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Any country that accepts the rules and principles may, in principle, become a member of the Paris Club.

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Yet since the Paris Club permanent members are the major international creditor countries, they determine its practices. The five Paris Club 'principles' stipulate the general terms of all Paris Club treatments. They are: 1 Paris Club decisions are made on a case-by-case basis; 2 all decisions are reached by full consensus among creditor nations; 3 debt renegotiations are applied only for countries that clearly need debt relief, as evidenced by implementing an International Monetary Fund IMF program and its requisite economic policy conditionality ; 4 solidarity is required in that all creditors will implement the terms agreed in the context of the renegotiations; and 5 the Paris Club preserves the comparability of treatment between different creditors.

This means that a debtor country cannot grant to another creditor a treatment on more favorable terms than the consensus reached for Paris Club members. While Paris Club 'principles' are general in nature, its 'rules' specify the technical details of Paris Club treatments. The 'rules' detail 1 the types of debt covered -- Paris Club arrangements cover only medium and long-term public sector debt and credits issued prior to a specified "cut-off"date; 2 the flow and stock treatment; 21 3 the payment terms resulting from Paris Club agreements; and 4 provisions for debt swaps.

Since the Paris Club is an informal institution, the outcome of a Paris Club meeting is not a legal agreement between the debtor and the individual creditor countries. Creditor countries that participate in the negotiation sign a so-called 'Agreed Minute. Prior to U. Previously, debt treatments involved rescheduling of debts on increasingly concessional terms. At the Toronto meeting of G7 finance ministers, it was agreed that Paris Club members would extend to some countries up to one-third forgiveness of their bilateral debts. Over the next decade, the Paris Club gradually increased the amount of debt that it would be willing to write off from These terms are named after the cities where they were negotiated by G7 countries.

The United States joined Paris Club debt forgiveness negotiations in , under authority granted by Congress in Foreign Operations Appropriations, section , P. Annually re-enacted since , this authority allows the Administration to cancel various loans made by the United States. These may include U. These include Appendix 2 provides U. For much of their history, the international financial institutions IFIs argued that since they were lenders of last resort, providing assistance to poor countries that could not borrow money from the global financial markets, they required preferred creditor status.

This means that the World Bank and the IMF would be paid first in the event that borrowers ran into financial difficulties, and that debts owed to them would not be reduced under any circumstances.


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Forgiving their debts, they argued, would diminish their resources available for other poor and developing countries and set a bad example for other indebted countries as they undertook often painful, albeit economically crucial, reforms. This is the so-called "moral hazard" problem with debt relief. Some creditors argue that by providing debt relief, they are creating a "moral hazard" by convincing borrowers that they need not worry about repayment. Despite initial reservations, and at the G8's request, the World Bank and the IMF created the HIPC debt relief program in to reduce some multilateral debt in conjunction with bilateral debt forgiveness.

According to the IMF and the World Bank, the goal of the HIPC program would be to help the poorest and most indebted countries meet their "current and future external debt service obligations in full, without recourse to debt rescheduling or the accumulation of arrears, and without compromising growth. In , the program was expanded to provide deeper, faster, and broader debt relief.

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Moreover, it took a minimum of six years for borrowers to qualify for debt relief. Critics charged that this ratio was too high and the time-frame too long. The HIPC program was also modified to include a greater focus on poverty reduction efforts. Countries receiving debt relief were now be required to use money freed up by debt relief for poverty reduction as specified in a Poverty Reduction Strategy Paper PRSP approved by its lenders. Comoros was added in Many critics argue that the four excluded countries, as well as many others, should be eligible for relief.

They maintain that the debt sustainability analysis used to determine HIPC eligibility relied on overly optimistic assumptions with respect to GDP and export rates in deciding country eligibility. An official review of the HIPC program in concurred with this assessment and called for more realistic economic projections in determining HIPC eligibility. HIPC debt relief is divided into two stages: decision point and completion point. Pre-decision point HIPC countries do not receive any debt relief. Decision Point. In order to reach the decision point, a country must establish a three-year track record of good economic performance under existing IMF and World Bank lending arrangements.

Other bilateral and commercial creditors are expected by Paris Club members to offer at least similar treatment. If it is not, the IMF and World determine how much multilateral debt relief is required and the country enters the second phase of debt relief. Completion Point. If a country enters the second stage, it must establish a further track record of good economic policies and implement its poverty reduction strategy. Once the World Bank and IMF determine that a country has reached the completion point, it receives full and irrevocable debt relief of the amount determined at the decision point.

