DR 333: Letter to Rt Hon Gordon Brown MP, Prime Minister, from the Chairman of the Committee

 

 

Fluctuations in the value of the Pound

 

I write to express the concern of my Committee about the impact of recent fluctuations in the value of the pound on the ability of the Foreign and Commonwealth Office to maintain its spending commitments overseas. You will be aware that international subscriptions paid on behalf of the UK as a whole are generally paid from the FCO's budget and that the Government is billed by organisations such as the UN, EU and OSCE in US dollars and euros. The Treasury has withdrawn its support for the Overseas Pricing Mechanism, which used to protect departments from weakening of sterling, and whilst the FCO has actively sought to hedge using simple 'outright forward' contracts, this has not protected it from the full effect of the recent drop in the value of the pound.

 

As an example of the effect of such exchange rate fluctuations, in a Written Ministerial Statement on 25 March the Government announced that of the £556 million available in 2009/10 for conflict resource (excluding military operations in Afghanistan and Iraq), £456 million has been allocated by the FCO to cover the projected rise in the cost of peacekeeping contributions for which the UK has a legal obligation. Since the Treasury reserve has only allocated £374 million for peacekeeping this has necessitated cuts in other areas of the FCO's work.

 

In our recent Report on the FCO's Annual Departmental Report 2007-08, we reached the following conclusion:

 

We are deeply concerned that as a result of the Treasury's decision to withdraw its support for the Overseas Price Mechanism, the FCO may not be able to meet higher international subscriptions over the next two financial years unless it cuts its activities. We conclude that it is deplorable that the FCO should have to shoulder the financial burden from within its already tight budget to pay for subscriptions which also benefit other Government departments, and we recommend that additional non-discretionary costs should properly be met by the Treasury. (Foreign Affairs Committee, Second Report of Session 2008-09 (HC 195), para 214)

 

It is a matter for great concern that work in critically important fields such as conflict prevention is being undermined as a consequence of currency fluctuations which are outwith the control of the FCO. My colleagues and I are strongly of the opinion that cuts in conflict prevention could prove very short-sighted and may lead to heavier burdens on public spending in the future.

 

We wish to repeat our recommendation that the Government should pay non-discretionary costs such as subscriptions to international institutions directly from Treasury funds, and should put in place a mechanism to ensure that at this time of financial difficulties the work of the FCO, critical to long-term international stability and the interests of the UK, can be maintained at its previous level. We consider it appropriate for such allocations to be made wholly from the Treasury reserve.

 

I am copying this letter to the Chancellor of the Exchequer and the Foreign Secretary.

 

 

2 April 2009