countries have used reserve currencies for international transactions.docx

8/10/2019 Countries have used reserve currencies for international transactions.docx

1/22

Countries have used reserve currencies for international transactions

throughout the history. Foreign currency assets are both a store of value and a liquid

instrument to finance debt. For central banks they are tools for monetary policies as

well as exchange rate policies. Furthermore the financial crises of capitalism have

shown that foreign exchange reserves can be a kind of insurance policy against

economic instability. The question is which currency is best to be used as an

international reserve currency? That is, which currency can secure global economic

stability and at the same time preserve the value of the liquidity of the countries and

institutions?

During the course of the World War 2, Keynes considered this issue and

came up with the idea of the Bancor. The Bancor was an international currency

unit to be used in all of the international transactions. Keynes has also proposed a

new institution called the International Clearing Unit which would control the

supply of the Bancor serving as worlds central bank. It would promote global trade

balance by financing the trade deficits of countries by the trade surpluses of others.

However his idea was rejected. Instead it was decided that US economy was strong

enough to supply its national currency, the dollar, to function as the global currency.

2. A Brief Review of the Ideas of the Economists on Reserve Currencies

According to Paul Krugman (1984) the dollar plays different roles as a global

reserve currency. First of all it is a vehicle currency for transactions. Secondly it is

the intervention currency for central banks. Thirdly, it is the dominant currency for

international lending and borrowing. Fourthly, there are still few countries whose

currencies are pegged to the dollar. Fifthly, dollars in New York and Eurodollars in


2/22

London constitute the main liquid international asset. And lastly, the dollar accounts

for the bulk of nongold reserves (p. 264).

Krugman (1984) calls attention to the disadvantage of the dollar as a store of

value because of the uncertain exchange rates. According to Krugman (1984) this

uncertainty results in a trend towards diversification (p. 276).

Nobel Prize - winning economist Joseph Stiglitz also said at a conference that

the dollars role as a good store of value is questionable and the currency has a high

degree of risk. He mentioned the need for a new global reserve system (Chen, 2009).

C. R. Schenk (2009), from University of Glasgow, has focused on how

reserve currencies emerge and how they can be replaced by examining the case of

sterling in the post-war decades. She supports the idea that more than one major

reserve currency could operate at the same time by considering how sterling

continued to serve as a secondary international currency after the end of the 2nd

World War. Schenk (2009) suggests that the current global reserve system under

which the US dollar acts as the primary international reserve asset, not only

contributed to the current global crisis, but also continues to pose a threat to future 140 Aykz DOAN

stability. However the gradual trends towards the replacement of the dollar by the

euro requires more deliberate management to avoid a landslide effect.

Ocampo1

(2010) suggests a more fundamental reform. First of all he points

out that since the abandonment of the gold standard in 1971, worlds reserve

currency has no backing except the trust in the government that issues the currency.

Moreover the major currency as well as its alternatives, lacks a stable value.

According to Ocampo (2010) this system not only contributes to the generation of

payment imbalances over the world but also creates an unfair situation for the


3/22

developing countries. The obligation of self protection against financial crisis

compels these countries to accumulate their reserves in assets issued by the major

industrial countries, which essentially means lending to rich countries at low interest

rates.

Rodrik (2006), who is a professor of international political economy at the

Harvard University, has focused on the costs of the foreign reserve accumulation in

developing countries. Rodrik (2006) calls attention to the rapid rise in foreign

reserves, which have climbed to almost 30% of developing countries GDP, since

1990s.

European Central Bank experts2

as well as the International Monetary Fund

staff have also studied the subject. For instance, the analysis of Lago, Duttagupta

and Goyal (2009) considers a connection between the global crisis and the setup

with a dominant country-issued reserve currency.

3. The Dollar as the Major International Reserve Currency

According to the IMF (2009a) estimates for 2009 which are summarized in

Table 1, approximately 62% of the worlds cur

4. Arrival of the Euro as the Major Competitor to the Dollar

When the economic depressions and instabilities of the early 20th century

showed that the modern international banking system required a regulated

international money market and a reserve currency, US was the single, dominant

economic power. Europe was struggling to pay its war debts and was under the 142 Aykz DOAN

threat of totalitarian regimes when the Bretton Woods Conferences have taken place.

However, Europe area, Japan and newly industrialized countries such as China

began to gain economic influence in the world markets at the end of the 20th century.


4/22

As these economies share more economic power today, the hegemony of the U.S. rency reserves are

held in U.S.

dollars. Although euro is preferred by some countries for certain transactions and

also used as a reserve currency, Table 1 demonstrates how huge the difference is

between the Euro holdings and the Dollar holdings as foreign exchange.

The Middle East nuclear weapon free zone(MENWFZ) is a proposed agreement similar to

otherNuclear-weapon-free zonesin other regions. Steps towards the establishment of such a zone

began in the 1960s led to a joint declaration by Egypt and Iran in 1974 which resulted in a General

Assembly resolution (broadened in 1990 to cover weapons of mass destruction).[citation needed]

Such a zone would strengthen theNuclear Non-Proliferation Treaty(NPT), would help to promote

global nuclear disarmament and would also help theMiddle East peace processas substantial

confidence-building measures.[1]

Israel is the only Mideast country believed to have a nuclear arsenal, which was developed in the

1960s.[2]Israel has been unwilling to discuss nuclear demilitarization except in the context of a

comprehensive peace settlement including Palestinian issues and all of Israels neighbors, such as

Syria and Iran.[3]Israel maintains a veil of studied ambiguity (amimut), which Avner Cohen calls

"opacity,"[2]about its nuclear arsenal, and has not signed the Nuclear Non-Proliferation Treaty.[4]

Four countries in the Middle East have been found in non-compliance with their IAEA safeguards

obligations under the NPT:Iraq,Libya,Iran,andSyria.Of these cases, Iran and Syria remain

unresolved.[citation needed]

Finland agreed to host the 2012 conference to start talks on the proposed Middle East zone free of

nuclear weapons and other weapons of mass destruction.[5]However, the conference was called off

in November 2012.[6][7]

An international group of concerned citizens, including former members of the IsraeliKnesset,

responded to the lack of progress in official talks by organizing anInternational Conference For A

WMD-Free Middle East.It was held inHaifain Decemb.

--

Human rights in post-disaster and post-conflict situations

At its twenty-second session, the Council adopted resolution 22/16 (A/HRC/RES/22/16)on the protection of

human rights in post-disaster/post-conflict situations, which takes note of the research proposals made tothe Human Rights Council by the Advisory Committee in its decision 9/1 of 10 August 2012 and requests theAdvisory Committee to:

