Order Code RS22534
Updated April 1, 2008
The Multilateral Debt Relief Initiative
Martin A. Weiss
Analyst in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Summary
In June 2005, G8 finance ministers proposed the new Multilateral Debt Relief
Initiative (MDRI). The MDRI proposes to cancel debts of some of the world’s poorest
countries owed to the International Monetary Fund, World Bank, and African
Development Bank. This report discusses MDRI’s implementation and raises some
issues regarding debt relief’s effectiveness as a form of foreign assistance for possible
congressional consideration. It will be updated as events warrant.
The Multilateral Debt Relief Initiative (MDRI) is the most recent effort by the
International Monetary Fund (IMF), World Bank, and African Development Bank (AfDB)
to provide poor country debt relief. Proposed by G8 finance ministers in June 2005, the
MDRI provides 100% debt relief to select countries that are already participating in the
joint-IMF/World Bank Heavily Indebted Poor Countries (HIPC) program.1 The goal of
the MDRI program is to free up additional resources for the poorest countries in order to
help them reach the United Nations’ Millennium Development Goals (MDGs), which are
focused, among other things, on reducing world poverty by half by 2015.2
There are several key features of the MDRI:
! All pre-existing IMF, World Bank, and AfDB debt will be cancelled for
any country that completes the HIPC program. (The Asian Development
Bank, Inter-American Development Bank, and other development banks
are not participating in the Initiative.)3
1 See CRS Report RL33073, Debt Relief for the Heavily Indebted Poor Countries: Issues and
Options for Congress
, by Martin A. Weiss.
2 The Millennium Development Goals Report 2006, United Nations, New York, 2006.
3 In November 2006, the Inter-American Development Bank separately announced that it agreed
to provide 100% debt relief to five Latin American HIPCs: Bolivia, Guyana, Haiti, Honduras, and
Nicaragua. Bachelet, Pablo. “IDB OK’s massive debt relief package for five nations,” Miami
Herald
. November 18, 2006.

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! The MDRI Agreement provides no additional net assistance. HIPC
countries that receive debt reduction will have their total assistance flows
from the agency canceling their debt reduced by the amount of debt
forgiven.
! The IMF will internally fund its debt relief while the World Bank and
AfDB will be compensated by G8 donors. IMF debt relief will be funded
with the money obtained from the sale of some IMF gold in the late
1990s.
The MDRI raises several questions for policy makers: What is the effect of debt on
the poorest countries? What impact can the MDRI be expected to have on poverty
reduction? What policies could make debt relief more effective?
Looking at several studies of the effectiveness of the HIPC program from 1996-2006,
it appears that although debt relief can slightly increase the amount of financial resources
available to poor countries, the debt burden is not the main impediment to poverty
reduction and economic growth in the poorest countries. Weak macroeconomic
institutions and difficulty absorbing foreign assistance, as well as political challenges,
appear more likely hurdles. Alleviating the debt burden in the absence of other strategic
reforms is unlikely to substantially contribute to improved conditions in the poorest
countries. If combined with other efforts, however, debt relief can have a complementary
effect on domestic government finances and can help promote further reform.
Past Debt Relief Efforts
The MDRI builds on several bilateral and multilateral debt relief initiatives
conducted over the past twenty years. In the 1980s and early 1990s, as the debts of the
poorest countries increased rapidly compared to other low-income countries, the G7 and
other creditor countries implemented several plans aimed at reducing the countries’ debt
payment burden.
Bilateral Debt Relief. In 1988, in response to a G7 initiative, a group of major
creditor nations, known as the Paris Club, agreed for the first time to cancel debts owed
to them by up to one-third instead of refinancing them on easier terms as they had done
previously.4 Over the next decade, the Paris Club gradually increased the amount of debt
that it would be willing to write off by up to 90% in 1999. The United States did not
participate in the initial debt forgiveness plans, but in 1991, at the initiative of Congress,
independently forgave almost all of the debt owed to it by the poorest nations. Since
1991, the United States has forgiven $23.9 billion in foreign debt.5
HIPC Debt Relief. The IMF and World Bank introduced debt relief in 1996
through the Heavily Indebted Poor Country (HIPC) Initiative. When conceived, the
intention of the program was to reduce poor countries’ debts to a so-called “sustainable”
level. Sustainability was defined as multilateral debts not exceeding a maximum debt-to-
4 See CRS Report RS21482, The Paris Club and International Debt Relief, by Martin A. Weiss.
5 U.S. Treasury Department and the Office of Management and Budget. U.S. Government
Foreign Credit Exposure as of December 31, 2005, Part I, p. 19.

