APPENDIX 6
Memorandum from the Peru Support Group
HOW THE ECGD CAN CONTRIBUTE TOWARDS THE WIDER
UK GOVERNMENT OBJECTIVE OF ELIMINATING POVERTY IN THE DEVELOPING
WORLD
CASE STUDY:
PERU'S
BURDEN OF
DEBT
Indebtedness and poverty
1. Peru is a country that faces high levels
of poverty, extreme inequality, unequal distribution of wealth
and an onerous debt burden of just over US$30 billion. "Adjustment
policies" pursued by successive governments in Peru since
the debt crisis first broke in 1982 have exacerbated poverty and
inequality. In Latin America as a whole, the scale of the transfers
required to service the foreign debt has bled the region of resources
in the last 20 years, with the most indebted (including Peru)
suffering the most. In the Peru of the 1980s, adjustment policies
fanned the flames of inflation, eroding real incomes—particularly
among those least able to protect themselves. During the 1990s,
despite some efforts to reduce extreme poverty, the Fujimori government
in Peru has continued to give debt service payment priority over
social expenditure. It sees this as the only way to ensure that
its future financing needs (which reflect its existing debt burden)
can be met. In return for international financial support, it
has been obliged to open up its economy and abandon redistributive
policies. Privatisation and deregulation have tended to benefit
an already wealthy elite, whilst a lack of "trickle-down"
mechanisms mean that growth has not directly benefited the poor
population. Although Peru is classified as a "middle income"
country by the World Bank, figures show that just under 50 per
cent of its people receive under than US$1 a day, a higher proportion
than in Honduras, Nicaragua or even Rwanda.
PSG debt swap proposal
2. The Peru Support Group, which forms part
of the Jubilee 2000 Coalition, has long argued the need for debt
relief for Peru. Since 1996, the PSG has campaigned for a debt
conversion scheme through which the UK government would forgive
debt and for the funds thereby released to be channelled to grass-roots
development schemes with the aim of alleviating poverty. The PSG
was established in 1993 with the support of Church and development
agencies to lobby in favour of policy changes that would benefit
the majority of Peruvians. It was with this in mind that in 1996,
the PSG came forward with a debt proposal, advocating the sway
of a proportion of the outstanding debt with a view to the funds
being released providing direct benefit to the poor in Peru.
3. The proposal was addressed to the Export
Credits Guarantee Department (ECGD), which holds nearly all of
Peru's bilateral debt with the United Kingdom. This was debt that
arose because of the guarantees provided by the ECGD to British
exporters to Peru who had called on the ECGD to insure themselves
against risk of deals not being fully honoured. The proposal advocated
that the ECGD cede a proportion of the outstanding debt to Peru
on the understanding that the funds realised would be administered
for social programmes under the auspices of a binational committee
composed of representatives from the Peruvian government, the
British embassy in Lima, a consortium of Peruvian NGOs and British
NGOs with programmes in Peru. The proposal envisaged the funds
released being invested, with the interest or dividends raised
being used to fund social programmes on an on-going basis. The
scheme was modelled on successful debt relief programmes pioneered
by the Canadian and Swiss governments. It recognised the liveliness
of civil society in Peru which provides the most reliable route
towards poverty alleviation.
Responses
4. Unfortunately, the proposal did not prosper.
The ECGD made it known that it was prevented by the terms of the
1991 Export and Investment Guarantee Act from entering into deals
which it considered did not represent the best interests of the
British taxpayer. Since the ECGD benefits from the regular servicing
of these debts by the Peruvian government (and therefore the Peruvian
taxpayer), any debt forgiveness could clearly be to the detriment
of British taxpayers. Also, given the increase in the secondary
market valuations of Peruvian debt paper since the early 1990s,
this has become a much more valuable asset. The UK Treasury showed
interest in the PSG proposal but little inclination to force the
hand of the ECGD on the matter. However, the proposal was widely
supported by the public, and several MPs made representations
thereby stimulating debate about the status of ECGD (as opposed
to Treasury) debt.
5. The election of the Labour Government,
combined with the lobbying efforts of the Jubilee 2000 Coalition,
has changed official attitudes in the United Kingdom, making it
more likely that the objectives outlined by the PSG in 1996 can
be achieved. Not only is the climate much more conducive to discussion
of debt write-offs by members of the Paris Club, but there is
a growing acceptance of the idea that civil society organisations
have a central role to play in the process of development. In
particular, the role played by the ECGD has become a subject of
public discussion. In a recent speech, Minister for International
Development, Clare Short, underlined her support for debt reduction
initiatives, subject to conditions that the resources released
are effectively used to improve the living standards of the poor.
She also underscored the importance of funding debt relief through,
amongst other things, Export Credits Guarantee Department write
downs. Internationally, too, the climate surrounding debt relief
has changed dramatically, in part due to the efforts displayed
by Gordon Brown, the Chancellor of the Exchequer, through the
HIPC and other initiatives.
Recommendations
6. With the government convinced of the
need for greater ECGD flexibility in negotiating the debt paper
it holds, the main obstacles to the PSG Debt Proposal may be in
the process of being removed. Consequently, the PSG—which
greatly welcomes the opportunity to play its parts in this review
of ECGD policy—would like to make the following recommendations:
— Parliament needs to reformulate the
1991 law governing the operations and mandate of the ECGD so as
to balance its commitment towards the UK taxpayer with a commitment
to reduce outstanding debt wherever possible and in such a way
as to provide relief to poverty in indebted countries.
— The ECGD should take immediate steps
to harmonise its actions with stated government policy. Any debt
reduction should include initiatives linked to poverty alleviation
such as the "sway" arrangement outlined by the Peru
Support Group.
— Guidelines for country's eligible
for ECGD debt reduction be made more flexible, ie countries such
as Peru, which is ranked by the World Bank as a "middle income"
country (therefore not eligible for HIPC relief) should be able
to qualify for ECGD debt reduction.
— ECGD debt reduction should not be
conditional on whether the debtor country has satisfied the three-year
implementation of IMF structural adjustment policies since these
tend to intensify social inequalities.
— There should be greater accountability
and transparency on future bilateral negotiations between debtor
countries and the ECGD. This should include the participation
of civil society in both countries.
— For ECGD policy to reflect a more
ethical dimension and to focus on programmes which eliminate rather
than exacerbate poverty in developing countries. Greater scrutiny
should therefore be made on the purposes to which ECGD finance
is made available, and its congruence with criteria of sustainable
development, poverty relief and observance of human rights.
Peru Support Group
September 1999
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