1. to prepare, within existing resources, a research-based report on best practices and main challenges in
http://en.wikipedia.org/wiki/Nuclear-weapon-free_zonehttp://en.wikipedia.org/wiki/Nuclear-weapon-free_zonehttp://en.wikipedia.org/wiki/Nuclear-weapon-free_zonehttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Nuclear_Non-Proliferation_Treatyhttp://en.wikipedia.org/wiki/Nuclear_Non-Proliferation_Treatyhttp://en.wikipedia.org/wiki/Nuclear_Non-Proliferation_Treatyhttp://en.wikipedia.org/wiki/Middle_East_peace_processhttp://en.wikipedia.org/wiki/Middle_East_peace_processhttp://en.wikipedia.org/wiki/Middle_East_peace_processhttp://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-1http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-1http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-1http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-Cohen1-2http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-Cohen1-2http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-Cohen1-2http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-3http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-3http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-3http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-Cohen1-2http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-Cohen1-2http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-Cohen1-2http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-4http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-4http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-4http://en.wikipedia.org/wiki/Iraq_and_weapons_of_mass_destructionhttp://en.wikipedia.org/wiki/Iraq_and_weapons_of_mass_destructionhttp://en.wikipedia.org/wiki/Iraq_and_weapons_of_mass_destructionhttp://en.wikipedia.org/wiki/Libya_and_weapons_of_mass_destructionhttp://en.wikipedia.org/wiki/Libya_and_weapons_of_mass_destructionhttp://en.wikipedia.org/wiki/Libya_and_weapons_of_mass_destructionhttp://en.wikipedia.org/wiki/Iran_and_weapons_of_mass_destructionhttp://en.wikipedia.org/wiki/Iran_and_weapons_of_mass_destructionhttp://en.wikipedia.org/wiki/Iran_and_weapons_of_mass_destructionhttp://en.wikipedia.org/wiki/Syria_and_weapons_of_mass_destructionhttp://en.wikipedia.org/wiki/Syria_and_weapons_of_mass_destructionhttp://en.wikipedia.org/wiki/Syria_and_weapons_of_mass_destructionhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-5http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-5http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-5http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-6http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-6http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-6http://en.wikipedia.org/wiki/Knessethttp://en.wikipedia.org/wiki/Knessethttp://en.wikipedia.org/wiki/Knessethttp://en.wikipedia.org/wiki/International_Conference_For_A_WMD-Free_Middle_Easthttp://en.wikipedia.org/wiki/International_Conference_For_A_WMD-Free_Middle_Easthttp://en.wikipedia.org/wiki/International_Conference_For_A_WMD-Free_Middle_Easthttp://en.wikipedia.org/wiki/International_Conference_For_A_WMD-Free_Middle_Easthttp://en.wikipedia.org/wiki/Haifahttp://en.wikipedia.org/wiki/Haifahttp://en.wikipedia.org/wiki/Haifahttp://www.ohchr.org/Documents/HRBodies/HRCouncil/AdvisoryCom/A-HRC-RES-22-16_en.pdfhttp://www.ohchr.org/Documents/HRBodies/HRCouncil/AdvisoryCom/A-HRC-RES-22-16_en.pdfhttp://www.ohchr.org/Documents/HRBodies/HRCouncil/AdvisoryCom/A-HRC-RES-22-16_en.pdfhttp://www.ohchr.org/Documents/HRBodies/HRCouncil/AdvisoryCom/A-HRC-RES-22-16_en.pdfhttp://en.wikipedia.org/wiki/Haifahttp://en.wikipedia.org/wiki/International_Conference_For_A_WMD-Free_Middle_Easthttp://en.wikipedia.org/wiki/International_Conference_For_A_WMD-Free_Middle_Easthttp://en.wikipedia.org/wiki/Knessethttp://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-6http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-6http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-5http://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Syria_and_weapons_of_mass_destructionhttp://en.wikipedia.org/wiki/Iran_and_weapons_of_mass_destructionhttp://en.wikipedia.org/wiki/Libya_and_weapons_of_mass_destructionhttp://en.wikipedia.org/wiki/Iraq_and_weapons_of_mass_destructionhttp://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-4http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-Cohen1-2http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-3http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-Cohen1-2http://en.wikipedia.org/wiki/Middle_East_nuclear_weapon_free_zone#cite_note-1http://en.wikipedia.org/wiki/Middle_East_peace_processhttp://en.wikipedia.org/wiki/Nuclear_Non-Proliferation_Treatyhttp://en.wikipedia.org/wiki/Wikipedia:Citation_neededhttp://en.wikipedia.org/wiki/Nuclear-weapon-free_zone


5/22

the promotion and protection of human rights in post-disaster/post-conflict situations, with a focus on thehuman rights mainstreaming in relief, recovery and reconstruction efforts, to be presented to the HumanRights Council at its 28th session;

2. to seek the views and inputs of member States, relevant international organizations, the Office of theUnited Nations High Commissioner for Human Rights, the Office of the United Nations High Commissioner forRefugees, the Office for the Coordination of Humanitarian Affairs, relevant United Nations agencies, funds

and programmes, such as UNISDR, UNICEF, UNDP and UNFPA, relevant Human Rights special procedures,as well as agencies and organizations which work in post-disaster/post-conflict situations, and civil societyrepresentatives, in order to prepare the above mentioned research-based report; and

3. to present a progress report of the requested research-based report, to the Human Rights Council at its26th session, for the Councils consideration.

HRC resolutionA/HRC/RES/22/16in the all languages.

At its eleventh session in August 2013, the Advisory Committee established a drafting group tasked with thedrafting of the report and designated the following experts as members of the drafting group: Mr. LatifHseynov, Ms. Katharina Pabel, Ms. Cecilia Rachel V. Quisumbing (Rapporteur), Ms. Anantonia Reyes Prado(Chairperson) and Mr. Imeru Tamrat Yigezu, as well as Ms. Chung Chinsung and Mr. Vladimir Kartashkin,whose term ended on 30 September 2013. Subsequently, Mr. Mikhail Lebedev and Mr. Ahmer Bilal Soofialso joined the drafting group.

In line with Council resolution 22/16, requesting the Committee to seek the views and inputs of differentstakeholders, the following questionnaires were prepared and disseminated by the Committee in September2013.

Amidst increasing advances byIslamic State of Iraq and the Levant(abbreviated ISIL, ISIS, and also

called "Islamic State") militants in June and July 2014, many states began to intervene in the

ongoing civil wars inSyriaandIraq.Rapid territorial gains from ISIL military operations in Iraq and

Syria in the first half of 2014 combined with internationally condemned brutality, reported human

rights abuses,and fear of furtherspillovers of the Syrian Civil Warcaused many countries to

consider interventions.[93]With different agendas and political considerations in a complex situation,

countries have approached intervening in the two civil war conflicts in different ways, and to different

degrees.

American-led intervention in Iraq[edit]

Main article:2014 American-led intervention in Iraq

For previous American interventions in Iraq, seeGulf War (199091),Operation Desert Fox,

andIraq War (200311).

Starting in August 2014, the United States assembled a coalition of partner countries to combat ISIL.

Various countries contributed aircraft, military aid to local ground forces, military advisors to train

