1. The Debt Reduction Facility for IDA-Only Countries: An Overview and Update Edward Mountfield Economic Policy and Debt Department The World Bank Multilateral Development Banks Meeting on Debt Issues Washington DC, July 11 2007

2. Objectives of the presentation To provide: To provide: –A brief overview the Debt Reduction Facility for IDA-Only Countries (DRF) –An update on progress

3. Background To help heavily indebted, low-income countries extinguish external commercial debt where this is impeding growth and poverty reduction To help heavily indebted, low-income countries extinguish external commercial debt where this is impeding growth and poverty reduction Established by the Boards of IBRD and IDA in July 1989 Established by the Boards of IBRD and IDA in July 1989 With approval of the IDA Board, the DRF provides: With approval of the IDA Board, the DRF provides: –preparation grants to fund legal and financial advisers –implementation grants to finance debt buybacks Major policy changes decided by the Board in 2004 Major policy changes decided by the Board in 2004 In March 2006, the DRF was transferred from the Infrastructure Vice Presidency to the PREM Vice Presidency In March 2006, the DRF was transferred from the Infrastructure Vice Presidency to the PREM Vice Presidency In July 2006, a new DRF Oversight Committee was established, chaired by the PREM Vice President In July 2006, a new DRF Oversight Committee was established, chaired by the PREM Vice President In April 2007 the IDA Board extended the DRF until 2012 In April 2007 the IDA Board extended the DRF until 2012

4. Eligible countries “IDA-only” countries “IDA-only” countries Acceptable progress with a medium term program for economic development Acceptable progress with a medium term program for economic development A strategy for debt management which: A strategy for debt management which: –addresses commercial debt comprehensively –involves substantial relief from official bilateral creditors –and which enhances country’s growth and development Countries must have reached HIPC decision point (a requirement since 2004) Countries must have reached HIPC decision point (a requirement since 2004)

5. Guinea-Bissau Guinea The Gambia Chad Congo, Dem. Rep. 9 10 Burundi Togo Sudan Somalia Liberia Comoros Côte d’Ivoire Central African Rep. Eritrea Kyrgyz Rep. Nepal Pre-Decision Point HIPCs Interim HIPCs Zambia Uganda Tanzania Senegal Rwanda Niger Nicaragua Mauritania Madagascar Guyana Ethiopia Bolivia Mozambique Mali Honduras Ghana Burkina Faso Benin 22 Completion Point HIPCs Sierra Leone Afghanistan Sao Tome and Principe Congo, Rep. of Cameroon Malawi Haiti

6. Eligible and ineligible debt ELIGIBLE DEBT Public and publicly guaranteed uninsured medium and long- term external commercial debt in arrears Public and publicly guaranteed uninsured medium and long- term external commercial debt in arrears Public and publicly guaranteed uninsured short-term external commercial debt (trade financing, suppliers credit and overdrafts) Public and publicly guaranteed uninsured short-term external commercial debt (trade financing, suppliers credit and overdrafts) Debt must have been contracted and disbursed before the end of the “reference year” for HIPC decision point (since 2004) Debt must have been contracted and disbursed before the end of the “reference year” for HIPC decision point (since 2004) INELIGIBLE DEBT Bilateral debt or multilateral debt Bilateral debt or multilateral debt Domestic debt Domestic debt Third-party guaranteed debt Third-party guaranteed debt Debt contracted after end of the “reference year” for HIPC decision point (since 2004) Debt contracted after end of the “reference year” for HIPC decision point (since 2004) Debt that is time-barred under statutes of limitation (since 2004) Debt that is time-barred under statutes of limitation (since 2004)

