House of Commons - International Development

Select Committee on International Development Fourth Report

FOURTH REPORT

The International Development Committee has agreed to the following Report:—

DEBT RELIEF — FURTHER DEVELOPMENTS

INTRODUCTION

1. The International Development Committee has produced two reports in the current Parliament examining the policy of the UK, the World Bank and the International Monetary Fund (IMF) on debt relief for heavily indebted poor countries.[1] In our first Report, 'Debt Relief', published in advance of the G8 summit[2] at Birmingham in May 1998, we examined the terms and conditions of the Heavily Indebted Poor Countries (HIPC) Initiative, the policy of the United Kingdom Government on the relief of debts owed to the Department for International Development (DFID) and the Export Credits Guarantee Department (ECGD), and the question of conditionality in debt relief. The Government's response to that Report was received and published in July 1998.[3] In our second Report on the subject, 'Debt Relief and the Cologne G8 Summit', we considered the case for significant modifications to be made to the HIPC framework. We concluded that the HIPC Initiative was on the brink of failure, falling short of its promise of a permanent, sustainable solution to the problem of unpayable debt. We received the Government's response to that report in October 1999. It is published as an Appendix to this Report.

2. Shortly after the publication of our Report on Debt Relief and the Cologne G8 Summit, the Finance Ministers of the G8, the richest countries in the world, met at Cologne. Debt relief was, as had been the case a year previously in Birmingham, high on the agenda. The Finance Ministers agreed a package of reforms aimed at reviving the HIPC Initiative, allowing for the provision of faster, deeper and broader debt relief for the poorest countries in the world. The richest countries in the world confirmed their commitment to bring an end to the problem of unpayable debt, and called on the IMF and World Bank to present at the autumn meetings proposals for strengthening the link between debt relief and poverty eradication.

3. The purpose of this Report is to summarise and comment briefly upon the main changes to the HIPC Initiative which were agreed in principle by the G8 at Cologne, and formally endorsed at the annual meeting of the IMF and World Bank in Autumn 1999. We also consider progress made internationally in reaching agreement on how the enhanced HIPC Initiative is to be financed. Finally, we examine recent developments in UK policy on the relief of bilateral aid debt, and export credit guarantee debt, owed to the UK by Heavily Indebted Poor Countries (HIPCs), and on the provision of export credit guarantees to poor countries for 'unproductive' expenditure.

4. In the last Session of Parliament, we heard two oral evidence sessions on the policy of the UK towards the IMF and World Bank. In July 1999, we heard evidence from Mr Myles Wickstead, UK Alternate Executive Director, IMF/International Bank for Reconstruction and Development (IBRD), Mr Barrie Ireton, Director-General (Programmes), Department for International Development (DFID), and Ms Margaret Cund, Head of International Financial Institutions, DFID. In October 1999, we heard evidence from Mr Stephen Pickford, UK Executive Director, IMF / IBRD, and Mr Paul Spray, Economics Adviser, International Financial Institutions Department, DFID. At those two meetings we discussed a wide range of issues relating to the activities of the IMF and World Bank and the priorities of the UK towards them. Several non-governmental organisations have submitted written evidence to us since the publication of our Report on 'Debt Relief and the Cologne G8 Summit'. We were grateful to those who gave oral and written evidence, and, in publishing it with this Report, we commend the evidence to the House.

THE COLOGNE G8 AND THE ENHANCED HIPC INITIATIVE

Strengthening the Link Between Debt Relief and Poverty Eradication

5. The contribution of debt relief to poverty eradication has been a central tenet of the Jubilee 2000 campaign for the cancellation of unpayable debt. In our previous reports on the subject, we have joined them in calling for improvements to the Initiative to increase its potential impact on poverty, and for enhancements to make poverty eradication central to its purpose. The UK Government has also emphasised the role of debt relief in its broader development policies. For example, in its submission to the second phase of the HIPC review, the Government stated that "Debt relief should provide an opportunity to invigorate the entire government anti-poverty programme. It should not be seen as funding a separate, add-on operation".[4] The G8 at Cologne stated explicitly for the first time, with strong support from the UK Government, that the central purpose of debt relief was to free up resources for investment in programmes to tackle poverty. We welcome this statement and the role of the UK in securing a renewed high-level commitment of the world's leading industrialised nations to poverty eradication in the poorest countries in the world.

