In 1996, to help multilateral creditors  meet the cost of the HIPC Initiative, the World Bank established a HIPC  Trust Fund with contributions from member governments and some  multilateral creditors. Key Multilateral Development Banks Face Significant Challenges to Financing the Existing Initiative

The World Bank, AfDB, and IaDB face a combined financing shortfall of  $7.8 billion in present value terms under the existing HIPC Initiative (see  table 1). The World Bank Has An Estimated Financing Gap of $6 Billion

Financing the enhanced HIPC Initiative remains a major challenge for the  World Bank. If donor countries close the financing gap through future  replenishments, we estimate that the U.S. government could be asked to  contribute $1.2 billion, which is based on its historical replenishment rate  of 20 percent to IDA. To eliminate this  shortfall, donor countries may be asked to provide the necessary funds  through a future replenishment contribution. Second, the financing shortfall does not include any additional relief that  may be provided to countries because their economies deteriorated since  they originally qualified for debt relief. Achieving Economic Growth and Debt Relief Targets Requires Substantial Financial Assistance

Even if the $7.8 billion shortfall is fully financed, we estimate that, if  exports grow slower than the World Bank and IMF project, the 27  countries that have qualified for debt relief may need more than $375  billion in additional assistance to help them achieve their economic  growth and debt relief targets through 2020. This $375 billion consists of  $153 billion in expected development assistance, $215 billion in assistance  to fund shortfalls from lower export earnings, and at least $8 billion for  debt relief (see fig. Countries Face a Substantial Financial Shortfall in Export Earnings

We estimate that 23 of the 27 HIPC countries will earn about $215 billion  less from their exports than the World Bank and IMF project. Under lower, historical export growth rates, countries are likely to  have lower export earnings and unsustainable debt levels (see table 2). High export growth rates are unlikely because HIPC countries rely heavily  on primary commodities such as coffee, cotton, and copper for much of  their export revenue. Therefore, if countries are to achieve  economic growth rates consistent with their development goals, donors  would need to fund the $215 billion shortfall. After examining 40 strategies for  providing debt relief, we narrowed our analysis to three specific strategies:  (1) switching the minimum percentage of loans to grants for future  multilateral development assistance for each country to achieve debt  sustainability, (2) paying debt service in excess of 5 percent of  government revenue, and (3) combining strategies (1) and (2). We estimate that the additional cost of this strategy would be $8.5 billion. If the United States decides to help fund the $375 billion, we estimate that  it could cost approximately $52 billion over 18 years, both in bilateral  grants and in contributions to multilateral development banks. Historically, the United States has been the largest  contributor to the World Bank and IaDB, and the second largest  contributor to the AfDB, providing between 11 and 50 percent of their  funding.
Why GAO Did This Study

The Heavily Indebted Poor Countries (HIPC) Initiative, established in 1996, is a bilateral and multilateral effort to provide debt relief to poor countries to help them achieve economic growth and debt sustainability. Multilateral creditors are having difficulty financing their share of the initiative, even with assistance from donors. Under the existing initiative, many countries are unlikely to achieve their debt relief targets, primarily because their export earnings are likely to be significantly less than projected by the World Bank and International Monetary Fund (IMF). In a recently issued report, GAO assessed (1) the projected multilateral development banks' funding shortfall for the existing initiative and (2) the amount of funding, including development assistance, needed to help countries achieve economic growth and debt relief targets. The Treasury, World Bank, and African Development Bank commented that historical export growth rates are not good predictors of the future because significant structural changes are under way in many countries that could lead to greater growth. We consider these historical rates to be a more realistic gauge of future growth because of these countries' reliance on highly volatile primary commodities and other vulnerabilities such as HIV/AIDS.

What GAO Found

The three key multilateral development banks we analyzed face a funding shortfall of $7.8 billion in 2003 present value terms, or 54 percent of their total commitment, under the existing HIPC Initiative. The World Bank has the most significant shortfall--$6 billion. The African Development Bank has a gap of about $1.2 billion. Neither has determined how it would close this gap. The Inter-American Development Bank is fully funding its HIPC obligation by reducing its future lending resources to poor countries by $600 million beginning in 2009. We estimate that the cost to the United States, based on its rate of contribution to these banks, could be an additional $1.8 billion. However, the total estimated funding gap is understated because (1) the World Bank does not include costs for four countries for which data are unreliable and (2) all three banks do not include estimates for additional relief that may be required because countries' economies deteriorated after they qualified for debt relief. Even if the $7.8 billion gap is fully financed, we estimate that the 27 countries that have qualified for debt relief may need an additional $375 billion to help them achieve their economic growth and debt relief targets by 2020. This $375 billion consists of $153 billion in expected development assistance, $215 billion to cover lower export earnings, and at least $8 billion in debt relief. Most countries are likely to experience higher debt burdens and lower export earnings than the World Bank and IMF project, leading to an estimated $215 billion shortfall over 18 years. To reach debt targets, we estimate that countries will need between $8 billion and $20 billion, depending on the strategy chosen. Under these strategies, multilateral creditors switch a portion of their loans to grants and/or donors pay countries' debt service that exceeds 5 percent of government revenue. Based on its historical share of donor assistance, the United States may be called upon to contribute about 14 percent of this $375 billion, or approximately $52 billion over 18 years.