Examination of witnesses (Questions 1 - 19)
TUESDAY 17 FEBRUARY 1998
MR ROBIN
FELLGETT, MR
RICHARD MANNING,
MR ANDREW
STEELE, AND
MR NICK
WESTCOTT
Chairman
1. Mr Fellgett, why is it that you are described as "ex-Head"
as you are leader of the team today? I understand that you do
not intend to give us an opening statement having previously briefed
us, but nonetheless for the benefit of the shorthandwriter perhaps
you would introduce yourself and your colleagues.
(Mr Fellgett) I am Robin Fellgett, one of the
Treasury's deputy directors. I am here because until recently
my responsibilities included oversight of policy on international
debt issues. I am here because of that former capacity to give
what help I can. On my far right is Richard Manning from the Department
for International Development who is therefore perhaps already
known to the Committee. While the Treasury leads on international
debt issue, in relation to the poorest countries which are the
subject of your inquiry we work very closely with DfID. Immediately
to my right is Nick Westcott, Head of the Economic, Finance and
Development Department in the Foreign Office. The Foreign Office
is another department with which we work very closely. On my left
is Andrew Steele from the Export Credits Guarantee Department.
The great bulk of debts owed to the UK by the poorest countries
are a consequence of past export credits. You therefore have here
the four departments most closely involved in these issues. We
are very happy to answer your questions.
2. Thank you for your introduction and briefing. The
Committee is on a steep learning curve and it looks forward very
much to receiving your expertise in this matter. Who among you
negotiates in the Paris Club on behalf of the United Kingdom?
(Mr Fellgett) The Paris Club is an organisation
of creditor countries which negotiate with debtor countries. In
common with most countries, the UK representation is led from
the Treasury. Until I moved jobs one or two weeks ago, one of
my responsibilities as head of the UK delegation was to act for
the UK in the Paris Club. Normally, the UK team at the Paris Club
would cover most of the departments represented here.
3. A team of about four of you with assistants would
attend the Paris Club meetings?
(Mr Fellgett) The precise size varies. On some
occasions as many as five of us have attended, and on other occasions
as few as one or two have attended. It depends on the subject
and who can be spared.
4. How often does it meet?
(Mr Fellgett) The Paris Club usually met about
once a month. This year it has gone over to meeting cycle of about
once every six weeks which appears to be a more efficient way
of conducting its business.
5. Does an official from our embassy in Paris oversee
these matters, or is it done purely from a UK base?
(Mr Fellgett) It is done almost entirely from
a UK base.
6. How large a committee is the Paris Club?
(Mr Fellgett) The Paris Club of creditor nations
comprises up to about 20 countries represented more or less as
the UK is represented. When the Paris Club meets to discuss matters
generally typically there are 20 countries there, although each
does not have exactly the same representation on every occasion.
When the Paris Club meets to negotiate with a debtor country the
number of countries represented, apart from the debtor who has
to be there, will depend on the number of creditors involved.
For example, I recall that in the case of Niger which was discussed
a year or so ago only four or five creditor countries were there
because they were the only ones who were creditors of that country.
In other cases perhaps the full 20 may attend.
7. I understand from your briefing that the club is serviced
by the French treasury?
(Mr Fellgett) Yes. The French treasury put an
awful lot of excellent work into it. It provides not only the
chairmanship of the Paris Club but also the secretariat, which
is provided by one of the divisions of the French treasury.
8. You are dealing with official debt—
country-to-country or bilateral debt—and also export credit
debt?
(Mr Fellgett) The category of debt that we are
considering is official debt; that is to say, debt owed by one
government to another government—bilateral debt—or
debt owed to one of the multilateral institutions such as the
World Bank or IMF.
