expanding the money supply (which promotes inflation) or raising taxes on
their profits to finance debt payments.14 Even if the debt is not being serviced, the
theory suggests that it is still an impediment to economic growth because of the
effect the large debt stock has dissuading private investors.
When a large stock of external debt is present, creditor countries could continue
to lend at concessional rates in the hope that continued aid will spur economic growth
and that the recipient country will one day be able to repay its debts. According to
the debt overhang theory, however, it is better to forgive the debts, either entirely or
to some reduced “sustainable” level so that investor confidence will be restored. It
is presumed that at a “sustainable” level debtor nations would be able to make some
debt payments to their creditors without sacrificing economic growth.
Debt Overhang: Evidence. A 2002 study of 93 developing countries
between 1969 and 1998, and a follow-up study of 61 countries over the same time
period, were cited as strong support for the debt-overhang theory. The first study
found that external debt began to have a negative impact on growth when its net15
present value exceeded 160% to 170% of exports and 35% to 40% of GDP. Study
simulations suggest that doubling the average stock of external debt in these
countries would slow down annual per capita growth by ½% to 1%. The second study
found that doubling a country’s average external debt level would reduce growth of
both per capita physical capital and productivity by almost 1%. The studies
concluded that large debt stocks negatively affect growth by slowing both the
accumulation of physical capital and productivity, often at the expense of
Although the debt overhang theory may be true in general, several new studies
have argued that it does not hold for HIPC countries. One study points to two key

13 Walter Molano, “From Bad Debts to Healthy Securities? The Theory and Financial
Techniques of the Brady Plan,” Business and the Contemporary World, VIII, 1997, No. 3-4.
14 Paul Krugman, “Financing vs. Forgiving a Debt Overhang.” Journal of Development
Economics, vol. 29, 1988, pp. 253-268; and Jeffrey Sachs, “The Debt Overhang of
Developing Countries,” in Guillermo A. Calvo and others, eds., Debt Stabilization and
Development, Essays in Memory of Carlos Dias Alejandro, Oxford, U.K.: Basil Blackwell,


15 Net Present Value (NPV) of a country’s total debt is the discounted sum of all future
debt-service obligations (interest and principal). This measure takes into account the degree
of concessionality of a country’s 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.
16 Catherine Pattillo, Helene Poirson, and Luca Ricci, “External Debt and Growth,” IMF
Working Paper No. 02/69, April 1, 2002; and Catherine Pattillo, Helene Poirson, and Luca
Ricci, “What Are the Channels Through Which External Debt Affects Growth?,” IMF
Working Paper No. 04/15, January 1, 2004.

differences between the Brady and HIPC countries.17 In contrast to the Brady
countries, there never was a significant amount of private investment in the HIPC
countries, and the HIPC countries have never suffered a negative net flow of
resources because inflows of foreign aid are typically more than sufficient to cover
debt payments.18 Moreover, debt relief that the HIPC countries have received has
not been sufficient to allow them access to private sector credit markets.
Thus, rather than a debt overhang, some argue that lack of institutional capacity
(legal, political, educational, health, etc.) are the HIPCs’ major impediments to
economic growth, and that in the absence of additional funds dedicated for debt
relief, other forms of targeted assistance may be more effective in boosting economic
growth than debt relief. If the economies of countries grew, they argue, the debt
would not be a problem. Instead of forgiving debts, creditor nations may be able to
help the poorest countries by helping to improve their domestic institutions, expand
their export sectors, and by providing greater market access for their goods.
U.S. Bilateral Debt Relief
U.S. bilateral debt relief is accomplished two ways. One is through legislation
enacted by Congress granting authority to the President to cancel country debt19
obligations. The second is through the Paris Club. The Paris Club is the major
forum where creditor countries renegotiate official sector debts. By definition,
‘Official sector’ debts are those that have been either issued, insured, or guaranteed
by creditor governments. A Paris Club ‘treatment’ refers to either a reduction and/or
renegotiation of a developing country’s Paris Club debts. The Paris Club includes
the United States and 18 other permanent members, the major international creditor
governments. Besides the United States, the permanent membership is composed of
Austria, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland,
Italy, Japan, Netherlands, Norway, Russia, Spain, Sweden, Switzerland, and the
United Kingdom. Other creditors are allowed to participate in negotiations on an ad-
hoc basis.
By contrast, a separate informal, voluntary group of private sector participants
meets to renegotiate some of the developing country debt they are owed. The
London Club, a parallel, informal group of private firms, meets in London to

17 Countries receiving assistance through the Brady Plan were Argentina, Brazil, Bulgaria,
Costa Rica, the Dominican Republic, Ecuador, Ivory Coast, Jordan, Mexico, Nigeria,
Panama, Peru, the Philippines, Poland, Russia, Uruguay, Venezuela and Vietnam.
18 Serkan Arslanalp and Peter Blair Henry, “Helping the Poor to Help Themselves: Debt
Relief or Aid,” National Bureau of Economic Research Working Paper 10230, January


19 The Federal Credit Reform Act of 1990 stipulates that Congress must be involved in any
official debt relief negotiations. The President must notify Congress of any debt
rescheduling or reduction. Congressional appropriation of the net present value of debt to
be reduced is also required. Finally, the Secretary of State is required to notify the
committees of jurisdiction 30 days prior to any debt relief agreement (P.L. 95- 424, Section


