Debt relief in low-income countries

Defining debt relief

We define debt relief as a broad term covering several approaches, including debt cancellation, debt restructuring and debt service suspension. A brief description of each of those concepts is provided below.

Box 1: Glossary of debt terms

• Debt Stock: constituted of two parts: “principal” and “interest.” The principal is the original amount of loan outstanding. A country’s debt stock is this plus the interest accrued (as well as any penalties for failure to make payments).
• Debt distress: when a country has started, or is about to start, a debt restructuring, or when a country is accumulating arrears.

Debt relief can take several forms, including:

• Debt cancellation: partial or 100% relief on the principal and/or interest.
• Debt rescheduling: payments (interest and/or principal) delayed or rearranged to a later date.
• Debt service suspension (flow relief): partial or 100% pausing of debt service payments.

1 Introduction

Our inquiry

1. In April 2022, we launched an inquiry on debt relief in low-income countries. Our previous work on the impact of coronavirus highlighted that not only had the pandemic pushed many countries into debt distress, but debt was preventing low-income countries from responding adequately to the pandemic.¹ We wanted to explore the wider development impacts of debt and how the UK Government could help low-income countries to reduce their debt to more sustainable levels, freeing vital funds to pursue the United Nations’ Sustainable Development Goals.²

2. We launched a call for written evidence and took oral evidence from witnesses both in the UK and overseas to explore the key issues. We heard how previous attempts to reduce debt to more sustainable levels through debt relief had delivered mixed results. Many witnesses identified the lack of participation in debt relief schemes by the private sector as a barrier to progress. We therefore engaged with low-income country creditors in the private sector.

3. Although debt relief is a policy lever that is primarily used to support international development, overall responsibility for UK debt relief policy lies with HM Treasury rather than with the Foreign, Commonwealth and Development Office (FCDO). The cross-government nature of debt relief means that we took evidence from both HM Treasury and the FCDO.

Context

4. According to the latest World Bank International Debt Statistics,³ the external debt stock of low-income and lower-middle income countries increased to nearly $2.9 trillion in 2021, as shown in Figure 1. External debt stocks rose sharply in response to the covid-19 pandemic, and in monetary terms these countries now owe more debt than ever.

Figure 1: External debt stocks of low and lower-middle income countries

Source: World Bank, International Debt Statistics 2022

5. To put debt levels in context and to understand the sustainability of debt, it is important to examine debt levels alongside other macroeconomic indicators. As Figure 2 shows, debt as a proportion of Gross National Income (GNI) decreased over the course of the 1990s and 2000s before rising sharply after the 2008 financial crisis. In 2020, external debt stocks as a percentage of GNI for low-income countries reached the highest level since the early 2000s, before falling slightly in 2021 as economic activity rebounded after the easing of the covid-19 pandemic.⁴

Figure 2: External debt stock as a percentage of Gross National Income (GNI)

Source: World Bank, International Debt Statistics 2022

6. As overall debt levels have increased, so too have debt servicing costs. As Figure 3 shows, debt servicing costs were particularly low for low-income countries in the early 2010s, at less than 1% of national income on average. However, they increased sharply in recent years. Low-income counties are spending more on debt servicing as a proportion of GNI than at any point in at least the past 30 years.

Figure 3: External debt service as a percentage of Gross National Income (GNI)

 

Source: World Bank, International Debt Statistics 2022

7. We received evidence highlighting the concerning trend in the relationship between total external debt and revenue. Stephanie Blankenburg from the United Nations Conference on Trade and Development (UNCTAD) told us that in low-income countries over the past decade debt stocks amount to double export earnings on average.⁵ In Somalia in 2020, for example, the share of Government revenue spent on debt servicing was around 98.9%. Comparable figures for other countries were almost 60% in Sri Lanka and 56% in Angola.⁶ According to Debt Justice, average government external debt payments in low-and-middle-income countries were 14.3% of government revenue in 2021, an increase from 6.8% in 2010.⁷

International events

8. The coronavirus pandemic and the current debt crisis are linked. The pandemic accelerated low-income governments’ dependence on external loans,⁸ because those governments took on additional debt to fund exceptional pressure on public services such as healthcare. Mae Buenaventura, Debt Justice Programme Manager at the Asian Peoples’ Movement on Debt and Development, explained how in Asia the debt-to-GDP ratio surged to nearly 300% from 266% in late 2019.⁹ The World Bank has stated that the largest single-year percentage point increase since at least 1970 in debt-to-GDP occurred in 2020.¹⁰

9. Russia’s invasion of Ukraine increased global commodity and food prices, compounding the debt crisis.¹¹ High inflation has put upwards pressure on global interest rates, which has increased the cost of servicing debt. High inflation also means that imports such as fuel and food are now taking larger shares of scarce foreign earnings, squeezing the financial capacity of low-income countries to service new and existing debt.¹² Rachel Turner, Director of International Finance, FCDO stated:

It was only when we saw the war, with Russia’s aggressive and illegal invasion of Ukraine, that countries were thrown into another crisis that compounded the pandemic and prevented countries from growing back.¹³

Who owes and who owns debt?

10. Creditors to low-income countries fall into broadly three groups:

(1) Multilateral creditors: International Financial Institutions (IFIs) such as the World Bank and International Monetary Fund (IMF) are a core source of external funding for lower-income countries.

(2) Official creditors: Individual countries often hold debt on a bilateral basis. Official creditor countries are sometimes sub-categorised into ‘Paris Club’¹⁴ and ‘non-Paris Club’ nations.

(3) Private sector or commercial creditors: Historically, commercial banks made up most private lending to lower-income countries, but since the mid-2010s, private bondholders have formed the majority.¹⁵

11. Figure 4 sets out the major creditors of countries eligible for debt relief under the Debt Service Suspension Initiative (DSSI).¹⁶ The majority of debt is held by multilateral institutions such as the World Bank and IMF (48%), followed by official creditors (32%) and private creditors (19%). Of all official creditors, China holds the most debt.¹⁷

Figure 4: Creditors to DSSI–eligible countries in 2020, by percentage share

Source: Calculated from IMF figures.

*Figures do not add up to 100% due to rounding.

2 Debt relief initiatives

12. The 1980s marked the beginning of a series of debt crises, particularly in South America and Africa. This was partly a response to the oil shocks of the 1970s, lower economic growth and increased interest rates in creditor countries in response to rising inflation.¹⁸ In the 1990s, international institutions such as the IMF and World Bank developed schemes to help low-income countries with unsustainable levels of debt restructure or eliminate debts. The UK has consistently championed debt relief in recent decades and has taken a leading role in many international debt relief schemes and initiatives.

The Highly Indebted Poor Country Initiative and the Multilateral Development Relief Initiative

13. The Highly Indebted Poor Country Initiative (HIPC) was launched by the World Bank and IMF in 1996. It was the first significant international initiative to tackle global debt, aiming to strengthen the links between debt relief, poverty reduction and social policies. Around 44% of the funding comes from the IMF and other multilateral institutions, with the remainder from other bilateral creditors.¹⁹ Of the 39 countries currently eligible for HIPC assistance, 36 are receiving full debt relief.²⁰

The HIPC process

Eligible countries are subject to a two-step process. They must also meet certain conditions, including committing to poverty reduction and demonstrating a track record of debt relief and poverty reduction. To be considered for HIPC Initiative assistance, a country must fulfil the following four conditions: (1)To be eligible to borrow from the World Bank’s International Development Agency (IDA). The IDA provides interest-free loans and grants to low-income countries. Countries must also be eligible to receive support from the IMF’s poverty reduction growth trust, which provides subsidized loans to similar countries. In practice, this means lower-income states are eligible for support. (2)Facing an unsustainable debt burden that cannot be addressed through other mechanisms. (3)Having a track record of reform, including work with the IMF and World Bank programmes. (4)Having a Poverty Reduction Strategy Paper (PRSP). In order to receive full and irrevocable reduction in debt available under the HIPC Initiative, a country must: (1) Establish a further track record of good performance under programs supported by loans from the IMF and the World Bank; (2) Implement satisfactorily key reforms agreed at the decision point; and (3) Adopt and implement its PRSP for at least one year. Once a country has met these criteria, it can reach its completion point, which allows it to receive the full debt relief committed at the decision point.