9. Do you also deal with regional bank debt?
(Mr Fellgett) We do, although not in the Paris
Club. Those debts arise in a number of ways. In the case of debts
owed to the UK—I am referring now to official bilateral
debt which is owed by the government of a debtor country to the
UK—the great bulk arises from past export credits. Where
my colleagues in ECGD provide in effect insurance to a British
exporter and that exporter is not paid he can claim under his
insurance policy from ECGD. Normally, the arrangements are set
up so that the money which ECGD has had to pay out then becomes
a claim by ECGD on the government of the debtor country. That
is how the government-to-government debt arises from export credits.
In the case of the poorest countries, particularly for the UK—though
it is not always the case for other creditors—all but a
tiny sum of official bilateral debt arises from past export credits.
10. What is the cause of the unsustainable debt burden
which now afflicts the heavily indebted poor countries known as
HIPCs?
(Mr Fellgett) In a nutshell, they are countries
that cannot repay or, if you like, have over-mortgaged themselves.
The causes are many and interacting, and they vary from country
to country. One should try to avoid the temptation to think of
all of the 40 countries as though they are identical, but categorisation
can help. One of the problems is that a good many bilateral aid
donors have in the past lent money to such countries, albeit at
very low interest rates. However, it is still lending that must
be repaid. In the view of the Government that is not appropriate
for countries that are so poor. For that reason, UK policy is
that any aid to these countries should be grant, ie. given and
not repaid. The policy of some other countries that aid should
be in the form of lending albeit at concessional interest rates
is obviously one cause. On the export credit side, with the usual
great benefit of hindsight it is clear that in some cases export
credits have been provided on what was intended to be a commercial,
or quasi-commercial basis, to countries that are not really creditworthy.
ECGD is an insurance business and it is bound to incur some losses.
Any insurance company cannot just insure drivers who never have
an accident. But the scale of losses experienced by creditors
to some of the poorest countries is excessive in commercial terms,
and with the benefit of hindsight the provision of export credits
has gone too far. That is the lending end of it. At the repayment
end, clearly there are even more reasons why countries cannot
repay. I list just a few of them although not in order of importance.
First, there was a period in which world interest rates rose.
Where countries had borrowed at floating interest rates rather
than have them fixed from the outset clearly that hit their capacity
to repay. Some of the things that poor countries had to buy in,
for example oil, rose in price, at least for a period. Some of
the things that poor countries could sell in world markets, such
as agricultural products—coffee and so on - fell in price.
I believe that in most cases the single most important factor
is simply that the economic policies of the country concerned
have not delivered the economic growth that is necessary to repay.
There is nothing wrong in a poor country borrowing to invest,
to make a return and to grow and develop, but if it borrows and
does not invest or if it invests unwisely, or the economic policy
framework within which it is operating does not facilitate growth,
the country cannot repay the debt. Therefore, economic policy
is one of the key reasons. It is the unfortunate fact that in
sub-Saharan Africa where most of the HIPCs are situated for 20
or 30 years economic growth has generally been negative; that
is, it is economic decline. However, there has been a turn-around,
albeit from an appallingly low base, in the past few years. Perhaps
the single most significant contributory factor has been economic
policy. Another reason is drought. A country may be hit by drought,
civil war or internal strife. I am sure that the Committee is
very familiar with this. There are some countries for whom that
has been another important contributory factor. I am sure that
I have not covered all of them.
11. When we try to discover who is responsible for this,
clearly there are two groups involved. On one side there are those
who have a responsibility to lend wisely and properly with due
caution to a country or project like a power station which they
expect to generate the money necessary to repay the foreign exchange.
In all these cases we are dealing with foreign exchange, are we
not? Presumably, the foreign exchange risk is almost invariably
borne by the recipient country. That can be a major problem. Some
of the debts are denominated in currencies like the Japanese yen
and Swiss franc, are they not, and they have escalated in value?
Therefore, on one side there may be irresponsible lending by the
creditors. Equally, those who borrow should be certain that they
can repay the loan, as my father taught me. Indeed, every time
my bank manager sees me he reminds me that it is my responsibility
as the borrower to ensure that I can repay. Who is responsible
for this, and how would you apportion blame?