renegotiate commercial bank debt. Unlike the Paris Club, there is no permanent
London Club membership. At a debtor nations request, a London Club meeting of
its creditors may be formed, and the Club is subsequently dissolved after a
restructuring is in place.
The Paris Club does not exist as a formal institution. It is rather a set of rules
and principles for debt relief that have been agreed on by its members. Five
‘principles’ and four ‘rules’ currently govern Paris Club treatments. Any country that
accepts the rules and principles may, in principle, become a member of the Paris
Club. Yet since the Paris Club permanent members are the major international
creditor countries, they determine its practices.
The five Paris Club ‘principles’ stipulate the general terms of all Paris Club
treatments. They are: (1) Paris Club decisions are made on a case-by-case basis; (2)
all decisions are reached by full consensus among creditor nations; (3) debt
renegotiations are applied only for countries that clearly need debt relief, as
evidenced by implementing an International Monetary Fund (IMF) program and its
requisite economic policy conditionality; (4) solidarity is required in that all creditors
will implement the terms agreed in the context of the renegotiations; and (5) the Paris
Club preserves the comparability of treatment between different creditors. This
means that a debtor country cannot grant to another creditor a treatment on more
favorable terms than the consensus reached for Paris Club members.20
While Paris Club ‘principles’ are general in nature, its ‘rules’ specify the
technical details of Paris Club treatments. The ‘rules’ detail (1) the types of debt
covered — Paris Club arrangements cover only medium and long-term public sector
debt and credits issued prior to a specified “cut-off”date; (2) the flow and stock
treatment;21 (3) the payment terms resulting from Paris Club agreements; and (4)
provisions for debt swaps.22
Since the Paris Club is an informal institution, the outcome of a Paris Club
meeting is not a legal agreement between the debtor and the individual creditor
countries. Creditor countries that participate in the negotiation sign a so-called
‘Agreed Minute.’ The Agreed Minute recommends that creditor nations collectively
sign bilateral agreements with the debtor nation, giving effect to the multilateral Paris
Club agreement.
Prior to U.S. involvement, Paris Club members began providing outright debt
cancellation in 1988. Previously, debt treatments involved rescheduling of debts on
increasingly concessional terms. At the 1988 Toronto meeting of G7 finance

20 For more information on Paris Club principles and rules, see []
21 The flow treatment provides a method for the debtor country to progress through
temporary balance of payments difficulties. Stock treatment specifies what portion of a
country’s ‘stock’ of debt is covered by the Paris Club agreement.
22 A debt swap is a transaction in which a company, or in the case of the Paris Club, a
country, exchanges debt for other assets, such as foreign aid, equity, or local currency debt.

ministers, it was agreed that Paris Club members would extend to some countries up
to one-third forgiveness of their bilateral debts.23
Over the next decade, the Paris Club gradually increased the amount of debt that
it would be willing to write off from 33.33% in 1988 to 90% in 1999.24 There are
currently two Paris Club debt cancellation options, “Naples” terms for non-HIPC
IDA countries and “Cologne” terms for HIPC countries (see box). These terms are
named after the cities where they were negotiated by G7 countries.
Paris Club Debt Cancellation
Naples Terms — Naples Terms, agreed at the December 1994 G7 meeting in
Naples, Italy, are the Paris Club’s terms for cancelling and rescheduling the debts
of very poor countries. A country may receive Naples terms treatment if it is
eligible to receive IDA loans. Under Naples Terms, at least 50% and up to 67%
of eligible debt may be cancelled.
Cologne Terms — Cologne Terms were created at the June 1999 G7 meeting in
Cologne, Germany, for HIPC countries only. Cologne Terms allow for higher
levels of debt cancellation than Naples Terms. Under Cologne terms, up to 90%
of eligible debts can be cancelled. Several countries, including the United States,
have agreed to go beyond Cologne terms to provide 100% bilateral HIPC debt
The United States joined Paris Club debt forgiveness negotiations in 1994,
under authority granted by Congress in 1993 (Foreign Operations Appropriations,
section 570, P.L. 103-87). Annually re-enacted since 1993, this authority allows the
Administration to cancel various loans made by the United States. These may include
U.S. Agency for International Development (USAID) loans, military aid loans,
Export-Import Bank loans and guarantees, and agricultural credits guaranteed by the
Commodity Credit Corporation.
Between 1990 and 2005, the United States forgave $23.1 billion in foreign debt
owed to the United States, only a small part of which — $3.14 billion — was reduced
via the Paris Club.25 Debt has also been reduced through various legislative measures
and congressionally authorized U.S. bilateral negotiations. These include (Appendix

2 provides U.S. bilateral debt relief data):

!Section 411 Debt Relief. Under Section 411 of the Agricultural
Trade Development and Assistance Act of 1954 (PL 83-480; 7 USC
sec. 1736e), Congress authorized the President to cancel

23 Many Paris Club policy decisions are decided during periodic finance ministers meetings
of the G7 countries.
24 More information on Paris Club debt treatment options is available at the Paris Club Web-
site: [].
25 U.S. Treasury Department and the Office of Management and Budget. U.S. Government
Foreign Credit Exposure as of December 31, 2003, Part I, p. 19.

concessional food aid loans to poor and indebted countries under an
IMF or World Bank economic program.
!Section 572 Debt Relief. Under Section 572 of the Foreign
Operations, Export Financing, and Related Appropriations Act for
Fiscal Year 1989 (P.L. 100-461, 22 USC 2151), the U.S. President
was authorized to forgive debt during fiscal years 1990 and 1991
from concessional development assistance loans to African and other
poor and indebted countries that maintained an economic reform
program with the IMF or the World Bank.
!Enterprise for the Americas Initiative (EAI). The Enterprise for
the Americas (EAI) Initiative supports trade, investment and
economic growth in Latin America and the Carribean. Debt
reduction legislation in support of the EAI Initiative was enacted in
1990 to forgive U.S. food aid loans for EAI countries that did not
meet the necessary criteria for Section 411 debt relief (P.L. 102-549,
Enterprise of the Americas Act of 1992, which added part IV to the
Foreign Assistance Act of 1961; 22 USC 2430 et seq.) and in 1992
for USAID and Export-Import Bank debt (P.L. 102-429, Export
Enhancement Act of 1992, which added Section 12 to the Export-
Import Bank Act of 1945; 12 USC 635-6).
!Conservation of Tropical Forests. The Tropical Forest
Conservation Act of 1998 (TFCA) (P.L. 105-214, which added part
V to the Foreign Assistance Act of 1961; 22 USC 2431 et seq.)
authorizes the President to request debt relief for low and
middle-income countries with tropical forests to support
conservation of endangered forests.26
!Debt Swaps under the SEED Act. The Support for East European
Democracy (SEED) Act of 1989 (P.L. 101-170, USC 5401 et seq.)
authorized debt relief to support Eastern European countries as they
progressed towards democracies with free-market economies.
!Special Debt Reduction Programs. The U.S. government has
reduced the debts of Egypt, Poland, Jordan, and Pakistan for various
national security reasons. Each of these debt relief activities was
provided pursuant to special legislation.

26 See CRS Report RL31286, Debt-for-Nature Initiatives and the Tropical Forest
Conservation Act: Status and Implementation, by Pervaze A. Sheikh.

