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Helping the Poorest -
An Update on Canada’s Debt Relief Efforts

January 2005

Too often, the world’s poorest countries face an overwhelming financial burden: massive debt owed to foreign lenders and international financial institutions. Accumulated over many years, these debts can be so large governments have to spend more money on interest payments than on investments that could lift their populations out of poverty.

Canada has been a leader in a worldwide effort to change this. Working on our own and with other countries and lenders, Canada has eased the debt burdens facing many poor countries—and, in some cases, eliminated their debts altogether.

To reach this objective, Canada has relied on three different approaches:

• the Heavily Indebted Poor Countries Initiative;

• bilateral debt relief through the Paris Club; and

• the Canadian Debt Initiative.

The following document describes in detail how these three approaches work—and how they have made a lasting difference to indebted nations around the world.

1. The Heavily Indebted Poor Countries Initiative

The Heavily Indebted Poor Countries (HIPC) Initiative was launched in 1996. Proposed by the World Bank and the International Monetary Fund (IMF), it was the first comprehensive external debt reduction strategy—the first time debt held by international financial institutions was also involved.

The HIPC (pronounced Hip’-ik) Initiative’s goal is to reduce the external debt burdens (money owed to international financial institutions, foreign governments and commercial lenders) of the world’s poorest, most indebted countries, many of them in Africa (see Table 1). In September 1999, a number of improvements were introduced aimed at providing faster, deeper and broader debt relief and stronger links between debt relief, poverty reduction and social policies.

Before a poor country is accepted into the HIPC process, it must first seek the debt relief options available through traditional avenues such as the Paris Club. To get advanced debt relief offered by the HIPC Initiative, countries must then work through three phases.

Phase 1: The Pre-Decision Point

To be considered for HIPC assistance a country must:

• face an unsustainable debt burden;

• have established a track record of reform and sound policies through IMF- and World Bank-supported programs; and

• have developed a plan to pull their country out of poverty: a Poverty Reduction Strategy Paper (PRSP).

Once a country has made progress in meeting these conditions, the Executive Boards of the IMF and the World Bank can formally decide that a country is eligible for the HIPC Initiative. Once that happens, the international community that supports the HIPC Initiative then commits to reducing the country’s debt. This is called the decision point, and it launches the next phase.

Once a country reaches the decision point, it may immediately begin receiving interim relief on its debt service payments (see Figure 1). To receive the full debt reduction available under the HIPC Initiative, however, the country must continue to build a track record of good performance under IMF and World Bank programs.

The length of this interim period depends on:

• the successful implementation of key policy reforms specified at the decision point;

• the maintenance of macroeconomic stability; and

• the adoption and implementation of a PRSP for at least one year.

Once a country has met these criteria, it can reach its completion point.

A country that has reached the completion point has met all criteria and qualifies for full debt relief under the HIPC Initiative. At this point, lenders are expected to provide the full relief promised at the beginning of this process.

Countries Eligible for the HIPC Initiative
(as of November 1, 2004)

The HIPC Initiative needs substantial amounts of money to work. Multilateral creditors, including the World Bank, IMF and multilateral development banks, are responsible for assuming approximately half of the costs of the HIPC Initiative. As many of these creditors do not have the necessary resources to finance their full share of the costs, donor countries have taken steps to ensure the success of the HIPC Initiative by supporting the World Bank’s International Development Association (IDA) and creating two trust funds—the HIPC Trust Fund and the PRGF (Poverty Reduction and Growth Facility)-HIPC Trust Fund—to help the multilateral creditors provide much-needed debt relief.

Canada has provided $312 million in support to these two HIPC Initiative trust funds, and has been an ongoing supporter of IDA.

Administered by the World Bank, the HIPC Trust Fund was established in 1996 as a way to mobilize donor resources to support the debt relief efforts of multilateral creditors, particularly the African Development Bank. The World Bank also uses the HIPC Trust Fund to deliver IDA’s share of debt relief through transfers of net income from the International Bank for Reconstruction and Development.

Canada has taken a leadership role in providing funds for the HIPC Trust Fund, contributing $247 million since 1998. This represents 4.7% of all contributions.

Table 2: Summary of Canadian Contributions to the HIPC Trust Fund
(in Canadian dollars as of February 12, 2004)

The PRGF-HIPC Trust Fund, which was established in February 1997, is administered by the IMF. It is used to obtain grant funds from donors and other internal resources to support the Fund’s HIPC debt relief effort and its highly concessional lending to poor member countries, including HIPCs. Ninety-four members, including all G-7 members, agreed to fund the PRGF-HIPC Trust. In March 2000, Canada contributed $65 million.

The International Development Association, part of the World Bank Group, helps the world’s poorest countries reduce poverty by providing interest-free loans and some grants to boost economic growth and improve living conditions. IDA is funded largely by contributions from developed countries belonging to the World Bank, including Canada. As a result of its mission to provide concessional loans to the poorest countries, IDA is one of the largest HIPC creditors.

As IDAs loans are repaid, the funds are used to provide further interest-free loans and grants to other poor countries. As a result, IDA could not simply forgive HIPC debt—if it did, it would eliminate funds needed for future loans to other poor countries, including other HIPCs.