6. At the Cologne G8 summit, the G8 Heads of Government called on the IMF and World Bank to prepare, in time for their annual autumn meeting, proposals for improved mechanisms for linking debt relief to poverty reduction.[5] At the annual meeting, donors agreed to a set of modifications to the terms and conditions of the HIPC Initiative to bring about such changes. One key element of these modifications is the replacement of the Enhanced Structural Adjustment Facility (ESAF) with a new Poverty Reduction and Growth Facility (PRGF). The change in name reflects the new recognition by the IMF of its role in poverty reduction, and of the fact that economic growth is no longer to be accepted as an end in itself, but as a means to reduce poverty.

The Poverty Reduction and Growth Facility

7. The PRGF will be underpinned by a Poverty Reduction Strategy Paper (PRSP), to be agreed in each country between the IMF, World Bank and the government (on the basis of broad-based consultations with civil society). PRSPs will be "comprehensive, nationally-owned, and outcome-oriented",[6] and, within them, "the complementarity of macroeconomic, structural and social policies will now be given greater recognition, and the PRSP will provide a new vehicle to integrate these policies — including their costs — in a mutually reinforcing manner".[7] It is intended that in the longer term the PRSP, which is being introduced first only to HIPCs, will be extended to form the basis of all countries eligible for PRGF and IDA[8] assistance.[9]

8. The UK Government "warmly welcomes the adoption by the IMF and World Bank of the proposal to develop Poverty Reduction Strategies",[10] which will "integrate social and macroeconomic policies, as well as providing a framework within which we can ensure increased and more effective fiscal expenditures for poverty reduction, with better targeting of budgetary resources, especially on social priorities in basic health and education".[11] We join the UK Government in welcoming the recent steps taken towards an improved poverty-focus and greater emphasis on developing country ownership of IMF-supported economic reform programmes.

9. The requirement that the PRSP be owned jointly by the developing country government (with the IMF and World Bank) brings with it a promise of broad-based consultations with civil society representatives in each country. In principle this is obviously a step in the right direction for a process which in the past has been criticised for its lack of transparency, and for the apparent forcing of reform priorities onto developing country governments by the IMF and / or the World Bank. In practice, however, there are questions about the extent to which the new philosophy will be reflected on the ground.

10. At the very least there is a risk that HIPCs will find difficulties in developing the capacity genuinely to participate in the design of the PRSP, and that this will lead to delays in their receipt of debt relief. The update on costing the enhanced HIPC Initiative, prepared by the staffs of the World Bank and IMF, stated that "Based on actual performance under reform programs and the pace at which countries are able to advance in their PRSP process, some decision points may be reached later than envisaged".[12] The replacement of the ESAF with the PRGF as the vehicle for conditionality attached to debt relief must not lead to unnecessary delays in the provision of debt relief to Heavily Indebted Poor Countries. The PRGF must be supported by programmes to assist in the building of negotiation and policy expertise within developing country governments in order that they can play a full and effective role in the process.

11. The PRSP will include targets, the attainment of which will signify the Completion Point under the HIPC Initiative. This replaces the previous system, where conditionality was based on the adoption of two consecutive programmes of reform under the ESAF for a particular length of time (up to three years for each of the two stages) depending on the country circumstances. We have, in previous reports, argued in favour of the introduction of such 'floating completion points', on the basis that they offer increased certainty and clarity about exactly what conditions must be fulfilled in order for the Completion Point to be reached, and that they would provide an incentive for rapid reform and good performance. Stephen Pickford reiterated these benefits of the floating completion point when he gave oral evidence to us.[13] This will, however, only be a positive development if the principles of consultation which underpin the new PRSPs are fully adhered to.