Multilateral Debt Relief: The Heavily Indebted Poor
Countries Program
For much of their history, the international financial institutions (IFIs) argued
that since they were lenders of last resort, providing assistance to poor countries that
could not borrow money from the global financial markets, they required preferred
creditor status. This means that the World Bank and the IMF would be paid first in
the event that borrowers ran into financial difficulties, and that debts owed to them
would not be reduced under any circumstances. Forgiving their debts, they argued,
would diminish their resources available for other poor and developing countries and
set a bad example for other indebted countries as they undertook often painful, albeit
economically crucial, reforms. This is the so-called “moral hazard” problem with
debt relief. Some creditors argue that by providing debt relief, they are creating a
“moral hazard” by convincing borrowers that they need not worry about repayment.
Despite initial reservations, and at the G8’s request, the World Bank and the
IMF created the HIPC debt relief program in 1996 to reduce some multilateral debt
in conjunction with bilateral debt forgiveness. According to the IMF and the World
Bank, the goal of the HIPC program would be to help the poorest and most indebted
countries meet their “current and future external debt service obligations in full,
without recourse to debt rescheduling or the accumulation of arrears, and without
compromising growth.”27
In 1999, the program was expanded to provide deeper, faster, and broader debt
relief. Initially, the HIPC program determined that a debt service-to-exports ratio28
of 250% was determined to be sustainable. Moreover, it took a minimum of six
years for borrowers to qualify for debt relief. Critics charged that this ratio was too
high and the time-frame too long. When the program was redesigned in 1999, the
debt service-to-exports ratio was reduced to 150%, and the time period was
shortened. The HIPC program was also modified to include a greater focus on
poverty reduction efforts. Countries receiving debt relief were now be required to
use money freed up by debt relief for poverty reduction as specified in a Poverty
Reduction Strategy Paper (PRSP) approved by its lenders.
There are three criteria for HIPC eligibility. A country must:
!Be a low-income country eligible to borrow only from the World
Bank’s concessional facility, the International Development
Association. 29

27 International Monetary Fund and World Bank, The Challenge of Maintaining Long-Term
External Debt Sustainability. Washington, D.C., April 20, 2001.
28 Debt service is the sum of interest payments and repayments of principal.
29 Middle-income countries borrow from the World Bank’s market-rate lending facility, the
International Bank for Reconstruction and Development (IBRD).

!Have a strong record of policy performance, evidenced by a strong
track record of economic reforms under World Bank and IMF-
sponsored programs; and
!Possess a debt burden that is unsustainable (greater than 150% debt
service-to-exports ratio) after bilateral debt relief has been applied.
In 1996, at the start of the program, the World Bank and the IMF designated 41
countries as potentially HIPC-eligible. Comoros was added in 2001. Of these 42
countries, Angola, Kenya, Vietnam, and Yemen were later removed after additional
IMF/World Bank debt analysis determined that they could reach debt sustainability
through bilateral debt relief.
Many critics argue that the four excluded countries, as well as many others,
should be eligible for relief. They maintain that the debt sustainability analysis used
to determine HIPC eligibility relied on overly optimistic assumptions with respect to
GDP and export rates in deciding country eligibility. An official review of the HIPC
program in 2003 concurred with this assessment and called for more realistic
economic projections in determining HIPC eligibility.30 It has also been asserted that
the eligibility criteria were based on political and cost factors, rather the actual
amount of debt relief a country may need to be able to successfully pay off a given
level of debt.31
HIPC Stages
HIPC debt relief is divided into two stages: decision point and completion
point. Pre-decision point HIPC countries do not receive any debt relief.
Decision Point. In order to reach the decision point, a country must establish
a three-year track record of good economic performance under existing IMF and
World Bank lending arrangements. During the three-year period, the debtor country
receives debt reduction from Paris Club official creditors on Naples Terms (67% net
present value reduction). Other bilateral and commercial creditors are expected by
Paris Club members to offer at least similar treatment. At the decision point, staffs
of the World Bank and IMF carry out a debt sustainability analysis to determine
whether bilateral Paris Club debt reduction (at Naples Terms) is sufficient for the
country to reach the 150% target ratio. If it is not, the IMF and World determine how
much multilateral debt relief is required and the country enters the second phase of
debt relief.
Completion Point. If a country enters the second stage, it must establish a
further track record of good economic policies and implement its poverty reduction
strategy. During the period between the decision point and the completion point, a

30 Madhur Gautam, “Debt Relief for the Poorest: An OED Review of the HIPC Initiative,”
The World Bank, 2003.
31 Bernard Gunther, “Does the HIPC Initiative Achieve its Goal of Debt Sustainability?”
United Nations University/World Institute for Development Economics Research Discussion
Paper 2001/100.

debtor country receives bilateral debt rescheduling under Cologne Terms (90% to

100% debt relief) and interim assistance is provided by the multilateral creditors.

Once the World Bank and IMF determine that a country has reached the completion
point, it receives full and irrevocable debt relief of the amount determined at the
decision point. Table 2 summarizes the HIPC program.
Table 2. Summary of the HIPC Program
StatedTo bring the country’s debt down to a sustainable level (150% of
Objectivedebt to exports), and free up resources for higher spending aimed
at poverty reduction
Qualification1) IDA-only countries
Criteria2) Strong record of policy performance
3) Unsustainable levels of debt after the use of traditional
DebtA ratio of debt service to exports of 150%
Timing of DebtInterim debt service relief after the decision point (up to 60% of
Relieftotal), total irrevocable debt relief at completion point.
Decision Point:Three-year track record of macroeconomic stability and policy
Performancereform plus implementation of interim or full Poverty Reduction
CriteriaStrategy Paper (PRSP)
CompletionMaintenance of macroeconomic stability; Completion of PRSP and
Point:one-year of PRSP implementation; performance benchmarks for
Performancestructural and social reforms
Financing HIPC Debt Relief
HIPC Trust Fund. The World Bank provides its debt relief through the IDA-
administered HIPC trust fund. The trust fund has two components. The first is for
funds provided to reimburse IDA for HIPC debt relief. The second uses
contributions from donors to support HIPC debt relief provided by eligible regional
multilateral creditors. Individual nations, including the United States, have also
made pledges and contributed to the fund. As of the end of February 2005, bilateral
contributions to the HIPC trust fund totaled $2.97 billion.32
The United States initially pledged $600 million to the HIPC trust fund. This
pledge was fulfilled with contributions in FY2001 and FY2002. In 2002, the Bush
administration pledged an additional $150 million for the HIPC trust fund to fund
remaining costs. In FY2004, Congress appropriated $74.6 million for the HIPC trust
fund. A funding gap of $75.6 million remains. Other large contributors to the trust