(Mr Fellgett) I agree with everything that you
have said. Thank you for reminding me that I omitted from my list
of factors currency depreciation. That is yet another reason for
problems that may arise. It is quite difficult to apportion blame
because it varies from country to country. Clearly, a country
that can reasonably expect stable rainfall and commodity prices
and then suddenly experiences a drought such that its commodities
cannot be sold may have made a misjudgment, but whether it can
be blamed is perhaps another matter. Where a country is pursuing
economic policies that are unlikely to advance its development
then, perhaps with the benefit of hindsight, one can begin to
attach blame. Where the lender is insufficiently cautious—to
return to your bank manager—with the benefit of hindsight
it can be said that there are misjudgments. Hindsight is a wonderful
thing. I do not want to characterise it as black and white. It
is quite complex and it varies according to circumstances, from
country to country and over time.
12. But if the economic policy that is being pursued
is clearly wrong then it should behove the lender to be cautious
about lending to a country that is following such a policy?
(Mr Fellgett) I agree with that.
Mrs Kingham
13. What do you mean by sound economic policies? You
have placed great emphasis on that so far. Obviously, a little
bit of blame should be attached to some of the lending policies.
When a country has been strapped for cash and is very dependent
on commodities unscrupulous lending has still gone ahead, sometimes
to unscrupulous regimes. The people have to pick up the tab afterwards
and pay it back. What kind of economic policies do you regard
as sound ones?
(Mr Fellgett) Clearly, there have been occasions
when lending has gone ahead and it has been insufficiently cautious.
As to economic policy, clearly the economic circumstances particularly
of sub-Saharan Africa have gone disastrously wrong over a long
period. There have been encouraging signs in recent years, although
it is still moving slowly.
14. You said that it had gone wrong. Does that assume
that the economic policy was ever right, or is it the case that
the country has had to start from such a poor base and it has
tried to pick itself up from absolute zero?
(Mr Fellgett) I was simply referring to the fact
that economic output on any measure had gone down; in other words,
it had moved in the wrong direction.
Chairman
15. You mean that it has not succeeded in producing growth?
(Mr Fellgett) On the contrary, things have got
worse.
16. And a variety of economic policies can produce that
undesirable result?
(Mr Fellgett) Yes. It also means that with a growing
population living standards for a typical individual have gone
down even faster.
Mr Canavan
17. By how much are the HIPCs in debt and who are the
main creditors?
(Mr Fellgett) That is an excellent question to
which I am afraid I cannot give an excellent answer. One of the
problems in this area is how to place one's hands on reliable
figures, which is understandable. One is talking about countries
that do not have efficient treasuries, central banks, statistical
offices and all the rest of it. Very simple questions that hopefully
we could answer about the UK would be very difficult to answer
in certain countries. There are a number of estimates available,
none of which I regard as precise. Not only is there a lack of
an effective statistical office in these countries but quite often
if you ask the debtor and the creditor what is owed you will get
different numbers. That must be resolved at some stage in the
debt relief process. You will be aware that recently Russia joined
the Paris Club. Russia inherited from the Soviet Union very large
claims on poor countries. As part of the agreement to enter the
Paris Club Russia agreed to write off quite a lot of those claims.
There is a particular problem in calculating just how much Russia
is now owed. Having made my excuses and warned the Committee not
to expect precise numbers in this area, there are 41 HIPCs identified
by the World Bank and IMF. For four of them the figures are so
unreliable that no assessment has been made.
Chairman
18. Perhaps you would tell us which they are?
(Mr Fellgett) Nigeria, Liberia, Sudan and Somalia.
19. Neither we nor they know what they owe?
(Mr Fellgett) If they do they are not telling
the IMF! The only database is held by the World Bank. We and our
colleagues in ECGD know about our little bit. To give the Committee
a feel for the size of it, I suggest that the total official external
debt of the 37 countries is probably of the order of US$100 billion
or £60 billion. That could easily be out by 10 or 20, but
it is of that size.[2]
2 See Evidence, p. 21. Back
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