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 funds 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
UKs 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 IMFs 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 IMFs
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 UKs 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 bondsup to $50 billion and
$10 billion respectively. The US has passed legislation to
allow for a $100 billion contribution to the funds 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
IMFthe special drawing rightand currently stands at
2.577 billion SDR. The current limit is equivalent to approximately $4
billion on todays 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
UKs 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 UKs 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 UKs 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
marketsthey 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
IMFs 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 Chinas 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 momentthat is, the money that has been drawn
downand 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 IMFs 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.
Gentlemans 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.
The
hon. Member for Fareham mentioned an unnamed Ministerwe have
never really substantiated thissaying
that visits to the IMF were like a trip to a spa. I do not think that
accessing IMF funds is the equivalent of going to jail, but it is
certainly not a visit to a spa. It might be an uncomfortable visit to a
dentist, when work is being done, but, knowing that it is in their
long-term best interest, someone would want to take advantage of the
facilities. With respect to
Latvia
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 Latvias 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
ƒ,ª1.2 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 ƒ,ª200 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 SDRa unit that is really a
basket of currencieswould 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.