32 “Heavily Indebted Poor Countries (HIPC) Initiative — Statistical Update,” International
Monetary Fund and International Development Association, April 11, 2005.

fund include the United Kingdom ($261 million), Germany ($232 million), Japan
($219 million), France ($187 million), and the Netherlands ($174 million).
IMF Gold. The IMF initially funded its share of HIPC debt relief through an
interim arrangement that drew on the resources of the IMF’s Enhanced Structural
Adjustment Facility (ESAF), the predecessor to the IMF’s current concessional
lending facility, the Poverty Reduction and Growth Facility (PRGF). In order to
create a permanent facility to finance the IMF’s HIPC participation, the IMF and
several major contributors designed a plan in the late 1990s to sell some IMF gold
reserves. When the IMF was originally created, member nations were required to33
contribute a percentage of their quota in gold. Although, the international financial
system is no longer based on a gold standard, the IMF continues to hold this gold in
its reserves and values it at around $48 an ounce, significantly less than the current
market price of $438 per ounce.34 The IMF currently holds 103.4 million ounces of
gold that are valued on its balance sheet at about $9 billion. At current market prices
the IMF’s holdings amounts to around $45.3 billion.
Fearing disruption of the international gold market, the Clinton Administration35
and several members of Congress strongly objected to any plans to sell IMF gold.
A compromise was reached at the September 1999 IMF annual meetings authorizing
off-market transactions in gold of up to 14 million ounces to help finance IMF
participation in the HIPC program. Between December 1999 and April 2000,
transactions involving a total of 12.9 million ounces of gold were carried out between
the IMF and two members, Brazil and Mexico, that had financial obligations to the
IMF. Gold was sold to Brazil and Mexico at the then-market price and profits were
placed in a special IMF HIPC account. At the same time, the IMF accepted back the
gold sold to Brazil and Mexico in settlement of their financial obligations to the
Bank. The balance of the IMF’s holdings of physical gold remained unchanged36
although its usable resources shrank.
Current Status of HIPC
To date, 18 of the 38 HIPC-eligible countries have completed the HIPC
program, eleven countries have reached their decision point, and nine are in pre-
decision point status (Table 3).37

33 CRS Report RL32364, The International Monetary Fund: Organization, Functions, and
Role in the International Economy, by Jonathan E. Sanford, Martin A. Weiss.
34 Price quoted on August 23, 2005 [].
35 For example, see “IMF Gold Sales in Perspective,” Joint Economic Committee. August

1999. Available at [].

36 The IMF may hold gold as an asset but it cannot lend gold nor can it use gold as security
for borrowing funds. See Jonathan E. Sanford, “IMF Gold and the World Bank’s Unfunded
HIPC Mandate,” Development Policy Review, January 2004.
37 HIPC documents are available at [].

Table 3. HIPC Countries and Their Status
Completion pointDecision pointPre-decision point
Benin Burundi Burma
BoliviaCameroonCote d’Ivoire
Burkina FasoChadCentral African Republic
EthiopiaCongo, Dem. Rep. ofComoros
Guya na Ga mb i a La os
Ghana Guinea Liberia
Honduras Guinea-Bissau Somalia
Madaga scar Malawi Sudan
MaliSão Tomé & PrincipeTogo
MauritaniaSierra Leone
NicaraguaCongo, Rep. of
Source: International Monetary Fund and World Bank.
Appendix 3 displays debt statistics for all HIPC countries. Countries with
major debt obligations to the United States are: the Democratic Republic of Congo
($1.66 billion), Sudan ($1.65 billion), Somalia ($592.7 million), Cote d’Ivoire
($327.7 million), and Liberia ($363.3 million).
The 2005 G8 Proposal for 100% HIPC Debt
According to a 2004 IMF study, significant additional donor support and
structural reforms are necessary for HIPC countries to reach debt sustainability. The
study found that HIPC completion point countries had more robust economic policies
and institutional frameworks than other HIPC countries but they still fared poorly
when compared to other developing countries. In addition their debt management

capacity remained weak.38 Many argue that these countries need additional donor
support for other reasons as well, in areas such infrastructure, education, and AIDS
prevention. Other similar research, as well as NGO pressure, led in 2004 to active
discussions proposing 100% multilateral debt relief for HIPCs and other poor
indebted countries.
Discussion of 100% debt relief began in earnest among the G8 nations at the
February 5, 2005 finance ministers meeting in London. At the meeting, ministers
announced their “willingness to provide as much as 100% multilateral debt relief.”39
Moreover, ministers intended to work with the African Development Bank and the
World Bank “to bring forward proposals ... to achieve this [additional debt relief]
without reducing the resources available to the poorest countries through these
Central to the multilateral debt cancellation debate was whether to compensate
the international financial institutions for the amount of debt they would write off.
U.S. officials had reportedly argued that the cost of multilateral debt relief could be
borne by the institutions themselves without compromising new assistance. The
World Bank’s IBRD resources have increased steadily over the past several years,
and many argued that some of this money could be diverted to provide IDA debt
relief without harming the bank’s financial situation.41 Other creditors, including
Great Britain, believed the institutions should be compensated for their debt
forgiveness so as not to possibly weaken the credit standing of the World Bank and
force it to raise borrowing rates to IBRD borrowers.42
On July 11, 2005, G8 finance ministers compromised on a plan to cancel all
remaining HIPC multilateral debt.43 The compromise was that the multilateral
development banks would receive new money from creditor nations to offset their
debt reductions and the IMF would absorb the cost of debt relief using internal
resources, principally the remaining proceeds of the 1999 off-market gold
transactions with Brazil and Mexico. New gold sales had been proposed during the
2005 discussion but, like earlier proposals, were strongly opposed by the gold
industry, the Bush Administration, and many Members of Congress.44

