Select Committee on International Development First Report


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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Prepared 20 December 1999