The Debt Reduction Facility for IDAOnly Countries: An Overview and Update

1
The Debt Reduction Facility for IDA-Only
CountriesAn Overview and Update

• Edward Mountfield
• Economic Policy and Debt Department
• The World Bank
• Multilateral Development Banks Meeting on Debt
  Issues
  
• Washington DC, July 11 2007

2
Objectives of the presentation

• To provide
• A brief overview the Debt Reduction Facility for
  IDA-Only Countries (DRF)
  
• An update on progress

3
Background

• To help heavily indebted, low-income countries
  extinguish external commercial debt where this is
  impeding growth and poverty reduction
  
• Established by the Boards of IBRD and IDA in July
  1989
  
• With approval of the IDA Board, the DRF
  provides
  
• preparation grants to fund legal and financial
  advisers
  
• implementation grants to finance debt buybacks
• Major policy changes decided by the Board in
  2004
  
• In March 2006, the DRF was transferred from the
  Infrastructure Vice Presidency to the PREM Vice
  Presidency
  
• In July 2006, a new DRF Oversight Committee was
  established, chaired by the PREM Vice President
  
• In April 2007 the IDA Board extended the DRF
  until 2012

4
Eligible countries

• IDA-only countries
• Acceptable progress with a medium term program
  for economic development
  
• A strategy for debt management which
• addresses commercial debt comprehensively
• involves substantial relief from official
  bilateral creditors
  
• and which enhances countrys growth and
  development
  
• Countries must have reached HIPC decision point
  (a requirement since 2004)

5
Completion Point HIPCs
Pre-Decision Point HIPCs
Interim HIPCs
Sao Tome and Principe
Sierra Leone
22
Benin
Bolivia
Burkina Faso
Cameroon
Ethiopia
Ghana
9
10
Guyana
Honduras
Madagascar
Comoros
Malawi
Mali
Côte dIvoire
Afghanistan
Mauritania
Chad
Eritrea
Mozambique
Central African Rep.
Congo, Dem. Rep.
Nicaragua
Kyrgyz Rep.
Congo, Rep. of
Niger
The Gambia
Liberia
Rwanda
Guinea
Nepal
Senegal
Somalia
Tanzania
Guinea-Bissau
Sudan
Burundi
Uganda
Haiti
Togo
Zambia
6
Eligible and ineligible debt

• ELIGIBLE DEBT
• Public and publicly guaranteed uninsured medium
  and long-term external commercial debt in
  arrears
  
• Public and publicly guaranteed uninsured
  short-term external commercial debt (trade
  financing, suppliers credit and overdrafts)
  
• Debt must have been contracted and disbursed
  before the end of the reference year for HIPC
  decision point (since 2004)

• INELIGIBLE DEBT
• Bilateral debt or multilateral debt
• Domestic debt
• Third-party guaranteed debt
• Debt contracted after end of the reference year
  for HIPC decision point (since 2004)
  
• Debt that is time-barred under statutes of
  limitation (since 2004)

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Characteristics of an operation

• Debt buyback prepared, negotiated and implemented
  by the Government and its advisers not by IDA
  
• Typically takes several years to complete, from
  start of preparation to final buyback
  
• Principal, interest and penalties/late fees all
  extinguished
  
• Comprehensive high participation essential
• Best possible price deep discount requiring, at
  minimum, proportionate burden sharing (defined
  as traditional debt relief on Naples terms plus
  HIPC common reduction factor)

8
22 DRF operations completed

• Around US8 billion of debt has been extinguished
  in 22 countries
  
• US 4.5 billion of principal
• plus US 3.5 billion of interest and
  penalties/late fees

10
Niger (91)
With others planned
8
Mozambique I (91)
Ethiopia (96)
Guyana I (92)
5
Mauritania (96)
Uganda (93)
Bolivia (93)
Senegal (96)
4
Mozambique II (07)
Togo (97)
Sao Tome Principe (94)
Nicaragua II (07)
Vietnam (98)
Zambia (94)
DR Congo (08?)
Yemen (01)
Sierra Leone II? (08?)
Cote dIvoire (98)
Albania (95)
Honduras (01)
Liberia? (08?)
Cameroon (03)
Sierra Leone I (95)
Guyana II (99)
Tanzania (04)
Others?
Nicaragua I (95)
Guinea (00)
1991-1995
2007 onward
2001-04
1996-2000
9
Mozambique

