Written evidence submitted by the Jubilee
Debt Campaign
1. INTRODUCTION
Jubilee Debt Campaign is part of a global movement
working for full cancellation of unpayable and unjust poor country
debts, by fair and transparent means. Jubilee Debt Campaign is
a UK coalition of national organisations and local groups, supported
by thousands of individuals. It is a company limited by guarantee
(number 3201959) and a charity registered in England and Wales
(number 1055675). See www.jubileedebtcampaign.org.uk for more
details.
2. POVERTY REDUCTION
IN AN
INTERDEPENDENT WORLD
Jubilee Debt Campaign recognises DFID's historic
commitment to debt relief, as a form of finance for poverty reduction
which is recognised to be predictable, flexible, non-cyclical
and with low transaction costs. However there is a clear need
for a major re-engagement with the debt issue, if countries are
going to be able to raise sufficient funds for development and
poverty eradication.
3. Wider, deeper debt cancellation is urgently
needed to help countries at risk of debt distress and facing funding
shortfalls in meeting their people's basic needs. Additional emergency
financing in the current downturn is also vitally important but
DFID must ensure that such financing, whether given bilaterally
or channelled through international institutions, is provided
largely in the form of grants, not loans, and comes without harmful
economic policy conditions attached. Otherwise there is a real
danger that new unpayable debt burdens will be created for the
future.
4. Sustainable development agenda across
Government
It is vital that the UK Government has a cross-Whitehall
approach to sustainable development, and DFID should play a key
role within Government advocating for such a joined-up approach
in order to protect the poorest. In this regard, we are particularly
concerned about the role of the Export Credit Guarantee Department
(ECGD), which has, with other export credit agencies, been given
a key role in responding to the economic crisis by the G20 and
in turn by national Government. While it is important to take
action to protect trade finance, ECAs have supported high-risk
investments in many poor countries that have been linked to human
rights violations, corruption and environmental damage. We now
have an opportunity to rethink how export finance might better
serve the poor and the environment. There is at present an enormous
accountability gap in so far as the activities of ECAs are inadequately
monitored for their social and environmental impacts, and are
often operating in ways that are incompatible with the international
human rights obligations that the ECAs' home states have agreed
to meet.
5. This is particularly concerning when
the ECGD holds some 95% of remaining developing country debt claims
owed to the UK. At the current time, the ECGD is initiating new
schemes for export credit insurance which will be exempt from
the department's own "Business Principles" on environmental
and human rights standards and sustainable development. There
is a real danger that, without significant reforms, new loans
through the ECGD could create future unjust debt burdens for the
poor.
6. PROMOTING
ECONOMIC RECOVERY
The current crisis is a moment for real change
in the economic model. The "Washington Consensus" approach
of deregulation, liberalisation, and complete faith in free markets,
has been acknowledged to be a failure. We must look towards different
solutions for countries to tackle poverty in the longer-term.
This includes changes to the global financial architecture, and
in the nature of international financial flows.
7. The global financial system is based
on vast amounts of capital flowing across the world, large sums
of it in debt service, tax evasion and avoidance, other forms
of illicit capital flight, and speculation. These flows are at
best not contributing to efforts to tackle poverty, and at worst
are actually damaging countries' ability to raise sufficient funds
domestically to finance their own development. These flows must
be plugged, and reversed, so that countries can raise more taxes
to invest in their own economies and public services, be less
dependent on aid and lending, and less at risk from the volatility
of speculative capital.
8. DFID must consider, and actively engage
with, bold new approaches to economic development and poverty
eradication. However, it seems that such approaches have been
sidelined, as was evident at the UN conference on the impact of
the financial crisis on development in June. This conference could
have endorsed new ideas, such as those put forward in the report
of the Commission of Experts of the President of the UN General
Assembly on Reforms of the International Monetary and Financial
System chaired by Nobel laureate Joseph Stiglitz. Its findings
call for an international debt work-out process which would allow
for far greater and fairer debt cancellation, an end to forced
conditionality, a global Economic Council and a new reserve currency
to replace the dollar. Such ideas must be considered, not simply
to minimise the impact of the current crisis on the poor, but
to use the opportunity the crisis presents to build new policies
and practices that will help eradicate poverty for good and which
enable a more equitable, democratic global economic system.