local forces in-country, and bases for operations and training of local ground forces. In addition to
http://ap.ohchr.org/documents/dpage_e.aspx?si=A/HRC/RES/22/16http://ap.ohchr.org/documents/dpage_e.aspx?si=A/HRC/RES/22/16http://ap.ohchr.org/documents/dpage_e.aspx?si=A/HRC/RES/22/16http://en.wikipedia.org/wiki/Islamic_State_of_Iraq_and_the_Levanthttp://en.wikipedia.org/wiki/Islamic_State_of_Iraq_and_the_Levanthttp://en.wikipedia.org/wiki/Islamic_State_of_Iraq_and_the_Levanthttp://en.wikipedia.org/wiki/Syrian_Civil_Warhttp://en.wikipedia.org/wiki/Syrian_Civil_Warhttp://en.wikipedia.org/wiki/Syrian_Civil_Warhttp://en.wikipedia.org/wiki/Iraqi_insurgency_(2011%E2%80%93present)http://en.wikipedia.org/wiki/Iraqi_insurgency_(2011%E2%80%93present)http://en.wikipedia.org/wiki/Iraqi_insurgency_(2011%E2%80%93present)http://en.wikipedia.org/wiki/Islamic_State_of_Iraq_and_the_Levant#Human_rights_abuseshttp://en.wikipedia.org/wiki/Islamic_State_of_Iraq_and_the_Levant#Human_rights_abuseshttp://en.wikipedia.org/wiki/Islamic_State_of_Iraq_and_the_Levant#Human_rights_abuseshttp://en.wikipedia.org/wiki/Islamic_State_of_Iraq_and_the_Levant#Human_rights_abuseshttp://en.wikipedia.org/wiki/Spillover_of_the_Syrian_Civil_Warhttp://en.wikipedia.org/wiki/Spillover_of_the_Syrian_Civil_Warhttp://en.wikipedia.org/wiki/Spillover_of_the_Syrian_Civil_Warhttp://en.wikipedia.org/wiki/2014_military_intervention_against_the_Islamic_State_of_Iraq_and_the_Levant#cite_note-hp1-93http://en.wikipedia.org/wiki/2014_military_intervention_against_the_Islamic_State_of_Iraq_and_the_Levant#cite_note-hp1-93http://en.wikipedia.org/wiki/2014_military_intervention_against_the_Islamic_State_of_Iraq_and_the_Levant#cite_note-hp1-93http://en.wikipedia.org/w/index.php?title=2014_military_intervention_against_the_Islamic_State_of_Iraq_and_the_Levant&action=edit&section=1http://en.wikipedia.org/w/index.php?title=2014_military_intervention_against_the_Islamic_State_of_Iraq_and_the_Levant&action=edit&section=1http://en.wikipedia.org/w/index.php?title=2014_military_intervention_against_the_Islamic_State_of_Iraq_and_the_Levant&action=edit&section=1http://en.wikipedia.org/wiki/2014_American-led_intervention_in_Iraqhttp://en.wikipedia.org/wiki/2014_American-led_intervention_in_Iraqhttp://en.wikipedia.org/wiki/2014_American-led_intervention_in_Iraqhttp://en.wikipedia.org/wiki/Gulf_Warhttp://en.wikipedia.org/wiki/Gulf_Warhttp://en.wikipedia.org/wiki/Gulf_Warhttp://en.wikipedia.org/wiki/Gulf_Warhttp://en.wikipedia.org/wiki/Gulf_Warhttp://en.wikipedia.org/wiki/Operation_Desert_Foxhttp://en.wikipedia.org/wiki/Operation_Desert_Foxhttp://en.wikipedia.org/wiki/Operation_Desert_Foxhttp://en.wikipedia.org/wiki/Iraq_Warhttp://en.wikipedia.org/wiki/Iraq_Warhttp://en.wikipedia.org/wiki/Iraq_Warhttp://en.wikipedia.org/wiki/Iraq_Warhttp://en.wikipedia.org/wiki/Iraq_Warhttp://en.wikipedia.org/wiki/Iraq_Warhttp://en.wikipedia.org/wiki/Operation_Desert_Foxhttp://en.wikipedia.org/wiki/Gulf_Warhttp://en.wikipedia.org/wiki/2014_American-led_intervention_in_Iraqhttp://en.wikipedia.org/w/index.php?title=2014_military_intervention_against_the_Islamic_State_of_Iraq_and_the_Levant&action=edit&section=1http://en.wikipedia.org/wiki/2014_military_intervention_against_the_Islamic_State_of_Iraq_and_the_Levant#cite_note-hp1-93http://en.wikipedia.org/wiki/Spillover_of_the_Syrian_Civil_Warhttp://en.wikipedia.org/wiki/Islamic_State_of_Iraq_and_the_Levant#Human_rights_abuseshttp://en.wikipedia.org/wiki/Islamic_State_of_Iraq_and_the_Levant#Human_rights_abuseshttp://en.wikipedia.org/wiki/Iraqi_insurgency_(2011%E2%80%93present)http://en.wikipedia.org/wiki/Syrian_Civil_Warhttp://en.wikipedia.org/wiki/Islamic_State_of_Iraq_and_the_Levanthttp://ap.ohchr.org/documents/dpage_e.aspx?si=A/HRC/RES/22/16


6/22


7/22

The same year saw publication of the most extensive scheme forcomprehensive water development along the Nile , now known as the CenturyStorage Scheme. The plan, put forth by the British, included a storage facilityon the Uganda-Sudan border, a dam at Sennar to irrigate the Gezira regionsouth of Khartoum , and a dam on the White Nile to hold summer flood water

for Egypt .

The plan worried some Egyptians, and was criticized by nationalists, becauseall the major control structures would have been beyond Egyptian territory andauthority. Some Egyptians saw the plan as a British means of controllingEgypt in the event of Egyptian independence.

The problem

As the Nile riparians gained independence from Colonial powers, ripariandisputes became international and consequently more contentious,particularly between Egypt and Sudan . The core question of historic versussovereign water rights is complicated by the technical question of where theriver ought best be controlled-upstream or down.

Attempts at conflict management

In 1925, a new water commission made recommendations based on the 1920estimates which would lead finally to the Nile Waters Agreement betweenEgypt and Sudan on 7 May 1929. Four BCM/yr. was allocated to Sudan butthe entire timely flow (from January 20 to July 15) and a total annual amountof 48 BCM/yr. was reserved for Egypt . Egypt , as the downstream state, hadits interests guaranteed by

Having a claim to the entire timely flow. This meant that any cottoncultivated in Sudan would have to be grown during the winter months.

Having rights to on-site inspectors at the Sennar dam, outside ofEgyptian territory.

Being guaranteed that no works would be developed along the river oron any of its territory, which would threaten Egyptian interests.

In accord with this agreement, one dam was built and one reservoir raised,with Egyptian acquiescence.


8/22

The Aswan High Dam, with a projected storage capacity of 156 BCM/yr, wasproposed in 1952 by the new Egyptian government, but debate over whetherit was to be built as a unilateral Egyptian project or as a cooperative projectwith Sudan kept Sudan out of negotiations until 1954. The negotiations whichensued, and carried out with Sudan's struggle for independence as a back-

drop, focused not only on what each country's legitimate allocation would be,but whether the dam was even the most efficient method of harnessing thewaters of the Nile.

The first round of negotiations between Egypt and Sudan took place betweenSeptember and December 1954, even as Sudan was preparing for itsindependence, scheduled for 1956. The positions of the two sides can besummarized as follows:

Theannexationof Crimea by the Russian Federationis the name given by many worldwide

media to the 2014 incorporation of most of theCrimean Peninsula,internationally recognized as part

ofUkraine,into theRussian Federation.Starting 21 March 2014, Russia effectively

administersCrimeaas twofederal subjectstheRepublic of Crimeaand thefederal

cityofSevastopol.[3]

The annexation occurred at culmination point in the2014 Crimean crisiscaused by amilitary

intervention of Russiainto theAutonomous Republic of Crimeaand the city ofSevastopol,both

administrative divisions of Ukraine, earlier in March. Masked green troops without insignia (the

"green men"), identified as theRussian militaryby multiple worldwide sources, took theSupreme

Council of Crimeaover,[4][5]

which led to the installation of the pro-RussianAksyonovgovernment inCrimea, the declaration ofCrimea's independenceand the holding of a disputed, majorly

unconstitutionalreferendum,that was described byBBC NewsreporterJohn Simpsonas a

"remarkable, quick and mostly bloodlesscoup d'etat".[6]

The eventcaused much controversyand was condemned by many world leaders, as well asNATO,

as an illegalannexationof Ukrainian territory, in disrespect to the signing of the1994 Budapest

Memorandumon its sovereignty and territorial integrity, by Russia.[7]Moreover, theYatsenyuk

Government,responsible for internal Ukrainian affairs at the time, confirmed at least seven

constitutional violations of the process, including the dodged obligation of Crimea to request such

restitution from Ukraine itself first, before being given the formal right to conduct any supra-political

processes for the matter.