38 Yan Sun, “External Debt Sustainability in HIPC Completion Point Countries, IMF
Working Paper WP/04/160, September 2004.
39 “G7 Finance Ministers Conclusions on Development,” London, February 5, 2005.
40 Ibid.
41 For example, see Sony Kapur, “World Bank (IBRD) Resources and Debt Cancellation,”
Jubilee USA Network, January 2005.
42 Elizabeth Becker and Richard W. Stevenson, “U.S. and Britain Agree on Debt Relief for
Poor Nations,” New York Times, June 10, 2005.
43 The full text of the G7 Finance Ministers’ Conclusions on Development is available at
[ lopment_1


44 For a discussion of new proposals for IMF gold sales, see Jonathan E. Sanford, “IMF Gold

According to British Chancellor of the Exchequer, Gordon Brown, “We are
presenting the most comprehensive statement that finance ministers have ever made
on the issues of debt, development, health and poverty.” He further added that the
agreement represents a “new deal between the rich and poor of the world.”45 U.S.
Treasury Secretary John Snow called the agreement “an achievement of historic
According to officials at the meeting, the cost of forgiving this debt will be
$16.7 billion — the net present value of payments that the IFIs would have received
from the HIPCs between now and 2015. Of this, the United States reportedly agreed
to pay up to $1.75 billion over the next ten years in compensation to the development
banks over the next ten years to fund the debt relief.47 According to British and
German officials, Britain will pay $700 million to $960 million, and Germany will
pay $848 million to $1.2 billion to offset future lost repayments to the World Bank
and the African Development Bank.48
Reaction from poor countries not included in the debt deal was critical. Many
have long argued that debt relief benefits countries that have poor economic
performance and that are less willing to service their debts than other developing
countries. Some countries, such as Kenya, are ineligible for debt relief, yet suffer
from many of the same economic constraints as many HIPC countries and are
servicing their debts. “Those faithful in servicing their debt like Kenya are being
ignored while HIPCs who have failed to service the debt are getting more attention.
This is not good for Africa,” asserted Kenyan Planning and National Development
Minister Peter Anyang Nyongo.49
Both IMF Managing Director Rodrigo Rato and World Bank President Paul
Wolfowitz cautiously welcomed the proposal but stressed the importance of
providing debt relief without diverting resources from other developing countries.
According to Mr. Rato, although International Monetary Fund member countries are
committed to canceling debts of the world’s poorest nations, debt relief should be
carefully designed and implemented. He stressed that there is a “clear consensus”
among IMF directors that writing off the debt should not affect the fund’s ability to

44 (...continued)
and the World Bank’s Unfunded HIPC Deficit,” Development Policy Review, vol. 22, No.
1, January 2004, pp. 31-40. For U.S. resistence to IMF gold sales, see “Congress, Bush will
block IMF gold sales,” United Press International, April 4, 2005.
45 “G8 finance ministers agree on debt relief for poor nations,” Associated Press, June 11,


46 Ibid.
47 Ed Johnson, “G-8 Pact Slashes $40 Billion in Debt Relief,” Associated Press, June 12,


48 Ibid.
49 Quoted in Shapi Shacinda and Mateus Chale, “Africans cheer G8 debt relief plan, want
more done,” Reuters, June 11, 2005.

continue to lend to poor countries.50 Mr. Wolfowitz has also voiced support for the
proposal.51 However, several World Bank concerns with the proposal were reported
in the press. These will be discussed below.
Key Details of the Agreement
If fully implemented, the agreement would result in immediate 100%
cancellation of the remaining debts of 18 countries that have reached HIPC
completion point ($40 billion) from the International Monetary Fund, the World
Bank, and the African Development Bank, and total cancellation of $55.6 million if
all HIPC-eligible countries complete the program. Decision point and pre-decision
point countries would be eligible for 100% debt cancellation upon their completion
of the HIPC program. Key features of the agreement are:
!World Bank and AfDB debt cancelled under the proposal will be
deducted from gross country allocations and redistributed among all
available countries.
!The amount of the redistributed assistance that the 18 completion
point countries receive will depend on how they compare with other
World Bank or AfDB countries. That they meet the economic
targets to reach completion point should serve as assurance that they
will receive some portion of the redistributed assistance under the
!The World Bank and the AfDB would receive additional
contributions to offset “dollar for dollar” the principal and interest
payments of forgiven debts. Additional funds would be made
available immediately to cover the full costs during the next three
years , covering current replenishment periods.52
!For the period after this, donors commit to cover the full costs for
the duration of the cancelled loans by making additional
contributions to the World Bank and the African Development Bank
over the next 10 years.
The Bush Administration has not requested any new funds to cover debt relief
during IDA-14 or AfDF-10. Reportedly, the intention is to finance the U.S. share of
IDA and AfDF debt relief by early encashment of regular U.S. appropriated
contributions.53 Early encashment is the immediate disbursement of appropriated

50 “IMF chief says debt relief must be well designed,” Reuters, August 3, 2005.
51 “Wolfowitz, in Nigeria, Praises G-8 Debt Plan,” World Bank, June 13, 2005.
52 Both IDA and the African Development Fund (AfDF), the AfDB’s concessional lending
facility are funded by three-year replenishments. IDA-14 and AfDF-10 are the most recent
replenishment agreement, and both cover FY2006-FY2008.
53 Comments by Gerry Flood, Counselor, Office of International Justice and Peace, U.S.

funds that are normally disbursed over a given period of time. This means that either
more contributions will be asked for later to replace funds used by early encashment
or IDA aid will shrink in the future unless higher contribution levels are appropriated.
Donors also committed to finance debt relief for any new countries that enter the
HIPC program, either among the nine countries that have not yet reached the decision
point, or any new countries that the program accepts.
Potential Concerns
Since the proposal was released, several critiques of it have been published by
various debt relief-related NGOs.54 Four potential areas of concern are:
No Net Resource Gain. The proposed agreement specifies that HIPC
countries that receive debt reduction will have their gross assistance flows reduced
by the amount of debt forgiven. Many would prefer that any debt relief be additional
to current assistance. This is based on the belief, which is supported by some, that
according to recent research, one-for-one changes in debt service payments and
official aid flows have no net effect on economic growth. In this view, any potential
economic growth due to the increased resources provided by debt relief may be55
negated by a decrease in total net assistance.
Limited Debt Cancellation. As proposed, the agreement only covers one
regional development bank, the African Development Bank. Although the majority
of HIPC countries are African, several are not, and many owe debt to the other
regional banks, such as the Inter-American Development Bank or the Asian
Development Bank. There are also many smaller sub-regional development banks
to which the HIPCs are indebted.
Multilateral Development Bank Compensation is Not Guaranteed.
The proposed agreement to compensate the IFIs only covers the next three years,
through the completion of the most recent replenishments of the World Bank and the
African Development Bank’s concessional lending facilities. Future assistance to the
development banks, compensating them for their debt relief, is not assured. The
agreement states that “donors will commit to cover the full costs for the duration of
the cancelled loans, by making contributions additional to regular replenishments”
(emphasis added). However, there is no regular replenishment amount for either
institution. Every three years, donor nations meet and decide how much to fund the
institutions’ concessional lending facilities. Since there is no baseline level of
assistance, it may be impossible to know if the funds for debt relief are additional to

