Highly Indebted Poor Countries (HIPC) Debt Relief
Prof. Jeffrey D. Sachs
June 1999
Financial Feasibility of the Jubilee 2000 Program
The Jubilee 2000 Program calls for the outright cancellation of the unpayable debts of the worlds poorest countries. This would mean the total cancellation of debts for a large number of the so-called Highly Indebted Poor Countries (HIPCs), though probably not a complete cancellation of debts for all countries in the HIPC list. Many finance officials and politicians have charged that the Jubilee 2000 Program is unrealistic, claiming that a complete debt writeoff for a large proportion of the HIPC countries would require enormous budgetary outlays by the rich countries, and therefore would be politically infeasible. This objection appears to be mistaken. The Jubilee 2000 Program could be accommodated at little budgetary cost to the United States (and presumably other creditor countries), and would not pose fundamental risks to the international financial institutions or commercial banks.
The 42 HIPC countries (the original 41 HIPC countries plus Malawi) have the following approximate debt profile (all data in $US billion) for key categories of external indebtedness. Note that all data are provisional, as alternative published sources provide somewhat differing estimates:
| Owed to IMF:
of which: |
7.83 5.02 2.81 |
| Owed to World Bank: of which: IBRD IDA |
38.62 4.41 34.21 |
| Owed to DAC Bilateral Creditors of which: United States Others |
41.2 6.1 35.1 |
| Owed to commercial banks | 19.1 |
| Owed to regional development banks (mainly IDB, AfDB) |
22.0* |
| Total of the above categories *(RDB estimates are less certain) |
128.7 |
This list is not comprehensive. There is, in addition, external debt owed to suppliers,
short-term private-sector debts, and debts owed to non-DAC bilateral donors (e.g. Russia).
This memo will not discuss these other debts, except to note that non-DAC bilateral donors
would be expected to participate in debt relief, presumably on a pari passu basis. There
may be good reason for a differentiating the treatment of official debts (e.g. IMF, World
Bank, Bilateral creditors) and long-term commercial bank debt, from the treatment of
suppliers credits and short-term private debts (e.g. it would be appropriate to emphasize
timely payments on trade credits to the extent that they are financing current flows of
exports and imports).
The IDA loans have a substantial grant element (around 70%), so that the present value of the $34 billion of IDA debt is approximately $10 billion. The ESAF also has a substantial grant element (around 30%), so that the present value of the $5.0 ESAF loans is around $3.5 billion. Some of the regional development bank claims, especially in the case of Africa (under the window of the Africa Development Fund) also have a concessional component. The DAC bilateral debt also has a undetermined portion of concessionality, so that the present value of the DAC bilateral debt is below $41.2 billion, but by how much is unclear.
Achieving a debt writeoff for each category of debt
This memo considers the case of a complete writeoff of the major debt categories shown on the preceding page. As already noted, most HIPC countries would receive such a complete cancellation under the Jubilee 2000 proposals, but others would not.
IMF Debt. The HIPC countries owe approximately $7.8 billion to the IMF, of which around $5 billion is in the form of ESAF loans. The simplest method of debt relief would be the following. IMF Gold is currently valued on the IMF books at 35 SDR per ounce, for a total book value of 3.6 billion SDR, or $4.9 billion dollars. The current market value of the gold is approximately $27 billion. The IMF could revalue the gold on its books to market value, and thereby recognize a capital gain of around $22 billion. In the IMF’s balance sheet, this capital gain could be allocated to the Special Disbursement Account (SDA), which in turn could transfer assets to the ESAF-HIPC Trust account. It is clear that a small proportion of the capital gains would enable a complete writeoff of all IMF claims on the HIPC countries without disturbing the current quota levels of IMF members.
Of course, to realize the capital gains, the gold would have to be sold in stages on the world market. There is a long history of using IMF gold sales for developing country purposes, notably during 1976-80 when gold sales were used to establish a Trust Fund to make low-interest rate loans. In the current round of debate, the IMF has cautiously recommended selling a small amount of gold, investing the proceeds in interest bearing assets, and then using the interest payments on the gold sales to finance a small annual flow of debt reduction operations. It is obvious that a bolder move would be to sell the gold and use the proceeds outright (not the interest on the invested proceeds) to achieve a much larger amount of debt reduction.
To be concrete, if 36 million ounces of gold are sold, the revenues would be approximately $9.4 billion dollars, against a current book value of the 34 million ounces of gold equal to $1.6 billion. Of the total sales, $7.8 billion could then be transferred to the ESAF-HIPC Trust account and used to cancel the IMF claims on the HIPCs, while the remaining $1.6 billion (equal to the original balance sheet amount) would be invested in interest-bearing securities. In essence, the IMF would simply be using the realized capital gains ($7.8 billion), in their entirety, to retire the HIPC debt in line with the Jubilee 2000 proposals. Note that this would take a vote of 85 percent of IMF membership, but with leadership from the U.S. and Europe, and support from the HIPCs, this would be achieved.