9. Emergency funding for developing countries
Sufficient emergency funding must be delivered
as soon as possible to enable developing countries to invest in
economic stimulus and social protection measures. Such funding
must come without harmful economic policy conditionality. Insisting
on certain macroeconomic policies, public expenditure cuts, deregulation,
liberalisation and privatisation has interfered with domestic
decision-making processes, has frequently led to serious and damaging
impacts on poverty and the environment, and has contributed to
the spread of the financial crisis. DFID must ensure that its
own progressive stated policy in this area is reflected in the
IMF and World Bank, where increasing amounts of UK funds are being
directed.
10. We also note that the latest World Bank
analysis finds an $11.6 Billion gap in core spending on education,
health, social safety nets and infrastructure in 2009 for
the poorest 43 countries alone.[46]
As the Bank acknowledges, for those countries already struggling
with high debt burdens, what is needed to fill this gap is funding
that does not add even further to their debts. Additional resources
to help these countries tackle the crisis must be delivered as
much as possible in grants, rather than loans. Any lending must
be highly concessional, taking into account debt sustainability
based on measures of human development. Many countries are facing
a renewed debt crisis in the current downturn, and emergency funding
must not exacerbate this further. DFID has a welcome policy on
providing aid in grants and not loans to the poorest countries
in its bilateral programmes, but this is not followed through
in the IMF and World Bank. DFID must ensure that it follows through
on its own policy here as well, especially given its role as the
largest donor to IDA.
11. Meanwhile it is important that donors
continue making progress towards giving 0.7% of national income
as aid. New debt cancellation must be counted separately from
donors' aid commitments. Both increasing aid volumes and substantial
debt cancellation are required to enable developing countries
to cope with this crisis.
12. Extra Debt Relief
The Government has for some time acknowledged
the need for debt cancellation for all IDA-only countries, evidenced
in the existence of the UK's own Multilateral Debt Relief Initiative
(MDRI) scheme. We would urge DFID to take the lead in seeking
agreement on this measure internationally, and are disappointed
that the Annual Report and White Paper make no mention of this
proposal. Debt relief is the easiest and most efficient way to
provide the assistance countries require. All IDA-only countries
not eligible for the Heavily Indebted Poor Countries Initiative
(HIPC) should be provided with debt relief. The international
community should also provide debt cancellation for those low
income countries experiencing or projected to experience debt
distress due to the current crisis.
13. Creditor responsibility
There is a growing understanding of the need
for creditors to share responsibility for the debts that have
arisen from their past lending. Recent developments include Norway's
2006 write-off of some debts of five developing countries
on the basis of acknowledging their "development policy failure";
the World Bank report and roundtable event on the issue of odious
debt in 2008; and Ecuador's debt audit, published in autumn 2008 and
resulting in Ecuador refusing to meet its repayments on some of
its bonds.
14. This last example highlights the need
for a global framework for settling sovereign debt disputes, along
the lines of an arbitration tribunal mechanism, so that countries
have a forum where they can bring such claims. As part of international
institutional reforms currently being considered, an international,
fair and transparent debt work-out process should be created and
binding international responsible lending standards should be
agreed. In the interim, the debt portfolios in both borrower and
lender countries, including the UK, need to be audited so that
illegitimate debts arising from irresponsible loans can be written
off. This would help to ensure a more just and sustainable lending
environment and prevent debt crises in the future.
15. We recognise that these reforms cannot be
achieved by one country alone, but the UK should be seeking to
regain its global leadership on the debt issue by pursuing these
emerging challenges.
16. Regulating Financial Actors
The huge overexposure to risk and accumulation
of bad debts at the heart of the financial crisis has revealed
widespread under-regulation of financial market actors, including
hedge funds and other actors in secondary debt and derivatives
markets. One such group are the "distressed debt funds"
or "vulture funds".
17. The activities of vulture funds stand
in complete contradiction to, and indeed undermine, international
efforts to reduce the unsustainable debts of the poorest countries
in order to tackle poverty, for example through HIPC and MDRI.
Moreover, in taking legal action against countries' commercial
partners in order to gain the assets they may have been awarded
by the courts, vulture funds create uncertainty and instability
in those countries' trading and investment relationships, arguably
discouraging creditors from investing in such an environment.
Especially in the context of the global financial crisis, which
has already led to a lack of credit and investment in developing
countries, it is imperative to create as predictable and conducive
an environment for trade and investment as possible. Tackling
vulture funds is an important part of this effort.
