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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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.

We estimate that IDA, IMF, ADF, and IaDB will provide, in present value dollars, almost $29 billion in MDRI debt relief for 41 countries over the next several decades, with the U.S. government contributing about 15 percent of this amount. IDA is to provide the most debt relief, accounting for about $18.5 billion or about 64 percent, of the total. IMF is to provide about $4 billion in MDRI debt relief, and ADF and IaDB are to provide about $3.7 billion and $2.4 billion, respectively. As of the end of 2007, the 23 countries that were eligible for MDRI had realized about $1.7 billion (6 percent) of total planned debt relief from the four international financial institutions. The amount of debt relief realized to date is small compared to the total planned amount of MDRI debt relief because MDRI has only been operational since 2006 and because countries will only realize benefits over the next several decades as annual debt obligations that were irrevocably cancelled would have come due. Donor governments have agreed to fully fund MDRI debt relief on a "dollar-for-dollar" basis to IDA and ADF. We project that the U.S. government will provide about $3.8 billion to fund IDA MDRI costs and over $400 million for ADF MDRI debt relief, which represents about 19 percent of MDRI debt relief provided by these two institutions and almost 15 percent of all MDRI debt relief provided. Based on our projections, Treasury's early encashment approach does not fully fund the U.S. share of IDA MDRI costs, and may not fully fund the U.S. share of ADF MDRI costs by 2013. We project that the U.S. government will face a shortfall of approximately $142 million in its existing IDA MDRI commitments by 2009 if it does not clear $152 million of accumulated payments not yet provided to IDA during the current replenishment period. Based on our assumptions about the growth of future U.S. commitments, and if the U.S. government fully funds its future IDA replenishment contributions and continues to use only early encashment, it could experience an IDA MDRI shortfall of $108 million by 2014. This shortfall would begin to decrease by 2026 as U.S. MDRI commitments begin to decline. By 2044, when all IDA MDRI loans are expected to have expired, we project that the U.S. government would have generated a surplus in that replenishment period. In addition, we project that the U.S. government would face a shortfall to ADF for its MDRI commitment by 2013 that would increase until 2025 when, as with IDA, it would begin to decrease. By 2054, when all ADF MDRI loans are expected to have expired, we project that the U.S. government would have generated a surplus in that replenishment period. If the U.S. government does not pay its future contributions to IDA and ADF in full and on time, projected shortfalls in its IDA and ADF MDRI commitments could increase further. To offset these shortfalls, Treasury may need to request new appropriations, accelerate the early encashment schedule, or do both.

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