Russia, on the contrary, strongly opposes the "annexation" label as "offensive towards the

inhabitants of the peninsula",[8]and rather treats the process as anaccessionof the independent

"Republic of Crimea", which was briefly proclaimed after Crimea and Sevastopoljoined togetherand

subsequently requested admission to Russia in accordance with a public vote that, according to the
http://en.wikipedia.org/wiki/Annexationhttp://en.wikipedia.org/wiki/Annexationhttp://en.wikipedia.org/wiki/Annexationhttp://en.wikipedia.org/wiki/Crimeahttp://en.wikipedia.org/wiki/Crimeahttp://en.wikipedia.org/wiki/Crimeahttp://en.wikipedia.org/wiki/Ukrainehttp://en.wikipedia.org/wiki/Ukrainehttp://en.wikipedia.org/wiki/Ukrainehttp://en.wikipedia.org/wiki/Russian_Federationhttp://en.wikipedia.org/wiki/Russian_Federationhttp://en.wikipedia.org/wiki/Russian_Federationhttp://en.wikipedia.org/wiki/Crimeahttp://en.wikipedia.org/wiki/Crimeahttp://en.wikipedia.org/wiki/Crimeahttp://en.wikipedia.org/wiki/Federal_subjects_of_Russiahttp://en.wikipedia.org/wiki/Federal_subjects_of_Russiahttp://en.wikipedia.org/wiki/Republic_of_Crimeahttp://en.wikipedia.org/wiki/Republic_of_Crimeahttp://en.wikipedia.org/wiki/Republic_of_Crimeahttp://en.wikipedia.org/wiki/Federal_cities_of_Russiahttp://en.wikipedia.org/wiki/Federal_cities_of_Russiahttp://en.wikipedia.org/wiki/Federal_cities_of_Russiahttp://en.wikipedia.org/wiki/Federal_cities_of_Russiahttp://en.wikipedia.org/wiki/Sevastopolhttp://en.wikipedia.org/wiki/Sevastopolhttp://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-3http://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-3http://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-3http://en.wikipedia.org/wiki/2014_Crimean_crisishttp://en.wikipedia.org/wiki/2014_Crimean_crisishttp://en.wikipedia.org/wiki/2014_Crimean_crisishttp://en.wikipedia.org/wiki/2014_Russian_military_intervention_in_Ukrainehttp://en.wikipedia.org/wiki/2014_Russian_military_intervention_in_Ukrainehttp://en.wikipedia.org/wiki/2014_Russian_military_intervention_in_Ukrainehttp://en.wikipedia.org/wiki/2014_Russian_military_intervention_in_Ukrainehttp://en.wikipedia.org/wiki/Autonomous_Republic_of_Crimeahttp://en.wikipedia.org/wiki/Autonomous_Republic_of_Crimeahttp://en.wikipedia.org/wiki/Sevastopolhttp://en.wikipedia.org/wiki/Sevastopolhttp://en.wikipedia.org/wiki/Sevastopolhttp://en.wikipedia.org/wiki/Russian_militaryhttp://en.wikipedia.org/wiki/Russian_militaryhttp://en.wikipedia.org/wiki/Russian_militaryhttp://en.wikipedia.org/wiki/Supreme_Council_of_Crimeahttp://en.wikipedia.org/wiki/Supreme_Council_of_Crimeahttp://en.wikipedia.org/wiki/Supreme_Council_of_Crimeahttp://en.wikipedia.org/wiki/Supreme_Council_of_Crimeahttp://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-time1-4http://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-time1-4http://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-time1-4http://en.wikipedia.org/wiki/Russiahttp://en.wikipedia.org/wiki/Russiahttp://en.wikipedia.org/wiki/Sergey_Aksyonovhttp://en.wikipedia.org/wiki/Sergey_Aksyonovhttp://en.wikipedia.org/wiki/Sergey_Aksyonovhttp://en.wikipedia.org/wiki/Declaration_of_Independence_of_the_Republic_of_Crimeahttp://en.wikipedia.org/wiki/Declaration_of_Independence_of_the_Republic_of_Crimeahttp://en.wikipedia.org/wiki/Declaration_of_Independence_of_the_Republic_of_Crimeahttp://en.wikipedia.org/wiki/Crimean_status_referendum,_2014http://en.wikipedia.org/wiki/Crimean_status_referendum,_2014http://en.wikipedia.org/wiki/Crimean_status_referendum,_2014http://en.wikipedia.org/wiki/BBC_Newshttp://en.wikipedia.org/wiki/BBC_Newshttp://en.wikipedia.org/wiki/BBC_Newshttp://en.wikipedia.org/wiki/John_Simpson_(journalist)http://en.wikipedia.org/wiki/John_Simpson_(journalist)http://en.wikipedia.org/wiki/John_Simpson_(journalist)http://en.wikipedia.org/wiki/Coup_d%27etathttp://en.wikipedia.org/wiki/Coup_d%27etathttp://en.wikipedia.org/wiki/Coup_d%27etathttp://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-6http://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-6http://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-6http://en.wikipedia.org/wiki/International_reactions_to_the_2014_Crimean_crisishttp://en.wikipedia.org/wiki/International_reactions_to_the_2014_Crimean_crisishttp://en.wikipedia.org/wiki/International_reactions_to_the_2014_Crimean_crisishttp://en.wikipedia.org/wiki/NATOhttp://en.wikipedia.org/wiki/NATOhttp://en.wikipedia.org/wiki/NATOhttp://en.wikipedia.org/wiki/Annexationhttp://en.wikipedia.org/wiki/Annexationhttp://en.wikipedia.org/wiki/Annexationhttp://en.wikipedia.org/wiki/1994_Budapest_Memorandumhttp://en.wikipedia.org/wiki/1994_Budapest_Memorandumhttp://en.wikipedia.org/wiki/1994_Budapest_Memorandumhttp://en.wikipedia.org/wiki/1994_Budapest_Memorandumhttp://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-7http://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-7http://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-7http://en.wikipedia.org/wiki/Yatsenyuk_Governmenthttp://en.wikipedia.org/wiki/Yatsenyuk_Governmenthttp://en.wikipedia.org/wiki/Yatsenyuk_Governmenthttp://en.wikipedia.org/wiki/Yatsenyuk_Governmenthttp://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-8http://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-8http://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-8http://en.wiktionary.org/wiki/accessionhttp://en.wiktionary.org/wiki/accessionhttp://en.wiktionary.org/wiki/accessionhttp://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#Breakaway_republichttp://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#Breakaway_republichttp://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#Breakaway_republichttp://en.wikipedia.org/wiki/Declaration_of_Independence_of_Crimea_and_Sevastopolhttp://en.wikipedia.org/wiki/Declaration_of_Independence_of_Crimea_and_Sevastopolhttp://en.wikipedia.org/wiki/Declaration_of_Independence_of_Crimea_and_Sevastopolhttp://en.wikipedia.org/wiki/Declaration_of_Independence_of_Crimea_and_Sevastopolhttp://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#Breakaway_republichttp://en.wiktionary.org/wiki/accessionhttp://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-8http://en.wikipedia.org/wiki/Yatsenyuk_Governmenthttp://en.wikipedia.org/wiki/Yatsenyuk_Governmenthttp://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-7http://en.wikipedia.org/wiki/1994_Budapest_Memorandumhttp://en.wikipedia.org/wiki/1994_Budapest_Memorandumhttp://en.wikipedia.org/wiki/Annexationhttp://en.wikipedia.org/wiki/NATOhttp://en.wikipedia.org/wiki/International_reactions_to_the_2014_Crimean_crisishttp://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-6http://en.wikipedia.org/wiki/Coup_d%27etathttp://en.wikipedia.org/wiki/John_Simpson_(journalist)http://en.wikipedia.org/wiki/BBC_Newshttp://en.wikipedia.org/wiki/Crimean_status_referendum,_2014http://en.wikipedia.org/wiki/Declaration_of_Independence_of_the_Republic_of_Crimeahttp://en.wikipedia.org/wiki/Sergey_Aksyonovhttp://en.wikipedia.org/wiki/Russiahttp://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-time1-4http://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-time1-4http://en.wikipedia.org/wiki/Supreme_Council_of_Crimeahttp://en.wikipedia.org/wiki/Supreme_Council_of_Crimeahttp://en.wikipedia.org/wiki/Russian_militaryhttp://en.wikipedia.org/wiki/Sevastopolhttp://en.wikipedia.org/wiki/Autonomous_Republic_of_Crimeahttp://en.wikipedia.org/wiki/2014_Russian_military_intervention_in_Ukrainehttp://en.wikipedia.org/wiki/2014_Russian_military_intervention_in_Ukrainehttp://en.wikipedia.org/wiki/2014_Crimean_crisishttp://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-3http://en.wikipedia.org/wiki/Sevastopolhttp://en.wikipedia.org/wiki/Federal_cities_of_Russiahttp://en.wikipedia.org/wiki/Federal_cities_of_Russiahttp://en.wikipedia.org/wiki/Republic_of_Crimeahttp://en.wikipedia.org/wiki/Federal_subjects_of_Russiahttp://en.wikipedia.org/wiki/Crimeahttp://en.wikipedia.org/wiki/Russian_Federationhttp://en.wikipedia.org/wiki/Ukrainehttp://en.wikipedia.org/wiki/Crimeahttp://en.wikipedia.org/wiki/Annexation


9/22

Russian position, reflected the people's desire to join the larger country. Ukraine disputes this, as it

does not recognize the independence of the Republic of Crimea or the accession itself as

legitimate.[9]TheUnited Nations General Assemblyalso rejected the vote and annexation, adopting

anon-bindingresolutionaffirming the "territorial integrity of Ukraine within its internationally

recognized borders".[10][11]

Why Is There a HIPC Initiative?

