Development Policy Review, 2002, 20 (1): 5-24
Overseas Development Institute, 2002.
Published by Blackwell Publishers, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA.
What’s Wrong with the HIPC Initiative and
Bernhard G. Gunter
This article reviews the problems of the enhanced HIPC initiative and
outlines possible steps towards a more efficient debt and poverty reduction
initiative. After brief comments on the rationale for debt relief, it analyses
some key issues related to the HIPC initiative’s aim to achieve debt
sustainability, describes other fundamental problems of the HIPC
framework, and discusses some less known but still crucial flaws of the
initiative. It then proceeds with necessary improvements for an efficient
debt reduction programme, possible modifications for a revised HIPC
initiative, and some suggestions on how to overcome financing constraints.
Apart from being in several respects unfair, the current framework is
unlikely to permit a lasting exit from unsustainable debt for many HIPCs,
and may lead to a decline in traditional development assistance.
Between 1980 and 1990, the low-income countries’ total stock of external debt grew
rapidly from US$125 billion (in 1980) to US$419 billion (in 1990). In contrast, gross
national product increased only from US$0.9 trillion (in 1980) to US$1.3 trillion (in
1990). In other words, the debt-to-GNP ratio increased from less than 14% in 1980 to
over 31% in 1990. Even though the rescheduling terms of the Paris Club (PC)
increasingly concessional for low-income countries,
most of them continued to face
severe debt-service problems during the 1990s.
Owing to increasing evidence that the
development prospects of many of the heavily indebted and poor countries (HIPCs)
Consultant for the World Bank and Oxfam America/New Rules for Global Finance Coalition. From 1998
to 2000, the author was an economist in the World Bank’s HIPC unit. The views expressed here are the
author’s own and should not be associated with any position or organisation. He wishes to thank Jo Marie
Griesgraber, Eric A. Friedman and Tony Killick for useful comments. For communications, please contact
1. An informal group of creditor governments from mostly industrialised countries that has met regularly in
Paris since 1956 to reschedule bilateral debts, see www.clubdeparis.org/en/ for more information.
2. Following the Group of Seven (G-7) summits in Toronto (1988), London (1991), and Naples (1994), debt
relief provided on eligible debt was 33%, 50%, and 67%, respectively, with eligible debt defined as pre-
cutoff date, non-ODA (official development assistance) bilateral debt. The cutoff date refers to the date a
debtor country first approached the Paris Club for a debt rescheduling. ODA debt was excluded from debt
reduction, but was usually rescheduled. Note that Easterly’s (1999) argument that substantial debt relief
had been provided to heavily indebted and poor countries (HIPCs) before the HIPC initiative is misleading
as traditional debt relief provided only temporary relief on largely unpayable debt and was only provided
on eligible debt.
3. Of the 37 low-income countries that have rescheduled their debt with the Paris Club during the last two
decades, fewer than one quarter have graduated from the rescheduling process (IMF Survey, Supplement,
Vol. 29, September 2000, p. 17). For a historical description of debt relief for low-income countries from
the Toronto terms to the HIPC initiative, see Daseking and Powell (1999).