7. Characteristics of an operation Debt buyback prepared, negotiated and implemented by the Government and its advisers – not by IDA Debt buyback prepared, negotiated and implemented by the Government and its advisers – not by IDA Typically takes several years to complete, from start of preparation to final buyback Typically takes several years to complete, from start of preparation to final buyback Principal, interest and penalties/late fees all extinguished Principal, interest and penalties/late fees all extinguished Comprehensive – high participation essential Comprehensive – high participation essential Best possible price – deep discount requiring, at minimum, “proportionate burden sharing” (defined as “traditional debt relief” on Naples terms plus HIPC common reduction factor) Best possible price – deep discount requiring, at minimum, “proportionate burden sharing” (defined as “traditional debt relief” on Naples terms plus HIPC common reduction factor)

8. Cote d’Ivoire (98) Vietnam (98) Togo (97) Ethiopia (96) Mauritania (96) 8 10 Guyana II (99) Nicaragua I (95) Sierra Leone I (95) Zambia (94) Mozambique I (91) Guyana I (92) Bolivia (93) Uganda (93) Sao Tome Principe (94) Albania (95) 1991-1995 Tanzania (04) Cameroon (03) Honduras (01) Yemen (01) 4 Niger (91) Guinea (00) 22 DRF operations completed Around US$8 billion of debt has been extinguished in 22 countries: –US$ 4.5 billion of principal –plus US$ 3.5 billion of interest and penalties/late fees Senegal (96) Liberia? (08?) Sierra Leone II? (08?) DR Congo (08?) Nicaragua II (07) 5+ 2007 onward 2001-041996-2000 Others? With others planned… Mozambique II (07)

9. Mozambique In April 2007, the Board approved an implementation grant for a second buyback for Mozambique In April 2007, the Board approved an implementation grant for a second buyback for Mozambique It is hoped that the buyback, to be launched shortly, will eliminate all of Mozambique’s remaining US$176 million of eligible commercial external debt principal and interest, together with associated penalties/late fees It is hoped that the buyback, to be launched shortly, will eliminate all of Mozambique’s remaining US$176 million of eligible commercial external debt principal and interest, together with associated penalties/late fees Cost of US$16.1 million (or 9 cents per dollar of principal and interest plus closing costs) Cost of US$16.1 million (or 9 cents per dollar of principal and interest plus closing costs) The Government of Norway has contributed US$14.7 million to the DRF to support the costs of this buy- back The Government of Norway has contributed US$14.7 million to the DRF to support the costs of this buy- back Remaining US$1.4 million to be financed from the IBRD net income contribution to the DRF Remaining US$1.4 million to be financed from the IBRD net income contribution to the DRF

10. Nicaragua A Nicaragua buyback implementation grant is expected to be submitted to the Board in coming weeks A Nicaragua buyback implementation grant is expected to be submitted to the Board in coming weeks Hoped that this operation can eliminate Nicaragua’s remaining US$1.4 billion of eligible commercial external debt principal, interest and penalties/late fees at a price of 4.5 cents per dollar of eligible debt Hoped that this operation can eliminate Nicaragua’s remaining US$1.4 billion of eligible commercial external debt principal, interest and penalties/late fees at a price of 4.5 cents per dollar of eligible debt Expected that cost of around US$64.4 million will be financed roughly 50-50 by contributions from IBRD net income and contributions from Governments (including Finland, Netherlands, Norway, Russia, Sweden and UK, plus a contribution from Nicaragua itself) Expected that cost of around US$64.4 million will be financed roughly 50-50 by contributions from IBRD net income and contributions from Governments (including Finland, Netherlands, Norway, Russia, Sweden and UK, plus a contribution from Nicaragua itself) Ground breaking operation, in that it is expected to involve litigating creditors that have won judgments, but will now provide their fair share of HIPC debt relief Ground breaking operation, in that it is expected to involve litigating creditors that have won judgments, but will now provide their fair share of HIPC debt relief