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exports ratio of 250%. In 1999, the program was redesigned in response to criticism that
the debt-to-export ratio was too large, disqualifying many countries from debt relief. The
target debt service-to-exports ratio was reduced to 150%, and the time period for
eligibility was shortened. The HIPC program was also modified to require increased
poverty reduction efforts. Any money freed up by debt relief must now be used explicitly
on poverty reduction efforts.
HIPC debt relief is provided in stages, based on each country’s performance against
a defined set of economic targets and requirements. HIPC-eligible countries must
successfully implement IMF-proscribed reforms for three years before reaching the
“decision point” and receiving intermediate debt relief. Following a further track record
of good economic policy, a country reaches “completion point” where the remaining debt
relief is granted. Table 1 shows the current status of countries in HIPC initiative.
Table 1. Countries Eligible for HIPC Debt Relief (As of 04/2008)
Completion Point
Decision Point
Pre-Decision Point
(22 countries)
(11 countries)
(8 countries)
Benin
Mali
Afghanistan
Comoros
Bolivia
Mauritania
Burundi
Cote d’Ivoire
Burkina
Mozambique
Central African
Eritrea
Faso
Nicaragua
Republic
Krgyz Republic
Cameroon
Niger
Chad
Nepal
Ethiopia
Rwanda
Republic of Congo
Somalia
Ghana
Sao Tome &
Democratic Rep. of
Sudan
Guyana
Principe
Congo
Togo
Honduras
Senegal
The Gambia
Madagascar
Sierra Leone
Guinea
Malawi
Tanzania
Guinea-Bissau
Uganda
Haiti
Zambia
Liberia
Source: World Bank
MDRI Debt Relief
The eventual MDRI agreement was a compromise agreement between the United
States and the Europeans. U.S. officials had reportedly argued that the cost of multilateral
debt relief could be borne by the institutions and did not require donors’ contributing any
new assistance. Other creditors believed the institutions should be compensated for their
debt forgiveness to avoid diverting potential resources that could be lent to the poorest
countries. Any debt relief, they argued, should be additional to existing multilateral
assistance. The compromise plan entailed the multilateral development banks receiving
new money from creditor nations to offset their debt reductions while the IMF would
absorb the cost of debt relief using internal resources.6
6 Eric Helleiner and Geoffrey Cameron, “Another World Order? The Bush Administration and
(continued...)

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MDRI Implementation. The IMF was the first of the participating institutions to
implement its MDRI debt relief. Under MDRI, the IMF is cancelling all HIPC debt
incurred by year-end 2004. In addition to the eligible HIPC countries, the IMF expanded
MDRI to all IMF members with per capita incomes of $380 or less. Two non-HIPC
countries — Cambodia and Tajikistan — have qualified for MDRI debt relief. To date,
the IMF has provided MDRI debt relief to 21 countries, totaling $3.67 billion. The IMF
expects that total MDRI debt relief will be around $5 billion if all eligible countries
complete the program.
Unlike the IMF, both the World Bank and the Asian Development Bank are only
providing MDRI relief to HIPC completion point countries. Only debts accrued prior to
year-end 2003 are eligible for World Bank/AfDB MDRI debt relief. If fully implemented,
the World Bank will provide about $37 billion in debt relief. African Development Bank
debt relief would be $8.5 billion.
Policy Issues
There are numerous reasons why policy-makers support poor country debt relief.
Debt relief emerged as a foreign policy issue mainly through moral arguments against
requiring the poorest countries to repay their debts. At a United Nations conference on
Africa in 2004, Columbia University professor and United Nations advisor Jeffrey Sachs
remarked: “No civilized nation should try to collect the debts of people who are dying
of hunger and disease and poverty.”7
Others, including the Bush Administration, presented what they viewed as a
pragmatic argument for debt relief. They argued that debt was “locking these poorest
countries into poverty and preventing them from using their own resources [for
development].”8 By providing debt relief, they argued, resources that would have been
allocated for debt repayments would now be redirected toward new investment and/or
domestic social services. At a press release announcing the MDRI deal, former World
Bank president Paul Wolfowitz announced that, “across Africa and around the world,
leaders in 38 countries will no longer have to choose between spending to benefit their
people and repaying impossible debts.”9
Recent studies cast doubt, however, on debt relief’s contribution to larger
development and poverty reduction goals. These studies argue that poor underlying
economic and political conditions are the main reason for the HIPCs’ poor performance.
In light of this research, Congress may wish to explore in more depth what effect debt has
6 (...continued)
the HIPC Debt Cancellation,” New Political Economy, Vol. 11, No. 1, March 2006.
7 Quoted in “Is There a Way Out of the Debt Trap?” International Food Policy Research Institute
Forum
, December 2004.
8 Quoted in Paul Blustein, “Debt Cut Is Set for Poorest Nations — Deal Would Cancel $40
Billion in Loans,” The Washington Post, June 12, 2005.
9 International Monetary Fund & World Bank Development Committee Press Briefing,
September 25, 2005.

