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close this bookPutting Life Before Debt (CI - CIDSE, 1998, 38 p.)
close this folderPART II: Reducing Debt
View the documentEarly Attempts to Reduce Debt
View the documentHeavily Indebted Poor Country (HIPC) Initiative
View the documentShortcomings of the HIPC Initiative

Heavily Indebted Poor Country (HIPC) Initiative

In October 1996, the World Bank and IMF reached an agreement on the first ever comprehensive debt reduction plan to enable the debtor country to pay back its loans without compromising economic growth and without building up arrears again in the future. The initiative is designed to reduce the multilateral, bilateral, and commercial debt of HIPCs over a period of about six years to a sustainable level, a level at which the country is considered able to make debt payments.

As a condition of debt relief, the country has to implement SAPs approved by the World Bank and IMF. The HIPC Initiative allows some flexibility so that a country that exceeds the eligibility criteria established by the World Bank and IMF by having already demonstrated a record of reform, might get relief in a shorter time.

Under the initiative, after the eligible country has established a track record of economic reform over a period of three years, the Paris Club creditors provide a 67% reduction in eligible debt stock. This point is called the decision point. All other creditors (non-OECD bilateral creditors and commercial banks) are supposed to provide comparable reductions6. If these actions do not result in a sustainable debt, the country moves to the second three-year stage, during which time it might get support from the international financial institutions for economic reform and poverty reduction. At the end of six years, provided the country has established an acceptable track record by implementing required economic reforms, it will receive up to 80% reduction in eligible Paris Club debt stock. This point is called the completion point. The second period of three years might be shortened for countries which already have a track record of strong performance. At the completion point, the multilateral creditors provide debt relief only if all other reductions are not enough to reduce the country's debt to a sustainable level.