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Standing Committee Debates

Draft International Development Association (Multilateral Debt Relief Initiative) Order 2006

TheCommittee consisted of the followingMembers:

Chairman:Mr.Martin Caton
Blackman,Liz (Erewash)(Lab)
Browne,Mr. Jeremy (Taunton)(LD)
Byers,Mr. Stephen (North Tyneside)(Lab)
Campbell,Mr. Ronnie (Blyth Valley)(Lab)
Drew,Mr. David (Stroud)(Lab/Co-op)
Field,Mr. Frank (Birkenhead)(Lab)
Heathcoat-Amory,Mr. David (Wells)(Con)
Kramer,Susan (Richmond Park)(LD)
Levitt,Tom (High Peak)(Lab)
Milton,Anne (Guildford)(Con)
Randall,Mr. John (Uxbridge)(Con)
Scott,Mr. Lee (Ilford, North)(Con)
Simmonds,Mark (Boston and Skegness)(Con)
Singh,Mr. Marsha (Bradford, West)(Lab)
Skinner,Mr. Dennis (Bolsover)(Lab)
Thomas,Mr. Gareth (Parliamentary Under-Secretary of State for InternationalDevelopment)
Winnick,Mr. David (Walsall, North)(Lab)
Hannah Weston, CommitteeClerk
† attendedthe Committee

FifthStanding Committee on DelegatedLegislation

Thursday18 May2006

[Mr.Martin Caton in theChair]

Draft International Development Association (Multilateral Debt Relief Initiative) Order 2006

