2. UNITED KINGDOM
POLICY AND
THE MAURITIUS
MANDATE
2.1 An important marker . . .
Chancellor Gordon Brown's speech of 16 September 1997, known
as the Mauritius Mandate, laid down an important marker at the
annual meetings of the World Bank and IMF. The speech generated
debate and media attention at the Hong King meetings of the Bretton
Woods Institutions. It had a strong political impact, delivered
as it was at a time when other OECD creditors were openly dragging
their feet over HIPC negotiations for debt relief and proving
reluctant to mobilise resources for the HIPC Trust Fund.
Jubilee 2000 Coalition is delighted by the Chancellor's decision
to name the year 2000 as a deadline for decision-making on HIPC
countries. We also welcome the government's decision to write
off loans owed to DFID, and to make a contribution of $10.5 million
to reduce Uganda's debt to the African Development Bank. We were
encouraged by the Chancellor's call for economic policies to be
better tailored to the circumstances of individual countries,
and to include greater local partnership in decision-making. We
took heart from the Chancellor's announcement that in future export
credits to HIPCs would not be for "unproductive expenditure".
2.2. . . but more to do
If the problems we have outlined in part one are not resolved,
then the HIPC Initiative on current terms will not solve the debt
problems faced by the majority of HIPCs. While the Chancellor
has emphasised the importance of speeding up implementation of
the Initiative, the Mauritius Mandate does not propose a pace
much faster than that already projected by the IFIs—namely,
that three-quarters of eligible HIPCs should reach decision point
by the year 2000. We call on the Chancellor to promote the
recommendations on the HIPC Initiative contained in part one,
in his dealings with his counterparts in the Paris Club, the World
Bank and the IMF.
The Chancellor's public endorsement of the need to use the
millennium as a deadline has applied useful pressure on creditors
in OECD countries. However, the Initiative applies to a limited
list of countries defined as highly indebted by the World Bank
and the IMF. There are many impoverished and indebted countries—
including the Democratic Republic of the Congo (formerly Zaire),
Malawi, Somalia, Sierra Leone, Liberia, Vietnam, Laos, Angola,
Honduras and Peru—which have not even been assessed under
the HIPC Initiative.
Jubilee 2000 Coalition has used human development and fiscal
indicators to arrive at a longer and more realistic list of countries
in urgent need of debt relief. The Chancellor should call for
the criteria determining eligibility for debt relief to be made
fairer, more rational and just—and to include a much wider
range of highly indebted countries. He should do this by putting
forward proposals that take account of human indicators, giving
greater weight to fiscal indicators, and lower thresholds for
existing measures of sustainability.
2.3 Debt, export credits and arms sales
Two qualifications must be made in respect of the Government's
commitment not to support export credits to HIPCs for "unproductive
expenditure". Firstly, Jubilee 2000 Coalition noted that
the government was not providing export credit cover to these
countries anyway, and therefore the Chancellor's pledge, though
welcome, appears to be largely symbolic.
Secondly, it must be clearly understood that this pledge
is unlikely to affect the taxpayer-subsidised trade in arms, contrary
to the interpretation of many observers. In a recent letter to
the Coalition from the Prime Minister's Private Secretary, an
explanation was provided for the term. According to the Private
Secretary, "Ministers believe that the issue is about
what may be seen as wasted expenditures, of which excessive arms
sales might well be perceived as one example . . . The Government
does not, however, contend that "unproductive expenditure"
refers to arms sales per se". [12]Clearly,
the government may consider some arms exports to be productive,
and other wasted expenditures, e.g., prestige projects built at
the expense of basic health provision, as unproductive.
95 per cent of the debts owed to the UK, are owned to the
Export Credit Guarantee Department and research undertaken by
the World Development Movement indicates that in some years more
than half of these were to guarantee arms exports. These credits
for arms exports have been transformed into an unpayable debt
burden for some of the poorest countries. As the World Bank
has noted "export credits have become important instruments
of foreign trade policy.[13]
Taxpayer-backed credits are used to subsidise exporters and help
them gain competitive advantage in international markets.
The Government should seek to lessen the future debt burden
of impoverished countries by removing taxpayer subsidies granted
to arms exporters through the provision of DTI export credits.