Source: IMF, Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative, November 2022

14. In 2005, the HIPC initiative was supplemented by the Multilateral Debt Relief Initiative (MDRI), which facilitated 100% debt relief from the IMF, the IDA and the African Development Fund for countries completing the HIPC process.²¹ The IMF agreed that all member countries (including non-HIPCs) at or below the per capita income threshold of $380 should also be eligible. The debt relief provided by the IMF to the initial group of 19 qualifying countries was about $3.4 billion.²²

15. Under the HIPC and the MDRI, around $130 billion in debt was cancelled for 36 countries between 1998 and 2010.²³ The UK has provided debt relief worth £650 million through the HIPC and £1.4 billion through the MDRI.²⁴ In the years following debt cancellation, HIPC countries significantly increased public spending on social services. According to the IMF and World Bank, “poverty reducing” expenditure increased by around 40% in the years after countries benefitted from debt relief through the HIPC and the MDRI.²⁵ The HIPC and the MDRI were therefore relatively effective at facilitating debt relief from multilateral and bilateral creditors and creating fiscal space in low-income countries to fund vital services and to reduce poverty.

16. The FCDO identified international political leadership as an important factor in the success of the HIPC and the MDRI. The UK exercised its influence at key international meetings to advance the HIPC, such as through the UK’s presidencies of the G8 and EU in 2005, where it promoted 100% of eligible debt relief by multilateral institutions, which created the MDRI.²⁶

17. Although the HIPC and the MDRI resulted in significant debt cancellation by large multilateral IFIs and Paris Club Creditors, the IMF acknowledged that other creditors, including private creditors, have so far only delivered a small share of relief.²⁷ Neither the HIPC nor the MDRI included mechanisms to compel private creditors to participate in debt relief. The lack of participation by private creditors while public institutions relieved debt arguably amounted to a bailout. Debt Justice argued that that approach encouraged private lenders to conduct future reckless lending by creating the expectation that they would be bailed out.²⁸ Although the HIPC and the MDRI reduced debt and poverty in eligible countries, they did not create a framework to prevent future debt crises.

18. The HIPC and the MDRI showed that co-ordinated international efforts can have a meaningful impact on global debt. By not adequately addressing debt held by private creditors, however, they did not prevent future debt crises.

Debt Service Suspension Initiative (DSSI)

19. The global community acted swiftly to address financial challenges caused by the coronavirus pandemic in 2020. The establishment of the Debt Service Suspension Initiative (DSSI) by the G20 in May 2020 saw international governments agree to temporarily suspend debt payments owed to them by 73 low- and lower middle-income countries that requested the suspension. The IMF emphasised that the DSSI was not intended to address debt sustainability problems, but rather to allow spending to combat the covid-19 pandemic.²⁹ The DSSI ran from May 2020 to December 2021, and 48 out of 73 eligible countries participated in the initiative before it expired.³⁰ This short-term tool provided approximately $12.9 billion of temporary fiscal space to enable the world’s poorest countries to respond to the impact of the crisis.³¹

20. The FCDO and other informed witnesses stated that a major shortcoming of the DSSI was that it did not adequately address debt held by multilateral and private creditors.³² Although governments suspended debt payments at scale, multilaterals and the private sector did not. Tim Jones, Head of Policy, Debt Justice told us that over the course of the suspension initiative, only 23% of external debt payments from countries that applied for the suspension were suspended, because all the private and multilateral debts continued to be paid.³³ This resulted in payments of $14.9 billion to private lenders and $10.4 billion to multilateral institutions.³⁴

21. There was no mechanism to compel private creditors to participate in debt suspension under the DSSI, although the IMF and World Bank did call on private lenders to suspend debt payments voluntarily. In August 2020, President of the World Bank, David Malpass, said:

There is a risk of free riding, where private investors get paid in full, in part from the savings countries are getting from their official creditors. That’s not fair to the taxpayers of the countries providing development assistance and means poor countries don’t have the resources to deal with the humanitarian crisis.³⁵

22. In December 2020, the UK Government also expressed disappointment that private creditors were not participating in the DSSI. It stated that that was “primarily […] driven by a lack of willingness from borrowing countries to request suspensions due to risks to their sovereign credit ratings.” Nonetheless, the Government stated that it strongly encouraged private creditors to participate on comparable terms when requested to do so by eligible countries.³⁶

23. The DSSI provided valuable breathing space for many low-income countries, allowing them to focus resources on responding to the covid-19 pandemic. However, its effectiveness was limited by a lack of participation by private and multilateral creditors. It was only ever designed as a short-term measure, which makes the success of its successor (the Common Framework) so important.

The Common Framework for Debt Treatments Beyond the DSSI (The Common Framework)

24. In November 2020, the G20 and the Paris Club endorsed the Common Framework to deliver a long-term, sustainable solution to lower-income country debt vulnerabilities. They pledged to co-operate on debt treatments for the 73 countries eligible for the DSSI. Debt treatments under the Common Framework are initiated at the request of a debtor country and considered on a case-by-case basis. The framework is designed to ensure broad participation of creditors with fair burden sharing. Importantly, it includes not only Paris Club members but G20 official bilateral creditors such as China, India, Turkey and Saudi Arabia, which are not members of the Paris Club. For countries that have unsustainable levels of public debt, the Common Framework is intended to restructure and reduce the net value of debt to restore sustainability. For countries with substantial debt and liquidity issues, the Common Framework can facilitate the rescheduling or reprofiling of debt by deferring its repayment.³⁷

25. The Common Framework has not provided a long-term solution to unsustainable debt in low-income countries. Only four countries, Chad, Ethiopia, Ghana and Zambia, have applied for debt treatment under the initiative. At the time of writing, none of those countries has seen a reduction in debt under the Common Framework.³⁸ Veda Poon, Director of International Finance, HM Treasury noted that the pace of progress is disincentivising eligible countries from applying for debt-treatment.³⁹ Given the lack of progress, Kristalina Georgieva, Managing Director, at the IMF has called for a “comprehensive and sustained debt service payment standstill” during Common Framework debt restructuring negotiations.⁴⁰

26. Another factor that may be dissuading eligible countries from applying is the lack of clarity about how the Common Framework functions and what is expected of applicants.⁴¹ For example, as part of the Common Framework process, the IMF must assess whether a country’s debt situation is sustainable. However, the IMF has not defined “sustainable debt”.⁴² A clear definition would help countries to understand whether they meet the eligibility criteria and to decide whether to apply for debt treatment under the Common Framework.

27. The G20 has stated that private creditors should provide debt relief on at least the same terms as bilateral creditors, which is known as comparability of treatment. However, as with the DSSI, no mechanism exists to compel comparability of treatment. Creditors who are willing to restructure debt face the risk that they will effectively bail out creditors who are not willing to engage, which might include competing firms.⁴³ Private creditors have little incentive to proactively engage with debt relief schemes.

28. The Common Framework was intended to provide a long-term structural approach to assist low-income countries facing unsustainable debts. We cannot identify any meaningful progress on that agenda. At the time of writing, only four countries have applied for debt treatment under the initiative, and no country has yet seen a reduction in debt. Given the lack of progress on the Common Framework, the UK Government must support continued emergency debt service suspension for countries that have applied for the Common Framework. This would provide fiscal space for low-income countries while the international community, including the UK, works to develop a long-term approach to debt relief through the Common Framework.

29. A clear definition of “sustainability” would help countries to understand whether they meet the eligibility criteria and to decide whether to apply for debt treatment under the Common Framework. The Government should exercise its influence at the IMF to establish a clear definition of unsustainable debt to inform potential applicant countries on the likelihood of meeting the eligibility criteria for the Common Framework.