18. We welcome the actions of the Government
thus far, including the provision of legal support and funding
towards the buy-back operations managed by the World Bank's Debt
Reduction Facility. However, preventative action is needed in
order to stop the activities of vulture funds. DFID should work
with others in Government, for example in HM Treasury, to introduce
legislation to clamp down on vulture funds. In this regards we
strongly welcome the Treasury's current consultation on such legislative
change and look forward to these proposals being adopted in the
near future.
19. SUSTAINING OUR
COMMON FUTURE
Sources of finance and governance structures
Wealthy countries have a moral obligation to
ensure that the poorest have the resources to enable them to pursue
sustainable development, whilst adjusting to the impacts of climate
change. We are particularly concerned by DFID's support for the
use of loans for financing responses to climate change, and for
the prominent role of the World Bank in managing the provision
of climate change finance. Resource transfer for climate change
adaptation and mitigation must be additional to ODA, and take
the form of grants, not loans. Better and more coherent governance
arrangements are needed for such finance, with the United Nations
Framework Convention on Climate Change (UNFCCC) playing a central
role, rather than the World Bank.
20. Grants not loans
Rather than treating the provision of climate
financing as binding obligations by industrialised countries to
developing countries under the UNFCCC, the World Bank's Clean
Investment Funds are designed within the aid framework of donor
and recipient. This is particularly inappropriate given the large
historical responsibility of industrialised countries for creating
emissions. Developing countries should not have to pay for the
industrialised world's pollution by receiving loans to adapt to
the climate crisis they did not create. This will only add to
their economic debt burden, rather than acknowledging the ecological
debts they are actually owed.
21. Moreover, funding to help developing
countries respond to the challenges of climate change must be
explicitly additional to the long-standing ODA commitment of 0.7%
of national income.
22. Wider concerns over the role of the World
Bank
We also have the following concerns over the
involvement of the World Bank in managing the financial arrangements
for tackling climate change:
— Despite professed concern regarding climate
change, the World Bank Group is actually increasing its support
for fossil fuel projects. Given the World Bank's existing and
increasing support for fossil fuels, it is an inappropriate institution
to lead the fight against global climate change.
— The World Bank is effectively a major
deforester. Deforestation accounts for some 20% of global greenhouse
gas emissions, but the Bank continues to promote industrial logging
and agro-fuels.
— Numerous communities throughout the world,
including those impacted by the Chad-Cameroon pipeline and the
Nam Theun 2 Hydropower Project in Laos, have suffered human
and environmental rights violations as a direct result of World
Bank-backed projects.
— The World Bank's governance structures
need fundamental reform so that the voices of developing countries
can be properly heard and taken into account.
23. Rather than promoting the role of the
World Bank in an international climate regime, we would ask DFID
to establish a financing mechanism fully accountable to the UNFCCC,
based on equity and in accordance with the historical and current
responsibilities of industrialised countries, with predictable,
new and additional funding directly accessible to recipient countries,
which does not create new debt burdens for the future.
24. BUILDING
PEACEFUL STATES
AND SOCIETIES
Many of the countries eligible for HIPC debt
relief, which have either not yet qualified or which have been
between Decision Point and Completion Point for some years now,
are post-conflict or fragile states. Democratic Republic of Congo,
Guinea Bissau and Afghanistan are examples of countries caught
between decision point and completion point in this way.
25. Debt relief, which has its own benefits
and also helps to attract other sources of budget support, is
a vital mechanism to support peace and stability efforts in these
countries. DFID should work with the IMF and the World Bank to
ensure speedy completion of the HIPC process. This would include
developing mechanisms to quickly clear arrears that pre-HIPC countries
have with participating institutions, and following the precedent
set by Liberia, where a Staff Monitored Programme was counted
towards the track record requirements, rather than a longer, more
onerous PRGF track-record.
26. KEEPING PROMISES
IN A
DOWNTURN
We are disappointed that DFID make no reference
to the need for wider, deeper debt relief in the White Paper section
on holding to past commitments. While much debt relief has been
delivered, 14 countries have still not completed the HIPC
debt relief scheme, and many more are not eligible for assistance.
Yet the Government has in the past acknowledged the need for at
least the poorest countries, which qualify for IDA concessional
finance from the World Bank, to receive debt relief.
27. HIPC and MDRI debt relief schemes
The international initiatives administering
debt relief, and the institutions governing them, are fraught
with difficulties. Both the HIPC and MDRI schemes are managed
by the International Development Association of the World Bank,
and the IMF. This in itself is highly problematic because many
of the debts of HIPC countries are owed to these institutions.
