APPENDIX: GOVERNMENT RESPONSE TO THE FOURTH
REPORT
FROM THE COMMITTEE, SESSION 1998-99,
'DEBT RELIEF AND THE COLOGNE G8 SUMMIT' (HC 470)
The International Development Committee reported
to the House on Debt Relief and the Cologne G8 Summit in its Fourth
Report of Session 1998-99, published on 11 June 1999. The Government
response to that Report, reproduced in this Appendix, was received
on 27 October 1999.
Recommendation 1: During the first three years
of its operation it has become apparent that the HIPC Initiative
is failing to deliver its promise of a permanent and robust exit
from unsustainable debt (paragraph 3).
Recommendation 11: The fact that Uganda and Bolivia
have already returned to levels of debt which are unsustainable
demonstrates that the HIPC Initiative is failing to deliver debt
relief on anything more than a temporary and superficial level.
The terms of the HIPC Initiative must be revised as a matter of
urgency to ensure that debt relief provides a robust and genuinely
sustainable solution. Without such modification, the Initiative
will undoubtedly founder (paragraph 23).
Recommendation 12: The proposals put forward by
the UK Government for the reduction in the sustainability ratios
reflect a welcome recognition of the inadequacy of the relief
provided under the HIPC Initiative so far (paragraph 24).
Recommendation 35: The deadline for entry of Heavily
Indebted Poor Countries into the Initiative is looming. So far
the Initiative has failed to deliver its promise of a permanent
exit from unsustainable debt. Such a conclusive solution cannot
be accomplished on the basis of a design process characterised
by indecision, compromise and frequent revision (paragraph 62).
The HIPC Initiative has yielded some positive results
since its inception, notably in creating a comprehensive framework
for debt relief for the poorest and most heavily indebted countries.
Nonetheless, it became very clear some time ago that the HIPC
Initiative had to be reformed to ensure that it delivered a permanent
and robust exit from unsustainable debt, and freed up resources
for tackling poverty.
That is why the Government pressed for, and secured,
agreement to improvements to the HIPC Initiative, so that it delivers
faster, wider and deeper debt relief to countries committed to
eliminating poverty.
The Government strongly supported the proposals put
forward by the IFIs to strengthen the link between debt relief
and poverty reduction by the development of national Poverty Reduction
Strategies (PRS). The process to develop a PRS will be led by
national governments and will involve consultation with civil
society and donors so that it commands broad-based support. It
was agreed that HIPC should provide a means to refocus national
efforts to eradicate poverty and achieve the International Development
Targets, as well as coordinating donor efforts. The Government
will be contributing to the development and implementation of
these proposals.
Recommendation 2: We congratulate the Government
on its leading role in calling for a review of the HIPC Initiative
(paragraph 4).
The Government is grateful for the Committee's support.
Recommendation 3: We welcome the broad-ranging
consultation process which has been integral to the first phase
of the HIPC review, and look forward to similar consultations
taking place during the second phase and in any future reviews
of the HIPC Initiative (paragraph 5).
The Government welcomes the contributions made by
all parties to both phases of the HIPC Review and it is encouraging
civil society groups to contribute to the development of Poverty
Reduction Strategies in HIPC countries.
Recommendation 4: The G8 Summit at Cologne will
be an opportunity for G8 leaders to revitalise international debt
relief efforts. This opportunity must not be wasted (paragraph
6).
Recommendation 36: The G8 must now take decisive
action to rescue the HIPC Initiative from the brink of failure.
Before discussing the level of debt relief to be provided, the
G8 and the International Financial Institutions must agree on
a definition of debt sustainability which embraces the development
needs of the country, not just the ability of the country to service
its debts. Only thus can we ensure that debt relief is an attack
on poverty, rather than merely a rearrangement of accounts (paragraph
63).
The Government used the opportunity of the Cologne
Summit to push for agreement on significant changes to the HIPC
Initiative. It welcomes the agreement at the Annual Meetings of
the IMF and World Bank to endorse these revisions so that the
HIPC Initiative will deliver faster, deeper and wider debt relief.
