100% Multilateral Debt Cancellation Deal: Status of Implementing the G8 Promise

100% Multilateral Debt Cancellation Deal: Status of Implementing the G8 Promise

February 2009

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 countries that have completed the Highly Indebted Poor Country (HIPC) Initiative process. To date, 24 qualified HIPC countries have received debt cancellation through the MDRI, 20 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 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 has the overall impact been on HIPC countries?

• For the 24 completion point countries that have qualified thus far, MDRI has resulted in the cancellation of $43.3 billion over the life of the loans. This is in addition to $45.3 billion in HIPC relief. Combined, the two debt relief initiatives are currently providing approximately $88.6 billion in relief to completion point countries, of which $73 billion is for the 20 African completion point countries.
• Once all 41 HIPC countries have reached completion point, MDRI will result in the cancellation of $48.9 billion over the life of the loans and HIPC will provide approximately $99 billion in relief. If all 41 potentially eligible countries complete the process, the two initiatives will provide roughly $147 billion in relief. [1]

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 26 countries are now receiving IMF debt cancellation (24 HIPC countries plus Cambodia and Tajikistan); a total of 43 countries will be eligible once all HIPC countries reach their completion point.

Impact on qualified countries: The IMF has canceled $3.3 billion owed by the 24 completion point countries plus Cambodia and Tajikistan. This total will rise to $8b once all 43 countries qualify.[2]

New resources: To finance debt cancellation, the IMF is using the principal generated by the 1999 revaluation of IMF gold (estimated at approximately $4.5 billion), 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 13 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, 24 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. The monitoring so far has revealed that the main donors are broadly on track through 2008 with firm, unqualified pledges. For the period 2009-16 they are also broadly on track. However, an additional $2 billion will be necessary, much of which can be mobilised by turning qualified pledges into unqualified pledges. For the period 2017-44, $34.6 billion will be needed and $27 billion in qualified pledges has been received so far. Most G8 countries have therefore taken provisional measures to ensure long-term funding. The exceptions are Canada and Japan, with observed shortfalls of $1.354 billion (of a total $1.5 billion) and $4.8 billion (of a total $4.9 billion) respectively for the period through to 2044.

In December 2007, when the bilateral development partners replenished funds for the IDA they also committed to additional compensatory finance for the MDRI. Altogether, donor pledges for the IDA from July 2008 to June 2011 ('IDA15') amounted to $25.1 billion and were complemented by $16.5 billion in internal financing from the World Bank Group and prior donor pledges for financing debt forgiveness. IDA15 will thus operate with an additional $9.5 billion as compared with the previous funding period from July 2005 to June 2008 ('IDA14'); a 30% increase.

Impact on qualified countries: The World Bank has canceled $33.3b in debts owed by the 24 completion point countries, of which $29,6 b under MDRI. This total will rise to $42.7b once all 41 HIPC countries qualify, of which $30.5 b under MDRI .

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

African Development Fund debt

The African Development Fund (AfDF) of the African Development Bank (ADB) approved US$12.5 billion in financing for debt relief in 33 countries in Africa of which $ 6.6 billion for MDRI . To date, the African Development Fund has canceled $9.5 billion in debts owed by the 20 completion point countries in Africa of which $6.6 billion under MDRI.

In the same month, the African Development Fund of the AfDB was replenished with $5.6 billion in new donor resources. When combined with internal resources of $3.3 billion, this increase results in an overall funding level of $8.9 billion for the three-year period 2008-10. This is an increase of $3 billion as compared with the previous financing period (a 52% increase).

The Inter-American Development Bank

The Inter-American Development Bank joint MDRI only in 2007. It has provided $ 3,8 billion to the 4 Latin American completion point countries.

HIPC Status Report

February 2009

Countries at completion point:

• Due to debt relief, in combination with efforts of the Education For All-Fast Track Initiative, 34 million more kids are in school in Africa in 2006 than were in 1999. 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.

[1] These 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.

[2] This figure includes remaining HIPC assistance.