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WASHINGTON - The World Bank is considering additional debt relief for countries that complete the Heavily Indebted Poor Countries program but whose debt burden remains unsustainable, a report by the bank said.

The bank also considered a second approach to improve debt sustainability which would allow the country to deviate by a small margin from the targets in the program and so would be able to make use of an "unspecified cushion" built into HIPC.

However, the use of additional debt relief would only be used in exceptional circumstances.

"Only in exceptional cases when exogenous factors cause a fundamental worsening of the country's economy circumstances would such additional HIPC relief from the international community be considered," the World Bank said in a draft copy of report which was prepared for discussion on the executive board, a copy of which was obtained by Reuters on Monday.

The document was one of two on debt relief discussed on the executive board last week and may have been subject to some revisions after the discussion.

The HIPC program is an international initiative to reduce the debt of the world's poorest countries. So far only two countries, Uganda and Bolivia, have completed the program.

According to the report, World Bank staff would need to identify that the changes in the external environment -- such as terms of trade, incidents of natural calamities (for example prolonged droughts, hurricanes, and earthquakes) -- had been of a sufficiently large magnitude to account for the worsening in the debt outlook.

"As a rule of thumb, the adverse effects of a shock should be expected to last for at least 3-5 years to be considered fundamental," the bank said.

The report coincides with the slowdown in the global economy which has a negative impact on the terms of trade for many of the world's poorest countries. It also comes as a new wave of HIPC countries edge closer to the final point in their programs some of which are expected to still have an unsustainable debt load.

The World Bank defines a country's debt profile as being unsustainable if it the net present value of debt relative to exports is over 150 percent.

The report says that modest deviations from the original plan a country was under should not be surprising.

"Large adverse deviations, however, could be indicative of exogenous shocks and/or major policy slippages, excessive optimism in the original analysis," the report said.

The Washington-based lender notes that the cost of the HIPC program does not include additional debt relief on completion of the program and so additional funding would be required.

"To the extent that additional relief is required this would increase the overall cost of the initiative," the report said.

"Additional funding would thus be needed to cover these costs."

But the bank notes that it would be difficult to say exactly how much it would cost because the outside shocks cannot be predicted.

The staff report said that of the two options, the additional relief within the existing framework, rather than the "unspecified cushion" idea is the preferred option.

Charity Oxfam agreed that this would be the best solution.

"The World Bank and donors have to abide by the spirit of the HIPC initiative and deliver debt sustainability which in the context of declining terms of trade for the poorest countries may require a significant top up of debt relief in many cases," said Oliver Buston, a policy advisor at Oxfam in Washington.

The World Bank's decision-making executive board also discussed a second report last week, a copy of which was also obtained by Reuters on Monday.

That document noted that due to longer than anticipated time needed to develop poverty reduction strategies as well as delays in implementing key policies, fewer countries than expected have completed the program. Nampa-Reuters

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