Many factors contribute to poverty. War, corruption, and destructive economic management areamong the most pervasive. Others worsen povertys impact. Unsustainable debt is one suchfactor. Half of the 600 million people living in the 40 poorest, most debt-burdened countriesstruggle to survive on less than one dollar a day. They die earlier, have access to fewer schoolsand teachers, and are hungrier and sicker than their counterparts in other developing countries.

Development credits extended to these countries have been provided on highly concessional

terms1

and creditor countries have been working together to further ease repayment terms. TheParis Club, a group of official bilateral creditors mostly from developed countries, devised newand increasingly concessional mechanisms since the late 1980s for debt relief; by 1995 the ParisClub offered to low-income countries Naples terms for rescheduling, under which up to two-thirds of the eligible debt is canceled. Still, the poorest countries debt burdens remained high.

Over the past few decades, weak policies, adverse environmental and other external factorsoften combined with protracted armed conflictsand sometimes misguided borrowing andlending decisions have increasingly impeded progress toward sustainable economic and socialdevelopment. This, in turn, made the debt burdens of the poorest countries ever moreunmanageable. As it had become increasingly clear that much more needed to be done to help

countries break the poverty-debt cycle, a global consensus emerged on the need to confront highpoverty and crushing debt levels head-on.

Launched in 1996, the original Initiative for Heavily Indebted Poor Countries (HIPCs) markedthe first time that multilateral, Paris Club, and other official bilateral and commercial creditorsunited in a joint effort to reduce the external debt of the worlds most debt-laden poor countriesto sustainable levelsthat is, levels that allow these countries to service their debt throughexport earnings, aid, and private capital inflows without compromising long-term, poverty-reducing growth. Assistance under the HIPC Initiative is limited to countries that have per capitaincomes low enough to qualify for World Bank and IMF concessional lending facilities, and thatface unsustainable debt burdens even after traditional debt relief (i.e., that provided under the

Paris Clubs Naples terms). The vast majority of beneficiary countries are in Africa.

How Does the Enhanced HIPC Initiative Work?

The sustainability targets under the original HIPC framework were set in light of the empiricalwork that had examined largely middle-income countries, and manyin particular civil societyorganizationsfelt that low-income countries had less capacity to sustain external debt. Thus, in1999, a review of the HIPC Initiative was carried out by the World Bank and the IMF in broad
http://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-9http://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-9http://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-9http://en.wikipedia.org/wiki/United_Nations_General_Assemblyhttp://en.wikipedia.org/wiki/United_Nations_General_Assemblyhttp://en.wikipedia.org/wiki/United_Nations_General_Assemblyhttp://en.wikipedia.org/wiki/Non-binding_resolutionhttp://en.wikipedia.org/wiki/Non-binding_resolutionhttp://en.wikipedia.org/wiki/United_Nations_General_Assembly_Resolution_68/262http://en.wikipedia.org/wiki/United_Nations_General_Assembly_Resolution_68/262http://en.wikipedia.org/wiki/United_Nations_General_Assembly_Resolution_68/262http://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-CCTV_UNR_C.3DU-10http://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-CCTV_UNR_C.3DU-10http://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-CCTV_UNR_C.3DU-10http://www.imf.org/external/pubs/ft/exrp/debt/eng/#ft1http://www.imf.org/external/pubs/ft/exrp/debt/eng/#ft1http://www.imf.org/external/pubs/ft/exrp/debt/eng/#ft1http://www.imf.org/external/pubs/ft/exrp/debt/eng/#ft1http://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-CCTV_UNR_C.3DU-10http://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-CCTV_UNR_C.3DU-10http://en.wikipedia.org/wiki/United_Nations_General_Assembly_Resolution_68/262http://en.wikipedia.org/wiki/Non-binding_resolutionhttp://en.wikipedia.org/wiki/United_Nations_General_Assemblyhttp://en.wikipedia.org/wiki/Annexation_of_Crimea_by_the_Russian_Federation#cite_note-9


10/22

consultation with civil society organizations and public officials. As a result of this review, theinternational community agreed to enhance the Initiative and committed to providing faster,broader, and deeper debt relief: more debt relief is delivered more quickly and to more countriesonce they have demonstrated a commitment to put the freed-up funds to work for the poor. Thisapproach is also innovative because it delivers debt relief within a transparent framework that

invites the governments of these countriesin consultation with civil society, including the poorthemselvesto take the lead in formulating comprehensive national strategies for reducingpoverty. And because the qualifying thresholds have been lowered under the enhanced Initiative,more countries have become eligible for debt relief and some previously eligible countries areable to seek greater relief:

The debt-to-exports target is now 150 percent (down from 200250 percent) for countriesqualifying under the exports window; and

The debt-to-fiscal revenue target is now 250 percent (down from 280 percent) for countriesqualifying under the fiscal window, with the eligibility thresholds reduced as follows:

o The exports-to-GDP ratio is now 30 percent (down from 40percent); and

o The fiscal revenue-to-GDP ratio is now 15 percent (down from 20 percent).

Once a heavily indebted poor country has shown a commitment to put in place soundmacroeconomic policies with a focus on poverty reductionnormally over a three-year period,though this can be shorter under the enhanced Initiativethe country is considered to havereached its decision point (seeFigure 1). At this point, an external debt sustainabilty analysis iscarried out in cooperation with the country authorities, and a countrys eligibility and the amountof debt relief are determined by the IMF and World Bank Boards (based on the qualifying

thresholds and targets discussed above). Debt relief and other assistance now begin flowing assoon as the decision point is reached, with the amount based on the countrys immediate needsand capacity for channeling the funds to poverty-reducing purposes. This also marks the point atwhich the international community commits to provide sufficient assistance by a particular date(the completion point) in an amount that would enable the country to achieve debtsustainability. At the completion point, the remainder of the full stock-of-debt reductionpledged is delivered.

Assuming a country remains committed to sound, poverty-reducing policies throughout theperiod between its decision point and completion point, assistance during this period (interimrelief) will continue flowing. And the enhanced Initiative aims to deliver debt relief more quickly

by introducing floating completion points not linked to a rigid timeframe, but ratherdetermined by progress toward implementing measures that will reduce poverty in a sustainablemanner.

So the actual time period between a countrys decision and completion points is flexible. Itdepends on how quickly the country can formulate and implement its own poverty reductionstrategy, sustain macroeconomic stability, and put in place mechanisms to safeguard and track
http://www.imf.org/external/pubs/ft/exrp/debt/eng/#f1http://www.imf.org/external/pubs/ft/exrp/debt/eng/#f1http://www.imf.org/external/pubs/ft/exrp/debt/eng/#f1http://www.imf.org/external/pubs/ft/exrp/debt/eng/#f1


11/22

the use of funds freed by debt relief. Therefore, good performers can benefit from faster debtrelief.

Debt relief clearly is a key part of a comprehensive strategy for reducing poverty, but it is nopanacea. Debt reliefno matter how generousis only the first step toward economic recoveryfor heavily indebted poor countries. These countries can achieve long-term debt sustainabilityonly if they directly address the underlying causes that triggered the debt problem in the firstplace. To avoid slipping back into a situation where poverty-reducing investments are sacrificed


12/22

to mounting external debt repayments, these countries must use the debt relief proceeds to createthe basis for sustained growth and poverty reduction.