12. In a paper on the enhanced HIPC Initiative, prepared by IMF staff, it is stated that the IMF would expect the PRSP to be in place in HIPC countries by the time they reach their Decision Point, but that in some cases the Decision Point could be agreed whilst the process of producing the PRSP was still in progress. In all cases, the paper states, the PRSP will be expected to be in the process of being implemented by the Completion Point.[14] This raises interesting and important questions about the relationship between the proposed broad-based consultations with civil society and the rules governing the timing of the delivery of debt relief under the enhanced HIPC Initiative.

13. We are concerned that there appears to be a potential conflict for HIPCs under the new scheme, between the incentive for speedy attainment of reform targets, upon which the timing of debt relief will depend under the 'floating completion point' system, and the requirement for full consultation with civil society representatives in the design of reform programmes under the Poverty Reduction and Growth Facility. It does not take a great leap of imagination to see which of these will be likely to be sacrificed in practice, with HIPCs rushing the consultation process in order to receive debt relief quickly. We invite DFID to comment upon the ways in which HIPCs will be encouraged, under the new Poverty Reduction and Growth Facility, to carry out genuine broad-based consultations with civil society in the preparation of the Poverty Reduction Strategy Papers.

14. It is intended that the PRGF / PRSP process will lead to improved cooperation between the IMF and other donors, in particular the World Bank.[15] This is obviously to be welcomed. We would question the need, however, for another coordinating mechanism to add to the new United Nations Development Assistance Framework and the World Bank's recently developed Comprehensive Development Framework. It is not clear which of these will take precedence in countries which often lack the necessary capacity to negotiate with the various multilateral and bilateral agencies on their separate strategy papers and plans, or how these documents and negotiation processes will relate to one another. In its response to this Report, we recommend that DFID comment upon the relationship which is envisaged between the United Nations Development Assistance Framework, the World Bank Comprehensive Development Framework, the new Poverty Reduction Strategy Paper, and DFID's own Country Strategy Papers.

Debt Sustainability

15. The other key set of changes to the HIPC framework to be agreed at the annual meeting of the IMF and World Bank was a set of reductions in the various sustainability ratios — the levels of debt in relation to export (or fiscal) revenues deemed to be sustainable. The target ratio for most countries is a measurement of the net present value (NPV) of the total stock of public and publicly-guaranteed external debt owed by the government, compared to their annual export revenues. This, under the original HIPC Initiative, was supported by a target relating debt service obligations to export revenues. For countries with very open economies, an alternative, 'fiscal', sustainability ratio may be applied instead of the export ratio.

16. Under the original framework, the debt / export targets for each country were set at between 200 and 250 per cent, with debt service / export targets in the range of 20 to 25 per cent. The debt / export ratio has now been reduced to a single target of 150 per cent for all HIPCs. The fiscal ratio was, under the original framework, set at 280 per cent, with qualifying criteria for relief through this 'fiscal window' set at a minimum ratio of export revenues to GDP of 40 per cent, with fiscal revenues equivalent to at least 20 per cent of GDP. These targets have been revised, and under the enhanced HIPC Initiative, the fiscal target has been reduced to 250 per cent, and the qualifying criteria are now set at 30 and 15 per cent respectively.[16]

Table 1: Definitions of Debt Sustainability
Original HIPC Framework	Enhanced HIPC Framework
Debt / Export Target: target level of net present value of debt equivalent to 200-250 per cent of export revenues, and debt service obligations equivalent to 20 to 25 per cent of export revenues. Precise targets decided case by case on the basis of an analysis of 'vulnerability factors' affecting the ability of the debtor country to meet its obligations.	Debt / Export Target: single target for all countries: net present value of debt equivalent to 150 per cent of export revenues. No consideration of 'vulnerability factors'.
Fiscal target: net present value of debt equivalent to 280 per cent of fiscal revenue, for countries with very open economies. Qualifying criteria for fiscal target: ratio of exports to GDP of at least 40 per cent and fiscal revenues equivalent to at least 20 per cent of GDP	Fiscal target: net present value of debt equivalent to 250 per cent of fiscal revenue, for countries with very open economies. Qualifying criteria for fiscal target: ratio of exports to GDP of at least 30 per cent and fiscal revenues equivalent to at least 15 per cent of GDP
Amount of Relief Expected to be Provided: US $12.5 billion (NPV)	Amount of Relief to be Provided: US $ 27 billion (NPV)
Number of Countries Expected to Benefit from Multilateral Relief: 29	Number of Countries Expected to Benefit from Multilateral Relief: 36