Furthermore, we call on the Government to use the forthcoming
Summit of the G8 to forge an international agreement ending future
provision of taxpayer-backed export credits for international
arms sales. Finally, we urge the Government to follow the recent
precedent established for Russia in its Paris Club negotiations
with old Soviet debtors; namely to write off up to 90 per cent
of debts that originated as loans for military weapons, particularly
if these loans were made for Cold War purposes.
2.4 Political leadership
A resolution of the crisis of unpayable debt is thwarted
by the lack of political leadership among creditors. The succession
of initiatives to tackle the problem have invariably faltered
in a mire of indecision and inertia. This is exacerbated by the
fact that only the creditors have a role in the process, as we
indicate in part three, and by the wide scope for each creditor
to blame the others when initiatives fail, as demonstrated by
the burden-sharing problems of the HIPC Initiative.
Jubilee 2000 Coalition argues that strong political leadership
is required to solve the debt problem, and that the United Kingdom
is uniquely well-placed to provide it. The Mauritius Mandate has
established the Government's claim to lead in this area, and the
coincidence of opportunities such as the G8 summit in Birmingham
and the UK's presidency of the European Union provides a clear
basis for further action by the UK. However, we believe that leadership
has to come from the highest level. Jubilee 2000 Coalition
calls on the Prime Minister to place debt high on the agenda of
the G8 nations at their Birmingham summit in May. We ask him to
exert maximum pressure on other G8 leaders at the summit to take
a significant step toward the cancellation of the unpayable debt
of the world's poorest countries by the year 2000.
3. PROCESS
3.1. Introduction
In examining the processes whereby debt relief is negotiated
and agreed, whether it be under the HIPC Initiative, the Paris
Club procedures of emergency procedures such as those under which
South East Asian economies are currently receiving assistance,
it is necessary to examine first principles. These are:
(i) that international lending, borrowing and debt negotiating
processes are not governed, regulated or informed by an international
legal framework;
(ii) that private international borrowing frequently becomes,
by default, sovereign government borrowing—thereby transferring
risk and costs to taxpayers;
(iii) that creditors use the threat of barring access
to the capital markets as a weapon to enforce sovereign governments
to repay loans—whether these be private, public, odious
or unpayable;
(iv) that in the absence of a fair, open and independent
process for negotiating debt relief, negotiations are conducted
in secret, with little transparency;
(v) that decisions to make or accept international loans
are also invariably made in secret;
(vi) that such secrecy aids and abets corrupt elites—both
in creditor and debtor communities:
(vii) that partly as a result of this closed and unregulated
process, negotiations for loans and debt relief are driven and
controlled by creditors—whether they be private banks through
the London Club; OECD governments (the Paris Club); non-Paris
Club creditors (Russia, the Sudan, Libya); or the multilateral
financial institutions (IMF, World Bank, African Development Bank
etc.,);
(viii) that in this respect international debt relief
negotiations differ radically from domestic bankruptcy procedures
where a receiver arbitrates between debtor and creditor;
(ix) that these secretive, unregulated procedures, unlike
domestic bankruptcy procedures, or the US local government bankruptcy
code, do not permit for a line to be drawn under unsustainable
debts, and for debts to be brought to an end;
(x) that creditors are represented in negotiations by
the IMF, itself a major creditor, and at the same time the agent
of all creditors, including private banks;
(xi) that consequently, IMF negotiations with the debtor
nation are driven by the interests of creditors; and the interests
of creditors do not stretch to foregoing future debt service on
outstanding loans;
(xii) as a result, there is little pressure on creditors
to incur losses through debt write-offs: instead debts are kept
"on the books" and access to capital markets is denied
by the IMF;
(xiii) at the same time creditors, in times of general
financial collapse, are protected by IMF bail-outs;
(xiv) this protection introduces a "moral hazard"
into lending by de-linking risk from economic decision-making;
(xv) this encourages unwise lending and lifts constraints
on borrowing elites;
(xvi) as a result, debts build up, and debt negotiations
are drawn-out, take on a labyrinthine complexity and become intractable.