The Government strongly supported the G7 statement that the central
objective of HIPC is to free up resources for investment in programmes
to tackle poverty.
Recommendation 5: In our previous report, we welcomed
the impetus provided by the Mauritius Mandate targets for progress
to be made in the HIPC Initiative. We continue to believe that
such targets are important to the momentum of the Initiative,
and to its goal of providing a conclusive solution to unsustainable
debt (paragraph 9).
Recommendation 6: On current projections the Mauritius
Mandate target for all eligible countries to have at least entered
the HIPC Initiative process by 2000 is unlikely to be met. The
UK Government must use the Cologne G8 Summit, and the autumn meetings
of the IMF and the World Bank, to rejuvenate the necessary political
will to ensure that the remaining nine HIPCs secure entry into
the process by the end of 1999 (paragraph 13).
Recommendation 8: In order for the Mauritius Mandate
target relating to countries reaching their decision points to
be met, a further 21 countries must reach their decision points
during 1999, including six countries for which negotiations are
currently not planned. The UK Government must use the G8 Summit
at Cologne to galvanise political support for the targets set
out in the Mauritius Mandate, and ensure that a firm commitment
to their achievement is clearly reflected in any communique resulting
from the summit (paragraph 16).
Recommendation 9: We call on the G8 to dispel
the inertia which has so far characterised the implementation
of the HIPC Initiative. We recommend that the Government press
for an international commitment to a target of three-quarters
of eligible HIPCs reaching their completion points by the end
of 2000, with the remainder receiving debt relief by the end of
2002 (paragraph 18).
The Government shares the Committee's view that targets
provide an important and driving impetus to the momentum of the
HIPC Initiative. It welcomes the G7 and IMF/World Bank endorsement
of its call for the IFIs and the Paris Club to get HIPC countries
through the process more quickly and enable us to meet the target
of getting three quarters of eligible countries to their decision
points by the end of 2000 and for the remaining countries to embark
on the process as soon as possible thereafter.
Recommendation 7: We welcome the Government's
provision of technical assistance to Nigeria, and look forward
to progress being made towards a sustainable solution to Nigeria's
debt burden within the Paris Club (paragraph 14).
The Government welcomes the Committee's endorsement
of its assistance for Nigeria. We encourage the Nigerian government
to pursue economic reforms and to implement pro-poor policies.
The Government's policy on Nigeria's debt was set out in a speech
given by the Economic Secretary to the Treasury to the Financial
Times Conference on Nigeria on 4 May.
Recommendation 10: We welcome the Government's
acknowledgment that the maximum six-year track record requirement,
which must be fulfilled in order for HIPCs to receive debt relief,
is too long, and will continue unacceptably to impede progress
in the implementation of the HIPC Initiative. We urge the Government
to continue to press the case for a reduction in the track record
requirement to a maximum of three years, both at the G8 summit
in Cologne and again at the autumn meetings of the International
Financial Institutions (IFIs). We look forward to a formal agreement
being secured (paragraph 21).
The Government agrees with the Committee's view that
debt relief under the HIPC Initiative so far has been too slow.
We therefore welcome the IMF and World Bank endorsement of the
G7 proposal that multilateral creditors extend interim relief
to HIPC countries between Decision Point and Completion Point.
In this way, HIPC countries will receive debt relief after a maximum
of three years, and earlier for those already in the process,
rather than the current maximum of six years.
Recommendation 13: The reform of the HIPC Initiative
resulting from the current review must resolve its inadequacies
conclusively and fully. A continuing trickle of minor adjustments
will only undermine the credibility of the whole process, and
contrasts starkly with the decisiveness and extent of relief provided
in the Marshall Plan. We recommend that any revision in the formulae
used to determine the amount of debt relief to be given under
the HIPC Initiative be based not on the willingness of creditors
to provide funds, but on an analysis of the levels of debt which
HIPCs can realistically be expected to sustain. This must include
explicit reference to liabilities other than official external
debt, such as commercial and domestic debt (paragraph 28).
