Supplementary Memorandum from HM Treasury
NOTE TO
THE INTERNATIONAL
DEVELOPMENT SELECT
COMMITTEE ON
THE COST
OF DEBT
RELIEF TO
THE UK
The total cost of debt relief to the UK is made up of contributions
in four separate areas.
2. The first is the cost of cancelling ODA loans to the poorest
countries. Since 1978, the UK has written off about £1.2
billion of old ODA loans. This relief has all been given on a
purely bilateral basis, and has been funded through the UK's aid
programme. Additionally, the Secretary of State for International
Development announced at the Commonwealth Finance Ministers meeting
last year that she would write off a further £132 million
of ODA loans to middle-income Commonwealth countries, provided
they were committed to pro-poor policies. So far, £25 million
of this has been written off.
3. The second set of costs to the UK are the costs of forgiving
export credit debts owed to ECGD. This is the debt relief that
is given through the Paris Club and the HIPC initiative. There
is a problem in estimating these costs as we do not yet know the
precise level of debt relief that will be granted to each country
that qualifies for debt relief.
4. At present there are thought to be twenty poor countries
that are eligible for debt relief under the HIPC initiative (i.e.,
up to 80 per cent relief on eligible debt) and it is not known
how many countries will receive debt relief on Naples terms (i.e.,
up to 67 per cent relief). The number of countries that are granted
debt relief on either terms could always change as each country's
eligibility for debt relief is determined separately as they near
their decision point. Unpredictable changes in economic or political
fortunes, for example, could mean that either more or less than
twenty countries could finally be granted HIPC debt relief.
5. The majority of countries eligible for debt relief have
not yet had a decision point, as they have not had debt sustainability
analyses carried out by the IMF and World Bank. In these cases
it is not at all clear what level of debt relief they will require
to reach debt sustainability.
6. Even in the cases of countries that have had debt sustainability
analyses carried out, and have reached their decision point, the
final level of debt relief that will be granted at the completion
point is not certain. This is because the level of debt relief
required for debt sustainability in any particular case depends
on factors such as the country's future level of exports and future
commodity prices. As these can only be predicted, they are subject
to inaccuracies and change. The level of debt relief that will
be needed at the completion point could therefore be very different
from that agreed at the decision point.
7. The vast majority of completion points are more than three
years away, and, so far, only six countries have had a decision
point. the variables are therefore huge and hence the final cost
of debt relief to the UK cannot be estimated with any degree of
accuracy.
8. We can only know for certain the cost of granting debt
relief to Uganda under the HIPC initiative as they have just had
their completion point. This is £10.4 million. To give some
further indication, however, ECGD is owed about £750 million
by the twenty countries presently thought to need HIPC relief.
Should all these countries be granted a debt reduction of 80 per
cent, it would therefore cost the UK about £600 million.
9. The third area in which the UK spends money on debt relief,
is through its contributions to the IMF and World Bank. The money
that the IMF uses to fund ESAF programmes and the HIPC initiative
comes from the ESAF Trust. The UK has been contributing to this
fund since 1988, when it pledged to donate £377 million.
The UK remains one of the largest contributors to this fund, and
in 1997-8 it donated £34 million.
10. To further aid the IMF in funding the HIPC initiative,
the UK is willing to use the money attributable to us from the
Special Contingency Account (SCA) 2, which the IMF holds. This
is some £20 million. As the Chancellor stated in his Mauritius
Mandate, the UK is also ready to agree to the sale of some of
the IMF's gold reserves in order to meet the financing needs of
HIPC.
11. The World Bank has set aside $ billion of its net income
for financing the HIPC initiative. As a 5 per cent shareholder
in the World Bank, $100 million of that money is attributable
to the UK. The UK makes separate, additional contributions to
IDA, which also contributes to debt relief in a variety of ways.
The total UK commitments to IDA in 1997-98 were £180 million.
12. The fourth set of costs to the UK are the bilateral donations
that it has made to ensure that the HIPC initiative keeps moving
forward. So far, we have donated $10.5 million to the African
Development Bank to help meet their share of debt relief to Uganda;
$10 million to help meet the financing gap that arose in funding
debt relief for Mozambique; and £20 million to the HIPC trust
funds for Mozambique and Tanzania to help them meet their debt
service requirements to the IMF and World Bank. It is impossible
to predict the bilateral contributions of this nature that may
have to be made in the future.
NOTE TO
THE INTERNATIONAL
DEVELOPMENT SELECT
COMMITTEE ON
THE DETAILS
OF MOZAMBIQUE'S
DECISION POINT
On 7 April the Executive Boards of the IMF and World Bank
approved Mozambique's decision point under the HIPC initiative.
Directors approved an immediate decision point, a completion point
in mid-1999, and debt sustainability targets of 200 per cent debt
to exports ratio in Net Present Value (NPV) terms and 20 per cent
debt service ratio. This implies a reduction in Mozambique's stock
of debt of $1.442 billion (NPV) at the completion point. This
translates into debt service relief of $2.9 billion over time.
2. This decision was possible following the confirmation
that the full financing of Mozambique's debt relief had been agreed.
The outstanding financing gap has been met through contributions
from the World Bank, the IMF and bilateral donors. The UK led
the way with its donation of $10 million, which was announced
on 17 February by the Chancellor and the Secretary of State for
International Development.
3. The debt relief agreed on 7 April is consistent with the
agreement by the IMF and World Bank Boards in September at the
preliminary discussion of Mozambique's eligibility under the HIPC
initiative.
4. This relief is part of a broader effort, including other
ongoing traditional debt relief mechanisms. The overall effect
of all these debt relief mechanisms will be to reduce Mozambique's
external debt from US$5.6 billion in NPV terms in late 1996 to
US$1.1 billion at the completion point in 1999. Debt service payments
will be reduced to below 20 per cent of export earnings. Mozambique's
debt to exports ratio will be reduced to 200 per cent, compared
by 466 per cent without HIPC relief.
HM Treasury
23 April 1998
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