Sources: World Bank, 5 January 1999, 'Update on HIPC: New World Bank / IMF Poverty Reduction Program Enhances Debt Relief', and IMF, 'Debt Relief for Low-Income Countries — the Enhanced HIPC Initiative' (IMF Pamphlet Series No. 51, 1999)

17. The reductions in the sustainability ratios will significantly increase the amount of debt relief provided under the HIPC Initiative for those countries which were already expected to receive relief, with seven extra countries, which had not previously been expected to qualify, gaining access to the process (Benin, Central African Republic, Ghana, Honduras, Laos, Malawi, Senegal and Togo).[17] There will also be a retroactive assessment of the eligibility for further relief of those countries which had already reached their Decision Points prior to the Cologne G8 Summit of June 1999.

18. The UK Government has expressed disappointment in the small reduction in the fiscal ratio and the retention of the qualifying criteria for relief through the 'fiscal window'.[18] It was, however, satisfied with the net result of the reduction in both targets. Barrie Ireton explained that "to get the two ratios down a bit ... was much less beneficial in general in terms of the amount of debt relief which the countries would become eligible for, which is why, in the concluding stages of Cologne, we went for a substantial reduction in the export ratio which had much more support and only a very modest reduction, at the end of the day, in the fiscal ratio".[19]

19. The Government stated in its response to our Report on Debt Relief and the Cologne G8 Summit that "the reduction in the export ratio from a range of 200-250 per cent to 150 per cent greatly improves the prospect of countries achieving a sustainable exit from their debt problems".[20] We agree, and we congratulate the Government on its role in securing it. We also share the disappointment of the Government that the reduction in the fiscal ratio did not go far enough.

20. Under the original HIPC framework, the precise debt / export sustainability target was decided for each individual country on the basis of a vulnerability analysis. This included a consideration of various 'vulnerability factors' (such as, for example, single-commodity dependency) which may affect the ability of the country to sustain its debt burden. Clearly there is a balance to be struck between flexibility on the one hand, and speed and simplicity on the other. Of course there is still scope for unilateral cancellation of additional official bilateral and commercial debts, beyond those written off within the HIPC Initiative process, such as has been promised by the UK and others.[21] This offers scope for flexible treatment of countries within the overall debt relief package, if not in the provision of multilateral debt relief.

21. The introduction of a single sustainability target for all HIPCs will, however, mean that the vulnerability analysis will no longer play a part in decisions on the amount of multilateral debt relief to be provided. In previous reports we have argued, for example, that the burden of domestic debt must be taken into account in any consideration of the ability of the country to sustain its external debts. It has also been argued that the social spending needs of each country must be considered as part of any debt sustainability analysis.[22] We believe that the loss of flexibility resulting from the decision to set a single sustainability target for all HIPCs, rather than a range of targets, will be outweighed by the benefits of the increased amount of debt relief to be provided, and the improvements in the simplicity, clarity and speed of the process.

The Timing of Relief under the Enhanced HIPC Initiative

22. In addition to the reduction in the sustainability ratios which govern the amount of relief to be provided, agreement was reached at the autumn meeting of the IMF and World Bank on the provision of multilateral debt relief in the 'interim period' between the Decision and Completion Points.[23] This means that countries in the HIPC process will begin to receive relief of their multilateral debts, as well as their bilateral and commercial debts, after a maximum of three years rather than the maximum of six years as under the original framework. The Government has welcomed this agreement,[24] and the provision of interim relief by the multilateral creditors is in line with the arguments we set out in our previous reports. We note, however, that it does not go as far as to abolish completely the second (maximum three-year) tranche of conditionality, which remains in place.