The enhanced HIPC Initiative will deliver substantially
more debt relief. The reduction in the export ratio from a range
of 200-250% to 150% greatly improves the prospect of countries
achieving a sustainable exit from their debt problems. The reduction
in the fiscal ratio - from 280% to 250% - was not in our view
large enough, but we could not obtain sufficient support to go
further.
The Government notes the Committee's recommendation
on domestic and commercial debt. As noted in our response to the
Committee's previous report, the HIPC Initiative was designed
to deal with external debt owed to official creditors, and the
Government's immediate priority remains in ensuring a permanent
resolution of this issue, so that countries can tackle poverty
and achieve the international development targets. We share the
Committee's concerns about the problems posed by domestic debt
for some countries. However, this requires different action, and
we are encouraging countries to focus on this issue.
The Paris Club, in agreeing debt relief, already
requires a debtor country to seek comparable treatment from other
creditors, including commercial lenders and non-Paris Club official
creditors.
Recommendation 14: Even if the HIPC Initiative
were to fulfil its objective of delivering a robust exit to unsustainable
debt, there are serious doubts as to whether it would have any
significant development impact (paragraph 29).
Recommendation 15: Clare Short reported recently
that on average HIPC countries are spending only 2% less than
before on debt repayments. The relief of debts which are not being
paid clearly has no impact on the availability of cash in the
budget of the debtor government (paragraph 31).
Recommendation 16: The current provisions for
debt service relief within the HIPC Initiative do not go far enough
to release significant resources within the annual budgets of
HIPCs to allow increased expenditure in other areas (paragraph
32).
Recommendation 17: We agree with Clare Short,
who emphasised the importance both of reductions of debt stock
and debt service payments. Debt service reductions could significantly
increase the developmental impact of the HIPC Initiative, ensuring
that resources are freed up at an early stage within the annual
budget of the debtor government, enabling increased expenditure
on development-related policies (paragraph 34).
Recommendation 18: We reiterate our concern that
structural adjustment programmes take full account of the needs
of the poorest (paragraph 35).
Recommendation 19: The reluctance of the International
Financial Institutions to relinquish control over HIPC conditionality
should not prevent full discussion taking place on the appropriateness
of ESAF-supported structural adjustment programmes as the mechanism
of conditionality. The second phase of the HIPC review is considering
ways of ensuring a stronger link between debt relief and poverty
eradication. We recommend that the UK Government press for the
inclusion in the review not only of ways to make the ESAF programmes
more poverty-focused, but that it also include thorough consideration
of the alternatives being put forward by NGOs and others (paragraph
38).
The Government shares the Committee's view of the
importance of establishing a stronger link between debt relief,
poverty reduction and sustainable development, and, indeed, regards
a closer link between debt relief and reducing poverty as the
very rationale of a revised HIPC. The Government therefore warmly
welcomes the adoption by the IMF and World Bank of the proposal
to develop Poverty Reduction Strategies.
The Government has emphasised that debtor countries
should negotiate their own debt relief, so that they receive the
balance between debt stock reduction and flow relief which will
best enable them to tackle poverty. It has also underlined the
need for debt relief to be frontloaded for most countries to allow
them to invest now in anti-poverty programmes.
The Government strongly believes that structural
adjustment programmes must take full account of the needs of the
poor, and it welcomes the agreement reached at the Annual Meetings
to refocus IMF structural reform programmes so that they support
national poverty reduction strategies; the new Poverty Reduction
and Growth Facility will replace ESAF. The Poverty Reduction Strategy
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.
The Government recognizes the importance of civil
society's role in development and the need to create broad-based
support for reform. Officials will continue to keep in close contact
with NGOs and others as the Government offers advice to HIPC countries
and to the IMF and World Bank on the development of Poverty Reduction
Strategies.