53 (...continued)
Conference of Catholic Bishops, June 27, 2005.
54 “Devilish Details: Implications of the G7 Debt Deal” European Network on Debt and
Development, June 14, 2005; “G8 Debt Cancellation Deal: An Incomplete, Yet Positive Step
Forward,” 50 Years is Enough, June 21, 2005; and “G8 cancellation of World Bank, IMF
debt: ‘step forward,’” Bretton Woods Project, June 13, 2005.
55 Henrik Hanson, “The Impact of Aid and External Debt on Growth and Investment,” Paper
presented at the Wider Conference on Debt Relief, Helsinki, August 2001.

the amount of funding that the multilateral development banks would normally
The World Bank has expressed two additional concerns over the proposed debt
relief terms. These are contained in an internal World Bank presentation that was
leaked to the press.56 First, although the World Bank will write off the debt owed it
immediately, promised donor contributions to cover the cost of this debt relief will
be spread out over the next decade. Since the agreement includes no binding future
commitment to cover donor contributions during this period, the World Bank is
concerned that donor countries may not be committed to compensating the World
Bank for all of the debt payments it would have received from the debt relief
recipients. Second, many concessional loans from the development banks have
terms lasting up to forty years but the proposal only specifies repayment of lost debt
payments for ten years. Theoretically, the Bank would lose 30 years’ worth of
repayments under the proposal.
In response, the World Bank has suggested donor countries either make legal
commitments now for the extra money needed to finance the debt relief or allow
creditor countries to receive debt relief over time by relieving payments as they come
due rather than wiping out the entire stock of debt immediately. This would have the
same effect on net flows to debt relief recipients without the World Bank assuming
a potentially unfunded liability by cancelling all debts owed to it immediately. For
the United States, making a legal commitment to finance additional debt relief would
require congressional action.
Future Cost May Rise. Depending on which countries are added, the cost
of HIPC may increase. When the HIPC program was designed in 1996, a two-year
sunset clause was included to limit the countries eligible for debt relief to those that
have reached decision point as well as to prevent HIPC from becoming a permanent
facility. Since then, the sunset clause has been repeatedly extended. In September
2004, the World Bank and IMF Boards agreed again to extend the sunset clause by
two years, through 2006.57 The Boards also extended the sunset clause to IDA-only
and PRGF-eligible countries that have not yet benefitted from HIPC relief.
In April 2006, the World Bank released a list of eleven countries that currently
meet the HIPC income and indebtedness criteria and may wish to be considered for
HIPC debt relief. The list includes seven countries previously identified as HIPCs
(Central African Republic, Comoros, Cote d’Ivoire, Liberia, Somalia, Sudan, and
Togo) and four new countries (Eritrea, Haiti, the Kyrgyz Republic, and Nepal).
Three additional countries, Bhutan, Lao PDR, and Sri Lanka, also meet the HIPC
criteria but do not wish to partake in the initiative. If HIPC debt relief is provided to

56 Alan Beattie, “Bank Warns of Shortfall from G8 Debt Plans,” Financial Times, August

2, 2005.

57 “Note on the Status of Implementation of the HIPC Initiative and Further Considerations
on an Operational Framework for Debt Sustainability in Low-Income Countries,”
Development Committee (Joint Ministerial Committee of the Boards of Governors of the
Bank and the Fund On the Transfer of Real Resources to Developing Countries), September

29, 2004.

all eleven countries, the total cost is estimated at $21 billion, broken up among
various creditors. The cost to bilateral Paris creditors is estimated at $10.2 billion,
while the cost to the IMF and the World Bank would be $2.4 billion and $2.9 billion
respect i v el y. 58
Several analysts have proposed extending the HIPC program to countries
eligible for grant assistance from the World Bank. In November 2004, the World
Bank created a framework to assess the level of debt burden necessary to qualify for

100 % grant assistance instead of loans.59 Under the new “debt distress” framework,

47 countries are projected to receive grant financing, 42 of which will receive 100%

of their IDA assistance in grants. The 47 countries eligible for grant assistance
include 29 HIPC and 18 non-HIPC countries. According to one analyst, the debt
burden of these 18 countries is comparable to those receiving HIPC assistance and
they may be worthy of receiving debt relief under HIPC. This would mean an 18-
country increase in the size of the HIPC program, and increase the amount of debt
relief provided by an additional $31.8 billion in nominal debt relief. (Appendix 4
provides debt information for the 18 additional countries.)
Proposed Legislation
Several Members of Congress have introduced legislation in the 109th Congress
that would extend debt relief to a larger group of countries than is already covered
by HIPC.
Multilateral Debt Relief Act of 2005. Introduced by Senator Mike DeWine
on June 28, 2005, the Multilateral Debt Relief Act of 2005 (S. 1320) would authorize
the necessary funding to implement the June 2005 G8 debt relief and authorize the
Secretary of the Treasury to instruct the U.S. Executive Director of each international
financial institution to use the voice and vote of the United States to reach an
agreement among the other shareholder nations to permanently cancel 100% of the
debts owed to each institution by all HIPC countries.
The proposed legislation also expresses the sense of Congress to expand the list
of countries eligible for debt relief. If enacted, the act would request that the
Secretary of the Treasury pursue additional bilateral and multilateral debt relief
(including the Inter-American Development Bank) for each of the 47 countries that
are eligible for World Bank grant assistance.
Jubilee Act of 2005. Introduced by Representative Maxine Walters on
March 3, 2005, the Jubilee Act of 2005, is a much broader piece of legislation, with
higher costs. If enacted, H.R. 1130 would amend the International Financial
Institutions Act to require the Secretary of the Treasury to commence immediate