There are several alternative methods that could also be used, in lieu of the gold revaluation and sales, or in conjunction with it. The Reserve Account in the General Department of the IMF has approximately 2.133 billion SDR ($2.9 billion) which could be charged against debt writeoffs. The reserve account in the ESAF Trust Fund has approximately $2.82 billion, and the subsidy account also has reserves that could provide another $2 billion or so that could be used against writeoffs of ESAF claims. Thus, some combination of gold revaluation (and/or gold sales at market value) combined with the use of various reserve funds available to adverse contingencies, could easily fund a complete writeoff of IMF claims on HIPC countries.
World Bank Debt. The $4.4 billion of IBRD (non-concessionary) claims on the HIPCs could be written off directly against loan loss reserves and against bank capital, which is now approximately $27 billion. The IBRD has already provisioned for $3.24 billion of loan losses. Thus, the loan loss provisions could absorb around $3 billion of losses, while World Bank capital would absorb around $1 - 1.5 billion. Bank capital would be reduced from around $27 billion to around $26 billion, without impairing the Bank’s credit standing.
The IDA claims are held in a separate account, such at that IDA losses do not directly impair IBRD capital. An outright cancellation of IDA claims against the HIPCs would substantially reduce the availability of future IDA lending (reducing IDA resources by approximately $10 billion in net present value), but it would not otherwise impair World Bank capital or other Bank functions. The net result would be a scaling down of IDA activities, unless and until IDA is replenished by new donations from member governments. Still, it would be much more realistic to cancel the IDA claims outright, than to demand repayment simply to relend the funds back to the same countries (or more accurately, to lend the funds back to the HIPCs simply so that they can stay current on their IDA debts).
Bilateral Debt. Most governments already hold their HIPC claims on the books at far below face value. In the United States, for example, the face value of HIPC claims total approximately $6.1 billion. While the exact valuation of these claims (under the Interagency Country Risk Assessment System) is confidential, the informed estimate is that the debt is held on the books at approximately $0.10 per $1 of face value. The budgetary costs of a debt writedown are equal to the current book value of the debt. Thus, the cost of a complete writeoff of the $6.1 billion would be approximately $600 million. In other countries, similar accounting practices would allow steep writedowns without budgetary appropriations.
Commercial Bank Debt. Since the mid-1980s, the commercial banks have agreed to cancel bad debts in the context of the London Club. The amount of commercial bank debt outstanding -- around $19.1 billion -- is a tiny fraction of bank exposure to developing countries. A substantial or even complete writedown of these claims would have no discernible effect on the bank capital of international commercial banks. These losses would be a small fraction of those incurred in the recent emerging markets crisis. In any event, the HIPC claims are probably already heavily provisioned against in the balance sheets.
Regional Development Bank Debt. The InterAmerican Development Bank could easily absorb a complete writeoff of debt to the four Latin American HIPC countries (Bolivia, Guyana, Honduras, and Nicaragua). The total debt owed by these countries is approximately $1.1 billion. The IDB’s bank capital is $ 94 billion, of which $90 billion is callable capital. Loan loss reserve funds are about $1 billion, and various other special reserves are available to absorb losses. Similarly, the Asian Development Bank exposure to the two HIPC countries (Myanmar and Vietnam) is minimal. The problematic case is the African Development Bank (AfDB). A substantial writeoff of African debts would involve a substantial proportion of all lending by the concessional African Development Fund (ADF). Indeed, practical solutions may require the winding up the ADF in its current form. The need for financial restructuring of the AfDB is already evident, even independent of an intensification of the HIPC initiative.
Discussion
The Jubilee 2000 proposals have elicited scepticism in part because the IMF and the World Bank have claimed that they are unable to absorb the necessary writeoffs without substantial new contributions from the donor governments. This position appears to be unjustified, even if it understandable from the point of view of those two institutions. In fact, both have substantial cushions with which to absorb capital losses, and these institutions should be pressed harder to accept such writedowns. The IMF has huge unrealized capital gains on gold reserves (as well as other reserve accounts in the General Account as well as the ESAF Trust Fund), while the World Bank has substantial bank capital. In any event, both the ESAF and IDA loans could be reduced sharply without impairing Bank capital or Fund resources, since both programs are heavily backed by grants, not by Bank capital or IMF quota rights.
As for the bilateral donors, budget practices differ across countries, so each will have a distinctive budgetary burden that results from debt writeoffs. In the U.S., at least, it appears that most of the U.S. debt could be written off at a budgetary cost of around $0.10 per $1.00 of debt reduction. This would mean that the full stock of U.S. bilateral claims against the HIPCs, estimated at around $6.1 billion, could probably be eliminated with a budgetary outlay of around $610 million. There may be some modest added costs to recapitalizing (in part) the World Bank and regional development banks hit by the writedowns.
Conclusion
The assumptions in this note still need to be tested with critical scrutiny. No doubt some technical details would need to be adjusted to achieve the results outlined here. If the assumptions are essentially correct, however, it suggests that the U.S. Administration could, at a very modest budgetary cost and well within political limits, champion the Jubilee 2000 call for a full elimination of the crushing debt burden facing the world’s poorest countries.
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© 2007 by the President and Fellows of Harvard College.
Last revised 11/01/2007