Recommendation 20: The purpose of the HIPC Initiative
is enshrined in its definition of debt sustainability. If debt
sustainability continues to be defined only in terms of the ability
of the debtor to meet its remaining debt repayment obligations,
without any reference to the development needs of the country,
then the HIPC Initiative will in all likelihood continue to fail
to deliver any significant contribution to poverty eradication
(paragraph 42).
The Government's submission to the second phase of
the HIPC review set out a way forward to ensure that the HIPC
Initiative delivered a significant contribution to poverty eradication,
by ensuring that both the economic reform programmes undertaken
by debtor countries and the concomitant debt relief given by creditors
are included in an overarching poverty programme. The Government
is pleased that this message was taken on board by the IMF and
World Bank in the development of their proposals to strengthen
the link between debt relief and poverty reduction.
Recommendation 21: We welcome steps taken so far
to accelerate the HIPC Initiative process for countries emerging
from conflict, and in particular the contribution of £30
million made by the UK Government to Rwanda's HIPC Trust Fund.
The burden of Rwanda's ever-increasing unpayable debt falls on
the 7.1 million of its people who survive on less than the equivalent
of $2 per day. One of every five children born in Rwanda dies
before reaching the age of five. Rwanda is one of the few countries
in the world where the life expectancy of its inhabitants has
declined over the past 17 years. Rwanda cannot afford to wait
until 2003 before receiving HIPC debt relief. We urge the Government
to continue to press the case for the rapid and significant debt
relief which is crucial to Rwanda's progress towards peace and
recovery (paragraph 43).
The Government welcomes the Committee's endorsement
of its proposals for accelerating the HIPC process for countries
emerging from post-conflict situations. These have been endorsed
by the IMF and the World Bank. It is also grateful for the Committee's
support for our assistance for Rwanda, and agree that it is vital
that the international community supports Rwanda's progress towards
peace and recovery. The enhanced HIPC Initiative will provide
Rwanda with the benefits of debt relief earlier, allowing the
government to invest more resources on reducing poverty.
Recommendation 22: We welcome the steps taken
by the Paris Club to provide debt relief for Nicaragua and Honduras
in the aftermath of Hurricane Mitch. We look forward to the delivery
of substantial debt relief under the HIPC Initiative, and call
on the Government to ensure that this takes place as quickly as
possible (paragraph 44).
The Government agrees that countries emerging from
post-catastrophe situations need to be helped as quickly as possible.
Its proposals for speedier relief for post-catastrophe countries
- agreed by the Boards of the IMF and World Bank - and the enhanced
HIPC Initiative will ensure that Nicaragua and Honduras feel the
benefits of debt relief much earlier. Both countries are expected
to reach Decision Point by the early part of next year.
Recommendation 23: The UK Government must not
allow the international community simply to ignore the debt burdens
of Liberia, Somalia and Sudan, which between them owe almost US$20
billion to external creditors. Effective debt relief, while by
no means in itself a solution to the problems of these countries,
must be an important component of the strategies adopted by these
countries from their cycles of conflict (paragraph 45).
The Government recognizes the difficulties of post-conflict
countries and has proposed that post-conflict programmes should
count towards the track record necessary for HIPC relief. However
the Government strongly believes that debt relief should only
be provided where it will have a positive effect on poverty. Unless
countries have built a track record of reform, debt relief is
unlikely to benefit the poor, and could lead to increased spending
on unproductive expenditure, such as arms.
Recommendation 24: We welcome the Government's
speedy positive response to our recommendation that it contribute
to the HIPC Capacity Building Programme. We urge the Government
to encourage other donors to contribute to the programme so that
all HIPCs may receive technical assistance as they negotiate a
path through the HIPC Initiative process.
The Government is pleased to support the HIPC Capacity
Building Programme, which is expanding its operations substantially.
The Programme is fully funded until 2001, and other donors have
already expressed their willingness to provide funding for additional
work when this is required. The Government is also considering
what assistance it can provide to enable civil society to participate
more effectively in the development and monitoring of Poverty
Reduction Strategies.