58 “Heavily Indebted Poor Countries (HIPC) Initiative - Listing of Ring-Fenced Countries
that Meet the Income and Indebtedness Criteria at End-2004,” IMF and World Bank
Development Committee, April 14, 2006.
59 “Debt Sustainability and Financing Terms in IDA 14: Further Considerations on Issues
and Options” International Development Association, November 2004.

efforts, within the Paris Club, the International Monetary Fund, the World Bank, and
other international financial institutions to:
!Cancel all debts owed to each institution by 50 eligible poor
countries while limiting any waiting period before receipt of debt
cancellation to one month from the date of an eligible poor country’s
application for it. If implemented, this immediate debt cancellation
would inhibit the World Bank and the IMF from seeking economic
reforms from creditor countries in exchange for the given debt relief.
!Encourage the government of each eligible poor country to allocate
at least 20% of its national budget, including the savings from such
debt cancellation, for the provision of basic public health care,
education, and clean water to its citizens.
Unrelated to debt relief, the Jubilee Act of 2005 would also set forth
requirements for establishing a framework to improve transparency regarding each
international financial institution’s activities; and require the availability on the
Treasury Department’s website of all U.S. Executive Directors’ remarks at Bank or
Fund meetings.

Appendix 1: World Bank Debt and Poverty Ratings
Indebtedness is measured by the World Bank primarily using two debt service
ratios: the ratio of the present value of total debt service to gross national income
(PVGNI) and the ratio of the present value of total debt service to exports of goods
and service (PV/XGS). According to the Bank, these ratios reflect two of most
important aspect of a country’s ability to service its debts: gross national income,
since this is the broadest measure of a country’s total income, and exports, since
these are the revenue generating mechanism for debt service (exports provide foreign
reserves which are needed to service debt).
If any of the 136 countries that the World Bank collects debt data on exceeds a
critical value: 80% for the debt service to GNI ratio, or 220% for the debt service to
exports ratio, the country is classified as severely indebted. A country is classified
as moderately indebted if both of its debt ratios are three-fifths or more of the critical
value (48% for the debt service to GNI ratio and 132% for the debt service to exports
ratio) and less indebted if its debt ratios are below the three-fifths thresholds.
The World Bank also breaks out countries based on their level of income.
Countries are classified as low income if their 2003 GNI per capita is $765 or less.
Middle income countries are a much larger grouping including countries with GNI
per capita between $766 and $9,385. By combining these two sets of indicators, the
poorest and most indebted countries can be identified.
Table 4. World Bank Debt Categories
PV/GNI less than
80% but greater
PV/GNI greaterthan 48% and
than 80% orPV/XGS less thanPV/GNI less than
IncomePV/XGS greater220% but greater48% and PV/XGS
classificationthan 220%than 132%less than 48%
Low-income:Severely IndebtedModerately IndebtedLess Indebted Low-
GNI per capitaLow-IncomeLow-IncomeIncome Countries
less than $765Countries (SILICs)Countries (MILICs)(LILICs)
Middle-Severely indebtedModerately indebtedLess indebted
income: GNImiddle-incomemiddle-incomemiddle income
per capitacountries (SIMICs)countries (MILICs)countries (MILICs)
between $766
and $9,385
Source: World Bank, 2005 Global Development Finance.

Table 5. World Bank Debt Ratings
(HIPC countries are highlighted)
M o derately Le ss
Severely Severely M o derately indebt ed indebt ed
indebted low-indebtedindebted low-middle-Less indebtedmiddle-
inco me middle-income inco me inco me lo w - inco me inco me
Angola Ar ge ntina B enin B o liv ia B angladesh Albania
BhutanBelize Burkina FasoCape VerdeEquatorialAlgeria
B urundi Brazil Cambodia Chile Gh a n a Ar me n i a
Centra l B ulgar ia Ca meroon Co lo mb ia Haiti Azer b a ij an
ChadCroatiaEthiopiaEl SalvadorIndiaBarbados
Co mo ro s Do minica Kenya Honduras Lesotho Belarus
Congo, Dem.EcuadorMadagascarHungaryMaliBosnia and
Rep. ofHerzegovina
Congo, Rep.EstoniaMauritaniaJamaicaMozambiqueBotswana
Cote dIvoireGabonMoldovaLithuaniaNepalChina
EritreaGrenadaMongoliaMalaysiaNicaraguaCosta Rica
Gambia, TheGuyanaNigerMauritiusSenegalCzech
Gu i n e a Indonesia Nigeria P araguay Ta nz a n ia Dj ibouti
Gu i n e a - J o r d an P a kistan P hillip p ine s V ietnam Do minican
B i ssa u Republic
KyrgyzKazakhstanPapua NewPolandYemenEgypt
Republic Guinea
Lao PDRLatviaSolomonRussiaFiji
Island s
Liberia LebanonUgandaSlovakGeorgia
MalawiMaldivesUzbekistanSri LankaGuatemala
BurmaPanamaSt. LuciaIran
Rwanda PeruSt. VincentMacedonia
and the
São TomèSamoaTunisiaMexico

and Principe

M o derately Le ss
Severely Severely M o derately indebt ed indebt ed
indebted low-indebtedindebted low-middle-Less indebtedmiddle-
inco me middle-income inco me inco me lo w - inco me inco me
Sierra LeoneSerbia andTurkmenistanMorocco
So ma lia Seyc he lles V enezuela O ma n
SudanSt. Kitts andRomania
TajikistanSyriaSouth Africa
Togo T urkey Swaziland
Za mb i a U r ugua y T ha i l a nd
Zi mb a b we T o nga
Trinidad and
V a nua t u
Source: World Bank, 2005 Global Development Finance.