In order for IDA to provide its share of debt relief to HIPCs, therefore, it was necessary for it to secure funding from other sources. As a result, through the support of the World Bank members, including Canada, it was agreed that the International Bank for Reconstruction and Development (IBRD), another part of the World Bank, would transfer a portion of its net income to the HIPC Trust Fund every year until the end of 2005 to cover IDA’s HIPC costs.

Even though transfers from the IBRD have been adequate to finance IDA’s HIPC costs until now, by the end of 2005 the HIPC Trust Fund will likely need extra funds to cover IDA’s debt relief costs. Realizing this, IDA members, including Canada, agreed that during the next IDA replenishment (covering IDA’s operations from 2006 to 2008) donors would provide additional funding. This would replace foregone debt flows due to debt forgiveness on IDA credits under the HIPC Initiative. In this way, IDA will continue to be able to provide concessional loans to the world’s poorest countries, while still providing its fair share of HIPC relief.

As an IDA member and important contributor, Canada is playing an active role in the IDA 14 replenishment negotiations. We will continue to demonstrate debt relief leadership and fully contribute our fair share to cover IDA’s HIPC financing gap.

A traditional recourse for countries facing debt payment difficulties has been the Paris Club, an informal group of official bilateral creditors who provide debt rescheduling—a postponement in debt payments. (This is different than a concessional treatment, which involves a reduction in payment obligations.)

For countries involved in the HIPC Initiative, the Paris Club provides interim relief, on a case-by-case basis, by reducing debt payments once the country reaches its decision point. At its completion point, the Paris Club reduces the debt owed by up to 90% (or more if required). As a member of the Paris Club, Canada is fully engaged in providing interim relief and debt reduction at the completion point. 

2. Bilateral Debt Relief—The Paris Club 

Canada’s efforts to lessen the debt burdens of other countries go beyond the HIPC Initiative. They also include debt relief provided through the Paris Club, an informal group of countries that assist other countries with clearly unsustainable debt burdens.

The group was formed in 1956, when Argentina agreed to meet with its sovereign creditors in Paris. Since then, Paris Club creditor countries have reached over 380 debt agreements with almost 80 debtor nations. Over the past two decades the total amount covered by these agreements has exceeded US$425 billion. Today, the "club" has 19 permanent members, including Canada.

Through the Paris Club, Canada has played its part and provided debt relief to countries that have demonstrated an unsustainable debt burden and have official bilateral debts owed to Canada. Since 2001, Canada has written off over $419 million of interest payments owed by Poland and over $158 million of principal and interest payments owed by the former Yugoslavia.

As Table 3 shows, since the inception of the Paris Club, Canada has provided debt treatment to 48 countries—for many of these countries, on multiple occasions. In fact, Canada has participated in 205 debt treatment agreements with the countries listed in Table 3 since the Paris Club began, though not all of these involve debt reduction.

Table 3: Countries That Have Received, or Are Receiving, Debt Treatment From Canada Through the Paris Club
(as of November 2004)

3. The Canadian Debt Initiative

In March 1999, recognizing the grave implications of unsustainable debt levels of HIPCs, the Government of Canada created the Canadian Debt Initiative (CDI). Canada promised to cancel the debts it was owed by a number of countries once they completed the HIPC Initiative.

In February 2000, the CDI was expanded to include all countries completing the HIPC process. Canada then went even further, and announced an immediate moratorium on debt payments from 11 eligible HIPCs beginning on January 1, 2001. In all, 13 eligible HIPCs have benefited or are benefiting from the CDI (see Table 4).

Since 2001, combined debt savings for HIPCs from the CDI and Canadian participation in Paris Club treatments have amounted to approximately $609.1 million (see Table 4). Other countries have also followed Canada’s example by launching similar programs that go beyond the HIPC Initiative. 

Who Benefits From the CDI?

When the CDI was first announced in 1999, Canada was owed about $1.16 billion by the 16 HIPCs shown in Table 4. As a result of debt relief Canada has already provided since 1999 through the Paris Club and CDI, it is expected that a further $593.3 million of debt stock will be forgiven in order to provide the HIPCs with 100% debt cancellation under the CDI.

Of the 16 HIPCs participating in the CDI, 13 have already benefited from the moratorium. Of these, Benin, Bolivia, Ethiopia, Ghana, Guyana, Madagascar, Senegal and Tanzania have completed the HIPC process and have had their debts forgiven, totalling roughly $155.6 million in debt relief. In addition, the Democratic Republic of the Congo and Rwanda have demonstrated their commitments to reform and Canada announced that we would stop collecting debt service payments from both countries in Budget 2004.

Table 4: Total Canadian Debt Relief to HIPCs 2001 – 2004
(in millions of Canadian dollars through the CDI, Paris Club and HIPC initiative)

The CDI allows eligible countries to see debt relief earlier—giving them a head start on investments in their citizens—and enables them to have Canadian debt completely eliminated.

Under the CDI, Canada stops collecting debt payments from eligible HIPC countries immediately. Following the up to 90% debt reduction by the Paris Club, the CDI then forgives all remaining eligible debts for a total combined debt forgiveness of 100%.