Recommendation 25: When he appeared before the
Committee, Gordon Brown issued a challenge to the international
community to deliver $50 billion (in nominal terms) in debt relief
to the HIPCs by the end of 2000. We welcome this recognition of
the need for any changes to the HIPC Initiative to be accompanied
by a clear financing strategy (paragraph 50).
Recommendation 26: We support the Chancellor's
proposal for a new Millennium Trust Fund to finance the additional
costs of an enhanced HIPC Initiative to the World Bank and Regional
Development Banks (paragraph 52).
The Government is grateful for the Committee's support
and welcomes the agreement reached in Washington to a financing
package that will allow the enhanced HIPC Initiative to go ahead.
The Government is committed to playing its full part in financing
the HIPC Initiative and made a further pledge to the HIPC Trust
Fund of $50 million at the time of the Annual Meetings, this is
on top of the $100 million pledge announced in May of this year
and brings our total commitment to $221 million. This amount will
be increased when the UK share of an EC contribution to the Trust
Fund of up to 1 billion euros is finalised.
Recommendation 27: We continue to believe that,
ultimately, flexibility in the application of Paris Club rules
is not the answer. There must be a clear mechanism for the provision
of debt relief by Paris Club countries to meet the needs of debtor
countries as agreed within the HIPC Initiative. We therefore recommend
that the UK Government press for an agreement at the G8 for a
revision to Paris Club rules (paragraph 53).
Recommendation 31: Changes to enhance the HIPC
Initiative will incur increased costs. We agree with Gordon Brown,
who emphasised that it is vital that any agreement to make such
changes is accompanied by a clear financing strategy which encompasses
all creditors. We welcome most of the practical proposals which
have been put forward by the UK Government in support of its call
for an enhanced HIPC framework: the sale of up to $2 billion of
IMF gold reserves; the establishment of a Millennium Trust Fund;
and an increase in bilateral contributions beyond the normal 80%
debt stock reduction provided by the Paris Club where necessary.
We restate, however, our recommendation that the Government seek
to secure an agreement to a new formula for Paris Club contributions,
based on the needs of debtors (paragraph 58).
The Government pressed for, and achieved, agreement
at Cologne for an increase in the limit for debt relief under
the HIPC Initiative from 80% to 90%, and more if needed.
Recommendation 28: We welcome the continuing support
of the UK Government for the sale of IMF gold reserves. We look
forward to an agreement being secured in principle at the G8 Summit
in Cologne, and to this agreement being formalised at the autumn
1999 meetings of the IMF and World Bank (paragraph 54).
The Government welcomes the Committee's support for
the use of the IMF's gold reserves to help fund the IMF's share
of debt relief under the HIPC Initiative. The Government welcomes
the announcement by the IMF's Board of Governors at the Annual
Meetings that up to 14 million ounces of gold will be revalued
in an off-market transaction to finance part of the IMF's share
of the enhanced HIPC Initiative.
Recommendation 29: We have, in a previous Report,
commented upon the ineffectiveness of disbursement of ODA by the
European Commission. There are over 1 billion euro of European
Development Fund resources which remain to be disbursed under
the 1990-1995 replenishment alone. There must be an agreed and
comprehensive strategy to deal with the significant backlog of
EDF funds. This should involve either the reallocation of committed
funds to the budgets of bilateral donors, or equitable and speedier
distribution between ACP countries. As the Secretary of State
herself emphasised, debt relief should not skew our attention
and expenditure away from official development assistance and
the needs of those poor countries which are not heavily indebted.
