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This paper reviews the foreign debt burden in Central America with special emphasis on Honduras and Nicaragua. These countries have a large debt overhang and they have lagged behind the rest of the region in terms of economic growth. Our work suggests that Honduras and Nicaragua require alleviation of their foreign debt as a prerequisite to achieve sustained economic growth. The paper also reviews the initiative aimed at reducing the debt burden of the highly indebted poor countries (the HIPC Initiative) and evaluates alternative scenarios of debt reduction for both Honduras and Nicaragua. It ends with a critical assessment of the implications of the fiscal and openness criteria established in the HIPC Initiative. [ABSTRACT FROM AUTHOR]