Implementation of the Enhanced HIPC Initiative

23. Seven countries have so far received multilateral debt relief under the Initiative: Uganda, Bolivia, Burkina Faso, Guyana, Côte d'Ivoire, Mozambique and Mali. To date, the eligibility for relief of the debts of a total of 14 countries has been considered by the Executive Boards of the IMF and World Bank. It is expected that by the end of 2000, the eligibility of 26 countries will have been assessed, including retroactive consideration of the nine countries which had already reached their decision point under the original HIPC Initiative when the terms of the enhanced Initiative were agreed. In order for the Mauritius Mandate target for the entry of all eligible countries into the HIPC process by 2000 to be met, a further ten countries (beyond those already planned to be considered) which are now expected to be eligible for relief under the enhanced HIPC Initiative must also gain entry into the process. Six of these (Kenya, Laos, Liberia, Malawi, Somalia and Sudan) have yet to receive concessional rescheduling from the Paris Club, which itself is a requirement for entry into the HIPC Initiative. Eight countries have yet to meet the requirement of having in place an IMF-supported structural adjustment programme in the period since September 1995. The 'Sunset Clause', which imposes a deadline for entry into the Initiative, has already been extended once, from October 1998 to December 2000. The provision of a deadline for entry into the HIPC Initiative is crucial to its status as a final and contained solution. To extend it repetitively would undermine that status. We do not recommend that the UK approve any further extension to the Sunset Clause of the HIPC Initiative. Instead, we call again on those involved to work to ensure the entry of all eligible countries into the Initiative by the end of 2000.

24. The G8 heads of government, at the Cologne Summit in June 1999, reiterated their commitment to the goal, first set by the Chancellor of the Exchequer in his Mauritius Mandate in October 1997, of three quarters of eligible countries reaching their decision points by the end of 2000. Of the 36 countries now thought to be eligible for assistance under the enhanced HIPC Initiative, nine have so far reached their decision points. In order for the Mauritius Mandate target for three quarters of eligible countries to have reached their Decision Points by the end of 2000 to be met, a further 18 countries must reach their Decision Points before the end of 2000. We call again on the UK Government to press for the full and rapid implementation of the HIPC Initiative.

Financing Arrangements for the Enhanced HIPC Initiative

25. Countries expected to qualify for relief under the HIPC Initiative, after the application of traditional debt relief mechanisms (ie Paris Club 'Naples Terms' relief - the forgiveness of up to 67 per cent of official bilateral debts), owe a total of US $90 billion in NPV terms in official or officially guaranteed external debt.[25] The implementation of the revised HIPC Initiative will result in an additional estimated US $27.4 billion (NPV, or US $50 billion in nominal terms), beyond the debt relief provided through the 'traditional mechanism' of the Paris Club, of this total being written off. This is twice the amount envisaged under the original HIPC framework,[26] and will lead to their total debt burden being reduced by around fifty per cent.

26. The costs of the enhanced HIPC Initiative will, as in the original framework, be divided roughly equally between multilateral and bilateral creditors. The table below shows the most up to date estimate of the costs of the HIPC Initiative for each creditor, compared to the estimated cost for each creditor under the original framework.

Table 2: Costs by Creditor of the Original and Revised HIPC Initiative
(US $ Billions in NPV Terms)	Original Framework, Costings at July 1997, in 1996 NPV Terms	Revised Cost of Original Framework, April 1999, in 1998 NPV terms	Enhanced Framework, Updated December 1999, in 1999 NPV terms
Official Bilateral and Commercial Creditors	3.2	6.3	14.1
Multilateral Creditors	4.2	6.2	14.1
World Bank	1.6	2.4	6.3
of which IDA	-	-	5.7
of which IBRD	-	-	0.6
IMF	0.8	1.2	2.3
AfDB / AfDF	0.7	1.0	2.2
IaDB	0.4	0.5	1.1
Others	0.8	1.3	2.2
TOTAL COSTS	7.4	12.5	28.2

