Developing Countries

In 1996, the World Bank and the International Monetary Fund (IMF) agreed to undertake a comprehensive approach, called the Heavily Indebted Poor Countries Initiative, for granting debt relief to the world's poorest and most indebted countries. The initiative was enhanced in 1999 to provide more than $28 billion worth of relief to 32 nations and add as a central goal poverty reduction in the poorest countries. GAO analyzed the impact of the initiative on seven countries and found that it will provide significant debt relief, but that the countries may not enjoy lasting relief without strong, sustained economic growth. According to GAO, the decline in debt service for the seven countries will "free up" resources for additional poverty reduction only if the countries continue to borrow at the same rate as in the years just prior to qualifying for debt relief. Also, for the countries to service their debt after receiving debt relief, the World Bank and IMF assume that countries will achieve sustained strong economic performance. GAO analysis indicated that this assumption may be optimistic. The initiative requires debt relief to be linked to recipient countries' preparation of a comprehensive poverty reduction strategy, but this creates tension between quick debt relief and preparing such strategies. Financing the initiative has been challenging for some creditors, with some multilateral and smaller bilateral creditors reporting that they are having difficulty providing their full share of debt relief and may need external funding. Difficulties in financing the initiative could undermine its success because debt relief is supposed to be in addition to the assistance that donors and creditors otherwise provide to poor countries.

GAO noted that: (1) the enhanced HIPC initiative will provide debt relief to recipient countries; (2) however, given the continued fragility of these countries, the initiative is not likely to provide recipients with a lasting exit from their debt problems, unless they achieve strong, sustained economic growth; (3) the decline in debt service will only free up resources for additional poverty reduction if countries continue to borrow at the same level and concessional terms as in the years just prior to their qualifying for debt relief; (4) this occurs because countries previously borrowed for several reasons including debt payments, and they will need to continue borrowing after receiving debt relief in order to meet their remaining debt payments and to increase spending on poverty reduction; (5) debt relief under the initiative is linked to recipient countries' preparation of a poverty reduction strategy; (6) linking debt relief and poverty reduction creates tension between quick debt relief and preparing such strategies; (7) many actions are required to prepare and implement a strategy, including gaining the support of key stakeholders, such as political leaders with the power to affect change, and collecting and analyzing necessary data, such as data on the extent and major causes of poverty; (8) however, weaknesses in countries' ability to collect and analyze these data and other challenges may limit these efforts; (9) the desire to receive debt relief quickly may cause some countries to quickly prepare the strategies, which could diminish the strategies' quality, or the level of civil society participation; (10) the World Bank, the International Monetary Fund, and the U.S. Treasury said that these concerns are mitigated because some countries do not have to prepare a full strategy in order to qualify for debt relief; (11) financing the initiative has proven to be a challenge for many creditors, with some multilateral and smaller bilateral creditors reporting that they are facing difficulties in providing their full share of debt relief and need external funding; (12) for multilateral and smaller bilateral creditors, difficulties in financing their shares stem from legal, technical, and financial restrictions; and (13) difficulties in fully financing the initiative could undermine the success of the initiative, since debt relief is supposed to be additional to the assistance that donors and creditors would otherwise provide to low-income countries.