MDRI expands upon the HIPC Initiative and represents the  most recent effort to provide debt relief to heavily indebted poor  countries. Approach to Financing MDRI Does Not Fully Fund Current and Future U.S. Commitments

Treasury, IDA, and ADF have agreed to a financing approach for MDRI  called early encashment, under which the U.S. government earns income  for early replenishment payments to IDA and ADF. Early Encashment Income Insufficient to Fully Finance Current MDRI Debt Relief Due to Arrears

Because the United States is currently in arrears on its IDA14  replenishment commitment, the early encashment income the United  States earns does not fully finance the current U.S. MDRI commitment. Under the early encashment process, the World Bank first uses early  encashment income to fund the present value of the shortfall in the U.S.  IDA replenishment before applying early encashment income to the U.S.  MDRI commitment. Treasury officials noted that if the United States ultimately pays its arrears  to the IDA14 replenishment, early encashment income will then fund the  U.S. MDRI commitment. However, to fully fund the U.S. MDRI  commitment, (1) Treasury will need to release a withholding of $94 million  from the IDA14 replenishment, by reporting to Congress that the World  Bank has accomplished transparency reforms required under U.S. law, and  (2) Congress will need to appropriate approximately $49 million in funds  to compensate for the rescissions. The Extent to Which Countries Spend Debt Relief Resources to Reduce Poverty Is Unknown

We estimate that 41 countries are to receive nearly $44 billion in  additional MDRI and HIPC resources from the four IFIs, but the degree to  which the countries target these resources at poverty-reducing activities is  unknown. It is difficult to establish that debt  relief has led directly to increased poverty-reducing expenditures for two  reasons: (1) debt relief resources are difficult to track and (2) country  spending data are not comparable and also may not be reliable. However, IMF and World Bank officials  told us that they are unable to link debt relief resources directly to  poverty-reducing expenditures because it is difficult to separate debt relief  resources from other types of financial flows, such as international  assistance and fiscal revenue. The World Bank and IMF Have Improved Their Country Debt Sustainability Analyses and Identified Numerous Actions Countries Should Take to Avoid Future Unsustainable Debt Levels

The World Bank and IMF have improved their country debt sustainability  analyses (DSA) since 2005, including by addressing weaknesses that GAO  and others have previously identified. These objectives are ambitious and could prove  difficult for these poor countries to achieve over the course of the 20-year  projection period. DSAs Determine Risk Based on the Strength of Country Performance and Analysis of Numerous Possible Scenarios

In a departure from prior DSAs, the new DSAs consider the strength of a  country’s policies and institutions in assessing risk and determining  sustainable debt loads; countries with strong policies and institutions are  considered capable of successfully carrying greater levels of debt. The African  Development Bank provided comments on the U.S. costs for funding  MDRI. Appendix I: Objectives, Scope, and Methodology

Our objectives were to (1) analyze the U.S. financing approach for debt  relief efforts, (2) review the extent to which the Multilateral Debt Relief  Initiative (MDRI) might affect resources available to countries for poverty- reducing activities, and (3) assess revisions to the analyses conducted by  the World Bank and IMF to review and promote future debt sustainability. To  evaluate whether the U.S. approach to funding its IDA and ADF MDRI  costs was adequate to fully pay U.S. commitments, we estimated total U.S.  commitments in each IDA and ADF replenishment period and then used  this amount in a simulation model of the U.S. payment schedule in order to  estimate the amount of early payment credits that would be earned  annually if Treasury continued to use the early encashment approach. The surplus $1 million can  be used to pay future MDRI obligations.
Why GAO Did This Study

In 1996, the Heavily Indebted Poor Countries (HIPC) Initiative was created to provide debt relief to poor countries that had reached unsustainable levels of debt. In 2005, the Multilateral Debt Relief Initiative (MDRI) expanded upon the HIPC Initiative by eliminating additional debt owed to four international financial institutions (IFI): the International Monetary Fund (IMF), World Bank's International Development Association (IDA), African Development Fund (ADF), and Inter-American Development Bank (IaDB). These four IFIs are projected to provide $58 billion in total debt relief to 41 countries. GAO (1) analyzed the U.S. financing approach for debt relief efforts; (2) reviewed the extent to which MDRI might affect resources available to countries for poverty-reducing activities; and (3) assessed revisions to the analyses conducted by the World Bank and IMF to review and promote future debt sustainability. GAO analyzed Treasury, IFI, and country documents and data, and interviewed officials at Treasury and the four IFIs.

What GAO Found

Treasury's approach to financing MDRI, known as early encashment, does not fully fund current and future U.S. commitments. The approach does not fully fund the current U.S. MDRI commitment because the United States is in arrears on its IDA replenishment. These arrears are due to requirements under U.S. law for withholdings and across-the-board rescissions. Under early encashment, the World Bank requires that the U.S. commitment to the IDA replenishment be paid in full before early encashment income can be used to fund MDRI. The World Bank deducts the U.S. arrears to IDA from any early encashment income before applying this income toward the U.S. MDRI commitment, resulting in a current MDRI shortfall of $149 million. Treasury officials said that if the United States ultimately pays its arrears to the IDA replenishment, early encashment income will then fully fund the U.S. MDRI commitment. However, to fully fund the U.S. MDRI commitment, (1) Treasury will need to release a withholding of $94 million by reporting to Congress that the World Bank has accomplished transparency reforms required under U.S. law, and (2) Congress will need to appropriate approximately $49 million to compensate for the rescissions. Moreover, GAO estimates 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. GAO estimates that the HIPC Initiative and MDRI debt relief from the four IFIs combined may provide countries for which data are available with nearly $44 billion in additional resources over the next 50 years, but the extent to which countries spend these resources on activities to reduce poverty is unknown. In addition to providing debt relief, the MDRI program for IDA and ADF provides for a reallocation of assistance, based in part on a consideration of the strength of country policies and institutions. The estimated amount of this MDRI assistance individual countries receive will vary. Although IFIs and the U.S. government encourage recipient countries to spend resources generated from debt relief on efforts to reduce poverty, the extent to which such spending occurs is unknown for two reasons. First, debt relief resources are difficult to track, because these resources cannot easily be separated from other types of financial flows such as international assistance and fiscal revenues. Second, country data on poverty-reducing expenditures are not comparable across countries and also may not be reliable. The World Bank and IMF have improved their country debt sustainability analyses (DSA) since 2005, including by addressing weaknesses GAO previously reported. DSAs now consider the strength of a country's policies and institutions in determining sustainable debt loads and assess future debt sustainability under multiple scenarios that adjust economic assumptions. Furthermore, IDA and ADF now structure their assistance based on a country's risk of debt distress. While the new DSAs have identified numerous ambitious actions countries should take to avoid eroding their debt sustainability, implementing these actions could prove difficult.