Examination of witnesses (Questions 80 - 97)
TUESDAY 17 FEBRUARY 1998
MR ROBIN
FELLGETT, MR
RICHARD MANNING,
MR ANDREW
STEELE, AND
MR NICK
WESTCOTT
Chairman
80. What crop were you considering in the case of Guyana?
(Mr Fellgett) I think that it is bauxite! I am
reminded that it also exports sugar. Guyana was the beneficiary
of the process that Mr Westcott has described. It has a very open
economy where a lot is earned from exports. Debt is a fiscal problem;
it is a burden on government revenues, as it is everywhere. Adaptations
have been agreed. Guyana is to date the sole, and perhaps will
be the main, beneficiary of that adaptation.
Dr Tonge
81. In relation to those eligibility criteria, when the
IMF put together the recent big package of assistance for Indonesia
did that fulfil them? I know that Indonesia is not a HIPC, but
I should like to know as a matter of interest.
(Mr Fellgett) I am pretty sure that the answer
is no, but I will have to check the figures. Indonesia was very
different. It received no debt relief; it had traditional short-term
IMF assistance.
82. As a lay person who does not understand these matters,
I am amazed how quickly the package has been put together to relieve
the suffering of Indonesia at a time when poor old Mozambique
is bumping along the bottom waiting for the Paris Club to sort
itself out. It seems to be a rather sad contrast.
(Mr Fellgett) They are very different cases. The
Government agree with that contrast.
83. Presumably, the UK Government contributed to that
IMF package of assistance?
(Mr Manning) One key difference is that whatever
is being done for Korea, Indonesia and so forth is non-concessional
and is all at commercial rates, whereas under the HIPC initiative
debts are being written off and concessional aid is being provided.
84. It is done at commercial rates, but presumably the
British Government has put some money into it via the IMF and
World Bank?
(Mr Manning) The World Bank finances it by borrowing
on the markets.
(Mr Fellgett) It does not cost the taxpayer a
penny.
Chairman
85. Let us turn now to the Mauritius Mandate. Ambitious
targets have been set by the Chancellor. Do you believe that these
targets are realistic? I imagine that since you serve the Chancellor
your answer will be "yes", but I would be very interested
to know what misgivings you have about the idea of all eligible
poor countries embarking on the process of securing debt relief
by the year 2000, and for three-quarters of eligible countries
to have reached decision points by the year 2000. Having regard
to the tortuous nature you described this morning and the snail's
pace at which the Paris Club works you must be very doubtful about
the latter's capacity to meet those objectives?
(Mr Fellgett) I would be cautiously optimistic
that the problems that have emerged in the case of Mozambique
will not be repeated elsewhere. Guyana was dealt with very speedily.
86. So, you have 38 to go!
(Mr Fellgett) A few others have been dealt with.
I would describe the targets as the best sorts of targets, in
that they are achievable but not easily. There is no point in
having easily achievable targets. The idea is to challenge the
international community to move forward the process. On the other
hand, there is no point in having a target that is patently not
achievable. They have the classic status of being challenging
but achievable. It is do-able but certainly not a foregone conclusion.
It will require political commitment on behalf of the international
community, which has been a bit short in the case of Mozambique.
87. In his Mauritius speech the Chancellor also used
the phrase "productive expenditure", to which we have
already made reference. Can you define that? For example, does
it include education?
(Mr Fellgett) The answer is "not easily".
It is a bit like the proverbial elephant: it is easier to recognise
when you see it than describe it in advance. Clearly, education
would come into that category and a priori investment in
infrastructure is productive investment, but if one already has
a road from A to B a second one will not be so regarded. It is
very hard to define "a priori ". We have been
very clear that excessive spending on military matters is not
in our view productive expenditure. That is one of the targets
of the policy. In practical terms, bearing in mind that a country's
investment needs vary so much depending on the state of development,
infrastructure and so on, rather than operate on some rule-driven
definition the way to proceed is primarily to look at the kind
of sectoral investment programmes that countries often agree with
the World Bank and bilateral donors, not second guess them. The
aim is to support such programmes with official credits where
they are available.
88. It is a strange definition, is it not? Surely, "productive"
means that one will generate in the country in which one invests
sufficient foreign exchange—because that is what one is
concerned with—to service the investment or loan and repay
its capital. If one is to include things like infrastructure,
education and possibly health it is difficult to see how they
generate foreign exchange. Roads may do so but not education.
(Mr Fellgett) It depends on whether it is short
or long term.
