Examination of witnesses (Questions 60 - 79)
TUESDAY 17 FEBRUARY 1998
MR ROBIN
FELLGETT, MR
RICHARD MANNING,
MR ANDREW
STEELE, AND
MR NICK
WESTCOTT
60. That answer is very helpful. Up to now I had not
understood the position. Does Germany also take the IMF line?
(Mr Westcott) Gold sales in Germany is a very
sensitive political issue, in part because of Germany's history
of hyper-inflation in the 1920s and 1930s. There are good domestic
political reasons why Germany is nervous about gold sales.
61. Rather like the question of Japanese indebtedness?
(Mr Manning) Both the Japanese and Germans tend
to the view that if they lend people money they are more careful
of the money than they would be if they had been given it. There
is a feeling that money is valued more if it is lent rather than
given, and they have a preference for loans over grants. I do
not think that that really applies to us. If one is providing
money economically people will value it whether one gives it or
lends it. The Germans and Japanese also finance their aid programmes
in a way that depends on money being revolved. In part, the Japanese
programme is financed by the post office savings bank, so Japan
may use sources of money other than taxpayers' money.
Chairman
62. All that you have said comes down to the very basic
question: Who pays? Who is to suffer the loss? If the IMF says
that it cannot suffer the loss it must be replaced by gold sales;
the World Bank says that it cannot suffer the loss because it
does not do it that way and therefore there must be further subscriptions
to the World Bank, usually by the subterfuge of using IDA money,
to which I object very strongly. Even that must be repaid. The
whole question comes down to who pays. Presumably, ECGD has a
reserve against default which it earns by charging extra interest
rates on all loans.
(Mr Steele) Most of the debts that we are talking
about today are so-called account 1 debts. In 1991—
a bit before my time in ECGD, and so I speak under advisement
to some extent—in the light not least of the debt crisis
of the `eighties it was decided to split the accounts into three.
The so-called account 1 was basically business written before
1991. Essentially, that is the debt of which we are speaking today.
That account essentially is bust in the sense that the claims
paid out totalling several billion pounds—some of which
we are talking about today - were much more than the amounts that
ECGD had put aside to pay claims. Generally speaking, for many
years we have been making provisions against the likelihood of
loss. When we consider forgiveness we consider it in terms of
proper financial management, as ECGD's accounting officer must
do. He is forming a judgment about whether post-forgiveness the
value of the remaining debt in our books has increased by forgiving
a certain amount of that debt; in other words, whether the likelihood
of the repayment of the remaining debt is greater. Essentially,
that is the judgment that we must make in considering forgiveness
in the Paris Club and elsewhere. A major part of that judgment
is based on the sustainability of the debt position of the debtor
country concerned post-forgiveness.
63. So, you are also concerned with who pays or gets
the blow?
(Mr Steele) Yes.
Mrs Kingham
64. What is your view of what went wrong in relation
to Mozambique? You have explained why structurally the process
could not proceed. Does it mean that there is no future for the
initiative, or was that problem specific to Mozambique as a country?
(Mr Fellgett) Perhaps I may bring you up to date
with where we are with Mozambique. The issue of whose accounts
bear the loss is important. It was agreed that each individual
country within the Paris Club, including the United Kingdom, would
bear the loss up to their previously highest rate of forgiveness
(67 per cent). Beyond that, the loss would be borne equally by
all creditors, not just bilateral government creditors within
the Paris Club but also the IMF, World Bank, the African Development
Bank and the other regional development banks equally in proportion
to their claims. Someone who had twice the claims would bear twice
the loss. In percentage terms it was all equal. That was never
specified in the precise terms that I have just described but
that was the flavour of what was agreed. Assuming that the figures
are reliable—as I said at the beginning, that is always
an unwise assumption—that will work for all except a tiny
number of countries, one of which (perhaps the only one) is Mozambique
where that kind of approach to sharing the cost runs straight
into the buffer that the Paris Club has agreed to forgive only
up to 80 per cent. The view of the Government is that that buffer
must be overridden. We have agreed a process here under which
unpayable or unsustainable debts are written off so that the country
is in a position to pay what is left. Eighty per cent is not a
magic figure. In the case of Mozambique the required figure that
I have seen—it may not be accurate—is 88 per cent.
We believe that that is what we should do. Unfortunately, not
all members of the Paris Club are persuaded of that position.