TheParliamentary Under-Secretary of State for International Development(Mr. Gareth Thomas): I beg to move,
That the Committee hasconsidered the draft International Development Association(Multilateral Debt Relief Initiative) Order2006.
It is a delightto serve under your chairmanship,Mr. Caton; you come from aparticularly wonderful part of our world—Swansea.
Part of the analysis advancedlast year by the excellent Make Poverty History campaign was that highlevels of debt prevented some of the poorest countries from tacklingpoverty effectively. The international community agreed last year thatmore action was necessary, and it arranged to build on the heavilyindebted poor countries initiative.
Since the 1990s, when the HIPCprocess was launched, 19 countries have received irrevocable debtrelief under that process. Eleven more countries are receiving interimrelief, and a further 14 will be eligible once they reach the requiredstandards. HIPC has reduced qualifying countries’ debt burdensby more than 60 per cent., which shows the effectiveness of debt reliefin releasing resources for reducing poverty.
Hon. Members regularly askMinisters at the Department for International Development to say howaid is used and to demonstrate the results. I shall give an example.Debt relief savings in Tanzania have been used to build more than31,000 new classrooms and 11,000 new schools. That has given anenormous boost to the country’s efforts to provide basiceducation to every child, and it believes that it can achieve that aimnine years earlier than is set out in the millennium development goal.That is potentially a huge achievement.
However, as hon. Members willrealise, there remains an urgent need for more financing to enable themillennium development goals to be reached. That is why the Governmentled international efforts to agree more debt cancellation, and we usedour G8 and European Union presidencies last year to secureinternational agreement on that objective. Under our proposal, known asthe multilateral debt relief initiative, 100 per cent. of the remainingdebts owed by qualifying countries to the International Monetary Fund,the International Development Association of the World Bank, and theAfrican Development Fund of the African Development Bank would becancelled.
Once the MDRI is fullyimplemented, more than$50 billion of debt stock will havebeen cancelled for43 HIPC countries. About $1 billion a yearwill be freed for spending on poverty reduction by 2007, rising to $1.7billion by 2010. That is assured long-term financing. Countries will beable to plan to use it effectively by, for example, engaging newteachers or health workers, confident in the knowledge that they willbe able to continue to pay their wages.
Zambia, which I visited inOctober with the Minister of State, Department of Health, my hon.Friend the Member for Doncaster, Central (Ms Winterton), to considerthe future of health care there, has said that it will use part of itsdebt relief savings to abolish fees for health care in rural areas. Asa result, thousands of poor people will for the first time gain accessto free health care.
The MDRI involves recipientcountries receiving100 per cent. debt stock cancellation oncethey have completed the HIPC process. Each year, their allocation fromthe World Bank will be reduced by an amount equivalent to what theywould have paid in debt service. At the same time, donors will give thebank additional resources to the full value of the debt serviceforegone. Those resources are to be added to the bank’s otherIDA resources, and distributed to all the poorest countries through thebank’s allocation system.
The overall resultis that all poor countries receiving IDA assistance will be better off.There will be no conditions additional to those under HIPC, which aredesigned to ensure that debt relief benefits poor people. Countriesthat have already completed HIPC will need to demonstrate that they aremaintaining their commitment to poverty reduction and that they aremaintaining good macro-economic and public expenditure management. Allhave been able to do so with the one exception of Mauritania; it wasagreed relatively recently that that country should implement remedialactions before its case is reconsidered.
World Bank governors approvedthe multilateral debt relief initiative last month, and each donor mustnow provide its financing assurances. The UK’s share of thecosts for the IDA are planned to be some £591.57 million between2006 and 2016. We will meet 13.82 per cent. of the total coststhereafter, which we estimate will be approximately £2.8billion. The exact figures for that period will depend on whencountries reach HIPC completion point and on the exchange rate over thecourse of the period. We therefore plan to subscribe to an unqualifiedinstrument of commitment for the initial 10 years and to issue annualpromissory notes on the same basis as we do for regular IDAreplenishments. We intend to offer a qualified instrument of commitmentfor the subsequent 30 years, which will be subject to parliamentaryapproval in 2016 once final costs are available. The funds will beadditional to the resources that the UK already agreed to grant to theinstitutions in question.
On that basis, I commend thedraft order.
MarkSimmonds (Boston and Skegness) (Con): May I, too, say howpleased I am to serve under your guidance and chairmanship thismorning, Mr. Caton?
Istart by putting on record the Opposition’s views. We supportthe HIPC initiative and the principle of debt cancellation throughmultilateral institutions, which if properly managed will make asignificant contribution to alleviating poverty. We support world debtday, which was on Tuesday, and recognise the progress that has beenmade on debt since 2000. We also welcome the G8 agreement on debt,which resulted in 100 per cent. cancellation of the debt owed by 18countries, as the Minister rightly pointed out. We hope that othercountries will benefit from the HIPC initiative’s support to theIMF, IDA and the African Development Fund of the ADB. Prior to the HIPCinitiative, heavily indebted countries were spending more on debtservicing than on health and education combined. We accept the argumentthat debt inhibits economic growth and wealth generation and hindersinvestment in public services such as health andeducation.
Asthe Minister said, the purpose of the order is to make a furthercontribution to the £1.33 billion that the UK committed in the14th replenishment of the IDA, which was considered in Committee on 14February. This further contribution of £591.57 million willreplace funds used by the IDA for debt cancellation under the HIPCinitiative agreed by G8 Finance Ministers in July 2005. Through thereplenishment in full of the funds used for debt relief, the IDA willbe able to continue its work of providing loans on highlyconcessional terms to the poorest countries in the world over 2005-08and 2009-16.
My firstgroup of questions is on the continued provision of concessional loans.Will the Minister confirm whether they will be provided to the HIPCcountries that have just had their debt cancelled or to differentcountries, and if the latter, which ones? Have all the G8 countriescontributed to the multilateral debt relief initiative, and how werethe contribution amounts decided? Will any non-G8 countries contributeto the replenishment of the fund? Does the total amount contributedmatch exactly the debt that has been cancelled, and how was the amountto be paid to the IDA calculated? It is almost impossible to know whatreturn on the debts would have been received, because of different debtrepayment time scales and the fluctuation of exchangerates.