Sources: 'The Initiative for Heavily Indebted Poor Countries, Review and Outlook', prepared by staffs of the World Bank and IMF, September 22 1998, Table 5, and IDA and IMF, 'Heavily Indebted Poor Countries Initiative — Update on Costing the Enhanced HIPC Initiative', December 7 1997, p. 6

Multilateral Creditors

27. The multilateral creditors between them are owed a total of US $ 43.3 million (NPV) by the HIPCs.[27] The costs to the multilateral creditors of the enhanced HIPC Initiative are estimated at US$ 13.3 billion (NPV), compared to US $ 6.2 billion under the original HIPC framework.[28] This excludes Liberia, Somalia and Sudan for which reliable estimates of debt are still not available.

IMF

28. The cost to the IMF of the HIPC Initiative, and its ability to provide the necessary funds, have been a key focus of discussion since the launch of the Initiative in 1996. In our previous Reports we argued that the IMF should finance its own contribution to the Initiative, if necessary by selling some of its gold reserves.[29] Although the UK Government shared this view, it appeared that other creditors were less enthusiastic. At the Cologne G8 summit, in June 1999, the G8 heads of government agreed in principle to such a sale.[30] The decision was formalised at the annual meetings of the IMF and World Bank in October 1999.

29. In the debate leading up to this decision, some reservations had been expressed about the possible impact on world gold prices of the sale of large quantities of gold by the IMF. The IMF has devised a solution which will generate the necessary profit from the its gold without it actually entering the market. This is to be achieved by an off-market transaction between the IMF and member states. In essence, the transaction will involve the re-valuation of nine million ounces of the IMF's gold to bring its value in line with current prices, with the profit being invested into a special account and the interest used both to finance the IMF's contribution to the enhanced HIPC Initiative and to increase the funds available to the Enhanced Structural Adjustment Facility.[31]

30. This decision is obviously welcome, but has been marred by the failure of US Congress to support it fully, having agreed only to the sale of nine million ounces of IMF gold, compared to the original pledge of up to 14 million ounces. Stephen Pickford told us in oral evidence that "if the gold sales element is not approved by Congress ... I think we would have to go back to square one and look again at the overall financing of the IMF's part of the HIPC enhancements".[32] We welcome the agreement at the annual meeting of the IMF and World Bank to an off-market transaction between the IMF and its member states to revalue fourteen million ounces of gold. However we invite the Government to comment upon the impact on the enhanced HIPC Initiative of the decision by US Congress to allow the sale of only nine million ounces of gold. We also note, and invite DFID to comment upon, the concerns raised by the Bretton Woods Project about the proposal that the proceeds from the sale of IMF gold be shared between the contribution of the IMF to the HIPC Initiative and the funding of the Enhanced Structural Adjustment Facility.

The HIPC Trust Fund: The World Bank and Regional Development Banks

31. The contribution of the World Bank to the enhanced HIPC Initiative is estimated to be US $6.3 billion. The African Development Bank and Inter-American Development Bank between them will be required to write off debts of around US $3.3 billion, with the regional development bank creditors totalling US $2.2 billion. Some of this will be financed by the banks themselves, but even before the agreement of the terms of the enhanced HIPC Initiative, there was already a shortfall in the availability of funds to finance their contribution to the original HIPC framework. This will obviously be increased in line with the increase in the volumes of debt relief to be provided under the enhanced Initiative.