The Paris Club operates by consensus; everyone must agree, so
each member has a veto. People are discouraged from using it if
it means a vote of 19 to one. What was agreed with considerable
difficulty was that the Paris Club would do a number of additional
things to bring the gap down to about US$100 million. The Paris
Club will move to 80 per cent and then do a variety of other things
which mean that the level is equivalent to 85 per cent. It needs
to go to 88 per cent. The remaining gap is equivalent to about
US$100 million worth of debt relief for Mozambique. The Government
now seek to ensure that that gap is filled as quickly as possible
by whatever are the best means. One is talking about US$100 million
split between up to 20 creditors. This is a philosophical debate,
not a debate about money.
Chairman
65. What you are saying is that negotiations continue
and that you have some hope that the situation may be resolved.
In the context of the subject-matter with which we are dealing
it does not sound like a lot of money, although personally it
is a large figure. You believe that it is soluble, so you do not
believe that this is the end of the Paris Club procedures?
(Mr Fellgett) I believe that progress on Mozambique
has been disappointing, if I may use parliamentary terms. I have
used stronger language inside and outside the Paris Club. The
international community has not delivered what it agreed at the
IMF and World Bank meetings.
Dr Tonge
66. That was the target of 88 per cent?
(Mr Fellgett) It had the implication of 88 per
cent. Clearly, that has damaged the credibility of the Paris Club
process. My colleagues are working as hard as they can to ensure
that that gap is filled. I believe that in practice some of the
money will have to be found by the World Bank and/or IMF. That
is the only way to complete the process, which is already overdue
for Mozambique, as quickly as possible. The UK Government are
willing to put in some additional money. My colleagues in DfID
have already agreed that about US$17 million worth of assistance
to Mozambique will be in the form of a payment into their trust
fund for debt repayment. The Secretary of State for International
Development announced before Christmas that the UK was willing
to help finance the African Development Bank's contribution to
this process. That is a bank which has no resources of its own.
She and the Chancellor are to announce this morning that as part
of the resolution of the problem the UK will contribute unilaterally,
as it were—to set an example and encourage others—up
to another US$10 million to fill the US$100 million gap, with
the aim of ensuring that the process is completed for this country,
which is perhaps the most deserving case of all, with the minimum
further delay. Has this damaged the process? I hope not. The running
up against the buffers of the 80 per cent in the Paris Club ought
not to be a problem for at least the great majority of other countries
that must be considered. The numbers are different and 80 per
cent should be enough as Mozambique is resolved and the process
moves on to other countries. Although it has received almost no
publicity, the case of Guyana was ticked off very quickly and
simply over the Christmas period. I hope that the process will
get back on track. That is the Government's strong wish, to put
it mildly. I am cautiously optimistic about it. There is some
spotlight on the Paris Club to show that it will play ball in
the next few cases and that it will not run into the same kind
of problem.
Chairman
67. Mr Manning, this is the second time I have heard
of the aid budget being used to pay off debts to the African Development
Bank. I happen to know that the African Development Bank was lending
very injudiciously in the quite recent past to countries that
could not possibly repay at interest rates that they could not
possibly meet. Why are we rewarding the African Development Bank
with our precious aid money in this way?
(Mr Manning) I would not characterise it as a
reward for the African Development Bank. We would not be doing
this unless we had confidence in the new management of the African
Development Bank that it is now set on a sustainable policy course.
Indeed, there are meetings to take place in Washington later this
week at which the non-regional members of the African Development
Bank will consider what more that bank needs to do to provide
a degree of confidence required to supplement its capital. This
takes one back to the difficult question of governance and decision-taking
in the African Development Bank. We believe that Mr Kabbaj, the
new president of the African Development Bank, is doing an excellent
job in very difficult circumstances. We believe that it is right
to enable the bank to play its part where necessary. It is important
to keep the bank engaged in the process along with the World Bank
and IMF. That is why the decision was taken to make a contribution
in the case of Uganda and in principle to make a contribution
of a size yet to be determined in relation to Mozambique.
68. Did you not have a director on the board of the African
Development Bank when it was lending injudiciously?
(Mr Manning) We have a director on the board of
that bank. The problem with that bank rather than other regional
banks is that, as you rightly say, it has lent to countries which
are not creditworthy for the kind of funds that it has made available.
