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Debt Relief (Developing Countries) Act 2010

Section 4 – Meaning of “the relevant proportion”

21.Section 4 defines the reduction in the amount of a debtor’s obligations brought about by the Act.

22.Subsection (2) applies to the debts of countries that have reached Decision Point under the Initiative. It defines the relevant proportion of a debt by referring to the reduction in accordance with the Initiative. Practice under the Initiative is as follows. At Decision Point, the IMF and World Bank calculate the percentage reduction which is required from all creditors holding debts included in the Initiative in order to reduce the country’s indebtedness to a sustainable level. These organisations publish within their Decision Point document the Common Reduction Factor. This sets the reduction expected from all creditors after they have provided so-called traditional relief of 67%. The amount the debt would be if it were reduced in accordance with the Initiative is the amount it would be if firstly reduced by the application of traditional relief at 67% and secondly if further reduced by the proportion set by the Common Reduction Factor.

23.For example, the Common Reduction Factor for an eligible country might be 33%. A debt of £100, if reduced in accordance with the Initiative, would first be reduced by 67% through traditional relief, to a new value of £33. Further reduction by the Common Reduction Factor gives the amount the debt would be if it were reduced in accordance with the Initiative (A) as £22, and hence the relevant proportion as 22%.

24.The assumption, if it is not the case, that Completion Point has been reached, is included for the following reason. While individual Decision Point documents set out the debt relief a country needs in order for that country’s debt burden to become sustainable, under the Initiative debt relief need not be provided until a country reaches Completion Point. In practice, creditors who voluntarily participate in the Initiative give relief from Decision Point onwards, in the form of interim reductions in the debt service payments. The purpose of the Act is to ensure that once a country has reached Decision Point, creditors should only be able to recover that proportion of their debts that is consistent with the reduction expected in the IMF’s Decision Point analysis. That is done by the assumption that countries have reached Completion Point.

25.Some countries are assessed as needing additional ‘topping up’ of assistance at Completion Point. In these instances, a higher Common Reduction Factor is published by the World Bank and IMF in the Completion Point documents. HIPC Initiative practice is to apply the most recently published Common Reduction Factor, and that is the outcome expected under this section.

26.Subsection (3) applies to the debts of countries yet to reach Decision Point. For these countries, the World Bank and IMF will not (in general) have calculated the Common Reduction Factor by which debts must be reduced in addition to the provision of the traditional reduction of 67%. To be designated as a country potentially eligible for the Initiative, its debts must be sufficiently high as to remain unsustainable even if creditors provided this traditional relief. It is known that, upon reaching Decision Point, the expected reduction will be assessed as at least 67%. As its value cannot be determined beyond this, the subsection applies the 67% reduction alone to these debts and sets the relevant proportion at 33%.

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