32. The financing gap in the contribution of the World Bank and regional Development Banks to the enhanced HIPC Initiative will be filled by voluntary contributions to the HIPC Trust Fund. So far, US $1.8 billion has been pledged to the Trust Fund, including £221 million (about US $352 million) by the UK.[33] We welcome the role of the UK in calling for voluntary contributions to be made to the HIPC Trust Fund, and the £221 million which the UK Government has itself pledged to the Fund. We reiterate our previous recommendation, however, that debt relief under the HIPC Initiative should be additional to existing aid resources.[34]

The European Community

33. The European Community, via the European Investment Bank, is only a minor creditor to Heavily Indebted Poor Countries, accounting only for an estimated two per cent of the total cost of the enhanced HIPC Initiative.[35] The UK Government, however, proposed the contribution by the European Community of up to _1 billion to the cost of the enhanced HIPC Initiative, both to meet its own obligations and as a constructive solution to the problem of the huge backlog of unspent funds in the European Development Fund. In our Report on Debt Relief and the Cologne G8 Summit, our analysis of this proposal was that on this occasion it would provide a useful solution to the backlog of unspent funds in the European Development Fund, but that it should not set a precedent as a remedy for bad budgetary discipline.

34. In its Fourth Report, Session 1999/2000, the European Scrutiny Committee referred to us a Commission Communication[36] which contained details of the Commission's proposals for its contribution of resources to the HIPC Initiative. A package totalling _1 billion, comprising relief of _320 million owed to the European Investment Bank by African, Caribbean and Pacific (ACP) HIPCs and _680 million contribution to the HIPC Trust Fund (to be earmarked for the relief of debts owed by ACP HIPCs) was agreed at a Council of Ministers meeting on 8 December. Of the total, _954 million will be drawn from unspent European Development Fund Resources. The remaining _56 million will be taken from the European Community Development Budget for External Relations with Asian and Latin American Countries.[37] We welcome the allocation of _954 million of unspent European Development Fund resources to the contribution of the European Community to the HIPC Initiative.

Official Bilateral Creditors

35. Around US $20 billion of the official external debt owed by HIPCs to G8 bilateral creditors is debt arising from bilateral official development assistance.[38] Under traditional debt relief mechanisms, negotiated at the Paris Club,[39] bilateral creditors provide 'Naples Terms' relief of up to 67 per cent of the total official bilateral debt owed. The G8 bilateral creditors stated at Cologne that they would be prepared, within the Paris Club negotiation forum, to write off 90 per cent or more of export credit debts owed to them by HIPCs, to be agreed on a case by case basis, and up to 100 per cent of bilateral aid debts.[40] We welcome the pledges made at the G8 Cologne Summit of increased relief of bilateral debts. We call on the Government to press for the maximum amount of relief of bilateral debts for HIPCs within the Paris Club Forum.

36. At the time of our Report on Debt Relief and the Cologne G8 Summit, the UK was owed a total of £1.5 billion by HIPCs, including £70,000 in aid loans (to Liberia). DFID was owed £18.23 million in aid debt by low-income countries not eligible for relief under the HIPC Initiative. We recommended that a time-frame be established for the writing off of the aid debt still owed to DFID by all developing countries. DFID responded to our Report by stating that it has now cancelled almost all the aid debt owed to it by low income countries, and highlighting the establishment by the UK Government, in October 1997, of the Commonwealth Debt Initiative, which provided for the relief of all outstanding aid debts owed to the UK by those lower middle income Commonwealth Countries which were pursuing sound economic policies benefiting the poor, promoting responsive and accountable government, encouraging transparency and bearing down on corruption.[41]

37. The UK's Export Credits Guarantee Department is owed a total of approximately £1.9 billion by the 41 HIPCs.[42] The UK Government has stated that it is prepared, on a case by case basis, to provide relief of bilateral debts up to 100 per cent where necessary and where debt relief will finance poverty reduction.[43] In practice it has been stated that this means the cancellation of up to 100 per cent of debt owed to the Export Credits Guarantee Department (including post-cut-off date debts[44]). We welcome the commitment by the UK Government to go beyond what is required by the terms of the HIPC Initiative and to write off all aid debt, and up to 100 per cent of export credit guarantee debt, owed to it by individual HIPCs.

