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Session 2008 - 09
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Public Bill Committee Debates



The Committee consisted of the following Members:

Chairman: Mr. David Wilshire
Austin, John (Erith and Thamesmead) (Lab)
Breed, Mr. Colin (South-East Cornwall) (LD)
Browne, Mr. Jeremy (Taunton) (LD)
Dowd, Jim (Lewisham, West) (Lab)
Duddridge, James (Rochford and Southend, East) (Con)
Evans, Mr. Nigel (Ribble Valley) (Con)
Hoban, Mr. Mark (Fareham) (Con)
Holloway, Mr. Adam (Gravesham) (Con)
Hopkins, Kelvin (Luton, North) (Lab)
Hughes, Beverley (Stretford and Urmston) (Lab)
Keen, Alan (Feltham and Heston) (Lab/Co-op)
McNulty, Mr. Tony (Harrow, East) (Lab)
Mercer, Patrick (Newark) (Con)
Mudie, Mr. George (Leeds, East) (Lab)
Pearson, Ian (Economic Secretary to the Treasury)
Ryan, Joan (Enfield, North) (Lab)
Mark Oxborough, Committee Clerk
† attended the Committee

Twelfth Delegated Legislation Committee

Thursday 2 July 2009

[Mr. David Wilshire in the Chair]