This means that the institutions have a fundamental conflict of
interest, between seeking repayment of the debts owed to them,
and seeking the debt sustainability of the country involved.
28. Moreover, these multilateral creditors
and their shareholders, who are also creditors, share no accountability
or responsibility for the creation of these debts in the first
place. As the UN Independent Expert on foreign debt, Dr Cephas
Lumina, noted at the Financing for Development conference in Doha
in December 2008, "the days of creditors playing prosecutor,
judge and jury in debt issues must end."
29. These international schemes should also
have the arbitrary eligibility criteria, which prevent many indebted
poor countries from qualifying, removed and there should be an
end the inappropriate and undemocratic use of economic policy
conditionality that means debt relief schemes can actually cause
harm as well as good.
30. Avoiding a new debt crisis
Despite these drawbacks, where debt relief has
been delivered, it has had a hugely beneficial effect in developing
countries. Debt relief is critical to enhance governments' fiscal
space to boost the real economy and maintain social spending,
rather than using scarce financial resources to fulfil creditors'
demands. Development economists and donor countries have long
recognised the strengths of debt cancellation as a form of financing
for poverty reduction which is predictable, flexible and non-cyclical,
and has low transaction costs. However, to date it has been slow,
insufficient, and for too few countries. There has been no attempt
to reform the international lending and debt system at a structural
level. Moreover the current financial crisis threatens to push
dozens of poor countries back into debt crisis.
31. Further debt cancellation is urgently
needed to release funds in developing countries for economic stimulus
and social protection. Eligibility for debt cancellation should
be based on a human development measure of sustainability, which
would mean much more debt cancellation for many more countries.
Jubilee Debt Campaign estimates that at least $400 Billion
should be cancelled for around 100 countries if they are
to be able to pay for essential services for their people without
having to tax those below the poverty line.
32. ACTING TOGETHER
THROUGH THE
INTERNATIONAL SYSTEM
The Role of the World Bank and IMF
There must a transformation at both the World
Bank and IMF, to ensure that they are properly democratised, are
made fully transparent and accountable, and respect international
standards on human rights, the environment and labour. Furthermore,
much of the assistance provided by the World Bank and IMF is in
the form of loans, not grants. These loans contribute to poor
countries' debt burdens and increase the influence of these institutions
over poor countries through the imposition of policy conditions.
33. Although the focus of DFID has traditionally
been on the World Bank, the IMF plays an increasingly important
and often long-term role in the poorest countries. Indeed the
G20 has given the IMF an even greater mandate in relation
to Low Income Countries. This must in itself be questioned. In
the meantime, given its expertise on development, it will be important
for DFID to work closely with HM Treasury to ensure the IMF is
fundamentally reformed for the benefit of poor countries.
34. Further UK support for the World Bank
and IMF should be dependent on ambitious reforms including on
concessionality, conditionality, governance and impact assessment.
If such radical change is not forthcoming, new institutions should
be considered that are fair, representative and attuned to local
needs. Regional models such as the embryonic Bank of the South
should also be considered and supported.
35. Institutional reform to create a new debt
work-out mechanism
The current debt relief initiatives are inflexible,
entirely creditor-controlled, and wholly inadequate to meet the
challenge of the continuing debt crisis, particularly with many
more developing countries now being at risk. The financial crisis
and the possible increase in debt problems we will most likely
see in the months ahead, bring into sharp focus the need for existing
ad hoc debt relief schemes to be replaced with an international
forum—akin to a tribunal—to deal with sovereign debt
work-outs. Accordingly, there needs instead to be an open, impartial
and transparent debt tribunal which could resolve debt crises
and disputes, as was strongly supported by 77 developing
countries at the UN Financing for Development conference in December
2008.
36. Such a process would take account of
both the origin and the impact of the debts, and would give equal
treatment to both debtors and creditors, acknowledging the co-responsibility
that creditors share for the creation of these debts and giving
scope to assess debts on the basis of illegitimacy as well as
sustainability.
37. This debt work-out process would also
place the same moral and legal obligations on companies as it
does on governments, thus tackling the current lack of participation
by commercial creditors, and at the extreme end, the actions of
so-called "vulture funds" discussed earlier in this
submission. The aggressive approach by vulture funds is typical
of the rogue behaviour that has been exposed in the financial
markets in recent months, where pursuit of profit has been put
before values, such as human development and freedom from poverty,
which the market must be made to serve.
46 Protecting Progress: The Challenge Facing Low-Income
Countries In The Global Recession, World Bank, September 2009 Back
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