100% MULTILATERAL DEBT CANCELLATION DEAL:
STATUS OF IMPLEMENTING THE G8 PROMISE

02.07

At the July 2005 G8 Summit in Gleneagles, Scotland, G8 leaders pledged to cancel the debts of the world's most indebted countries, many of them located in Africa. At their annual meetings in September 2005, the Board of Governors of both the IMF and World Bank endorsed the principles of the 100% debt cancellation deal, formally called the Multilateral Debt Relief Initiative (MDRI). MDRI was finalized by the IMF in December 2005 and by the World Bank and African Development Fund in April 2006. The agreement provides 100% debt cancellation on eligible multilateral debts to qualified countries that have completed the Highly Indebted Poor Country (HIPC) Initiative process. To date, 21 qualified HIPC countries have received debt cancellation through the MDRI, 17 of them in Africa.

The guiding principles of MDRI agreed upon by the G8 leaders include:

• 100% multilateral debt cancellation for World Bank, African Development Fund (AfDF) and IMF debt stock
• Immediate debt cancellation for qualified countries that have completed the HIPC program (“completion point countries”) and eventual cancellation for all future HIPC completion point countries
• “Additional resources” to the International Financial Institutions (IFIs) so their financing capacity is not reduced
• No new conditionality attached to the cancellation

What will the overall impact be on HIPC countries?

• For the 21 completion point countries that have qualified thus far, MDRI will result in the cancellation of $38b over the life of the loans. This is in addition to $43b in HIPC relief. Combined, the two debt relief initiatives are currently providing approximately $81b in relief (an average of $2b per year in savings).
• Once all 40 HIPC countries have reached completion point, MDRI will result in the cancellation of $48b over the life of the loans and HIPC will provide approximately $98m in relief. If all 40 potentially eligible countries complete the process, the two initiatives will provide roughly $147b in relief¹.

Each of the participating institutions set individual policies with their Boards for implementation of MDRI. The details for the IMF, World Bank and African Development Bank are outlined below:

IMF debt
Qualified countries: The IMF decided to treat all countries within a similar income bracket in the same manner. This resulted in the IMF adding Cambodia and Tajikistan to its list of beneficiary countries; however, these countries were not added to HIPC Initiative as a whole. A total of 23 countries are now receiving IMF debt cancellation (21 HIPC countries plus Cambodia and Tajikistan); a total of 42 countries will be eligible once all HIPC countries reach their completion point.

Impact on qualified countries: The IMF has canceled $3.3b owed by the 21 completion point countries plus Cambodia and Tajikistan. This total will rise to $8b once all 42 countries qualify².

New resources: To finance debt cancellation, the IMF is using the principal generated by the 1999 revaluation of IMF gold (estimated at approximately $4.5b), which was estimated to be enough to write off debt stock for the original 28 countries that entered the HIPC process. To cover the cost of the remaining 12 HIPC countries, donors have committed to mobilize additional resources.

Implementation: IMF debt cancellation became effective on January 1, 2006.

World Bank debt
Qualified countries: As with the IMF, 21 HIPC countries are currently receiving 100% debt cancellation from the World Bank, however, the Bank did not include any non-HIPC countries. The remaining HIPC countries will be eligible for debt cancellation once they reach the program’s completion point.

Financing: When it approved MDRI, the World Bank emphasized the need for additional resources to provide “dollar for dollar compensation for IDA that is truly additional to existing commitments.” The G8 communiqué called for a compensation schedule and monitoring system of all donor contributions to IDA.

Impact on qualified countries: The World Bank has canceled $28.5b in debts owed by the 21 completion point countries. This total will rise to $36b once all 40 HIPC countries qualify.

Implementation: The Bank cancellation became effective on July 1, 2006.

African Development Fund debt
In April 2006, the Boards of Directors of the African Development Fund (AfDF) and the African Development Bank (ADB) approved US$8.8b in financing for debt relief in 33 countries in Africa. To date, the African Development Fund has canceled $6.6b in debts owed to the 17 completion point countries in Africa.

Going Forward:
MDRI provides significant relief for some of the poorest countries on the planet, but there are still key concerns relating to its implementation:

• First, poor countries such as Kenya and Lesotho, who spend a significant portion of domestic resources servicing debt, were excluded from the deal because their debt ratios were below the HIPC threshold. In this case, the eligibility requirements ended up excluding such countries from the benefits of debt cancellation because they did a relatively good job of managing their debts.
• Second, for every dollar of cancelled debt under MDRI, countries receive a dollar less in concessional financing from the World Bank. New concessional financing can be earned back by poor countries based on their policy performance; however, most MDRI countries lost some of their World Bank financing after it was redistributed in this way.
• Finally, it is important to address the issue of new debt. In order to have a realistic chance of achieving the Millennium Development Goals (MDGs), poor countries need access to new grants and low interest loans. But this type of financing is limited, and in its absence, many countries are taking on expensive loans from emerging powers such as China. A new policy by the World Bank threatens to exacerbate the problem by curtailing the Bank's low interest financing to any country that borrows at non-concessional terms. Countries therefore face a catch-22: Give up hope for achieving the MDGs or reaccumulate debt by borrowing more on unfavorable terms. To avoid this situation, donors need to increase the volume and predictability of their aid and the World Bank should make more concessional financing available to countries striving to achieve the MDGs.

¹These figures are nominal which means that they represent the actual face value of the debts. Net present value represents the amount that would be required to write off the debts immediately. The NPV total is reached by totaling the sum of all future payments plus interest discounted at the current market interest rate.
²This figure includes remaining HIPC assistance

HIPC Status Report

Countries at completion point:

• Primarily due to debt relief, 20 million more kids are in school in 2004 than were in 2000. Tanzania has used its savings from debt relief to increase education spending and eliminate school fees. Almost overnight, an estimated 1.6 million children enrolled in school. By 2003, 3.1 million additional children were attending school.
• Mozambique used its debt service savings to vaccinate 1 million children against tetanus, whooping cough and diphtheria, as well as build and electrify schools. In addition, Mozambique has invested in the fight against HIV/AIDS and used debt savings to open 24 new testing and counseling offices with the goal of reaching 50 such offices by 2007.
• Burkina Faso has focused debt relief savings on fighting AIDS, improving education and providing access to safe drinking water. In 2002, money freed up from debt service payments went to joint government and civil society initiatives that have helped control the spread of HIV/AIDS at 6.5%. Two clinics were built and the cost of drugs decreased by between 38 percent and 96 percent. In addition, Burkina Faso used debt savings to build 746 schools, 20,251 classrooms and put over 110,000 children back in school over the last three years. Access to clean water has increased by 26 percent for families. This means that over one million more people now access safe drinking water.