Theexplanatory memorandum states that the £591.57 million is to bepaid in annual instalments. Will the Minister tell us whether thosewill be equal annual instalments between now and 2016, whether thepayment will front-loaded or back-loaded, or whether that detail stillneeds to be worked out? Do the Government anticipate that there will befurther replenishment orders to be discussed before 2016 as the HIPCinitiativeprogresses?
For debt cancellation to beeffective and for the money saved to reach the poorest in society, theinternational community—the Department for InternationalDevelopment must take a lead—must work to enhance governance inHIPC initiative countries to prevent mismanagement of funds and thedamaging economic policies that have initially contributed to the highdebt position.
Arecent International Monetary Fund-World Bank study found that only twoof the debt relief recipient countries have satisfactory capacity totrack Government spending within a one-year period. That should startalarm bells ringing.
Historically, credit wasprovided to poor countries from private credit sources, yet over thepast three decades multilateral institutions have provided the bulk ofthe credit and loans to least developed countries in the event ofwithdrawal by private and non-concessional lenders. The IDA alone hasalmost tripled its share of new lending and by 1997 the share of IDAlending was 8.6 times that of private lending. The IDA continues toprovide loans to LDCs around the world and the UK alone has contributed£1.3 billion for the IDA to loan to countries at concessionalrates.
Responsiblelending and borrowing are vital to ensure that there are sustainablesolutions to debt problems. Many concerns have been raised that thathas not happened in the past in HIPC countries, whose Governments haveoften followed short-sighted policies such as controlling interestrates below the rate of inflation, keeping exchange rates artificiallylow and granting subsidised credit to favoured supporters. Suchpolicies, if they are allowed to continue, are likely only to increasedebts, as they have in the past.
Will the Minister say a littleabout what mechanisms exist to ensure that IDA loans are givenresponsibly in the future, so that the international credit standing ofrecipient countries is not compromised? It is clear that historydemonstrates that lending did not create the right incentives tostimulate economic growth. How will future loans be monitored, so thatwe do not get into the cycle of borrowing and debt cancellation thathas been sodamaging?
Evidenceshows that HIPC countries received less foreign direct investment thanother LDCs, which might be an indicator of poor economic circumstancessuch as high budget deficits and currency overvaluation. How do theGovernment intend to persuade the World Bank and the IDA to establishmechanisms to ensure that stable economies will be promoted after thedebt cancellation? How do the institutions plan to encourage foreigndirect investment, which, I think it is accepted, is the main andsignificant driver for economicgrowth?
I referthe Committee to note 7.7 of the explanatorymemorandum:
“Countriesthat have already completed the HIPC initiative will need todemonstrate that they have maintained their commitment to povertyreduction and good macro-economic and public expendituremanagement.”
Will theMinister explain the consequences for those countries if they do notfulfil those criteria, which I know that he prefers to conditions? Theexplanatory memorandumcontinues:
“Theallocation of additional donor resources through the existingPerformance Based Allocation systems will maintain a strong incentivefor good policy andperformance.”
Will hehighlight and explain to the Committee what is meant by“additional donor resources”? It sounds like hiddenconditionality, of which, in his opening remarks, he said that therewould be no more.
AsI said at the beginning, the Opposition support the HIPC initiative andthe further contributions to the IDA that we are discussing thismorning. However, we are concerned that there seems to be insufficientand ineffective monitoring structures to ensure that the additionalresources made available by the HIPC initiative are used to makeprogress towards the millennium development goals and to alleviatepoverty, which is what we allwant.
SusanKramer (Richmond Park) (LD): The Liberal Democrats verymuch support the HIPC initiative, the IDA programme and thereplenishment order before us. Therefore, I will not take up theCommittee’s time by repeating points that have already been wellmade by others.
Letme limit myself to a series of questions. Programme after programme, weare concerned about other donors of aid and debt relief: the BritishGovernment are stepping forward and fulfilling their pledges andcommitments, but others have been far slower. That is leaving gaps inthe capacity and ability of multilateral institutions in particular toreach the targets that they have promised to the world. Will theMinister comment on how others are behaving and achievingreplenishment?
Doesthe failure of other countries to step up to the plate in the way thathas been expected mean that the figures before us today are a best casescenario? Is it highly probable that the Government will come back tous in future years in an attempt to fill those gaps? Is the Ministerconcerned about the way in which the World Bank is approaching debtrelief and cancellation in contrast to, for example, the IMF, which is approaching the same issueswith more generous terms? For example, the IMF is accelerating itscancellation programme, which will come into effect one year earlier, Ithink, than a similar World Bank programme. Furthermore, the IMF iscancelling debts through to the end of 2004, in contrast to the WorldBank, which is cancelling only through to the end of2003.
As the Ministermentioned, a number of highly indebted countries are not meeting theconditions that would bring them into the arena of debt cancellation.What kinds of strategies does he envisage to draw in those countries,and is he using the World Bank contributions as leverage to attempt tobring those mechanisms into play?
The hon. Member for Boston andSkegness (Mark Simmonds) approached monitoring in a variety of ways.However, I think that everyone in the Committee shares the underlyingconcern about the absence of interim targets, or the measuring ofstandards, from many such programmes, as well as the inability ofcountries to provide information through monitoring. That seems to bean ongoing weakness. Will the Minister talk about the mechanisms thathe anticipates will come intoplay?
In conclusion,in addition to the Government’s work and that of internationalinstitutions, we should pay tribute to the many non-governmentalorganisations and to the public at large, whose pressure, in a sense,has been behind debt relief. That is why it is important to monitor theeffectiveness of theprogramme.
Mr.Dennis Skinner (Bolsover) (Lab): My hon. Friend theMinister has been asked a lot of questions about this, that and theother—the minutiae of the programme. That is okay, and I have nodoubt that he has adequate answers. Praise has been lavished in allsorts of quarters about the fact that the money is okay. I have beenhere for long enough to know that, in most years since 1970, theGovernment have not been in a position to do what they are doing today.We should not forget how we have come to be in this situation. The onlyreason that we are able to make available £591.57 million on topof the more than £1 billion that has already gone in is that theeconomy has been strong for eight and a half successiveyears.
There havebeen 28.5 million people in work, and even in my constituency, wherethe Tories closed every single pit, unemployment is low. People are inwork, and paying taxes and insurance, in direct contrast to what wentbefore. The situation has lasted for such a long time—more thaneight years—that it is the finest economic spurt that we havehad in 200 years.
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