WRAP Plan finalised for debt cancellation for poor countries

Table 2 summarizes the HIPC program. Table 2. The trust fund has two components. The second uses contributions from donors to support HIPC debt relief provided by eligible regional multilateral creditors. Individual nations, including the United States, have also made pledges and contributed to the fund. This pledge was fulfilled with contributions in FY and FY IMF Gold. When the IMF was originally created, member nations were required to contribute a percentage of their quota in gold.

Fearing disruption of the international gold market, the Clinton Administration and several members of Congress strongly objected to any plans to sell IMF gold. Between December and April , transactions involving a total of At the same time, the IMF accepted back the gold sold to Brazil and Mexico in settlement of their financial obligations to the Bank. The balance of the IMF's holdings of physical gold remained unchanged although its usable resources shrank.

To date, 18 of the 38 HIPC-eligible countries have completed the HIPC program, eleven countries have reached their decision point, and nine are in pre-decision point status Table 3. Table 3. Appendix 3 displays debt statistics for all HIPC countries. According to a IMF study, significant additional donor support and structural reforms are necessary for HIPC countries to reach debt sustainability.

Debt Sustainability for Low-Income Countries: A Review of Standard and Alternative Concepts

The study found that HIPC completion point countries had more robust economic policies and institutional frameworks than other HIPC countries but they still fared poorly when compared to other developing countries. In addition their debt management capacity remained weak. Central to the multilateral debt cancellation debate was whether to compensate the international financial institutions for the amount of debt they would write off.

The World Bank's IBRD resources have increased steadily over the past several years, and many argued that some of this money could be diverted to provide IDA debt relief without harming the bank's financial situation.

New gold sales had been proposed during the discussion but, like earlier proposals, were strongly opposed by the gold industry, the Bush Administration, and many Members of Congress. According to British Chancellor of the Exchequer, [author name scrubbed], "We are presenting the most comprehensive statement that finance ministers have ever made on the issues of debt, development, health and poverty.

Treasury Secretary John Snow called the agreement "an achievement of historic proportions. Reaction from poor countries not included in the debt deal was critical.

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Debt Relief for Heavily Indebted Poor Countries: Issues for Congress

Many have long argued that debt relief benefits countries that have poor economic performance and that are less willing to service their debts than other developing countries. Some countries, such as Kenya, are ineligible for debt relief, yet suffer from many of the same economic constraints as many HIPC countries and are servicing their debts. Both IMF Managing Director Rodrigo Rato and World Bank President Paul Wolfowitz cautiously welcomed the proposal but stressed the importance of providing debt relief without diverting resources from other developing countries.

According to Mr. Rato, although International Monetary Fund member countries are committed to canceling debts of the world's poorest nations, debt relief should be carefully designed and implemented. He stressed that there is a "clear consensus" among IMF directors that writing off the debt should not affect the fund's ability to continue to lend to poor countries. Skip to main content. Advertisement Hide. This is a preview of subscription content, log in to check access. Arellano, M. Bond Review of Economic Studies 58 2 : — Google Scholar.

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Cassimon, J. Reding World Development 31 10 : — Birdsall, N. Claessens, and I. Diwan World Bank Economic Review 17 3 : — Bond, S. Bulow, J. Rogoff Sovereign Repurchases: No Cure for Overhang. Quarterly Journal of Economics 4 : — Burnside, C. Dollar Aid, Policies, and Growth. American Economic Review 90 4 : — Cassimon, D. Vaessen Economic Systems 31 1 : 12— Van Campenhout Chauvin, N. Kraay Claessens, S. Detragiache, R. Kanbur, and P. Wickham Review of the Issues. Journal of African Economies 6 2 : — Cohen, D.

The Sustainability of African Debt.

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  6. Cassimon Bursens and P. The Bank and the IMF continue to track debt service payments and "poverty reducing" expenditures in monitoring the HIPC Initiative, suggesting that the freeing up of resources for poverty reduction remains an objective. From the perspective of creditors and civil society, poverty reduction is the primary if not the sole objective of debt relief.

    It has proved challenging for the Bank to manage the enduring expectations of the international community for the initiative.