Debt Relief and Public Health Spending in Heavily Indebted Poor Countries
| Author | Sanjeev Gupta/Benedict Clements/Maria Teresa Guin-Siu/Luc Leruth |
| Position | Chief/Deputy Division Chief, of the Expenditure Policy Division in the IMF's Fiscal Affairs Department/Senior Economist/Senior Economist |
The Heavily Indebted Poor Countries (HIPC) Initiative, launched in 1996, was the first comprehensive effort by the international community to reduce the external debt of the world's poorest countries. It went beyond earlier debt-relief initiatives in that it included debt from multilateral creditors like the IMF and the World Bank and placed debt relief within an overall framework of poverty reduction. Enhancements made to this Initiative in 1999 further strengthened the links between debt relief, poverty reduction, and social policies.
The underlying objective of the enhanced Initiative is to channel the government resources freed up because of debt relief into poverty reduction programs. Under the programs being negotiated by the World Bank and the IMF with countries eligible for debt relief, government spending on public services-such as preventive health care and primary education-that directly affect the poor will increase.
By the end of May 2001, debt relief was committed to 23 of 41 eligible countries: Benin, Bolivia, Burkina Faso, Cameroon, Chad, The Gambia, Guinea, Guinea-Bissau, Guyana, Honduras, Madagascar, Malawi, Mali, Mauritania, Mozambique, Nicaragua, Niger, Rwanda, São Tomé and Príncipe, Senegal, Tanzania, Uganda, and Zambia. At this stage-called the "decision point"-interim debt relief becomes available to these 23 HIPCs, provided they meet certain conditions. This interim relief is provided by the IMF and the World Bank, and by other creditors at their discretion. At the completion point-which countries reach after establishing a track record of policy implementation determined at the decision point-all creditors provide the remainder of their agreed debt relief.
Countries receiving debt relief under the enhanced HIPC Initiative should see their debt-service payments drop, on average, by 1.9 percentage points of GDP a year during 2001-2003, relative to what they paid during 1998-99 (Chart 1). Based on an average weighted by each country's GDP, debt-service payments will decline by 1.6 percentage points of GDP. Savings on debt service could be quite significant for some countries-for example, Guyana's savings from debt relief will average 9 percent of GDP a year over the next few years.
[ SEE THE GRAPHIC AT THE ATTACHED RTF ]
Some HIPC debt relief may not be reflected in the beneficiary countries' budgets immediately, however. For instance, relief on debt owed to the IMF may not show up in a country's fiscal accounts initially because it accrues to the central bank rather than to the budget (except in the CFA franc zone countries). Hence, countries may need to set up special accounts in the central bank to identify savings stemming from HIPC relief so that they can be transferred to the budget as grants. Similarly, some public enterprises may benefit from debt relief in the form of write-downs of their government-guaranteed debt, but such write-downs will not be reflected in the government budget unless the savings they entail are transferred to it.
The use of funds saved because of debt relief is to be guided by each country's poverty reduction strategy (PRS), which is delineated in a poverty reduction strategy paper (PRSP). The PRSP will determine the basis for access to concessional loans from the IMF and the World Bank. Countries will formulate their poverty reduction strategies in collaboration with the IMF and the World Bank, as well as with civil society and development partners. Updated annually, the PRSP describes a country's plan for macroeconomic...
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