89. Is this not a recipe for getting into even more debt?
(Mr Fellgett) I believe that it depends on the
country. To take a hypothetical example, if what is being exported
is a British contractor building schools, which may come into
this category, they will not earn a commercial return by charging
pupils. The issue is much more that by enhancing the education
of people they are better able to contribute to the economy and
therefore in the long term the economy can generate the necessary
foreign exchange to repay. For most of these countries because
of their heavily indebted status export credits are not available.
One could not justify that kind of credit on what were intended
to be commercial terms.
90. It would have to be grant, would it not?
(Mr Fellgett) Yes.
(Mr Manning) Export credit means that one is providing
exports, so for much of health and education it is not very relevant
anyway. There is no real import content in most of primary education
in Africa. What one may be looking at possibly are the more high
tech ends of the spectrum where one will be rather cautious about
providing money at high interest rates to poor countries for hospitals
and so forth.
91. But presumably the Department for International Development
would be thinking only of building schools or supporting education
and health with grant money, would it not?
(Mr Manning) Yes. Many countries would not be
interested in borrowing offshore to finance that kind of expenditure.
However, I would draw a distinction between the idea of financing
only enclave projects that have direct exports and financing productive
infrastructure which should be generating economic growth that
in turn generates foreign exchange. Although the power station
itself may not earn foreign exchange it may be removing a supply
constraint.
Mr Khabra
92. In the Mauritius Mandate the Chancellor set targets
for securing debt relief. How will the Government pursue those
targets?
(Mr Fellgett) Extremely actively. The Chancellor
launched that proposal with his colleagues at the Commonwealth
Finance Ministers meeting. The conclusions of that meeting were
pretty supportive of what he had suggested. That initiative had
the support of a significant number of countries round the world.
Going via Bangkok, a few days later he had meetings with the IMF
and World Bank in Hong Kong. He put the same proposals to his
colleagues. He did not get as much support there. He continues
to raise this with all his colleagues in G7. We as officials do
the same with our opposite numbers. He is committed to raising
it with his colleagues in Europe. It is a matter of exerting continual
pressure on creditors who may have some doubts.
93. Will the Government be putting debt relief high on
the agenda at the forthcoming G8 conference?
(Mr Fellgett) It will be discussed there, as the
Chancellor has made clear.
Chairman
94. Mr Steele, you have several reasons for expecting
repayment. First, you want to get back the amount that you have
lent; secondly, you want the interest on that capital; and, thirdly,
you seek also to recover penalty clauses. The Antigua Government
has made representations to this Committee to suggest that a penalty
clause of 0.5 per cent above LIBOR on a daily basis on an outstanding
debt has increased the original capital lent from US$2 million
to US$5 million. Although it has repaid your loan, both capital
and interest, it now owes US$5 million because of extortionate
(as they describe it) interest payments. Is this common practice?
(Mr Steele) I believe that that arises under a
Paris Club agreement. Nevertheless, we are aware of the case.
The answer to your question is that it is common practice for
us to charge so-called delay interest on countries that do not
pay by the due date under the agreement.[6]
95. Is this explicitly stated in the documentation?
(Mr Steele) Certainly it is explicitly stated
in the bilateral agreements that we sign pursuant to Paris Club
debt rescheduling meetings. I would have to consult at headquarters
about precisely what was provided in the agreement with Antigua.
I suspect that this falls outside the Paris Club arrangements.
96. Perhaps you will let us know.
(Mr Steele) Yes.
Dr Tonge
97. That has come as a bombshell. I was unaware that
penalty clauses could increase a debt to that extent. How does
the Mauritius Mandate fit in with that? Does it have penalty clauses
in the event that these countries are a bit late with their payments?
(Mr Steele) If Mr Wells is correct and the effect
of the delayed interest clause is to increase the debt from US$2
million to US$5 million I suggest that it must be late by more
than a few days. In principle, these are international treaties
which are signed with the debtor countries. The payment dates
are clearly stated in those agreements. We invoice them six weeks
before the due date of payment. Obviously, if there is any mix-up
in banking arrangements, as occasionally happens, and it is a
matter of a few days we may waive the interest, but we would not
feel able to do away completely with the delay interest clause.
Chairman: The Committee will examine the nature of
the debts in some detail during the course of its inquiry. There
are such things as penalty clauses and changes in exchange rates.
Some of these loans extend over 40 or 50 years. Borrowing a Swiss
franc 50 years ago and repaying it today are very different propositions.
Thank you for helping the Committee hugely this morning with your
time and expertise. We hope to issue a helpful report on this
subject in due course, but we have a good deal of investigating
to do.
6 See Evidence, pp. 22-23. Back
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