The Provision of Export Credit Guarantees for Unproductive Expenditure

38. The HIPC Initiative has always aimed to provide a permanent solution to the problems of unsustainable debt. This means not only providing relief of existing unsustainable debts, but enabling countries to prevent such problems occurring again in the future. One element of the policy of the UK on this question concerns the provision of export credit guarantees to poor countries. In his Mauritius Mandate of October 1997, the Chancellor of the Exchequer announced a two-year moratorium on the provision of export credits to HIPCs for 'unproductive expenditure'. Since that time the UK Government has taken a lead internationally in calling on other bilateral donors to pursue similar policies. An agreement was secured in 1999 to report export credits granted to HIPCs to the OECD, and work has been undertaken at the OECD on the production of a clear definition of the term 'unproductive expenditure'.

39. In January 2000, Gordon Brown announced that the Government had decided to extend the ban on export credits for unproductive expenditure on a permanent basis to the 41 HIPCs and the remaining 22 countries defined by the World Bank as 'IDA-only'. The Chancellor stated that: "Britain's export credits will only support productive investment that assist social and economic development and thus reduce poverty".[45] Further clarification has since been provided of what constitutes 'unproductive expenditure'. In a written answer to Lord Hunt, the Government stated that projects in any of the 63 countries covered by the ban would be measured against a set of criteria, and that "support for projects [by ECGD in any of the 63 countries covered by the ban] must be cleared with the Department for International Development, which must be satisfied that the expenditure is consistent with the above [definition of productive expenditure]".[46]

40. We welcome the permanent ban on the provision of export credits guarantees to the poorest countries for unproductive expend

iture; the definition of unproductive expenditure which has now been provided by the Government; and the veto of the Department for International Development over projects to be supported by ECGD in the 63 poor countries covered by the ban. We note, however, that there have been few such projects in those countries during recent years. We request that DFID inform us of any projects which, having been proposed for support, are then not supported as a result of it exercising its right of veto.

CONCLUSION

41. Over the past two years, significant progress has been made towards the elimination of unsustainable debt. The UK Government must work to secure the full implementation of the enhanced HIPC Initiative, in particular the spirit of consultation and poverty-focus which is promised by the new Poverty Reduction and Growth Facility, and the provision of funds to provide the necessary relief under the revised terms of the Initiative. We congratulate the Government on its work so far, and look forward to further progress being made at the G7 Summit later this year.

1 Third Report from the International Development Committee, Session 1997-98, 'Debt Relief' (HC 563), and Fourth Report from the International Development Committee, Session 1998-99, 'Debt Relief and the Cologne G8 Summit' (HC 470). Back

2 The G8 are: Canada, the European Union, France, Germany, Italy, Japan, Russian Federation, the United Kingdom and the United States of America (References to the G7 refer to all of these but the Russian Federation). Back

3 Third Special Report from the International Development Committee, Session 1997-98, 'Government Response to the Third Report from the Committee, Session 1997-98: Debt Relief' (HC 1056) Back

4 HM Treasury, 'Debt Relief and Poverty Reduction: a UK Submission to Phase 2 of the HIPC Review' (July 1999) p. Back

5 'Report of G7 Finance Ministers on the Köln Debt Initiative to the Köln Economic Summit, Cologne', 18-20 June 1999, para 6 Back

6 IMF 'Debt Relief for Low-Income Countries - The Enhanced HIPC Initiative' (IMF Pamphlet Series no. 51, 1999), p. 15 Back

7 IMF 'Debt Relief for Low-Income Countries - The Enhanced HIPC Initiative' (IMF Pamphlet Series no. 51, 1999), p. 15 Back

8 IMF 'Debt Relief for Low-Income Countries - The Enhanced HIPC Initiative' (IMF Pamphlet Series no. 51, 1999), p. 15) Back

9 IMF 'Debt Relief for Low-Income Countries - The Enhanced HIPC Initiative' (IMF Pamphlet Series no. 51, 1999), p. 13) Back

10 Government Response to the Fourth Report from the Committee, Session 1998-99, 'Debt Relief and the Cologne G8 Summit', See Appendix p. xxi Back