The World Bank and the International Monetary Fund (IMF) define HIPCs as countries that meet the following three criteria:
As of 2020, there are 73 countries that meet the above criteria and are designated as HIPCs by the IMF and World Bank. Most HIPCs are located in Sub-Saharan Africa and have very low incomes, heavy debt burdens, and limited access to private capital markets.
To provide debt relief to HIPCs, the IMF and World Bank launched the HIPC Initiative in 1996. Under this initiative, international creditors agree to reduce debt owed to them on the condition that HIPCs implement economic and social reforms.
There have been two stages under the HIPC Initiative:
To reach the decision point for Stage 1 debt relief, HIPCs must:
Once approved for Stage 1, creditors commit to reducing the country’s debt to a “sustainable” level, usually meaning an NPV debt-to-export ratio of 200-250%.
To reach the completion point for Stage 2 relief, HIPCs must:
Once Stage 2 relief is approved, creditors provide additional debt relief to bring the NPV debt-to-export ratio down to 150%.
In 2005, the HIPC Initiative was supplemented by the Multilateral Debt Relief Initiative (MDRI). Under the MDRI, three multilateral institutions—the IMF, World Bank, and African Development Fund—provide 100% debt cancellation to HIPCs that reach the completion point. This further reduces their debt burdens.
Debt relief under HIPC Initiative provides multiple benefits:
However, debt relief has limits in terms of promoting lasting poverty reduction and growth. Domestic reforms and policies aimed at improving governance, institutions, and economic structures are also essential.
While debt relief provides tangible benefits, HIPCs continue to face steep challenges:
While debt relief provides some fiscal space, HIPCs ultimately need to implement structural reforms and policies that promote inclusive growth and poverty reduction. This requires tackling governance challenges, diversifying economies, and investing in health, education, and economic infrastructure.
Given the ongoing challenges facing HIPCs, what is the outlook for continued international assistance?
The IMF and World Bank will likely back further debt relief in deserving cases. However, the overall appetite among advanced economies for additional debt cancellation is uncertain.
Other forms of aid and preferential financing will remain important for HIPCs. But there are concerns about donor fatigue and the fiscal pressures facing advanced economies in the wake of crises like COVID-19.
Multilateral development banks and bilateral donors will probably emphasize lending for productive investments in infrastructure, agriculture, digital connectivity, and human capital in HIPCs. The hope is that these investments, combined with governance reforms, will promote lasting growth.
Private creditors may also have a larger role to play in financing HIPCs through instruments like collateralized loans. But private capital flows remain well below levels needed to fill financing gaps.
Ultimately, while external support remains crucial, HIPCs will have to rely more on domestic resource mobilization and policy reforms to finance development spending and progress towards the Sustainable Development Goals.
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