The absence of legal disciplines on international creditors
and borrowers is a critical flaw. It explains why the developing
country debt crisis of the early 1980s has taken decades of protracted
negotiations, used up precious, scare capacity in debtor country
finance ministries, and culminated with the poorest countries
even deeper in debt than when negotiations began.
3.2 Recent developments
Indeed the malaise has spread. South Korea is only the most
recent example of careless lending—another was the Tesobono
(bond) crisis in Mexico in 1995. George Soros, the international
financier, has now joined the chorus of voices calling for regulation
of international creditors.[14]
High levels of debt—the debt overhang—place some
limits on the creditworthiness of governments, and their capacity
to borrow. However even these countries are encouraged by the
IMF and World Bank to borrow new loans to pay off old loans. Although
these new loans may be concessional, currency fluctuations and
commodity price volatility invariably increase their long-term
cost to debtor countries. Anecdotal evidence from indebted countries
indicates that even the debt overhang does not appear to inhibit
private lenders from offering loans and other credit facilities
for purchasing exports—often military weapon exports—from
richer countries.
Professor Kunibert Raffer has argued that international creditors
do not only operate in a legal vacuum. They are also protected
from risk by the IMF and not subject to the lash of market forces
when making "bad loans". Again the example of South
Korea is appropriate here. In times of crisis, when careless lending
precipitates general financial collapse, creditors enjoy a level
of protectionism from OECD governments (through the IMF), not
granted to debtor countries. In the United States in 1998 this
"welfare" for bankers has caused a backlash against
the replenishment of funds for the IMF by Congress. Thomas L Freidman
in the International Herald Tribune of 19 January, 1998 called
on the US Treasury Secretary, Mr Robert Rubin to make sure that
"any US bank that was involved in loans to Asia and now
wants to share in the IMF bailout, has to take a haircut ".
Nobel laureate Milton Friedman has accused the International Monetary
Fund of helping create the financial crisis by bailing out troubled
economies, and encouraging international investors to take undue
risks.[15]
3.3 The way forward
Jubilee 2000 Coalition believes that existing procedures
are unjust and unfairly biased against debtor nations. We are
calling for a fair, transparent process for debt negotiations.
Furthermore we want to see far greater transparency in loan agreements
between OECD governments and developing countries, and between
the multilateral institutions and borrowing countries. Civil society
should be actively involved in decisions taken on long-term loans,
the projects and purposes of the loans, and the likely effects
of these projects and loans on the environment and on the local
economy. This is particularly important because the cost of such
loans invariably falls on the poor, as resources are diverted
from clean water, health and sanitation—into debt repayment.
We note that in the past such an independent and transparent
procedure was adopted for negotiating debt relief for Germany
in 1953. The London Accord of that year consisted of an independent,
fair process, overseen by a "receiver" who enjoyed the
confidence of both debtor and creditor—and which resulted
in generous debt relief for the then West Germany. The Accord
ensured that Germany would not be expected to devote more than
5 per cent of her export revenues to future debt service. Today
Germany and her Allied creditors sit on the Board of the IMPF
and insist that countries as poor as Mozambique devote 20 per
cent of future export revenues to debt service.
The British government should take the lead and present
proposals to future meetings of the IMF and World Bank Boards
for a fair, more independent and transparent procedure for negotiating
debt relief for the poorest countries.
Jubilee 2000 Coalition
January 1998
7 See "Debt Relief and Poverty Reduction: new
hope for Uganda." Oxfam International position paper. September,
1996. Back
8 The present
value (PV) of a debt is the amount a debtor would need to have
in a bank account today-earning interest at the market rate-so
that all the principal and interest payments could be made from
the account as they came due. Back
9 World
Bank, World Debt Tables, 1994-95, volume 1, page 40. Back
10 Treasury
Select Committee, Fourth Report 1996-97: International Monetary
Fund, pages 24-31. Back
11 IMF,
The HIPC Debt Initiative, September 24, 1996, page 2. Back
12 Letter
from Philip Barton, Private Secretary, 10 Downing Street, to Ann
Pettifor, 19 December 1997. Back
13 World
Bank, World Debt Tables 1996. Back
14 Financial
Times, 31 December 1997. Back
15 Observer,
18 January 1998. Back