Debt relief initiatives and credit rating agencies

30. A sovereign credit rating is an independent assessment of the creditworthiness of a country. The credit rating attached to a country can affect the terms on which that country can borrow. For example, creditors will typically demand higher interest rates to compensate for the higher risk of default. Witnesses expressed a range of views on the effect of credit ratings agencies on debt relief initiatives. Some argued that a major barrier to low-income countries seeking debt relief is the concern that it will affect their credit ratings and future access to finance. Sonja Gibbs, Institute for International Finance stated:

the implications of the DSSI for credit ratings were such that countries became very worried about their ability to access markets on an ongoing basis, because it is just not the way that private markets work to do things on a one-size-fits-all basis.⁴⁴

Similarly, fears about market reaction may be deterring countries from seeking debt treatment under the Common Framework.⁴⁵

31. Other witnesses advanced alternative arguments. Tim Jones, Head of Policy, Debt Justice suggested that private sector lenders pay limited attention to credit rating agencies. He highlighted the example of Ghana. Ghana’s bonds crashed in autumn 2021 and were subsequently downgraded by credit rating agencies in February 2022. He argued that credit rating agencies follow what the private lenders do, not vice versa.⁴⁶ The World Bank highlighted the lack of evidence supporting the proposition that participation in the DSSI negatively affected credit ratings.⁴⁷ Nonetheless, the perception that a country’s credit rating may be downgraded as a result of that country seeking debt relief, regardless of what happens in practice, may serve as a barrier to countries seeking debt relief.

3 Debt and development

32. There is nothing inherently wrong with a country having debt. Borrowing to invest in national infrastructure or to help reach Sustainable Development Goals (SDGs) can increase the long-run productivity of developing countries, which can in turn engender economic growth and fiscal stability. However, high levels of debt can constrain development unless the debt is invested in activities that promote development and the servicing costs of the debt are lower than the expected overall return.⁴⁸

33. When debt reaches unsustainable levels, countries start to have difficulty repaying debts and can find themselves in ‘debt distress’. The IMF defined debt distress as “where a country is unable to fulfil its financial obligations and debt restructuring is required”.⁴⁹ The IMF assessed that about 60% of DSSI-eligible, low-income countries with debt sustainability analyses are currently in, or at high risk of, debt distress.⁵⁰ That percentage has approximately doubled since 2015. If a country is forced to default on its debt, it can reduce market access, result in higher borrowing costs, deter investment and lead to a negative feedback cycle of reduced growth and higher debt. To restore financial sustainability, some countries now require debt relief, as the FCDO acknowledged.⁵¹

Figure 5: Countries facing debt distress

Source: International Monetary Fund, IMF Annual Report 2022

The opportunity cost of servicing debt

34. Every dollar spent by low-income countries servicing unsustainable debt is a dollar not spent on providing basic healthcare, educating girls, or tackling climate change. In 2019, 25 countries spent more on debt servicing than on education, health, and social protection.⁵² The FCDO stated that high debt levels constrain spending on public services and slow investment and growth.⁵³ The opportunity cost of low-income countries servicing unsustainable public debt is huge. The impact of debt on development is also not uniform. The Westminster Foundation for Democracy explained that the social cost of unsustainable debt can disproportionately affect women and marginalised groups.⁵⁴

35. Jason Braganza, Executive Director, AFRODAD explained the opportunity cost of debt payments in Africa:

When you look at how Governments are then making decisions on how to allocate resources in sub-Saharan Africa, for almost every dollar that is being invested through the budget system, between 50 cents and 60 cents are being allocated to debt servicing. This means that key services such as health, education, water and sanitation are being traded off in favour of debt servicing.

…

Money being diverted towards debt servicing and, in particular, in some cases, private credit at the expense of health and education, as well as water, does leave a bit of a bitter taste in the mouth of the general public.⁵⁵

36. WaterAid explained the opportunity cost of servicing debt in Zambia (Figure 5). Over the decade 2009 to 2019, the increased proportion of the Zambian fiscal budget needed for interest payments coincided with a decrease in the overall proportion of the fiscal budget dedicated to investment in education, health, water, sanitation and hygiene (WASH).⁵⁶

Figure 6: Social sector budget versus debt service in Zambia 2009–19

Source: WaterAid (DEB0011)

37. Looking forward, the FCDO told us that the amount of debt repayments that African countries are due to make in 2024 and 2025 is six times higher than the total sum those countries expended on servicing debt in 2021.⁵⁷ The situation is bleak. Without sustained and effective intervention by the international community, it will deteriorate further in the next few years. The development impacts of such a trend could be catastrophic for many low-income countries.

Debt relief and ODA expenditure

38. In each year from 2013 to 2020, the UK spent 0.7% of its gross national income (GNI) on ODA. In 2020, however, the Government announced that the UK would temporarily reduce ODA expenditure to 0.5% of GNI. In 2022, HM Treasury stated that it plans for ODA to be “around 0.5% of GNI”.⁵⁸ In December 2022, Andrew Mitchell MP, the Minister for International Development, told the Committee that spending currently stands at 0.55% of GNI.⁵⁹ This temporary reduction from 0.7% presents significant constraint on the UK’s financial capacity to support the development of low-income countries.

39. UK overseas aid has nonetheless been vital in supporting low-income countries to cope with and mitigate the effects of humanitarian crises and global events, such as the covid-19 pandemic. However, if the positive effects of that aid are offset by unsustainable debt service payments, then the impact of this aid will be undermined. Debt relief must be integrated into wider international development policy. Despite this, debt relief does not feature prominently in the International Development Strategy. The FCDO acknowledged that the strategy does not make a specific commitment to or statement on debt relief.⁶⁰ The omission of debt relief from the strategy was incoherent, and risks fundamentally undermining the strategy. It is similarly absent from the UK’s cross-government Integrated Review of Security, Defence, Development and Foreign Policy,⁶¹ which is due to be updated.⁶²

40. Sustainable debt to fund investment is an important development tool. By borrowing to finance crucial public investments, governments can make economic and social returns in excess of the cost of that debt. Solutions to the debt crisis must not materially reduce low-income countries’ access to development finance.

41. When debt becomes unsustainable, it undermines both development opportunities for low-income countries and the effectiveness of UK overseas aid. In the context of reduced ODA expenditure, it has never been more important to make every penny spent by the UK on ODA count.

42. The opportunity cost of unsustainable debt for development can be very high. Many low-income countries are faced with an impossible trade-off between serving debt and providing vital public services. Despite this, the International Development Strategy does not include a commitment on debt relief. The Government must acknowledge the critical interplay between debt and development by including its strategy for debt relief in (a) the next iteration of its International Development Strategy and (b) the updated Integrated Review.

Linked crises: debt and climate change

43. Low-income countries face not only a debt crisis, but a climate crisis. Climate change threatens to “undermine development efforts and increase poverty in vulnerable countries.”⁶³ Low-income countries are often more vulnerable to the impact of climate change than wealthy countries:

(1) Low- and lower-middle income countries are more likely than other countries to have economies which rely on climate-sensitive sectors.⁶⁴ This means that climate shocks are more likely to slow their economic development.