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on poor countries’ economies and under what conditions debt relief can help promote
economic growth and poverty reduction.
How Debt Affects the HIPC Countries. Historically, policymakers and
academics viewed high levels of debt as a constraint on economic growth. It was argued
that as long as investors expected a country’s debt level to impair its ability to repay its
loans — its “debt overhang” — investors would abstain from entering a country out of
a concern that the government may resort to distortionary or inflationary measures, such
as expanding the money supply or raising taxes on their profits, to finance debt payments.
Even if the debt is not being serviced, the theory suggests that it is still an impediment to
economic growth because of the effect the large debt stock has of dissuading private
investors. In a debt overhang situation, the appropriate policy response is to forgive the
debt, either entirely or to some “sustainable” level so that investor confidence will be
restored.10 Debt overhang theory was instrumental in driving the development of the
HIPC program. Over time however, it became apparent that the theory was not especially
well suited for the poorest countries, which relied on foreign assistance, rather than
private investment, as their key source of foreign capital.
According to the World Bank’s 2006 evaluation of the HIPC program, debt relief
alone is not sufficient for debt sustainability in the poorest countries. Under HIPC, 18
countries had their debt levels reduced to half their initial levels, cancelling $19 billion
of external debt. However, in 11 out of the 13 countries (with data available), the debt
situation has worsened. In 8 countries, debt levels once again exceed HIPC thresholds.11
Several reasons may explain this situation. First, the concepts of “sustainable debt”
and “debt overhang” may be inappropriate for the HIPC countries. Earlier debt overhang
models were designed with middle-income countries in mind, which were suffering under
heavy non-concessional private debt. For example, when financial crises hit Latin
American countries in the 1980s, their debts were resolved under the “Brady Plan”
(negotiated by former Secretary of the Treasury Nicholas Brady). The forgiveness of debt
amounted to $60 billion, after which, private capital surged into the Brady countries.
These countries received $210 billion dollars in net capital flows in the five years
following their debt write-off.12
In the case of the HIPC countries, investors were more likely to stay away for other
reasons, such as political and economic instability, rather than any concerns about
indebtedness per se. Moreover, unlike other debtor nations, bilateral and multilateral
HIPC debt is highly concessional (i.e., inexpensive) compared to private sector debt.
Foreign aid providers have not stopped their aid just because they are not being repaid
10 Paul Krugman, “Financing vs. Forgiving a Debt Overhang.” Journal of Development
Economics
, vol. 29, 1988, pp. 253-268; and Jeffrey Sachs, “The Debt Overhang of Developing
Countries,” in Guillermo A. Calvo and others, eds., Debt Stabilization and Development, Essays
in Memory of Carlos Dias Alejandro
, Oxford, U.K.: Basil Blackwell, 1989.
11 Debt Relief for the Poorest: An Evaluation Update of the HIPC Initiative, The World Bank
Independent Evaluation Group, 2006.
12 Serkan Arslanalp and Peter Blair Henry, “Helping the Poor to Help Themselves: Debt Relief
or Aid?” in Sovereign Debt at the Crossroads, edited by Chris Jochnick and Fraser A. Preston.
Oxford University Press, 2006.

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100% on their bilateral debt. Moreover, the inflow of foreign aid funds is typically more
than sufficient to cover debt payments, so the cost of debt service is effectively borne by
the donor countries rather than by the debtors.
Secondly, there are additional factors, unique to the poorest countries, that may
promote increased indebtedness. Since their debt is highly concessional, there may be a
perverse incentive for countries not to grow in order to remain eligible for multilateral
assistance. Preliminary evidence looking at 94 countries (33 of which are low income)
over 1988-2000 found evidence of this effect. A significant number of countries appeared
to stagnate around the income level that defined eligibility for concessional assistance.
Above the cutoff level, countries would no longer be able to receive concessional aid. By
diverting their assistance away from investment toward consumption they were able to
hover just below the eligibility cutoff.13
Issues for Congress. High levels of debt, especially in the case of the poorest
and most indebted countries, are largely a symptom of deeper, more fundamental
economic and societal difficulties. Removing pre-existing debt is not seen as improving
growth or reducing poverty by itself. This raises two key questions that the second
session of the 110th Congress may wish to consider: (1) what impact can the MDRI be
expected to have on poverty reduction; and (2) what policies could make poor country
debt relief more effective in reducing poverty and/or promoting economic growth?
The impact of MDRI debt relief will likely be modest at best. First, by definition,
MDRI debt relief does not increase the overall resources available to poor countries. Any
debt relief that a country receives results in a net decrease in future multilateral aid
resources allocated. Second, the amount of debt relief provided by MDRI is small. In
the case of the 15 African HIPCs, on average, they paid $19 million in debt service to the
World Bank in 2004. That same year, they received $197 million in new World Bank aid
and $946 million in total aid.14 Any debt relief, even if it were in addition to existing
foreign aid, would provide only a minuscule increase in domestic resources. Thus it
appears that debt relief can have its largest impact if it is situated as part of a broader
package of reforms that include, among other things, increased debt management
capacity, and targeted growth enhancing changes in national policy.15
13 Junko Koeda, “A Debt Overhang Model for Low Income Countries: Implications for Debt
Relief,” International Monetary Fund Working Paper WP/06/224, October, 2006.
14 Todd Moss, “Will Debt Relief Make a Difference? Impact and Expectations of the Multilateral
Debt Relief Initiative,” Center for Global Development Working Paper Number 88, May 2006.
15 CRS Report RL30449, Debt and Development in Poor Countries: Rethinking Policy
Responses
, by J.F. Hornbeck.