Only 33 of the 71 ACP countries which receive funds form the EDF
under the Lome Convention are also eligible for debt relief under
the HIPC Initiative. In theory, the use of funds to finance HIPC
debt relief will therefore mean a significant reduction in the
amount available in the EDF for disbursement in the remaining
38 countries. In practice, however, it was always unlikely that
such disbursement would take place. Any use of EDF funds for the
HIPC Millennium Trust Fund must be with the full agreement of
the ACP countries and must not be an excuse to delay radical reform
of the EDF. Although we are clear this is bad budgetary practice
and should not be taken as a precedent, we support the contribution
of unspent EDF funds to the HIPC Millennium Trust Fund (paragraph
56).
We welcome the Committee's support for our call for
a substantial contribution from the European Commission to enable
more debt relief to be provided under the enhanced HIPC Initiative.
The Government welcomed the announcement by the Commission in
Washington that up to 1 billion euros will be made available from
EDF underspends. The precise amount of this figure that will go
to meet the costs of other multilateral institutions has yet to
be decided, but the Government is pressing for the maximum possible:
at least 700 million euros.
Recommendation 30: We recommend that the Government
continue to take unilateral action in the cancellation of debt,
and make bilateral contributions beyond those required under burden-sharing
rules, where there is a possibility that this will lead to further
funds being made available by other donors (paragraph 57).
The Government believes that priority should be given
to securing funds for the enhanced HIPC Initiative. We encourage
those countries considering unilateral cancellation of debt to
use the money to contribute to the HIPC Initiative, to ensure
that it is fully financed. The UK has already written-off some
$5 billion (1998 prices) of aid loans and has now pledged a total
of $221 million to the World Bank=s
Trust Fund, plus its share of the EDF contribution. The Paris
Club has now agreed to increase its level of debt relief under
the enhanced Initiative by providing debt reduction of 90 % or
more, if needed. The Government has since said that it is prepared
- on a case by case basis - to possibly go up to 100% debt cancellation,
if necessary, and where debt relief would finance poverty reduction.
Recommendation 32: Debt relief alone cannot solve
the problems faced by the world's poorest countries. It would
be perverse for the richest countries in the world to spend several
years squabbling over the terms of a comprehensive debt relief
package, only to undermine its effectiveness by failing to make
adequate aid resources available in the long term (paragraph 59).
The Government agrees with the Committee's view that
debt relief cannot solve the problems faced by poor countries.
They will have a continuing requirement for development assistance.
The Government last year announced an increase of 28% in real
terms of DFID's budget, and we are encouraging others to follow
this lead, and reverse the long trend of decline in aid budgets.
It also recognises the importance of private sector investment
and trade in stimulating economic growth and contributing to poverty
reduction.
Recommendation 33: We congratulate the Department
for International Development for the lead it has taken in cancelling
aid debts owed to it by Heavily Indebted Poor Countries. We recommend
that the Department for International Development establish a
time frame for the write-off of remaining outstanding ODA debt
owed to it by other low-income countries (paragraph 60).
DFID has cancelled nearly all the debts owed to it
by low income countries - some $5 billion in 1998 prices. In September
1997, the Government launched the Commonwealth Debt Initiative,
which announced that we were willing, in principle, to cancel
the remaining aid debts of lower-middle income countries of the
Commonwealth. The relief is provided to those countries which
are committed to the international development targets and are
pursuing sound economic policies which benefit the poor, and which
promote responsive and accountable government, encourage transparency
and bear down on corruption.
Recommendation 34: We welcome progress made so
far towards an international agreement on the provision of export
credit guarantees to Heavily Indebted Poor Countries for productive
expenditure only, including the work which has taken place on
producing a definition of the term "unproductive". We
look forward to a more formal long-term international commitment
to this policy. We recommend that the UK Government extend its
own moratorium on export guarantees to HIPCs for unproductive
expenditure indefinitely as part of its continuing strategy for
the achievement of this objective (paragraph 61).
The Government remains committed to limiting export
credit to HIPC countries to those for productive expenditure,
and welcomes the decision by Germany and Canada to follow this
example. The OECD agreement reached last year was that countries
would report the export credits which they have extended to HIPC
countries. This report is expected soon, and it provides an opportunity
for further discussion of this issue in OECD.
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