(2) Developing countries are less likely than other countries to have the fiscal space to invest in climate change and adaptation.⁶⁵ In November 2022, a report commissioned by the UK Presidency of COP26, Egyptian Presidency of COP27, and the UN Climate Change High Level Champions for COP26 and COP27, calculated that “[e]merging markets and developing countries other than China will need to spend around $1 trillion per year by 2025 (4.1% of GDP compared with 2.2% in 2019) and around $2.4 trillion per year by 2030 (6.5% of GDP)” on investment and spending priorities necessary to meet their climate and related development.⁶⁶

(3) A lack of climate change mitigation and adaptation in developing countries increases the losses and damages from extreme weather shocks. The cost of the response and reconstruction is therefore higher and requires governments to acquire more debt.⁶⁷ High public debt reduces the fiscal space for countries to invest in climate change and adaptation.⁶⁸ This creates “a negative feedback loop”, where unsustainable debt worsens the climate crisis and vice versa.⁶⁹

(4) At the same time, low-income countries have contributed the least to the production of greenhouse gas emissions responsible for climate change in comparison to high-income countries.⁷⁰ This means that low-income countries are facing a debt burden because of the excessive carbon emissions of high-income countries.⁷¹

The UK’s approach to climate finance

44. At COP27, the UK Government acknowledged that “some countries are now facing tough choices between protecting their citizens as they respond to climate shocks or paying down their debts”. It announced that UK Export Finance (UKEF) will offer Climate Resilient Debt Clauses (CRDC) in its direct sovereign lending. It stated that the CRDCs will allow low-income countries and small island developing states to defer debt repayments in the event of a severe climate shocks or natural disasters. The UK Government also announced that the Private Sector Working Group, chaired by the UK Treasury, had launched an example model of a term sheet which embeds CRDCs into standard bond and loan contracts.⁷²

Debt-for-nature swaps

45. A debt-for-nature swap (otherwise known as debt-for-climate swaps) enables a certain debt nominally owed by a low-income country to be bought at a fraction of its original price in exchange for investment in, for example, environmental projects and programmes. The principle behind these swaps is that they could simultaneously reduce the debt burden and mitigate the impact of climate change.⁷³

46. Debt-for-nature swaps have often occurred at a small scale and had high transaction costs.⁷⁴ Paul Steele, Chief Economist, IIED stated:

In terms of disadvantages […] they have been challenged in the past as having relatively small impacts, because of this high transaction cost. At the moment, we are looking at ways to upscale and make them much larger and more significant, so that the administrative costs relative to the total share of the fiscal improvement would be reduced.⁷⁵

There are relatively few examples of debt-for-nature swaps taking place at scale. However, the recent experience of Belize highlights the potential benefits of debt-for-nature swaps in tackling the triple threat of debt, climate change and biodiversity.

Debt-for-nature swap case study: Belize

In November 2021, the Government of Belize and The Nature Conservancy announced the completion of a $364 million debt conversion for marine conservation that reduced Belize’s debt while creating long-term sustainable financing for conservation. The transaction is the world’s largest debt refinancing for ocean conservation to date.76 The debt conversion enabled Belize to repurchase $553 million, a quarter of the country’s total public debt, from bondholders at a 45% discount through a “Blue Loan.77 This enabled Belize to create a significant annual cash flow for marine conservation ($4million/year) until 2041 and establish an endowment fund for conservation.78 Under the terms of the swap, Belize committed to ocean conservation undertakings to place 30% of its ocean, including parts of the Mesoamerican Reef, under protection by 2026, using a transparent, participatory Marine Spatial Planning process, and establishing an independent Conservation Fund to allocate the conservation funding to in-country partners.79

47. The conditionality associated with debt-for-nature swaps can pose challenges for local communities. In some low-income countries, those who live on land included in debt-for-nature swaps are minority indigenous people who are politically marginalised. Decision-making bodies that decide such swaps often do not include “even significant minorities who identify with the ethnic groups most affected by the “conservation” efforts”. Conservation efforts have “historically redrawn boundaries, driving local communities from ancestral lands and into rent relationships and higher carbon lifestyles in urban centres.” Debt-for-nature swaps can have socially divisive implications that can last for generations. People impacted by debt-for-nature swaps can see these swaps as “exploitative” and an “overtly colonial financial mechanism”.⁸⁰

48. The Westminster Foundation for Democracy (WFD) said that debt-for-nature swaps “require ownership from civil society and local communities, as conservation and related climate adaptation activities require the active participation of local communities.” It argued that national Parliaments could provide an avenue for NGOs and civil society to be part of the policy debate. WFD argued that parliamentary oversight was necessary for “high-level political ownership across the political spectrum to ensure continuity in both their negotiation and implementation phases.”⁸¹

49. Debt-for-nature swaps offer an opportunity to tackle both the debt crisis and the climate crisis. However, debt-for-nature swaps can also disempower and harm communities, because they may entail top-down conditions that impact indigenous and ethnic minorities. The UK Government should seek opportunities to align nature and climate objectives with debt relief frameworks. However, debt-for-nature swaps should be treated with sensitivity and caution. It is important that they occur at the right scale, that decision-making processes include local communities and that they include mechanisms to support political accountability.

4 An evolving creditor landscape

50. Since the introduction of the HIPC and the MDRI, the creditor mix has evolved significantly for low-income countries.⁸² The current debt landscape is now more heterogenous. The relative amount of debt held by private and non-Paris Club creditors (such as China) has increased significantly since the 2000s. Building consensus among creditors is crucial to large-scale debt relief. However, achieving such a degree of consensus in today’s heterogenous creditor landscape is challenging. The FCDO stated that the current international debt landscape today militates against the introduction of large-scale debt relief schemes.⁸³ Veda Poon, Director of International Finance, HM Treasury highlighted reduced international support for debt relief compared with the early 2000s.⁸⁴

Private creditors

51. Lending by private creditors increased from 10% to 19% of GDP for lower-income countries from 2006 to 2020. Over the same period, the share of multilateral debt fell from 55% to 48%.⁸⁵ Despite private creditors as a group holding less debt than multilateral and official creditors, according to Debt Justice, private lenders account for 42% of external debt payments by lower-income country governments, with 33% to multilateral institutions and 25% to other governments.⁸⁶ This suggests that debt repayments to private creditors may be being prioritised over official and multilateral creditors.

52. Participating in debt relief and restructuring is not always an act of charity. It can benefit creditors if restructurings support stronger public finances, public investment and ultimately growth in low-income countries. This allows debtor countries to continue to service outstanding debt. Sonja Gibbs, Managing Director and Head of Sustainable Finance, Institute of International Finance (IIF), stated that good faith negotiations between developing countries and their private creditors is crucial. The IIF argued for a case-by-case approach to debt restructuring.⁸⁷ Although such an approach appears reasonable, the voluntary approach to private sector participation adopted by Common Framework, which broadly aligns with the IIF proposals, is clearly not working. Private creditors are not always engaging in good faith with developing countries, and the lack of a system-wide approach means that those firms lack incentives to engage.

53. Private creditors stated that they have a fiduciary responsibility to their clients or shareholders to maximise profits. That responsibility makes it difficult for individual firms voluntarily to participate in debt restructuring or relief, because competitor firms may not follow suit. BlackRock Asset Management pointed out that this responsibility raises the possibility of civil liability for an asset manager acting as a fiduciary for a single creditor to provide unilateral relief on debt held in its portfolios. Unilaterally restructuring debt would result in an effective subsidy to other creditors.⁸⁸

54. To enable participation in debt relief, a level playing field must be created for all private creditors. The Common Framework could provide such a level playing field. However, because participation in the Common Framework by the private sector remains voluntary, no such level playing field currently exists.

Creating a level playing field: legislation and market-based solutions

55. The failure of voluntary approaches means that robust measures must be introduced to incentivise or compel private sector participation in debt relief. Such measures would allow the private sector to participate in debt relief without risk to their fiduciary responsibilities. The UK is uniquely placed to take such measures, because 90% of bonds owed by countries that are eligible for the Common Framework are governed by English law.⁸⁹ In 2020, the UK Government estimated that some 45% of the total outstanding stock of international sovereign bonds are governed by English law. New York is the other major jurisdiction, covering some 52% of the total outstanding stock.⁹⁰ UK and New York legislation therefore cover most international sovereign bonds.

56. Multilateral organisations, debt campaigners and civil society organisations support the introduction of legislation to create a level playing field for debt relief. David Malpass, President, World Bank Group said:

Under the current system…each country, no matter how poor, may have to fight it out with each creditor. Creditors are usually better financed with the highest paid lawyers representing them, often in US and UK courts that make debt restructurings difficult. It is surely possible that these countries—two of the biggest contributors to development—can do more to reconcile their public policies toward the poorest countries and their laws protecting the rights of creditors to demand repayments from these countries.91

57. The World Bank outlined four statutory approaches that countries might adopt to encourage private sector creditor participation in the Common Framework.⁹² These include legislation to:

a) codify a duty for creditors to cooperate in the context of sovereign debt restructuring;

b) limit the amount that a creditor can recover if an agreement is reached with a majority of creditors;

c) prevent the sovereign debtor’s assets from seizure when they are undergoing a good faith restructuring; and

d) retrofit collective action mechanisms into existing debt instruments.

