Implementing Debt Relief

The Heavily Indebted Poor Country (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI) were introduced in 1996 and 2005, respectively, in order to lower the debt levels of the world's poorest and most indebted nations. The World Bank, International Monetary Fund (IMF), African Development Bank, and Inter-American Development Bank provide debt relief under both efforts.

The U.S. government is providing financial support to these institutions for their debt relief efforts. However, the U.S. approach to funding its share of MDRI for the World Bank and African Development Bank, which requires early payment of U.S. commitments to the two institutions in order to generate credits to fund debt relief and is known as "early encashment," does not fully fund current and future U.S. MDRI commitments.

• Currently, the U.S. government is in arrears to the World Bank, and the World Bank deducts arrears from any early encashment income before applying this income toward MDRI commitments. This approach has resulted in a current shortfall of $149 million in U.S. MDRI commitments to the World Bank.
• We estimate that the early encashment approach will be insufficient to fully finance future U.S. MDRI commitments even if U.S. payments are made on time and in full because these commitments exceed projected early encashment income.

We estimate that the HIPC Initiative and MDRI may provide beneficiary countries with $21 billion and $22 billion, respectively, in additional resources over the next 50 years. While countries are encouraged by the U.S. government and others to spend such resources on efforts to reduce poverty, the extent to which such spending occurs is unknown. It is difficult to demonstrate that debt relief has led directly to increased poverty-reducing expenditures as such expenditures are difficult to track and country data are not comparable across countries and may not be reliable.

The World Bank and IMF have improved their country debt sustainability analyses (DSAs) since 2005. Specifically, new DSAs consider country performance in determining sustainable debt loads and vary assumptions of future economic growth. Furthermore, the World Bank and African Development Bank now structure their future assistance to countries based on a country's risk of future debt distress. Such improvements address weaknesses that GAO previously identified in past DSAs. New DSAs have identified numerous ambitious actions countries should take in order to avoid future unsustainable debt levels. Achieving such objectives could prove difficult for these poor countries.

^ Back to topWhat Needs to Be Done

The Secretary of the Treasury implemented our recommendation by requesting separate appropriations to fund the World Bank and MDRI obligations, and Congress has funded separate appropriations.
Full Report of GAO-08-888R (PDF).

Continued oversight is essential to ensure that debt relief is fully funded.
Highlights of GAO-09-162 (PDF, 1 page)

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Developing Countries

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