What Has Been Done So Far?

Debt Relief

Of the 41 countries identified by creditors as potentially eligible for debt relief under the HIPCInitiative, 23 now have debt relief agreements in placewith relief already flowing (seeTable1). Two countries (Bolivia and Uganda) have already reached their completion points under theenhanced Initiative. The HIPC Initiative agreements together with other debt relief sources cutthe total external debt stock of the 23 beneficiary countries by as much as two-thirdsto a levelthat is below the average for all developing countries. That is, the total external debt stock ofthese countries will be reduced to around $20 billion in net present value terms, down from $54billion (seeFigure 2). The corresponding savings in total future debt service payments (innominal terms) is estimated at US$53 billion.

Expressing the external debt2of these countries as a percent of GDP, the ratio falls from 57percent before relief under the HIPC Initiative (as of 1999) to a projected 29 percent by 2003alevel that is lower than the average of 36 percent for non-HIPC developing countries (seeTable2).

Actual debt service savings in these 23 countries in the near term are also substantial: on anannual basis, they will pay about $0.8 billion less in 200103 compared with 199899.3In otherwords, while these countries paid on average $2.7 billion in debt service a year in 199899, theirdebt service obligations are projected to fall to $1.9 billion a year on average during 200103.This amount probably underestimates the full effects of debt relief: several creditor governmentshave indicated that they will provide additional relief through further and sometimes completedebt cancellation. HIPC relief is projected to nearly halve debt service levels as a percent of GDPfor this periodto 2.1 percent of GDP, down from 4 percent of GDP otherwise. More important,the share of government revenue going to debt service is slated to fall from an annual average of27 percent at the end of the last decade to 12 percent in 200103, and then to less than 10 percent

by 2005.

Sources: World Bank Global Development Finance; and HIPC documents.1Excludes Liberia and Somalia due to incomplete data. Figures for 1999 are based on data in GlobalDevelopment Finance.
http://www.imf.org/external/pubs/ft/exrp/debt/eng/#t1http://www.imf.org/external/pubs/ft/exrp/debt/eng/#t1http://www.imf.org/external/pubs/ft/exrp/debt/eng/#t1http://www.imf.org/external/pubs/ft/exrp/debt/eng/#t1http://www.imf.org/external/pubs/ft/exrp/debt/eng/#f2http://www.imf.org/external/pubs/ft/exrp/debt/eng/#f2http://www.imf.org/external/pubs/ft/exrp/debt/eng/#f2http://www.imf.org/external/pubs/ft/exrp/debt/eng/#ft2http://www.imf.org/external/pubs/ft/exrp/debt/eng/#ft2http://www.imf.org/external/pubs/ft/exrp/debt/eng/#ft2http://www.imf.org/external/pubs/ft/exrp/debt/eng/#t2http://www.imf.org/external/pubs/ft/exrp/debt/eng/#t2http://www.imf.org/external/pubs/ft/exrp/debt/eng/#t2http://www.imf.org/external/pubs/ft/exrp/debt/eng/#t2http://www.imf.org/external/pubs/ft/exrp/debt/eng/#ft3http://www.imf.org/external/pubs/ft/exrp/debt/eng/#ft3http://www.imf.org/external/pubs/ft/exrp/debt/eng/#ft3http://www.imf.org/external/pubs/ft/exrp/debt/eng/#ft3http://www.imf.org/external/pubs/ft/exrp/debt/eng/#t2http://www.imf.org/external/pubs/ft/exrp/debt/eng/#t2http://www.imf.org/external/pubs/ft/exrp/debt/eng/#ft2http://www.imf.org/external/pubs/ft/exrp/debt/eng/#f2http://www.imf.org/external/pubs/ft/exrp/debt/eng/#t1http://www.imf.org/external/pubs/ft/exrp/debt/eng/#t1


13/22


14/22

Sources: HIPC documents; and IMF and World Bank staff estimates.1Weighted averages.

The enhanced HIPC Initiatives aim of freeing up more funds more quickly to be reallocated topoverty reduction has lent increased urgency to the need for the beneficiary countries to put in

place systems that track their public spending on poverty-related programs. The World Bank, theIMF, and others are providing technical and other assistance to help these countries develop andstrengthen their national public spending management systems to ensure that budgetary savingsfrom HIPC assistance are properly accounted for and are effectively used for their intended,poverty-related purposes.

Funding the HIPC Initiative

The total cost of assistance under the HIPC Initiative is estimated at $29.3 billion5in 1999 netpresent value terms, divided roughly evenly between bilateral and multilateral creditors. Two-thirds of the total amount$19.5 billionhas been committed to the 23 countries that already

have reached their decision points (seeTable 4).

Virtually all of the worlds multilateral creditors have pledged to participate in the Initiative. TheWorld Bank, IMF, and African Development Bank are among the several multilateral lendersthat have committed to funding the interim debt relief now made available as soon as countriesreach their decision points under the enhanced Initiative.

At an estimated cost of $14.2 billionnearly half the total costthe participation of multilateralcreditors in the Initiative depends on the support of their member countries. Taxpayers inmember countries are the ultimate source of the debt relief these institutions are able to provide.

The World Bank is financing its estimated $6.3 billion participation in the Initiative partly out ofearnings on its loans to middle-income countries. Part of the IMFs estimated $2.3 billion shareof the cost of funding debt relief comes from investment income related to the IMFs goldholdings. But both the Bank and the IMF will also rely directly on pledged member countrycontributions to fund their participation in the Initiative.

The IMFs gold holdings reflect part of the capital contributed by its members. After long anddifficult discussions, the IMF Executive Board authorized on a one-time basis the sale andsubsequent reacquisition of some of the gold holdings. (These transactions do not actuallyrelease gold to the market and so the balance of supply and demand in the market remains

unchanged.) The interest earnings on the related revaluation profits help fund the IMFs HIPCrelief. There has been strong opposition in the IMFs membership to further gold transactions,including from non-HIPC developing countries.
http://www.imf.org/external/pubs/ft/exrp/debt/eng/#ft5http://www.imf.org/external/pubs/ft/exrp/debt/eng/#ft5http://www.imf.org/external/pubs/ft/exrp/debt/eng/#t4http://www.imf.org/external/pubs/ft/exrp/debt/eng/#t4http://www.imf.org/external/pubs/ft/exrp/debt/eng/#t4http://www.imf.org/external/pubs/ft/exrp/debt/eng/#t4http://www.imf.org/external/pubs/ft/exrp/debt/eng/#ft5


15/22

Sources: Country authorities; and IMF and World Bank staff estimates.1Excluding Liberia, Somalia, and Sudan, as well as Angola, Ghana, Kenya, Lao P.D.R., Vietnam, andYemen.2Benin, Bolivia, Burkina Faso, Guyana, Mali, Mozambique, Senegal, and Uganda. Cte dIvoire is aretroactive case but has not reached its enhanced decision point.3

Cameroon, Chad, The Gambia, Guinea, Guinea-Bissau, Honduras, Madagascar, Malawi, Mauritania,Nicaragua, Niger, Rwanda, So Tom and Prncipe, Tanzania, and Zambia.4Burundi, Central African Republic, Democratic Republic of Congo, Republic of Congo, Cte dIvoire,Ethiopia, Myanmar, Sierra Leone, and Togo.

A number of bilateral creditorsnotably the G7 countries but also othershave announcedtheir intention to provide debt forgiveness over and above HIPC Initiative assistance, in somecases up to total cancellation of bilateral debt. The onus is now on bilateral creditors to fulfilltheir pledges both to multilateral agencies as well as directly to HIPCs. Most important, donorsand lenders must contribute their share to funding debt relief without cutting back on other formsof aid. These other aid flows provide the support many HIPCs need to implement their povertyreduction strategies, a task that is supported by, but goes beyond, the prudent use of debt relief.