The IMF has also expressed support for legislative in measures. In April 2022, Managing Director, IMF, Kristalina Georgieva stated

We also are pressing for some of the… legal changes that need to happen in New York, in London, to close loopholes for vulture funds and others to prevent debt resolution.93

58. Debt Justice highlighted the effect of vulture funds, which specialise in buying defaulted debt at low prices and pursuing aggressive legal strategies to seek repayment in full. Zambia and Liberia were sued by vulture funds in the UK courts in the 2000s.⁹⁴ The UK passed the Debt Relief (Developing Countries) Act in 2010 in response to that legal action.⁹⁵ The 2010 Act limited court-enforced recoveries to the level dictated by the HIPC, which prevented private creditors from using UK courts to sue for more than they would have received if they had taken part in the HIPC debt relief process.

59. In 2011, the Government estimated that the 2010 Act saved HIPC countries £145 million.⁹⁶ The IMF noted that the number of litigation cases against HIPCs declined since the introduction of this legislation.⁹⁷ The Government included a sunset clause in the 2010 Act, meaning that the legislation would expire unless an Order were made to extend it.⁹⁸ This was to protect against any unforeseen or damaging consequences of the legislation, such as driving firms out of the UK. The 2010 Act was made permanent in 2011, suggesting that the benefits of the legislation outweighed any costs.

60. The Debt Relief (Developing Countries) Act 2010 does not cover countries participating in the Common Framework. The UK Government could introduce equivalent legislation, updated to include recent debt relief initiatives such as the Common Framework. It could adopt one of two potential legislative approaches:

a) Replicate the Debt Relief (Developing Countries) Act 2010, making it impossible for creditors to sue for more than they would have received if haven taken part in the Common Framework for debt restructuring (or other internationally agreed debt restructuring); or

b) Legislate to make debt restructuring agreements binding for all private creditors, if the agreement is supported by at least two thirds of private creditors.

61. Given the success of previous UK legislation, we were surprised to hear that the Government is prioritising “market-based solutions” and that legislative approaches along the lines of the HIPC legislation were not being actively considered.⁹⁹ Treasury officials acknowledged that “the sheer scale of privately held debt means that we need to really address the issues head on”.¹⁰⁰ The Government’s approach is not commensurate with the scale of the problem. It was therefore encouraging that the new Minister for International Development, Andrew Mitchell MP, stated that he was open to exploring legislative options.¹⁰¹

62. The HIPC, the MDRI, the DSSI and the Common Framework were all undermined by the inability to compel or incentivise private creditors to participate. A legislative solution is required to enable the Common Framework to provide a meaningful way to address this. The UK Government’s view on the relative merits of market-based solutions compared with legislative options is currently unclear. The UK Government should consult on the introduction of legislation to compel or incentivise participation of private creditors in the Common Framework, such as those proposed by the World Bank. This should include proposals either:

(a) to prevent low-income countries facing debt distress from being sued by private creditors for a sum greater than that those creditors would have received had they participated in the Common Framework; or

(b) to make debt restructuring agreements binding for all private creditors, if the agreement is supported by at least two-thirds of private creditors.

63. As New York and English law comprise the two major legal jurisdictions covering international debt agreements, the UK and New York have the potential to significantly improve private creditor participation in debt relief initiatives globally, particularly if these efforts are co-ordinated. We recommend that the UK Government engages in bilateral talks with New York law makers to explore the scope for co-operation in legislative approaches.

International Development Committee engagement with private creditors

64. The International Development Committee contacted a sample of private creditors holding the sovereign debt of low-and-middle-income countries. The process was arduous and provided little return for the time and work expended on engagement. Many private creditors were difficult to contact, slow to reply, asked for extensions to deadlines and then replied with extremely brief answers. Others provided more comprehensive answers and engaged with the Committee.¹⁰² On the whole, however, the sector was reluctant to engage with the Committee.

The UK as an official creditor

65. Having cancelled significant debt in recent decades, the UK Government holds some $1.79 billion of debt from DSSI-eligible lower-income countries, which is held primarily by UK Export Finance.¹⁰³ The FCDO estimated that about one-third of that debt relates to countries defined by the IMF as being in or at high risk of debt distress.¹⁰⁴ This is a relatively small portfolio, with other Paris Club creditors holding around $70 billion across the same debtor countries.¹⁰⁵ Further debt cancellation from the UK relies on a consensus being reached with other creditors, as the UK is party to comparable treatment agreements with other creditors, meaning its ability to write off debt unilaterally is limited.

66. Although the scope for the UK to cancel or provide relief on further debt is limited, it could use its influence and expertise to champion debt relief and to support developing countries to manage their public finances. A key element of the International Development Strategy is making the best use of UK expertise. Rachel Turner, Director of International Finance, FCDO stated that the UK “will focus on providing developing countries with the expertise and the access to expertise partnerships that they need to build the institutions for sound economic management”.¹⁰⁶ In a time of constrained aid spending, making the best use of UK expertise would be valuable yet not financially costly. However, institution building takes time, and the acute nature of the debt crisis means that deployment of UK expertise alone will not be sufficient.

67. The UK has already cancelled a large portion of its loans to low-income countries, and there is limited scope for further bilateral debt relief. Although the amount of debt owed to the UK by debt-distressed countries is relatively small, the UK should work to establish a consensus with other creditors that such debt should be written off.

68. We support the Government’s ambition to use UK expertise to help low-income countries build institutions to support sound economic management. However, many low-income countries are at a crisis point and do not have the fiscal breathing space to spend time building institutions. The UK Government should therefore focus its efforts on addressing the current gridlock in the Common Framework.

Other official creditors

69. Historically, the Paris Club group of nations, which includes the UK, has been central to co-ordinating international debt relief. The origin of the Paris Club dates to 1956, when Argentina agreed to meet its public creditors in Paris. Since 1956, the Paris Club has reached 478 agreements with 102 different debtor countries. The debt treated in the framework of Paris Club agreements amounts to $614 billion.¹⁰⁷

70. Shares of official lending have shifted from Paris Club members, such as the UK, to emerging economies, such as China.¹⁰⁸ The FCDO stated that the total volume of lending by public Chinese institutions has tripled since 2011. Low-and-middle-income countries owed China $170 billion at the end of 2020, which equated to 45% of the debt owed to the World Bank. China is now the largest official creditor in more than half of lower-income countries. By volume, Angola, Ethiopia, Kenya, Lao People’s Democratic Republic, Pakistan and Zambia are the largest borrowers from China, accounting for about half the Chinese Government’s exposure to low-income countries. Although China has been lending to countries for decades, the FCDO told us that current debt relief initiatives represent its first major participation in co-ordinated debt restructurings with other bilateral creditors. China is not a Paris Club member country and has refused permanent membership, which complicates reaching an agreement across official creditors on debt restructuring and relief efforts. China holds more debt than all Paris Club member countries combined.¹⁰⁹

71. Of the non-Paris Club countries, excluding China, the largest bilateral creditors to lower-income countries by size of debt stock in 2020 were Saudi Arabia, United Arab Emirates, Kuwait, South Korea, Singapore and India. Many of those countries have been invited to the Paris Club as ad-hoc members.¹¹⁰

72. A solution to the debt crisis cannot be found without engagement by and support from China. The UK Government must engage with the Chinese Government on debt relief for low-income countries both bilaterally and through the Paris Club.

Multilateral creditors and international finance institutions

73. Multilateral international finance institutions (IFIs), such as the World Bank and IMF, remain the core source of external finance for low-income countries. The UK is a member of the World Bank Group, IMF and six regional development banks that lend to developing countries.¹¹¹ The IFIs lend to countries more cheaply than countries can borrow from markets, and the terms of finance reflect the country’s income level and risks of debt distress.