Draft International Monetary Fund (Limit on Lending) Order 2009
8.55 am
The Economic Secretary to the Treasury (Ian Pearson): I beg to move,
That the Committee has considered the draft International Monetary Fund (Limit on Lending) Order 2009.
It is a pleasure to serve under your chairmanship, Mr. Wilshire. The order increases the limit on the amount that the International Monetary Fund can borrow from the UK. Over the past few months, countries across the world have made important commitments to increase the resources available to the IMF. It is now crucial that these commitments are finalised, so that the fund has increased capacity to support the stability of the international monetary system. Through its core responsibilities for economic surveillance and the provision of financial assistance, the IMF has a critical role in promoting economic growth and financial stability. A reinvigorated IMF, with greater resources and a well-focused mandate, is needed to ensure that the response to the crisis is co-ordinated and comprehensive, and that the global economy is put on a sustainable path to recovery and growth. As part of the global drive to safeguard the fund’s lending capacity, the UK has announced its intention to provide a $15 billion bilateral loan. The order will allow the UK to fulfil its international responsibilities and help the IMF carry out its vital mandate.
An important outcome of the London G20 summit on 2 April was the UK’s brokering of an agreement to treble the lending capacity of the IMF from $250 billion to $750 billion. Of that money, $250 billion will be provided through bilateral arrangements, as this represents the quickest way to mobilise the needed resources. G20 leaders also agreed to a future enlargement of the IMF’s multilateral new arrangements to borrow, by up to $500 billion, alongside an expansion of the number of creditors. It is envisaged that the bilateral loans will serve as a bridge to the expanded new arrangements to borrow. If the fund should need to call upon these loans, they would be repaid to the lender country in full and with interest.
The funds will be targeted at supporting growth in emerging markets and developing countries by helping finance counter-cyclical spending, bank recapitalisation and balance of payments support. Alongside this substantial increase in resources, the IMF has, over the past few months, made significant reforms to its lending framework to enhance flexibility and better tailor its facilities to the needs of members. It is crucial that emerging and developing economies can continue to receive the capital flows on which they depend. Some 70 per cent. of world economic growth has come from those economies over the past few years, and we must not let them down now. Without concerted international action, vulnerable countries might face difficulties securing financial support from the IMF, which could quickly exacerbate the costs of the global economic crisis. We must ensure, therefore, that the increased pressure on the IMF’s lending capacity is addressed swiftly and that additional resources are received without delay. It is also necessary to ensure that the responsibility of providing these resources is shared fairly across IMF membership.
The UK has been encouraging countries, including other European Union member states, to move quickly to implement the London summit commitments. As a result, the EU is ready collectively to lend $100 billion in immediate support to the fund, which will come in the form of bilateral loans agreed between the IMF and individual EU member states. The UK’s contribution of $15 billion towards the EU commitment is consistent with its economic weight in the world, as defined by our quota share. France, with an equal quota share in the IMF, has already announced that it will provide an equivalent sum. Non-EU countries are also doing their bit. For example, Japan has recently finalised a $100 billion bilateral loan agreement with the IMF. Similarly, China and Brazil have announced their intention to purchase IMF bonds—up to $50 billion and $10 billion respectively. The US has passed legislation to allow for a $100 billion contribution to the fund’s new arrangements to borrow.
For the UK to be able to demonstrate its continued commitment to doing what is necessary to tackle this global economic crisis, the Government are seeking to increase the limit that the IMF can borrow under the International Monetary Fund Act 1979. The limit was last amended in 1997. It is denominated in the unit of account used by the IMF—the special drawing right—and currently stands at 2.577 billion SDR. The current limit is equivalent to approximately $4 billion on today’s exchange rate.
The order will raise the limit to 12.47 billion SDR, equivalent to $19.3 billion or £11.68 billion. The increase would allow the UK to finalise a $15 billion bilateral loan arrangement with the IMF and accommodate the UK’s existing commitments under the current new arrangements to borrow. I am sure hon. Members will welcome the important measure we are seeking to introduce today, which will ensure that the IMF is equipped to do its job during the current crisis and in the years ahead.
9 am
Mr. Mark Hoban (Fareham) (Con): It is a pleasure, Mr. Wilshire, to serve under your chairmanship. If the Treasury had a better sense of timing it would have tabled the statutory instrument for debate yesterday, 65 years after the start of the Bretton Woods conference, which established the IMF. Agreeing to an increase in the UK’s share of the facilities provided to the IMF is one way of celebrating that anniversary.
Hon. Members may have heard Lord Healey on “Desert Island Discs” a few weeks ago, commenting that when the Labour Government called in the IMF in 1976, it was down to a forecasting error of £2 billion in Treasury estimates. The current Chancellor or Prime Minister would be greatly relieved to have a forecasting error as low as £2 billion.
The Economic Secretary set out the case for the UK’s increasing its commitment to the IMF. A number of countries already draw on IMF facilities: Hungary, Iceland and Latvia are already taking part in the stand-by agreements. The Economic Secretary talked about emerging and developing economies, some of which are close to home and fellow members of the EU.
Why do those countries require funds from the IMF? To stabilise a banking system that is too big for the size of the domestic economy. Perhaps they did not fix the roof when the sun was shining, the state of their public finances was poor, they had allowed spending to increase out of control and had not put money aside for difficult times. They were perhaps economies that had lost the confidence of international debt markets—they could not fund their public borrowing requirements through the debt markets and had to go to the IMF. The debt markets were closed to those countries because they did not have a credible plan to get their public finances under control. It all sounds familiar in one way or another.
I want to ask the Economic Secretary some questions about the measure. He said that it was part of a package that was agreed at the G20 summit in April. The explanatory memorandum says that there was a commitment at the summit to triple IMF resources to $750 billion, with an immediate increase of $250 billion. The Economic Secretary mentioned some countries that had signed up to the commitment. How much of that $250 billion has already been committed to the IMF?
The Economic Secretary talked about the amounts that the US Congress had approved towards the new borrowing arrangement, which seemed larger than the initial increase. How much have the American Administration agreed to contribute to the immediate increase in facilities available to the IMF? Will the Economic Secretary say a bit about how we are going to account for it in the UK? I assume that the Government will end up borrowing money to fund these commitments. The matching asset means that there will be no increase in national debt, but the amount will be added to our funding requirement, for which the latest figures I saw suggest that the Government had to borrow about £220 billion this year, or find the funds for that amount from gilt markets.
Will the amount that we are debating today be paid to the IMF straight away, or will it be drawn down as required? If the UK is in a position to advance that money, having signed up to the commitment, will we draw down our commitment or will those states that have agreed their commitment first be first to be called upon? What are the arrangements for drawing down resources from other countries?