The Challenges Ahead

Keeping HIPCs on Track to Reach Their Completion Points

Relief from many, but not all, creditors is already flowing to the 23 countries that have reachedtheir decision points. Creditors have the responsibility to ensure that these countries continue toreceive the full relief required. Delays in the commitment and delivery of assistance run the riskof derailing a countrys progress to the completion pointand the full benefits of debt reliefand thereby may seriously thwart a countrys ability to achieve longer-term debt sustainability.

This points to the need for stronger donor/creditor coordination.

In turn, one of the main challenges ahead for the 23 decision-point countries is to stay on trackwith growth-oriented macroeconomic policies that integrate poverty-reducing measures. Each ofthese countries must develop a nationally owned action plan for policy reform, set forth in apoverty reduction strategy paper (PRSP) endorsed by the IMF and the World Bank Boards. Eachcountrys PRSP should emerge out of a local, broad-based participatory process. To reach itscompletion point, each HIPC must have made progress in implementing its PRSP.

There is no single blueprint for poverty reduction strategies: each PRSP is expected to reflectindividual country circumstances. But each countrys paper will describe the main characteristics

of poverty and outline the appropriate antipoverty strategies over the medium and long term.These strategies are meant to focus the countrys policy agenda on shared economic growth andpoverty reduction, promote government accountability by encouraging a national dialogue oneconomic and social policies, and lead to programs that command more public support than inthe past. As part of the preparation process, a country must identify key obstacles to fastergrowth and poverty reduction, specify realistic and trackable poverty reduction goals, and set outmacroeconomic, structural, and social policies for reaching those goals. To make it easier totrack programs in the short term, countries will have to set annual targets to correspond to their


16/22

longer-term poverty reduction goals. The PRSP also provides a means of identifying thefinancing needs associated with various poverty reduction programs and incorporating them in asustainable fiscal and macroeconomic framework.

Unfortunately, other obstaclesbeyond crushing debt burdenscan obstruct progress toward

poverty reduction and growth in HIPCs. In many African countries, armed conflict and theHIV/AIDS pandemic have depleted essential capacities for macroeconomic management andhave taken an enormous human toll. This underscores the importance of and need for more helpfrom donor countries.

Maintaining External Debt Sustainability

The HIPC Initiative is meant to provide heavily indebted poor countries with a way topermanently escape unsustainable debt burdens and transition smoothly to more normalrelationships with external creditors. These are essential conditions for securing the necessaryfinancing for sustainable growth and development, and enduring poverty reduction in these

countries.

A country is considered to have achieved external debt sustainability when it is able to makegood on all of its external debt service paymentscurrent and futurein full and withoutsacrificing economic growth. That is, a country that has reduced its debt burden to sustainablelevels should not have to resort to rescheduling its debt or accumulating arrears.

Three key determinants of a countrys external debt sustainability can be identified:

the existing stock of external debt and its repayment terms;

the countrys abilityto repay its foreign debt, based on growth of income, exports, and fiscalrevenues; and

the characteristics of new external financing available to the countrythe amount offinancing, mix of grants and loans, and the terms on which the financing is available.

These three determinants are closely interrelated and are themselves influenced by past domesticand external economic policies and have an influence on future policies. For example, acountrys debt stock and associated debt repayment terms today areoften to some degree by-products of past policies. In turn, todays debt burden influences future economic policesoftenin the form of taxes borne by a countrys inhabitants. A heavy debt burden today can worsenpoverty in the future by discouraging investment flows and reducing funds available for

development spending. And a countrys ability to repay its debt based on growth of nationalincome and exports together with new external finance depends largely on both current andfuture policies. The relationship here is clear: when export revenues grow strongly, they give apositive boost to GDP, which can increase government revenues available to pay back debtsolong as the country has an adequately functioning system for collecting these revenues.Similarly, the terms of agreements for new external loans will have implications for the returnsto investment from these fresh funds and will help shape tax policies, thereby indirectlyinfluencing the countrys future growth prospects.


17/22

The real progress made in lowering the debt stocks and debt service obligations of the 23 HIPCsnow receiving relief under the Initiative helps put these countries firmly on the path to longer-term debt sustainability. But debt reduction, no matter how generous, provides only temporaryrelief. Countries must still take steps to build on the foundations of debt relief by improving theunderlying conditions that caused past debt problems and by responding to unforeseen events

beyond their control.

A comprehensive approach is needed to stimulate durable, rapid growth and poverty reduction.More specifically, this requires a twin pillar strategyinvolving HIPCs own efforts throughpolicy reform, on the one hand, and actions by the rest of the world, on the other.

The Role of HIPCs Themselves

Sticking to sound policies

HIPCs themselves must do their part to break the vicious cycle of poor policies and weak

governance that, in many cases, contributes to a buildup of unsustainable debt. Sound policesand structural reforms that lay the groundwork for lasting economic growth and povertyreduction are crucial to ensuring debt sustainability for the longer term.

Unsound policies and corrupt practices and institutions mean that funds released by debt relief donot reach and benefit the poor people for which the funds are intended. And this tends tojeopardize new debt relief and financing flows from donors concerned that future assistancewould be squandered as well.

From the start, the HIPC Initiative has been embedded in an overall framework of economic andsocial reform. Five aspects of this policy framework deserve special attention:

macroeconomic policies, including fiscal, monetary, and exchange rate policies that, whenadjusted in an appropriate and timely way in the face of economic shocks, can provide a stableenvironment for economic activity;

structural policies, including trade, tax, regulatory, and industry and agriculture sector policiesthat positively affect incentives for private investment and production;

public sector management, whereby public sector institutions provide infrastructure, social,and other services in an effective, accountable, and transparent way;

governance and market institutions, including the rule of law (the judiciary and police) and

reduction of corruption; and

social inclusion, which embraces the full participation of society through social services thatreach the poor and disadvantaged, including women and minorities.

Improving the investment environment


18/22

An easing of HIPCs debt burdens to sustainable levels is an important step toward a morefavorable climate for private investmentboth domestic and foreign-financed. Foreigninvestment capitalput to effective useis critical for HIPCs development prospects. So far,these countries have remained marginalized in the global competition for foreign directinvestment, however. Policies that produce stable socio-economic environments so vital to

attracting investors both locally and from overseas could help reverse this trend. To this end, thebusiness operating environment must be improved, particularly by strengthening the rule of lawand eliminating excessive and discriminatory regulations, so that investors become more willingto choose these countries as destinations for job-creating capital and technological know-how.

Diversifying exports

Typically, these countries are heavily dependent on a narrow range of exports, which exposesthem more than industrialized countries to external shocks such as fluctuations in commoditiesprices and bad weather conditions. The 23 HIPCs that already have reached their decision pointsrely on just three main export items for more than half of their total exports. Moreover, these

exports tend to be commodity goods, subject to low and widely fluctuating prices. The narrowexport base of most HIPCs and their exceptional vulnerability to external shocks was one mainreason for lowering the Initiatives qualifying thresholds in 1999 (see above).

But a diversified export base remains the best protection against external shocks to the fragileHIPC economies and holds out much better prospects for export-driven growth. In this regard,public policy must actively promote private-sector development, strengthen infrastructure, stepup public investment in education and training to boost human capital, and cultivate new exportsectors and add value to existing ones. Countries must adopt trade policies that provide strongincentives for export-oriented growth and do away with trade policies that promote a weakmanufacturing base geared mostly to import substitution. Finally, HIPCs can only succeed in

diversifying their exports and increasing export revenues if developed countries do more to opentheir markets and remove trade barriers (see below).

Prudent policies on new borrowing

Poor debt management and imprudent borrowing practices play a major role in the build-up ofunsustainable debt levels. This typically happens when governments do not carefully manage theamounts and terms of their foreign borrowing and borrow excessively for consumptionratherthan using borrowed funds with adequate regard to future economic returns and debt repaymentobligations. The picture becomes bleaker still if macroeconomic policies are not adjusted in anappropriate and timely way in the face of economic shocks, thereby only worsening debtproblems.