74. IFIs provide independent advice to the Paris Club and other debt relief initiatives (including the Common Framework), on the debtors’ macroeconomic position and the nature and extent of debt restructuring likely to be required based on a debt sustainability analysis. The FCDO highlighted that IFIs do not typically participate in international debt treatments, unless compensated for repayments forgone by donors. This is due to their ‘preferred creditor status’, which requires borrowing countries to prioritise meeting debt obligations to the IFIs over other creditors, and the importance of the IFIs being able to maintain large-scale development financing.¹¹²

75. According to Action for Southern Africa, around one-third of external debt payments due between 2022–2028 are owed to multilateral institutions.¹¹³ In 2020, more than 140 senior Church leaders from around the world signed a letter urging the IMF and World Bank to cancel debts for developing countries fighting the coronavirus pandemic:

Both of your institutions hold significant reserves in US dollars and in gold, which are held for such a time as this. It is therefore essential that these reserves are used to relieve the burden of debts for countries in precarious need.¹¹⁴

Although we understand that multilateral IFIs must maintain sufficient liquidity to support development financing, the scale of the current debt crisis and the lack of progress on the Common Framework means that further debt cancellation merits consideration by multilateral IFIs.

76. It is important to recognise the seriousness of the current crisis, but also the need to maintain liquidity within institutions to deal with future crises and to provide large-scale development financing. Taking this into account, the UK should use its influence to encourage board-level discussion on debt cancellation by multilateral international finance institutions.

77. The diversified nature of the creditor landscape makes it difficult to establish an international consensus on debt relief. The importance of strong political leadership, including the willingness to introduce robust measures, will be crucial to bringing all creditors to the negotiating table.

78. Reductions in ODA expenditure since 2020 have limited the UK’s financial capacity to support poverty reduction in low-income countries. However, by creating an effective debt relief system and supporting low-income countries to put their finances back on a sustainable footing, the UK has an opportunity to have meaningful impact on development without expending significant sums of ODA. This can only be achieved by bringing all creditors, including the private sector, to the table.

5 Debt and transparency

Debt transparency

79. Transparency in relation to public debt is good for both debtors and creditors. For debtors, it enables better scrutiny of how the government is managing its finances, which can encourage prudent debt management.¹¹⁵ CAFOD told us that one significant problem is the lack of transparency as debt changes hands between private creditors. This means that even if a country facing a debt crisis wanted to negotiate a restructuring with private creditors, it may not know who the creditors are. CAFOD research found that in the case of one Zambian Eurobond ($1 billion due to mature 14 April 2024) bondholders holding 70% of the Eurobond were unknown.¹¹⁶

80. A lack of transparency in relation to debt can also restrict access to finance. The IIF told us that the lack of detailed data on debt beyond the central government’s debt obligations undermines investor confidence.¹¹⁷ That can mean “higher borrowing costs and limited access to private capital markets for sovereign borrowers.”¹¹⁸ Strengthening debt transparency can therefore help to ensure that countries have stable and affordable access to international financial markets.

81. The IIF stated that public information on sovereign debt is currently insufficient.¹¹⁹ The Center for Global Development stated that “[m]uch official bilateral lending, including China, and private creditor lending has often been opaque, failing to disclose amounts, terms, and conditions.”¹²⁰ In November 2021, the World Bank found that nearly 40% of low-income developing countries have never published data on debt or have not updated the information in the past two years.¹²¹ The Centre for Global Development advocated the introduction of a “global central debt registry”.¹²² Christian Aid argued for the creation of “a permanent, publicly available registry of loan and debt data that includes information on sovereign bonds.”¹²³

The UK’s work on debt transparency: leading by example?

82. The FCDO stated that the UK Government has been a consistent advocate for greater debt transparency.¹²⁴ HM Treasury publishes a report on outstanding debt owed by other countries to the UK Government.¹²⁵ During the UK’s G7 Presidency, the UK secured a commitment from the G7 to follow the UK’s lead in publishing details of all official overseas lending on a quarterly basis.¹²⁶ The UK advocates for all G20 members to publish the details of their lending to developing countries.¹²⁷ The OECD, supported by the UK Government and the IIF, launched the OECD debt transparency initiative, with the UK providing initial funding and currently serving as chair of its advisory board.¹²⁸ The initiative seeks “to operationalise the Voluntary Principles for Debt Transparency so that relevant debt data is collected, analysed and reported”.¹²⁹

83. More could be done. The ONE Campaign stated that the UK should improve the quarterly publication of its loan portfolio by providing at least as much detail as that outlined by the Institute of International Finance’s Principles.¹³⁰ Save the Children told us that the details provided on the UK’s compliance with G20 Operational Guidelines on Sustainable financing are often “scant”. It added that the UK should provide “much more information on its export finance, including project details and lending agreements” in order to “provide global best practise and leadership”.¹³¹ The ONE Campaign contended that the UK Government should publish its self-assessment of its adherence to the guidelines.¹³²

84. A lack of transparency on sovereign debt undermines debt sustainability and debt relief initiatives. The UK Government has been a consistent advocate for greater debt transparency at key forums such as the G7 and OECD. In particular, the UK’s achievement in securing a commitment during its G7 presidency that all G7 countries will follow the UK’s lead in publishing details of all official overseas lending on a quarterly basis to improve best practice is an encouraging development. The UK should continue to lead by example by publishing at least as much detail as that outlined by the IIF’s Voluntary Principles for Debt Transparency in its ‘Report on outstanding debt owed by other countries to His Majesty’s Government’. It should also publish its assessment of its adherence to the Operation Guidelines to Sustainable Financing.

85. The UK should use its membership of the G20 to secure commitments on publishing details of all official overseas lending on a quarterly basis from other G20 Member States. The UK should use its influence in multilateral forums to push for more transparency, including granular data, from international finance institutions on debt.

6 Consolidated list of conclusions and recommendations

Debt relief initiatives

1. The HIPC and the MDRI showed that co-ordinated international efforts can have a meaningful impact on global debt. By not adequately addressing debt held by private creditors, however, they did not prevent future debt crises. (Paragraph 18)

2. The DSSI provided valuable breathing space for many low-income countries, allowing them to focus resources on responding to the covid-19 pandemic. However, its effectiveness was limited by a lack of participation by private and multilateral creditors. It was only ever designed as a short-term measure, which makes the success of its successor (the Common Framework) so important. (Paragraph 23)

3. The Common Framework was intended to provide a long-term structural approach to assist low-income countries facing unsustainable debts. We cannot identify any meaningful progress on that agenda. At the time of writing, only four countries have applied for debt treatment under the initiative, and no country has yet seen a reduction in debt. Given the lack of progress on the Common Framework, the UK Government must support continued emergency debt service suspension for countries that have applied for the Common Framework. This would provide fiscal space for low-income countries while the international community, including the UK, works to develop a long-term approach to debt relief through the Common Framework. (Paragraph 28)

4. A clear definition of “sustainability” would help countries to understand whether they meet the eligibility criteria and to decide whether to apply for debt treatment under the Common Framework. The Government should exercise its influence at the IMF to establish a clear definition of unsustainable debt to inform potential applicant countries on the likelihood of meeting the eligibility criteria for the Common Framework. (Paragraph 29)

Debt and development

5. Sustainable debt to fund investment is an important development tool. By borrowing to finance crucial public investments, governments can make economic and social returns in excess of the cost of that debt. Solutions to the debt crisis must not materially reduce low-income countries’ access to development finance. (Paragraph 40)

6. When debt becomes unsustainable, it undermines both development opportunities for low-income countries and the effectiveness of UK overseas aid. In the context of reduced ODA expenditure, it has never been more important to make every penny spent by the UK on ODA count. (Paragraph 41)