11. DRC, Sierra Leone and Liberia A DRF buyback preparation grant has been approved for the Democratic Republic of the Congo, with work expected to start early in Bank FY08 A DRF buyback preparation grant has been approved for the Democratic Republic of the Congo, with work expected to start early in Bank FY08 A Sierra Leone buyback preparation grant is expected to be submitted to the Board in the coming weeks A Sierra Leone buyback preparation grant is expected to be submitted to the Board in the coming weeks The Government of Liberia has started work on a commercial debt reduction operation: The Government of Liberia has started work on a commercial debt reduction operation: –preparation is currently financed by the Swiss Agency for Development and Cooperation (SDC) –however, DRF support has been requested by the Minister of Finance once Liberia reaches decision point

12. Why the DRF is still needed Many commercial creditors have not provided “proportional burden sharing” debt relief, as expected by the Paris Club and the HIPC Initiative Many commercial creditors have not provided “proportional burden sharing” debt relief, as expected by the Paris Club and the HIPC Initiative The DRF is a proven instrument for catalyzing commercial creditor participation in debt relief The DRF is a proven instrument for catalyzing commercial creditor participation in debt relief Share of commercial debt is high in upcoming HIPC Initiative cases Share of commercial debt is high in upcoming HIPC Initiative cases Concerns about litigation by commercial creditors and aggressive acquisition of claims by “vulture funds” Concerns about litigation by commercial creditors and aggressive acquisition of claims by “vulture funds”

13. Pricing and participation: the past To date, buybacks have been priced as a percentage of principal only: To date, buybacks have been priced as a percentage of principal only: –Price per dollar of principal has fluctuated from 8 cents to 26 cents This has resulted in: This has resulted in: –uneven treatment of creditors (those with older claims/more interest got a lower effective price) –sometimes in low participation (participation has fluctuated from 100% down to as low as 62%) –in some cases, need for “clean up” second buybacks (e.g. Guyana, Mozambique, Nicaragua)

14. Pricing and participation: the future In future, buybacks will be priced as a percentage of a broader definition of debt (including interest components) In future, buybacks will be priced as a percentage of a broader definition of debt (including interest components) Proportionate burden sharing is called for by the Paris Club and the HIPC Initiative Proportionate burden sharing is called for by the Paris Club and the HIPC Initiative DRF beneficiary governments and their advisers are required to negotiate the best possible deal DRF beneficiary governments and their advisers are required to negotiate the best possible deal However, “best possible deal” will be assessed in terms of participation as well as pricing so as to eliminate the need for second buybacks However, “best possible deal” will be assessed in terms of participation as well as pricing so as to eliminate the need for second buybacks

15. Financing Since inception, $350 million of IBRD net income has been allocated to the DRF Since inception, $350 million of IBRD net income has been allocated to the DRF There have also been co-financing contributions from Canada, Finland, France, Germany, IADB, Japan, Norway, Netherlands, Sweden, Switzerland, EU, UK and USA There have also been co-financing contributions from Canada, Finland, France, Germany, IADB, Japan, Norway, Netherlands, Sweden, Switzerland, EU, UK and USA DRF operations to date have been financed from: DRF operations to date have been financed from: –IBRD net income (about $218 m.) –grant contributions from other donors (about $207 m.) –and approximately $212 m. from other sources (beneficiary countries’ own resources, IDA credits and IMF financing) After upcoming Nicaragua and Mozambique operations, around $125 m. of IBRD-provided resources available After upcoming Nicaragua and Mozambique operations, around $125 m. of IBRD-provided resources available Based on the current work program, this is currently expected to be sufficient to finance the DRF’s activities through FY08 Based on the current work program, this is currently expected to be sufficient to finance the DRF’s activities through FY08

16. Conclusion The DRF can play a bigger role in encouraging commercial creditor participation in the HIPC Initiative The DRF can play a bigger role in encouraging commercial creditor participation in the HIPC Initiative But only if other donors contribute: But only if other donors contribute: –IBRD net income contributions to the DRF are limited –Future DRF demands on IBRD net income will need to be weighed against the competing needs of IDA And only if responsible commercial creditors continue to provide debt relief as part of buybacks And only if responsible commercial creditors continue to provide debt relief as part of buybacks