Because the ability of HIPCs to repay their external debt is expected to strengthen only graduallyeven following debt relief, both HIPCs and donors agree that new external borrowing on termsthat are not concessional should be strictly limited. While debt relief should not preclude newexternal financing on adequately concessional terms, each beneficiary HIPC has a responsibilityto make its debt management structure and practices more effective, to provide a framework forprudent future borrowing policies while enabling timely servicing of obligations. In particular,


19/22

this means strengthening the transparency and accountability of the national structure formanaging debt by improving information disclosure and public oversight.

Fiscal and monetary policies must be coordinated with debt management, especially wheneconomic shocks occur and policies must adjust quickly for speedy recovery. An effective debt

management strategy also requires good monitoring, analytical, and negotiation capabilities. Inthese areas, the poverty reduction strategy paper is a useful vehicle for clearly communicating tothe international community the countrys financing needs and goals as part of a comprehensivestrategy for growth and poverty reduction.

The Role of Creditors and Donors

More aid: grants and low-cost loans

For the foreseeable future, HIPCs will continue to depend on substantial inflows of grants andlow-cost loans from international financial institutions and bilateral donors/creditors to reach

levels of investment needed to spur economic growth and reduce poverty.

While creditor governments are clearly making real progress in easing the crushing debt burdensof the worlds poorest countries, it is essential that this relief not be offset by reductions in aidflows. A decline of just 10 percent in new aid flows would wipe out the benefits of HIPC debtrelief. In order for debt relief to make any meaningful difference in the fight against poverty,developed countries must reverse the trend of declining aid flows and honor their pledge to boosttheir official development assistance levels to at least the UN target of 0.7 percent of GNP. At anannual average 0.24 percent of national output, current levels of foreign aid fall short of thispromise by some $100 billion a year.

Creditor governments also must continue to make available low-cost loans and ensure that themix of concessional finance is in line with the debt servicing ability of the particular country.When warranted by unforeseen, adverse events such as natural disaster or a sudden decline interms of trade, creditors must be flexible in their assistance to struggling economies by providingfurther financing, additional grants, and/or a temporary moratorium on debt service.

More open rich country markets

Export growth is directly related to a countrys ability to repay its domestic and foreign debtsone of the key determinants of the countrys debt sustainability. For this reason, more generousofficial development assistance must be complemented by more open developed country markets

to poor countries exports.

Over the past three decades, the HIPCs share of world exports eroded to a meager 0.7 percentby 1997, down from already low levels of 2.2 percent in 1970. And industrial countries nowspend some $360 billion a year on subsidies to protect their own agricultural sectors, whilepoverty rates climb in poor countries, especially in rural areas. These subsidies together withdirect limitations on market access for developing countries products inhibit the diversificationof these countries exports toward higher value-added products. Clearly, developed country trade


20/22

restrictions are a direct blow to the efforts of the poorest countries to earn their own way throughtrade.

To have any meaningful effect, rich countries must open their markets to products from poorcountries, particularly their agricultural sectorsupon which most HIPC economies depend. Just

as important, free access must also provide better opportunities for exports of manufacturedgoods by poor countries, as they diversify and develop their economies. A lowering of barriers torich countries export markets would help HIPCs attract the vital long-term private investmentflows needed to build and diversify their export sectors.

Recent World Bank studies show that if the United States, the European Union, Canada, andJapan were to give unrestricted market access to the 49 least developed countries (as identifiedby the United Nations General Assembly), their net exports would increase by about 11 percent,with non-oil exports from Africa expanding by 14 percent. Recent market-opening actions by theEU and some other industrial countries are welcome initiatives, but it is important for allcountries to remove remaining barriers to the exports of the poorest countries and find common

ground for launching new multilateral trade negotiations.

The Special Case of Conflict-Affected Countries

The HIPC Initiatives top challenge in the year ahead is to bring the remaining eligible countriesto their decision points as fast as realistically possible so that they can begin to receive debtrelief. This challenge presents special difficulties since most of these countries have recentlyemerged from, or are still engaged in, conflict, and many of them are struggling with severegovernance problems. Several of these conflict-affected countries have built up large arrears tointernational financial institutions, further obstructing progress to their decision point. At thesame time, these countries have a particularly acute need for debt relief, because of their major

reconstruction requirements and the urgent need for speedy and effective action to help break thecycle of violence, low growth, and severe poverty.

To take into account the extreme difficulties faced by these countries and deliver debt relief tothem as quickly as practicable, the World Bank and IMF intend to link these countries at an earlystage to the HIPC process. These countries would be able to reach decision pointand beginreceiving debt reliefas early as feasible, assuming they could show progress in pursuing soundpolicies with a commitment to alleviating poverty and an emphasis on rebuilding institutionaland administrative capacity and improving overall governance. The HIPC Initiative frameworkhas the flexibility to front-load assistance to conflict-affected countries. That is, the Initiativecan make a larger amount of debt relief available at as early a point as possible, taking into

account the countries debt service profiles and capacity to put the proceeds to poverty-reducinguses.

The move to put debt relief agreements in place as swiftly as practicable would normally becombined with a longer period to completion point. This would allow these countries the time toprepare and implement national strategies for poverty-reducing uses of the funds freed by debtrelief (set forth in a poverty reduction strategy paper), sustain macroeconomic stability, and putin place good mechanisms for tracking the use of debt relief proceeds. The authorities in


21/22

postconflict countries would be encouraged to start preparing an interim poverty reductionstrategy paper as soon as political and security conditions permit, specifying measures to helpstabilize the political and security situation and help restart economic activity. As is the caseunder the usual HIPC debt relief mechanism, the actual length of the period between decisionand completion points would be flexible, depending on how quickly a country can make progress

in implementing reforms for sustainable, pro-poor growth.

Under the usual two-stage qualification period, debt relief would begin to flow to a postconflictHIPC from an early decision point and throughout the period during which the country works toarrive at its completion point. During this period, the World Bank also would provide support tothe country through grants and/or low-cost credits under its International DevelopmentAssociation (IDA) concessional window, while the IMF would provide support through itsconcessional lending facility, the Poverty Reduction and Growth Facility (PRGF).

Moreover, the World Bank and IMF have proposed that plans to clear the (in some cases large)arrears of postconflict HIPCs to international financial institutions be worked out jointly with the

countries themselves, in consultation with other creditors. Such a plan would typically includeagreement on the length and content of the track record required for arrears clearance, as well ason the types of assistance the World Bank and the IMF would provide in the pre-arrearsclearance period.

Obviously, the infrastructural and economic devastation suffered by postconflict countries hasleft them with severely limited institutional implementation capacity. For this reason, the WorldBank and the IMF will do more to provide the technical assistance and policy advice needed tohelp rapidly restore the critical functions of government to these countries and to help themfulfill the specific poverty-reducing capacity requirements of the HIPC Initiative in a timely way.For its part, the IMF is prioritizing and coordinating ways to improve the delivery and

effectiveness of technical assistance to build capacity in areas that are vital to restoringmacroeconomic stability, such as public expenditure management, monetary and exchange ratepolicies, and the financial sector. In giving increased priority to technical assistance, the WorldBank and the IMF, together with other providers of technical assistance and the countryauthorities themselves, will assess the countrys technical assistance needs early on and developa concrete plan for delivering this assistance into the medium-term. While the World Bank andthe IMF can provide policy advice and technical assistance in their respective areas ofcompetence, this effort also will require a considerable involvement of other donors throughfinancial support and direct provision of expertise over an extended period.

1Often at interest rates of 1 percent or less and maturities of more than 30 years.2In net present value terms.3Taking into account the debt relief provided under the original HIPC Initiative, which reduced debt servicepayments in a number of countries in 198999, the debt service savings in these 23 countries amount to some $1.1billion each year in 200103.4Adult illiteracy rates in 1998, according to the World BanksWorld Development Indicators, 2000.5This is the total cost for 32 HIPCs. The figure excludes costs for Liberia, Somalia, and Sudan due to insufficientdebt data and protracted arrears. Also, other countries that have not yet been identified may meet the criteria andqualify for relief under the HIPC Initiative.


22/22