• In April 2007, the Board approved an
  implementation grant for a second buyback for
  Mozambique
  
• It is hoped that the buyback, to be launched
  shortly, will eliminate all of Mozambiques
  remaining US176 million of eligible commercial
  external debt principal and interest, together
  with associated penalties/late fees
• Cost of US16.1 million (or 9 cents per dollar of
  principal and interest plus closing costs)
  
• The Government of Norway has contributed US14.7
  million to the DRF to support the costs of this
  buy-back
  
• Remaining US1.4 million to be financed from the
  IBRD net income contribution to the DRF

10
Nicaragua

• A Nicaragua buyback implementation grant is
  expected to be submitted to the Board in coming
  weeks
  
• Hoped that this operation can eliminate
  Nicaraguas remaining US1.4 billion of eligible
  commercial external debt principal, interest and
  penalties/late fees at a price of 4.5 cents per
  dollar of eligible debt
• Expected that cost of around US64.4 million will
  be financed roughly 50-50 by contributions from
  IBRD net income and contributions from
  Governments (including Finland, Netherlands,
  Norway, Russia, Sweden and UK, plus a
  contribution from Nicaragua itself)
• Ground breaking operation, in that it is expected
  to involve litigating creditors that have won
  judgments, but will now provide their fair share
  of HIPC debt relief

11
DRC, Sierra Leone and Liberia

• A DRF buyback preparation grant has been approved
  for the Democratic Republic of the Congo, with
  work expected to start early in Bank FY08
  
• A Sierra Leone buyback preparation grant is
  expected to be submitted to the Board in the
  coming weeks
  
• The Government of Liberia has started work on a
  commercial debt reduction operation
  
• preparation is currently financed by the Swiss
  Agency for Development and Cooperation (SDC)
  
• however, DRF support has been requested by the
  Minister of Finance once Liberia reaches decision
  point

12
Why the DRF is still needed

• Many commercial creditors have not provided
  proportional burden sharing debt relief, as
  expected by the Paris Club and the HIPC
  Initiative
• The DRF is a proven instrument for catalyzing
  commercial creditor participation in debt relief
  
• Share of commercial debt is high in upcoming HIPC
  Initiative cases
  
• Concerns about litigation by commercial creditors
  and aggressive acquisition of claims by vulture
  funds

13
Pricing and participation the past

• To date, buybacks have been priced as a
  percentage of principal only
  
• Price per dollar of principal has fluctuated from
  8 cents to 26 cents
  
• This has resulted in
• uneven treatment of creditors (those with older
  claims/more interest got a lower effective
  price)
  
• sometimes in low participation (participation has
  fluctuated from 100 down to as low as 62)
  
• in some cases, need for clean up second
  buybacks (e.g. Guyana, Mozambique, Nicaragua)

14
Pricing and participation the future

• In future, buybacks will be priced as a
  percentage of a broader definition of debt
  (including interest components)
  
• Proportionate burden sharing is called for by the
  Paris Club and the HIPC Initiative
  
• DRF beneficiary governments and their advisers
  are required to negotiate the best possible deal
  
• However, best possible deal will be assessed in
  terms of participation as well as pricing so as
  to eliminate the need for second buybacks
  

15
Financing

• Since inception, 350 million of IBRD net income
  has been allocated to the DRF
  
• There have also been co-financing contributions
  from Canada, Finland, France, Germany, IADB,
  Japan, Norway, Netherlands, Sweden, Switzerland,
  EU, UK and USA
• DRF operations to date have been financed from
• IBRD net income (about 218 m.)
• grant contributions from other donors (about 207
  m.)
  
• and approximately 212 m. from other sources
  (beneficiary countries own resources, IDA
  credits and IMF financing)
  
• After upcoming Nicaragua and Mozambique
  operations, around 125 m. of IBRD-provided
  resources available
  
• Based on the current work program, this is
  currently expected to be sufficient to finance
  the DRFs activities through FY08
  

16
Conclusion

• The DRF can play a bigger role in encouraging
  commercial creditor participation in the HIPC
  Initiative
  
• But only if other donors contribute
• IBRD net income contributions to the DRF are
  limited
  
• Future DRF demands on IBRD net income will need
  to be weighed against the competing needs of IDA
  
• And only if responsible commercial creditors
  continue to provide debt relief as part of
  buybacks