7. The opportunity cost of unsustainable debt for development can be very high. Many low-income countries are faced with an impossible trade-off between serving debt and providing vital public services. Despite this, the International Development Strategy does not include a commitment on debt relief. The Government must acknowledge the critical interplay between debt and development by including its strategy for debt relief in (a) the next iteration of its International Development Strategy and (b) the updated Integrated Review. (Paragraph 42)

8. Debt-for-nature swaps offer an opportunity to tackle both the debt crisis and the climate crisis. However, debt-for-nature swaps can also disempower and harm communities, because they may entail top-down conditions that impact indigenous and ethnic minorities. The UK Government should seek opportunities to align nature and climate objectives with debt relief frameworks. However, debt-for-nature swaps should be treated with sensitivity and caution. It is important that they occur at the right scale, that decision-making processes include local communities and that they include mechanisms to support political accountability. (Paragraph 49)

An evolving creditor landscape

9. To enable participation in debt relief, a level playing field must be created for all private creditors. The Common Framework could provide such a level playing field. However, because participation in the Common Framework by the private sector remains voluntary, no such level playing field currently exists. (Paragraph 54)

10. The HIPC, the MDRI, the DSSI and the Common Framework were all undermined by the inability to compel or incentivise private creditors to participate. A legislative solution is required to enable the Common Framework to provide a meaningful way to address this. The UK Government’s view on the relative merits of market-based solutions compared with legislative options is currently unclear. The UK Government should consult on the introduction of legislation to compel or incentivise participation of private creditors in the Common Framework, such as those proposed by the World Bank. This should include proposals either:

a) to prevent low-income countries facing debt distress from being sued by private creditors for a sum greater than that those creditors would have received had they participated in the Common Framework; or

b) to make debt restructuring agreements binding for all private creditors, if the agreement is supported by at least two-thirds of private creditors. (Paragraph 62)

11. As New York and English law comprise the two major legal jurisdictions covering international debt agreements, the UK and New York have the potential to significantly improve private creditor participation in debt relief initiatives globally, particularly if these efforts are co-ordinated. We recommend that the UK Government engages in bilateral talks with New York law makers to explore the scope for co-operation in legislative approaches. (Paragraph 63)

12. The UK has already cancelled a large portion of its loans to low-income countries, and there is limited scope for further bilateral debt relief. Although the amount of debt owed to the UK by debt-distressed countries is relatively small, the UK should work to establish a consensus with other creditors that such debt should be written off. (Paragraph 67)

13. We support the Government’s ambition to use UK expertise to help low-income countries build institutions to support sound economic management. However, many low-income countries are at a crisis point and do not have the fiscal breathing space to spend time building institutions. The UK Government should therefore focus its efforts on addressing the current gridlock in the Common Framework. (Paragraph 68)

14. A solution to the debt crisis cannot be found without engagement by and support from China. The UK Government must engage with the Chinese Government on debt relief for low-income countries both bilaterally and through the Paris Club. (Paragraph 72)

15. It is important to recognise the seriousness of the current crisis, but also the need to maintain liquidity within institutions to deal with future crises and to provide large-scale development financing. Taking this into account, the UK should use its influence to encourage board-level discussion on debt cancellation by multilateral international finance institutions. (Paragraph 76)

16. The diversified nature of the creditor landscape makes it difficult to establish an international consensus on debt relief. The importance of strong political leadership, including the willingness to introduce robust measures, will be crucial to bringing all creditors to the negotiating table. (Paragraph 77)

17. Reductions in ODA expenditure since 2020 have limited the UK’s financial capacity to support poverty reduction in low-income countries. However, by creating an effective debt relief system and supporting low-income countries to put their finances back on a sustainable footing, the UK has an opportunity to have meaningful impact on development without expending significant sums of ODA. This can only be achieved by bringing all creditors, including the private sector, to the table. (Paragraph 78)

Debt and transparency

18. A lack of transparency on sovereign debt undermines debt sustainability and debt relief initiatives. The UK Government has been a consistent advocate for greater debt transparency at key forums such as the G7 and OECD. In particular, the UK’s achievement in securing a commitment during its G7 presidency that all G7 countries will follow the UK’s lead in publishing details of all official overseas lending on a quarterly basis to improve best practice is an encouraging development. The UK should continue to lead by example by publishing at least as much detail as that outlined by the IIF’s Voluntary Principles for Debt Transparency in its ‘Report on outstanding debt owed by other countries to His Majesty’s Government’. It should also publish its assessment of its adherence to the Operation Guidelines to Sustainable Financing. (Paragraph 84)

19. The UK should use its membership of the G20 to secure commitments on publishing details of all official overseas lending on a quarterly basis from other G20 Member States. The UK should use its influence in multilateral forums to push for more transparency, including granular data, from international finance institutions on debt. (Paragraph 85)

Formal minutes

International Development Committee

Tuesday 28 February 2023

Members present:

Sarah Champion, in the Chair

Mr Richard Bacon

Theo Clarke

Mrs Pauline Latham

Chris Law

Mr Ian Liddell Grainger

Kate Osamor

Mr Virendra Sharma

Draft Report (Debt relief in low-income countries), proposed by the Chair, brought up and read.

Ordered, That the draft Report be read a second time, paragraph by paragraph.

Paragraphs 1 to 85 read and agreed to.

Summary & Defining debt relief introduction agreed to.

Resolved, That the Report be the Seventh Report of the Committee to the House.

Ordered, That the Chair make the Report to the House.

Ordered, That embargoed copies of the Report be made available in accordance with the provisions of Standing Order No. 134.

[Adjourned till Tuesday 7 March at 2.00 p.m.

---

Witnesses

The following witnesses gave evidence. Transcripts can be viewed on the inquiry publications page of the Committee’s website.

Tuesday 14 June 2022

Mr Tim Jones, Head of Policy, Debt Justice; Dr Stephanie Blankenburg, Head of the Debt & Development Finance Branch, United Nations Conference on Trade and Development; Sonja Gibbs, Managing Director and Head of Sustainable Finance, Institute of International FinanceQ1–28

Jason R Braganza, Executive Director, African Forum on Debt and Development; Mae Buenaventura, Debt Justice Program Manager, Asian Peoples’ Movement on Debt and Development; Paul Steele, Chief Economist, International Institute for Environment and DevelopmentQ29–53

Tuesday 1 November 2022

Veda Poon, Director of International Finance, HM Treasury; Rachel Turner, Director for International Finance, Foreign, Commonwealth & Development Office; Edward Wilson, Head of the International Debt and Development Finance Unit, HM TreasuryQ54–126

---

Published written evidence

The following written evidence was received and can be viewed on the inquiry publications page of the Committee’s website.

DEB numbers are generated by the evidence processing system and so may not be complete.

1 Action for Southern Africa (DEB0017)

2 AllianceBernstein (DEB0022)

3 BlackRock (DEB0012)

4 Callender, Rob (Campaigner, Jubilee For Climate); Felix Barbour; Subham Kar Chaudhuri; and Dirk Campbell (DEB0002)

5 Catholic Agency for Overseas Development (CAFOD) (DEB0010)

6 Center for Global Development (DEB0015)

7 Christian Aid (DEB0018)

8 Clifford Chance LLP (DEB0021)

9 Debt Justice (DEB0001)

10 Foreign, Commonwealth & Development Office (DEB0029)

11 Foreign, Commonwealth and Development Office (DEB0014)

12 HSBC (DEB0023)

13 Institute of International Finance (DEB0008)

14 International Institute for Environment and Development (IIED) (DEB0016)

15 JPMorgan Chase (DEB0024)

16 Jubilee Scotland (DEB0006)

17 Legal & General Group Plc (DEB0025)

18 MFS International (UK) Ltd (DEB0026)

19 Oxfam GB (DEB0009)

20 Save the Children UK (DEB0019)

21 T. Rowe Price International Ltd (DEB0027)

22 Tan, Dr Celine (Reader, School of Law, University of Warwick); Dr Stephen Connelly (Reader, School of Law, University of Warwick); and Dr Karina Patricio Ferreira Lima (Lecturer, School of Law, University of Leeds) (DEB0020)

23 The Nature Conservancy (DEB0003)

24 The ONE Campaign (DEB0013)

25 Vanguard Asset Management Ltd (DEB0028)

26 WaterAid (DEB0011)

27 Westminster Foundation for Democracy (DEB0007)

---

List of Reports from the Committee during the current Parliament

All publications from the Committee are available on the publications page of the Committee’s website.