Appendix 2: U.S. Debt Reduction Agreements FY1990-FY2004
(in U.S. $ millions)
EAI/SpecialParis Club/
CountryDate 572 Debt411 DebtTFCALegislationHIPCSEEDTotal
rope and the Middle East
Bosnia 1999 24.0 24.0
Egypt19906,998.1 6,998.1
g/wIr aq 2005 3,914.2 3,914.2
s.orJordan1995, 1997698.4698.4
://wikiPoland 1991 2,464.7 2,464.7
httpYeme n 2001 2.5 2.5
Yugoslavia 2002 538.4 538.4
in America
Arge ntina 1993 3.8 3.8
Belize 2001 11.3 11.3
Bolivia 1991-2002 339.6 30.7 138.5 508.8
Chile 1991 30.6 30.6

EAI/SpecialParis Club/
CountryDate 572 Debt411 DebtTFCALegislationHIPCSEEDTotal
Colombia 1992 31.0 31.0
El Salvador1992, 2001484.8484.8
Guya na 1991-2004 76.3 40.3 45.9 162.5
Haiti1991, 199598.98.3107.2
Honduras 1991-2000 333.9 108.9 146.0 588.8
iki/CRS-RL33073Jamaica1991, 2004326.8326.8
s.orNicaragua 1991-2003 259.5 24.8 3.3 102.1 389.7
://wikiPanama 2003-2004 20.9 20.9
httpPeru1998, 2001190.9190.9
Uruguay 1992 3.7 3.7
Benin1989, 199129.829.8
Burkina Faso19912.42.4
Cameroon1990 - 200161.492.9154.3

EAI/SpecialParis Club/
CountryDate 572 Debt411 DebtTFCALegislationHIPCSEEDTotal
Central African1995, 19986.96.9
Congo, Rep. of199610.710.7
o, Dem. Rep. of1989, 200254.11,538.81,592.9
Cote D’Ivoire1990 - 199817.9220.4238.3
iki/CRS-RL33073Ethiopia 2001-2002 66.0 66.0
s.orGhana1989, 200283.795.811.3190.8
leakGuinea 1989-2001 4.5 126.7 131.2
://wikiK e nya 1990-1991 85.9 102.0 187.9
Madaga scar 1990-1991 5.6 53.4 8.5 67.5
Malawi1989, 199129.52.231.7
Mauritania 2000 7.1 7.1
Moza mbique 1991-2002 52.9 53.6 106.5
Nige r 1990-2001 6.9 12.6 19.5

EAI/SpecialParis Club/
CountryDate 572 Debt411 DebtTFCALegislationHIPCSEEDTotal
Nige ria 1989 64.8 64.8
Rwanda1998, 20012.42.4
Senega l 1991-2001 34.5 18.7 53.2
Sierra Leone200271.471.4
T a nzania 1990-2001 79.7 59.1 35.3 174.1
iki/CRS-RL33073T ogo 1991 7.4 7.4
s.orUganda 1990-1998 8.6 16.3 0.9 25.8
://wikiZa mbia 1991-2001 172.8 414.6 587.4
httpi a
Bangladesh 1991 291.6 0.6 292.2
Paki stan 2003-2004 1,471.5 1,471.5
Philippines 2002 8.4 8.4
T hailand 2001 11.5 11.5
2,021.0 689.1 1,155.0 15,550.2 3,142.1 562.4 23,119.8
The Department of the Treasury and the Office of Management and Budget, U.S. Government Foreign Credit Exposure As of December 31, 2004.

Appendix 3: HIPC External Debt Profile
(2003, in U.S. $ millions)
debt (PV) toExternal debt
exports of(PV) to gross
Total debtgoods andnational
owed to theTotal externalservicesincome
CountryUnited Statesdebt(PV/XGS)(PV/GNI)
Benin 0.0 1,828 151% 28%
Bolivia 1.8 5,684 157% 38%
Burkina Faso0.01,845178%19%
Burma0.07,318187% —
Burundi 0.0 1,310 2,182% 150%
Came roon 46.2 9,819 185% 53%
African 10.0 1,328 1,319% 155%
Chad 0.0 1,499 254% 45%
Comoros 0.0 288 289% 79%
Congo, Dem.1,656.311,170625%150%
Congo, Rep.64.05,516404%368%
Cote d’Ivoire327.712,187176%90%
Ethiopia 70.1 7,151 135% 24%
Gambia, The0.0629202%90%
Ghana 21.9 7,957 85% 38%
Guinea 126.7 3,457 225% 59%
Guinea-Bissau 0.0 745 594% 246%
Guya na 35.4 1,447 78% 84%
Honduras 108.1 5,641 106% 54%
Lao PDR0.02,846356%91%
Liberia 363.3 2,567 1,630% 646%
Madaga scar 41.2 4,958 138% 31%
Malawi 0.0 3,134 393% 108%

debt (PV) toExternal debt
exports of(PV) to gross
Total debtgoods andnational
owed to theTotal externalservicesincome
CountryUnited Statesdebt(PV/XGS)(PV/GNI)
Mali 0.0 3,129 124% 42%
Mauritania 0.0 2,360 153% 73%
Moza mbique 0.0 4,930 118% 38%
Nicaragua 96.8 6,915 98% 40%
Nige r 10.3 2,116 148% 26%
Rwanda 1.3 1,540 615% 57%
São Tomé and0.0338770%314%
Senega l 7.6 4,418 96% 36%
Sierra Leone51.91,612632%118%
Somalia592.72,838 — —
Sudan 1,652.1 17,496 550% 120%
T a nzania 0.0 7,516 132% 22%
T ogo 0.0 1,707 203% 91%
Uganda 0.0 4,553 170% 33%
Za mbia 273.2 6,425 372% 121%
Total 5,558.6 168,217
Source: World Bank, 2005 Global Development Finance.

Appendix 4: Non-HIPC Countries Eligible for 100%
World Bank Grant Assistance
(2003, in U.S. $ millions)
External debt External
(NPV) todebt (NPV)
exports ofto gross
Total debtgoods andnational
owed to theTotalservicesincome
CountryUnited Statesexternal debt(PV/XGS)(PV/GNI)
Afghanistan103.7 — — —
Angola 105.1 9,698 117 102
Bhutan 0.0 422 252 74
Cambodia 398.5 3,139 107 70
Eritrea 29.7 635 333 47
Georgi a 39.6 1,935 122 43
Haiti 16.6 1,308 83 29
K e nya 53.8 6,766 162 43
Kosovo — — — —
K yr gyz 0.0 2,021 221 98
Lesotho 0.0 706 80 47
Moldova 58.2 1,901 146 95
Mongolia 0.0 1,472 140 95
Samoa 0.0 365 209 122
Sol o mo n 0.0 186 176 60
T a j i ki stan 19.3 1,166 112 77
Timor-Leste — — — —
Total 824.5 31,804
Source: World Bank, 2005 Global Development Finance.