Debt Relief for Heavily Indebted Poor Countries: Issues for Congress

Summary

In recent decades, the rapid growth in poor country debt has emerged as a key foreign policy

concern. Many analysts believe that this debt burden is an impediment to economic growth and

poverty reduction. Others contend that for the poorest countries, other factors such as weak political

and economic institutions, are a greater impediment to growth than the debt burden.

There have been many efforts to help reduce poor country debt. In 1988 a group of major

creditor nations, known as the Paris Club, agreed for the first time to cancel debts owed to them

instead of refinancing them on easier terms as they had done previously. In 1996, the International

Monetary Fund (IMF), the World Bank, and the regional development banks agreed to allow a

portion of debts owed to them by a select group of countries to be cancelled. This effort is known

as the Debt Relief Initiative for Heavily Indebted Poor Countries (HIPC). In June 2005, the Group

of Eight (G8) nations agreed to further deepen debt relief and proposed 100% cancellation of all

multilateral debt for countries that have finished the HIPC program. Several pieces of legislation

( H.R. 1130 and S. 1320 ) also have been introduced that could extend debt

relief to an even larger group of countries. As introduced, the G8 proposal raises four possible

concerns:

Scope of Debt Cancellation -- The proposed agreement is limited to

the IMF,

the World Bank, and the African Development Bank. Several other development banks are major

creditors and are not included in the proposal.

No Net New Assistance -- The proposed agreement specifies that

HIPC

countries that receive debt reduction will have their total assistance flows reduced by the amount of

debt forgiven. This money will then be reallocated among all low-income countries.

Funding is Not Assured -- The agreement promises that G8 countries

will

compensate the development banks for any debt relief they provide. However, future contributions

to the development banks are not guaranteed.

Future Commitments are Unspecified -- The agreement commits G8

members to cover the cost of debt relief for countries that may later enter the HIPC process.

Depending on which, if any, countries are added, the potential cost of debt relief may rise

significantly.

No congressional appropriations are required at this time to implement the G8 proposal.

However, additional U.S. funds may need to be appropriated in the future to fund higher levels of

HIPC debt relief.

This report will no longer be updated. For information on the current status of the G8 debt

relief proposal, see CRS Report RS22534 , The Multilateral Debt Relief Initiative , by

Martin A.

Weiss.