2 Compensation for fluctuations in the
export earnings of ACP countries
| (25393)
6370/04
COM(04) 68
| Draft Council Decision on the position to be adopted by the Community within the ACP-EC Council of Ministers regarding the revision of the terms and conditions of financing for short-term fluctuations in export earnings (Annex II of the ACP-EU Partnership Agreement signed in Cotonou)
|
| Legal base | Article 310, in conjunction with the second sub-para of Article 300(2) EC; unanimity
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| Document originated | 12 February 2004
|
| Deposited in Parliament | 25 February 2004
|
| Department | International Development
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| Basis of consideration | EM of 4 March 2004
|
| Previous Committee Report | None
|
| To be discussed in Council | No date yet set
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| Committee's assessment | Politically important
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| Committee's decision | Not cleared; information on progress requested
|
The Commission document
2.1 The ACP-EC Partnership Agreement, known as the Cotonou Agreement,
provides for a system of financial support (FLEX) to mitigate
the negative effects on the African Caribbean and Pacific (ACP)
countries which are party to that Agreement of short-term fluctuations
in export earnings. Article 68.2 of the Agreement says that the
purpose of this support is "to safeguard macroeconomic and
sectoral reforms and policies that are at risk as a result of
a drop in revenue and remedy the adverse effects of instability
of export earnings". The support is financed from
the B-allocation of the financial envelope for support to long-term
development, which covers unforeseen needs.[1]
2.2 The current criteria used to determine eligibility
for support under FLEX are set out in Article 9 of Annex II of
the Agreement. During the first three years of this new system
(2000-2002) relatively few countries qualified. The Agreement
provides for these provisions to be reviewed and the Commission
now proposes that two revisions should be made to the eligibility
criteria. The Agreement allows amendment of Annex II on the basis
of a recommendation from the ACP-EC Development Finance Cooperation
Committee.
2.3 The Commission provides a summary which shows
how many ACP countries applied for support in the three years
2000, 2001 and 2002 and met the two criteria used to determine
eligibility:
- 51 countries (68% of ACP countries)
requested support under the FLEX mechanism;
- 29 countries fulfilled criterion one, a 10% loss
of export earnings, or 2% in the case of least-developed countries;
and
- Six countries fulfilled both criteria one and
two. Criterion two is a 10% worsening in the programmed public
deficit.
Total support received under FLEX during the period
was €35.65 million.
2.4 The Commission argues that the main principle
of the instrument is to provide support for losses in Government
revenues resulting from a fall in export earnings and that this
should not be changed. However, to improve the functioning of
FLEX, and to ensure that it responds better to its objectives,
the eligibility criteria should be simplified.
2.5 Two modifications are proposed:
- under criterion one, the extension
to landlocked and island ACP states of the more favourable provision,
currently available only to least developed countries, of having
suffered a 2% (rather than 10%) loss of export earnings; and
- elimination of the 10% hurdle in the second criterion
for eligibility: a worsening of 10% in the programmed public
deficit.
The Government's view
2.6 The Secretary of State for International Development
(Mr Hilary Benn) comments that compensatory financing facilities,
such as FLEX, have the potential to play a positive developmental
role, provided lessons learnt from the past, including those relating
to previous schemes such as STABEX, a predecessor of FLEX, are
applied. The Commission is anxious to make FLEX work better and
the changes proposed will almost certainly increase the flow of
funds through the mechanism.
2.7 The Minister notes that there are considerable
financial implications, which he sets out below. However, he
says, there is no guarantee that this, by which presumably he
means the proposal, will increase the effectiveness of the mechanism
from a development perspective. To achieve this result measures
are required to ensure that FLEX supports and is consistent with
broader EU development policy, with an emphasis on Poverty Reduction
Strategy Papers and Medium Term Expenditure Frameworks.
2.8 The Commission's current proposal is short on
detail on the potential financial implications. The Minister
says that there must be a focused debate on the role of compensatory
financing mechanisms in development processes before such a significant
decision as the one proposed here is made. The Commission should
also explore making FLEX complementary to other instruments operated
by, for example, the International Monetary Fund.
2.9 On the financial implications of the proposal,
the Minister comments as follows:
"There are no direct financial implications
for the UK, as overall funding for the EDF[2]
is fixed. Any increase in cost resulting from a change to the
criteria will have to be [met] from the existing fund. However,
there are opportunity costs in terms of other external activities
remaining unfund[ed].
"The Commission has not officially calculated
any financial implications for the cost of the mechanism. However,
based on initial contacts with the Commission, we understand that:
- 29 of the 51 applicants in
2000-2002 would have met the proposed revised eligibility criteria;
- This would have resulted in an increase in cost
of at least €205 million (£137million); and
- Approximately €400 million (£268 million)
would be required over a four-year period if the changes are adopted.
"Similarly, the proposal provides no estimates
from the Commission regarding any potential increase in the number
of applications resulting from the proposed revised eligibility
criteria.
"We will be encouraging the Commission to undertake
a more detailed analysis of potential financial implications."
2.10 The Minister says that the Government will seek
additional relevant information in order to have a constructive
dialogue with the Commission and other Member States on the proposal
in the Working Group discussions.
2.11 The exact timetable for the proposal to come
before the Council is not yet clear.
Conclusion
2.12 The Commission gives no clue in the document
to its reason for selecting landlocked and island ACP states as
potential further beneficiaries of a modification to the first
criterion for eligibility to support from FLEX.
2.13 We support the Government in pressing the
Commission to provide estimates of the cost of the proposal.
We also agree that this opportunity should be taken to ensure
that the FLEX financing facilities are consistent with broader
EU development policy.
2.14 We ask the Minister to provide us with an
update in due course on the negotiations in the Working Group
on this proposal. Meanwhile we do not clear the document.
1 Article 3.2(b) of Annex IV of the Cotonou Agreement. Back
2
The European Development Fund, from which support for the provisions
of the Cotonou Agreement is drawn. Back
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