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Developing Countries: U.S. Financing for Multilateral Debt Relief Initiative Currently Experiencing a Shortfall

GAO-08-888R Published: Jul 24, 2008. Publicly Released: Jul 24, 2008.
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Highlights

A buildup of foreign debt throughout the 1970s and 1980s--combined with low growth, falling commodity prices, and other economic difficulties--left many poor countries with significantly more debt than they could repay. International efforts to provide debt relief to 41 such heavily indebted poor countries have been ongoing for over a decade, and these efforts culminated in the Multilateral Debt Relief Initiative (MDRI), which was announced in 2005. MDRI eliminates eligible debt that countries owe to four international financial institutions--the World Bank's International Development Association (IDA), the International Monetary Fund (IMF), the African Development Bank's African Development Fund (ADF), and the Inter-American Development Bank (IaDB). To receive MDRI debt relief, countries must first complete the Heavily Indebted Poor Countries (HIPC) Initiative, which the World Bank and IMF created in 1996 to relieve the debt burden of poor countries. In response to concerns over the continuing vulnerability of these countries, the World Bank and IMF enhanced the initiative to provide additional debt relief in 1999. Recognizing that recipient countries needed further assistance, MDRI was created to help accelerate countries' progress toward achieving the United Nations Millennium Development Goals. Of the 41 eligible countries, 23 countries have received debt relief under both the MDRI and HIPC Initiatives, and another 10 countries are receiving debt relief under just the HIPC Initiative. Donor governments (including the U.S. government) have agreed to help fund multilateral debt relief. Donor governments and each institution agree to the amount of MDRI costs each donor is to fund. To fund MDRI, governments may (1) provide funding in addition to their regular contributions or replenishments to the institutions, (2) provide their regular contributions early and generate credits through an approach known as early encashment, or (3) do both. If a government uses these early encashment credits to fully fund its share of MDRI, it is not required to provide additional funding for MDRI. The U.S. Department of the Treasury (Treasury) is currently using early encashment to fund the U.S. MDRI commitment. If the U.S. government provides full funding for IDA and ADF, then the early encashment approach will generate sufficient funding to cover MDRI during the current replenishment periods. However, in past replenishments, the U.S. government has not fully funded its replenishment contributions to international financial institutions on time, resulting in arrears to IDA and ADF totaling more than $400 million as of the end of fiscal year 2007. We have previously reviewed the HIPC Initiative and other debt-related issues. In response to a Congressional request for this report, GAO (1) estimated the overall cost of MDRI for four international financial institutions (IDA, IMF, ADF, and IaDB), and (2) evaluated the United States' approach to funding its share of MDRI costs.

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Appropriated fundsCost analysisCost sharing (finance)DebtDebt collectionDeveloping countriesEconomic policiesFederal aid to foreign countriesFinancial analysisFinancial institutionsFinancial managementForeign economic assistanceInternational agreementsInternational cooperationInternational economic relationsInternational organizationsInternational relationsMonetary policiesProgram evaluationProgram managementCost estimatesForeign countries