Certainly, the board should have seen it coming, as it were. The
difficulty arises from the way that the board of the African Development
Bank operates and the relatively weak position of the non-regional
directors in relation to decision-taking. Those are the kinds
of issues that need to be properly addressed in relation to the
proposed capital increase.
69. One must pursue at another time the question of how
one controls these development banks. It raises very serious questions.
Your department keeps putting before Parliament renewals for these
banks with no explanation as to what the policy has been and whether
or not they are worthy of support. I think that that is a very
serious question facing both Parliament and you.
(Mr Manning) We would be very happy to respond
to that. We shall make sure that we look carefully at the memoranda
that we put forward in future.
Ms King
70. I should like to underline some of the concerns raised
earlier about structural adjustment programmes and their ability
to stimulate growth. As to who is giving money to whom, it is
helpful if we remember the context of the debate, which is the
situation since the onset of the debt crisis. In the decade between
1981 and 1991 there was a net transfer in terms of flows from
the poor countries of the south to the rich countries of the north
equivalent to five times the Marshall Plan. I think that it is
instructive to bear that in mind when making judgments in this
area. One of the key criticisms that has been levelled is about
the requirement of a six-year period of structural adjustment.
NGOs argue that that is an unnecessarily long period of time.
First, will the Government advocate a reduction in that period?
Secondly, why cannot relief be given after three years at the
decision point as opposed to six years at the point of completion?
(Mr Fellgett) Can the Government advocate a shorter
period? The answer is that they have done so, and they continue
to do so. To be one of a very large number of countries in these
decisions is always frustrating. Everything is a compromise. What
was agreed by the boards of the IMF and World Bank and Ministers
and governors at the interim and development committees was that
the process of getting full HIPC relief would depend on two three-year
stages with a so-called decision point in the middle but that
exceptionally the period could be shorter taking account of countries'
existing track records. In practice, so far it has been possible
to agree that the full six years should not be applied in any
case. While we continue to feel that six years is in general too
long, rather than argue the general point, especially as we can
continue to agree rather shorter periods in practice as each case
arises, we hope that you can be modestly reassured on the practice.
However, undoubtedly if you read the documents they say that the
HIPC process lasts for six years.
71. So, it is the practice at this point effectively
to give money after the three-year period?
(Mr Fellgett) The practice varies from country
to country. In the case of Mozambique, the second three-year period
will in practice be one and a half years.
72. Does that mean that it will receive debt relief after
a period of four and a half years?
(Mr Fellgett) Perhaps I may first outline the
process. The idea is that for the first three years the country
receives a reduction of up to 67 per cent from the Paris Club
year by year. The amount to be paid can be as little as one third
of the notional amount due each year. That happens year by year.
At the end of the three years the so-called decision point arrives.
Then decisions are made as to what is to happen in another three
years' time. During the next three years—we have not had
a three-years second phase so far—what is available from
the Paris Club is a reduction of up to 80 per cent year by year,
together with relief from the World Bank. At the end of the second
period there is a facility to write down the most outstanding
debt.
73. Are you satisfied that in practice the concerns raised
here are dealt with?
(Mr Fellgett) So far it has proved possible to
agree reasonable periods for these decisions and final implementation
following year-by-year write-offs.
(Mr Manning) Clearly, it raises a question as
to whether the country between the decision point and the completion
point, it having demonstrated virtue if you like, is helped through
the period. In the case of Uganda, all its multilateral debt service
up to the completion point is being met by a variety of bilateral
donor-funded initiatives.
74. My next question is about the eligibility criteria
for HIPCs. Are they unrealistically high? You will be aware that
they have been the subject of criticism. I understand that no
account is taken of the private commercial debts of debtor countries.
First, do you believe that the current eligibility criteria are
a reliable measure of debt sustainability? Secondly, is the threshold
set at a realistic level?
(Mr Fellgett) As far as eligibility is concerned,
the agreed initiative followed the outcome of analytic work by
staff primarily in the World Bank and IMF. There was then discussion
by all countries represented there by executive directors. One
has a layer of political compromise among a large number of countries
on top of the analysis made by staff. For example, Oxfam has produced
some cogently argued material suggesting that some of this is
not good enough both in terms of eligibility and sustainability.
