Washington -- Finance ministers from the member nations of the International Monetary Fund (IMF) and World Bank have finalized details on a plan that will provide substantial debt relief for the poorest highly indebted developing countries.

Initial debt relief under the Heavily Indebted Poor Countries (HIPC) Debt Initiative is likely to be forthcoming by the end of 1996, officials say.

Following is background and key details of the plan:

ORIGIN

A framework was first proposed at the April 1996 meetings of the IMF and World Bank and was given further impetus by the leaders of the Group of Seven (G-7) industrial nations at their June 1996 Economic Summit in Lyon. During September 1996, the executive boards of the Bank and Fund endorsed a program of action. Funding for it was approved by the IMF's policymaking Interim Committee on September 29 and by the joint World Bank-IMF Development Committee on September 30. Meanwhile, on September 27 the Paris Club of creditor governments completed their work on official debt relief under the initiative. The G-7 finance ministers endorsed the Paris Club action during their September 28 meeting.

OBJECTIVE

The debt relief initiative is aimed at reducing an eligible county's debt burden to sustainable levels, provided the country completes a period of strong policy performance. This approach will enable HIPCs to exit from a burdensome debt rescheduling process that had stood in the way of these governments achieving sustainable development for their people.

ELIGIBILITY

Only the world's poorest countries that face an unsustainable debt situation even after the full application of current debt relief mechanisms, despite a continued positive record of economic and structural reforms, are eligible for exceptional debt relief. The countries must be members of the International Development Association (IDA) -- the World Bank's concessional affiliate -- and must be pursuing or adopting programs of adjustment and reform supported by the IMF and World Bank over the next two years.

The IMF and World Bank say that 41 HIPCs are potentially eligible for support under the initiative, though debt burdens for many of these are currently regarded as manageable under existing debt-relief mechanisms. However, some 8 of the 41 HIPCs -- Burundi, Guinea-Bissau, Mozambique, Nicaragua, Sao Tome and Principe, Sudan, Zaire and Zambia -- currently have debt burdens that are viewed as unsustainable under current debt relief efforts and another 12 "possibly stressed" countries have debt burdens that may be unsustainable. The 12 are: Bolivia, Cameroon, Congo, Cote d'Ivoire, Ethiopia, Guyana, Madagascar, Myanmar, Niger, Rwanda, Tanzania and Uganda.

The determination of debt sustainability will be made by the IMF and World Bank together with officials of the debtor country. A sustainable level of debt is defined, on a case-by-case basis, as a debt-to-export ratio within the range of 200-250 percent and a debt service-to-export ratio within a range of 20-25 percent. A third criteria called "vulnerability factors" is added to determine in each case whether to target the lower or the upper end of the two ranges. These factors include the country's reserve position, its vulnerability to shocks, its dependence on a single or small number of commodity exports, and the impact of debt service on its fiscal position.

PROCESS FOR EXCEPTIONAL DEBT RELIEF

Before this new initiative, the Paris Club would provide debt relief of 67 percent under their current so called "Naples terms," and the World Bank and IMF would continue existing support for economic reforms. Countries would establish a three-year track record of good performance. Some HIPCs, such as Uganda, have already completed this initial step. At the end of this three-year period, a determination is made as to whether debt sustainability can be achieved in a second three-year period. Countries whose prospects for overall debt burden are regarded as unsustainable under current debt relief mechanisms may request exceptional debt assistance under the HIPC initiative.

For countries deemed eligible for support under the initiative, the Paris Club would, on a case-by-case basis, provide debt relief of up to 80 percent. A debt workout meeting co-chaired by the World Bank and the IMF, attended by representatives of the debtor country, and multilateral and bilateral creditors, would agree on a financing plan and commit to additional assistance needed to bring the country to a level of debt sustainability after the three-year period.

If at the end of the second three-year period debt sustainability has not been achieved, the Paris Club would provide deeper stock-of-debt reduction and the multilateral institutions would take additional measures.

ACTION BY CREDITORS

The Paris Club would deepen relief from the current ceiling of 67 percent to up to 80 percent.

The World Bank would initially set aside $500 million, and eventually a total of $2,000 million, to a HIPC Trust Fund earmarked to provide relief on debt owed to IDA.

Other multilateral development banks, such as the African Development Bank and the Inter-American Development Bank, would create trust funds totaling around $2,100 million to reduce HIPC debt to their institutions.

The IMF would provide greater concessionality -- grants or loans -- to be paid into an escrow account and used only to cover debt service payments to the Fund under its Enhanced Structural Adjustment Facility (ESAF), which provides low-interest loans to some 79 low-income countries. The debt initiative will require some $1,200 million in additional resources, of which some will come from bilateral contributions. Also being considered is the sale of a small amount of the IMF's gold holdings, whose proceeds would be invested and the profits used to fund debt relief. Gold sales are favored by most IMF members including the United States, but opposed by Germany. ®MDBO¯®MDNM¯ The plan also calls on commercial creditors and non-Paris Club bilateral creditors to provide a comparable level of relief as provided by the Paris Club.

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