As I said earlier, countries have already used the stand-by arrangements; I mentioned Latvia and Hungary. Latvia has a joint funding package from the EU and the IMF, but the Latvians seem to be able to arbitrage between the funds. The IMF was not sure that the Latvians had taken on its measures to reduce public spending seriously enough, so withheld a proportion of funds, whereas the EU had committed funds. Are the Government clear that proper arrangements are in place to ensure that, where countries sign up to receive support from both the IMF and the EU, member states are not able to arbitrage between the sources of funding, leading to more funds being drawn down from the EU than from the IMF?
At the time of the G20, an unnamed Minister described a visit to the IMF as a trip to a spa; I am not sure what spas Ministers experience these days. I do not know whether the Economic Secretary is a regular spa visitor, but when I read stories about, for example, Latvia, where there have been cuts in public sector pensions, pay and staff, I do not think that anyone should believe that a visit to the IMF is as easy as a visit to a spa. The IMF extracts a high price for its commitment to help states see through the financial crisis. That re-emphasises the importance of ensuring that Governments throughout the world, who have borrowed significantly to tide them through the economic crisis, have credible plans in place to restore public finances.
9.7 am
Mr. Colin Breed (South-East Cornwall) (LD): I thank the Economic Secretary for his statement. Obviously, we should fulfil our responsibilities to be part of the fund and assist those countries caught up in now dire economic circumstances, sometimes through no fault of their own. I assume that all countries that have committed to this will put their money where their mouth is at the same time. Too often, commitments are given to all sorts of things and then, so many months or years later, we find that people have not fulfilled them. Our $15 billion is part of the $100 billion. Will everyone be putting their money in at roughly the same time so that we are not leading the charge? Will others ultimately cough up? That is an important factor.
Is the Treasury contemplating having to avail ourselves of IMF support in the next five years or so? I ask that in all seriousness, not in a partisan sense.
9.8 am
Kelvin Hopkins (Luton, North) (Lab): It seems that though donations to the IMF are denominated in dollars, any receipts from it are denominated in special drawing rights, which is a weighted average of major currencies. Given that exchange rates have been fairly volatile in recent months, is there control over when the donation is made and is any attention paid to the exchange rate against the dollar? Why not donate in SDRs rather than dollars?
9.9 am
Ian Pearson: Let me respond to the comments made. First, I do not particularly share the analysis of the hon. Member for Fareham of the circumstances in the countries that have accessed the IMF’s stand-by arrangements to date. There are various reasons why each has had to do so; some directly related to the problems in the banking system as a result of the global financial crisis.
In terms of commitments to date, the hon. Member for Fareham will be aware that at the moment, several countries have made pledges and are going through the legal processes of getting parliamentary and other authorisation to make that money available to the IMF. In my opening remarks, I referred to the United States, Japan and France. In addition, I can report that Canada and Norway have pledged bilateral loans of $10 billion. I have mentioned China’s bond purchases and $50 billion. Brazil and Russia have made $10 billion in bond purchases. South Korea has pledged $10 billion and Australia $7 billion toward the new arrangements for borrowing. I understand that all those countries are making progress on realising those pledges, which were made at the London summit. It is important that we do the same here.
Mr. Hoban: I am grateful for that clarification, but I sense an element of mixing apples and pears. The commitment in London was to increase facilities by $250 billion. I understand from the explanatory notes that that is part of the new arrangements for borrowing. What proportion of the $250 billion has been committed?
Ian Pearson: I am trying to indicate that different countries have made commitments to provide bilateral loans and are in the process of seeking authorisation, as we are today, so that those loans can be made available. The commitment has been made, but each country must go through a process of achieving authorisation. The wider point, towards which the hon. Gentleman is perhaps pushing, concerns how that is likely to work. Bilateral loans are likely to be made available immediately to the IMF, and there will be a process whereby those loans will translate into the new arrangements for borrowing, which will be the more permanent facility made available to the IMF.
In terms of the accounting, I can confirm that the process will not add to public sector net debt. Money will be drawn down as required by the IMF rather than paid up front. As the hon. Gentleman follows these issues closely, he might well be aware of the report that we published earlier this week, “The UK and the IMF 2007 and 2009: responding to global economic challenges”. Annexe B contains a lot of detail about how the draw-down system works, what the reserve tranche position is at the moment—that is, the money that has been drawn down—and how that relates to the quota that we are committed to providing to the IMF.
Mr. Breed: I thank the Economic Secretary for that helpful information. Although it might be the IMF’s option to draw down the money, will it draw down in proportion or select certain victims to draw down from at any given moment?
Ian Pearson: That was the key point in the hon. Gentleman’s contribution. I am happy to confirm that the IMF tries to ensure that the burden is shared equitably among contributing member countries. That will continue to be the case with the draw-down of the different bilateral loan arrangements. It is my understanding that the IMF is currently examining what it calls its operating modalities for the new circumstances in terms of the additional money being committed, but the intention is clearly that it will operate on an equitable basis and money will be drawn down as required.
Mr. Hoban: The Economic Secretary was about to talk about Latvia, where there has been a 2 per cent. cut in state salaries and a 10 per cent. cut in pensions, as part of the IMF package. Is that simply going to the dentist?
Ian Pearson: It seems like root canal work for the country in question, but it is in Latvia’s long-term interest to adopt a new fiscal package. If the measures are fully implemented, they are expected to achieve a significant fiscal consolidation in 2009 and 2010.
The hon. Gentleman knows that on 26 June the Economic and Financial Committee approved the disbursement of the second instalment of the EU medium-term balance of payments assistance to Latvia, amounting to ,1.2 billion by the end of July. The IMF is still assessing the new measures and has yet to make a decision on the disbursement of the second tranche of ,200 million of the programme loan. There is clearly close co-ordination between the EU and the IMF, so I do not think that the arbitrage opportunities that he mentioned are particularly relevant.
My hon. Friend the Member for Luton, North made a point about exchange rates. Pledges were made in dollars at the G20 London summit because that is more easily understandable to a wider audience. A communiquA(c) that talked about SDR—a unit that is really a basket of currencies—would not have been very intelligible. The UK has in the past denominated its loans to the IMF in SDR terms, and that is how we and, I understand, other member states operate.
I hope that I have dealt with the comments that were made in the debate, apart from the question by the hon. Member for South-East Cornwall about whether the UK is likely now, or in the near future, to approach the IMF for a loan. That is not the case, and what we are doing today is the reverse of that. We are prepared to do our bit internationally to make funding available to the IMF so that it can loan that money on to nations that need it, to help promote international financial stability. That is a good thing for us to do.
The Chairman: Now that the dentists have finished their work, we come to the mouthwash at the end of the treatment.
Question put and agreed to.
Resolved,
That the Committee has considered the draft International Monetary Fund (Limit on Lending) Order 2009.
9.18 am
Committee rose.
 
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