Can a country like Mozambique really afford to pay as much as
20 per cent of its export earnings in debt service? First, there
is a risk that if we go back to the foundations and disturb the
compromise we will have no action. Even if the case for some change
is clear to go back to the drawing board and renegotiate will
result in the process stopping for a period. That is something
about which people from debtor countries whom I meet feel quite
strongly. They believe that even if the process does not give
them absolutely everything that they want on the whole it gives
them a lot and they prefer the process to run rather than stop.
Chairman
75. You also indicated that with all these targets and
the periods involved when an examination is made case by case
these criteria are modified. Is that the case with the two figures
that you have given?
(Mr Fellgett) The two sustainability targets are
that the total amount of a country's official debt should not
be more than twice its annual export earnings and that the amount
of its actual official debt payments in any single year should
not exceed 20 per cent. In practice, what my colleagues in finance
ministries in developing countries care most about are their annual
payments. What do they have to find out of their budgets this
year for debt servicing? In practice that figure is significantly
lower than 20 per cent in nearly all cases. What tends to happen
is that the 200 per cent target for the overall amount of debt
reduces debt to the point where the annual payments come in at
under 20 per cent because it is under 20 per cent over a very
long period, certainly in the case of Mozambique. That is not
so for every country. To go back to the Oxfam paper which argues
for a lower amount of debt for Mozambique, what has been agreed
on a preliminary basis—it must be confirmed—in the
boards of the World Bank and IMF is that the so-called completion
point at which Mozambique's debt is finally dealt with in a comprehensive
way rather than on the basis of a year-by-year write down will
arise prior to the earliest date at which the Cahora Bassa dam
can start to produce electricity again for export. It has the
practical effect that if the Cahora Bassa dam begins to produce
electricity again Mozambique's export earnings will go up but
no account would be taken of that in deciding the amounts. It
is all a question of what is tackled head on and what one plays
ad hoc. That is not to say that my friends in Oxfam, to whom I
spoke as often as I could in my previous job, think that the result
is perfect.
Ms King
76. Do you think that the threshold is at a realistic
level?
(Mr Fellgett) I think that in practice we can
deliver a realistic result.
Chairman
77. Mr Manning, are we doing anything to bring the Cahora
Bassa dam on stream?
(Mr Manning) Subject to checking, I do not think
that we are assisting under the bilateral aid programme. Perhaps
other funds are going in.
78. CDC was an investor?
(Mr Manning) I shall check.[5]
Ms King
79. There is also a question about some of the measurements
of debt sustainability, in particular the vulnerability factors
such as crop dependency. Can you give examples of other vulnerability
factors and in practice how they are taken into account?
(Mr Fellgett) To the best of my recollection,
so far the dependence of a country on a single export crop is
the main factor. Uganda and coffee is an example. The way that
the process is structured is that the debt sustainability target
is meant to be set in a range from 200 to 250 per cent. The remaining
amount of debt should be somewhere between two and two and a half
times annual export earnings. The vulnerability of the country
is an argument for pushing it to the 200 per cent end rather than
the other. That argument was used for Uganda. In addition, because
of the volatility of coffee prices the export earnings from coffee
were calculated over a period to avoid distortion of the figures
by taking one year rather than another. There was a pretty intense
discussion between my colleagues in the finance ministry in Kampala
and ourselves and other creditors, including the IMF and World
Bank, over that exceedingly obscure statistic. How does one smooth
coffee prices? Since then, on the whole the decisions have been
to give the maximum relief available under the initiative towards
the 200 per cent rather than the 250 per cent end. In a sense,
the "vulnerability" arguments have not been as important
as might have been thought. But I believe that it was very important
for Uganda as the first country; otherwise, I doubt whether it
would have done as well as it did under the process.
(Mr Westcott) There is one elaboration of the
eligibility criteria. Where one has a poor country that is HIPC
eligible but has very high exports, as some do, the additional
criterion of fiscal sustainability is introduced such that debt
payments do not exceed a certain level of a country's tax revenue.
This applies mainly to one country—the Ivory Coast - because
it has a very export-oriented economy. It was regarded as unfair
to penalise that country because of that since such a large proportion
of its GDP was in exports. It has been adapted in that way to
take account of some countries that are vulnerable in that respect.
(Mr Fellgett) To date, Guyana is the main beneficiary
of that change.
5 See Evidence, pp. 21-22. Back
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