1.2.) Two instruments have been used to reduce the commercial bank debt of some heavily indebted poor countries. Specifically, we focused our review on (1) the implementation of the HIPC initiative and (2) the initiative’s potential to achieve its stated goal. Implementation of the HIPC Initiative Reflects Compromise

The implementation of the HIPC initiative has involved significant negotiation among the major creditors on issues such as the eligibility of a country, the amount of relief to be provided, and the way in which relief is to be shared among creditors. For five of these six countries, the Boards agreed to provide relief at the upper end of what the negotiated framework allows. The HIPC Initiative Will Help Countries, but Many Will Remain Vulnerable to Future Debt Problems

The HIPC initiative will provide benefits to recipient countries; however, many will remain vulnerable to future debt problems, even with sound economic policies. For some countries, those export growth projections may turn out to be overly optimistic. HIPC Recipients Will Need Strong Economic Performance and Continued Economic Assistance

Countries receiving debt relief through the HIPC initiative will need to maintain strong economic performance and, in most cases, continue to receive large amounts of donor assistance in order to service their debt. The HIPC initiative’s projections assume that, after completing the HIPC initiative, countries will maintain sustainable debt levels in part through strong export growth. In addition, for most countries, substantial donor assistance is expected to continue, including balance-of-payments support. For this reason, their export earnings are considered to be particularly vulnerable to adverse economic events.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the: (1) implementation of the Heavily Indebted Poor Countries (HIPC) Debt Initiative; and (2) initiative's potential to achieve its stated goal of bringing poor countries' debts to sustainable levels.

What GAO Found

GAO noted that: (1) the HIPC initiative will help reduce participating poor countries' debt burdens, in some cases, substantially; however, many will remain vulnerable to future debt problems even with sound economic policies; (2) the implementation of the HIPC initiative reflects compromise among the major official creditors on issues such as countries' eligibility and the total amount of debt relief to be provided; (3) in recognition of countries' economic vulnerablities, creditors have generally agreed on relief amounts that are at or close to the upper bounds of what the negotiated framework allows; (4) nonetheless, in order to avoid further debt problems, countries receiving debt relief through the HIPC initiative are assumed to maintain strong economic performance and continue to receive large amounts of donor assistance; (5) in most cases this assistance includes balance-of-payments support; (6) the HIPC initiative projections assume that countries will maintain sustainable debt levels in part through strong export growth; (7) these export growth assumptions may be optimistic for some countries; and (8) since many HIPC recipients rely upon a few commodities for their export earnings, they are particularly vulnerable to economic events such as a decline in the price or output of a primary export.