Session 2022–23

Number	Title	Reference
1st Report	Racism in the aid sector	HC 150
2nd Report	Food insecurity	HC 504
3rd Report	From Srebrenica to a safer tomorrow: Preventing future mass atrocities around the world	HC 149
4th Report	(Fourth Report of the International Development Committee) - Developments in UK Strategic Export Controls	HC 282
5th Report	Extreme poverty and the Sustainable Development Goals	HC 147
6th Report	Aid spending in the UK	HC 898
1st Special Report	Afghanistan: UK support for aid workers and the Afghan people: Government response to the Committee’s Fifth Report of Session 2021–22	HC 152
2nd Special Report	Food insecurity: Government response to the Committee’s Second Report	HC 767
3rd Special Report	UK aid to Pakistan: Government Response to the Sixth Report of the Committee	HC 829
4th Special Report	From Srebrenica to a safer tomorrow: Preventing future mass atrocities around the world: Government response to the Committee’s Third Report	HC 992
5th Special Report	Racism in the aid sector: Government response to the Committee’s First Report	HC 956
6th Special Report	Extreme poverty and the Sustainable Development Goals: Government response to the Committee’s Fifth Report of Session 2022–23	HC 1177

Session 2021–22

Number	Title	Reference
1st Report	Assessing DFID’s results in nutrition Review: report from the Sub-Committee on the Work of ICAI	HC 103
2nd Report	Global Britain in demand: UK climate action and international development around COP26	HC 99
3rd Report	The UK’s approach to tackling modern slavery through the aid programme: report from the Sub-Committee on the Work of ICAI	HC 104
4th Report	International climate finance: UK aid for halting deforestation and preventing irreversible biodiversity loss: report from the Sub-Committee on the Work of ICAI	HC 730
5th Report	Afghanistan: UK support for aid workers and the Afghan people	HC 919
6th Report	UK aid to Pakistan	HC 102
1st Special Report	The humanitarian situation in Tigray: Government Response to the Committee’s Tenth Report of Session 2019–21	HC 554
2nd Special Report	The UK’s Support to the African Development Bank Group: report from the Sub-Committee on the work of ICAI: Government Response to the Committee’s Ninth Report of Session 2019–21	HC 555
3rd Special Report	DFID’s results in nutrition Review: report from the Sub-Committee on the work of ICAI: Government response to the Committee’s First Report	HC 780
4th Special Report	Global Britain in demand: UK climate action and international development around COP26: Government response to the Committee’s Second Report	HC 1008
5th Special Report	The UK’s approach to tackling modern slavery through the aid programme: report from the Sub-Committee on the Work of ICAI: Government response to the Committee’s Third Report	HC 1021

Session 2019–21

Number	Title	Reference
1st Report	Humanitarian crises monitoring: the Rohingya	HC 259
2nd Report	Effectiveness of UK aid: interim findings	HC 215
3rd Report	The Newton Fund review: report of the Sub-Committee on the work of ICAI	HC 260
4th Report	Effectiveness of UK aid: potential impact of FCO/DFID merger	HC 596
5th Report	Humanitarian crises monitoring: impact of coronavirus (interim findings)	HC 292
6th Report	The Changing Nature of UK Aid in Ghana Review: report from the Sub-Committee on the Work of ICAI	HC 535
7th Report	Progress on tackling the sexual exploitation and abuse of aid beneficiaries	HC 605
8th Report	Covid-19 in developing countries: secondary impacts	HC 1186
9th Report	The UK’s support to the African Development Bank Group: report from the Sub-Committee on the Work of ICAI	HC 1055
10th Report	The humanitarian situation in Tigray	HC 1289
1st Special Report	Follow up: sexual exploitation and abuse in the aid sector: Government Response to the First Report of the Committee	HC 127
2nd Special Report	Humanitarian crises monitoring: the Rohingya: Government Response to the First Report of the Committee	HC 658
3rd Special Report	The Newton Fund review: report of the Sub-Committee on the work of ICAI: Government response to the Committee’s Third Report	HC 742
4th Special Report	Effectiveness of UK Aid: Interim Report & Effectiveness of UK Aid: potential impact of FCO/DFID merger: Government Response to the Second & Fourth Reports	HC 820
5th Special Report	Humanitarian crises monitoring: impact of coronavirus (interim findings): Government Response to the Committee’s Fifth Report	HC 1160
6th Special Report	The Changing Nature of UK Aid in Ghana Review: report from the Sub-Committee on the Work of ICAI: Government response to the Committee’s Sixth Report	HC 1198
7th Special Report	Progress on tackling the sexual exploitation and abuse of aid beneficiaries: Government Response to the Seventh Report of the Committee, Session 2019–21	HC 1332
8th Special Report	Covid-19 in developing countries: secondary impacts: Government Response to the Eighth Report of the Committee	HC 1351

---

Footnotes

1 International Development Committee, Covid-19 in developing countries: secondary impacts, Eighth Report of the Session 2019–21, HC 1186, published 26 January 2021

2 United Nations, THE 17 GOALS | Sustainable Development, accessed 17 January 2023

3 World Bank, International Debt Statistics 2022, 11 October 2021

4 World Bank Group, International Debt Report 2022

5 Q3 [Stephanie Blankenburg]

6 Q5 [Stephanie Blankenburg]

7 Debt Justice (DEB0001) para 6

8 WaterAid (DEB0011) para 2.2

9 Q30 [Mae Buenaventura]

10 Foreign, Commonwealth and Development Office (DEB0014) para 32

11 Center for Global Development (DEB0015)

12 The ONE Campaign (DEB0013) para 5

13 Q93 [Rachel Turner]

14 The Paris Club is a group of official creditors established in 1956, which aims to find coordinated and sustainable solutions to payment difficulties of debtor countries while seeking to ensure that creditors receive appropriate debt repayments. The UK is a permanent member of the Paris Club.

15 Foreign, Commonwealth and Development Office (DEB0014) para 31

16 This is often used as a proxy for lower-income countries in the context of debt relief.

17 International Monetary Fund, Restructuring Debt of Poorer Nations Requires More Efficient Coordination, 7 April 2022

18 United Nations, The end of the golden age, the debt crisis and development setbacks, July 2017, p59–60

19 International Monetary Fund, Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative, 30 November 2022

20 As above.

21 International Monetary Fund, Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative, 30 November 2022

22 International Monetary Fund, Multilateral Debt Relief Initiative - Questions and Answers, 28 July 2017

23 Debt Justice (DEB0001) para 20

24 Foreign, Commonwealth and Development Office (DEB0014) para 73

25 Debt Justice (DEB0001) para 20, citing International Monetary Fund, Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI)—Statistical Update, 6 August 2019

26 Foreign, Commonwealth and Development Office (DEB0014) para 43(a)

27 International Monetary Fund, Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative, 30 November 2022

28 Debt Justice (DEB0001) para 19

29 International Monetary Fund, Questions and answers on sovereign debt issues, last updated 8 April 2021, accessed 17 January 2023

30 World Bank, Debt Service Suspension Initiative, 10 March 2022

31 Foreign, Commonwealth and Development Office (DEB0014) paras 5, 19 and 78

32 Foreign, Commonwealth and Development Office (DEB0014) para 35

33 Q8 [Tim Jones]

34 Debt Justice (DEB0001) para 27

35 The Guardian, World Bank: Covid-19 pushes poorer nations ‘from recession to depression’, 19 August 2020

36 PQ HL 10947 [Debt: Coronavirus], 15 December 2020

37 International Monetary Fund, Questions and answers on sovereign debt issues, last updated 8 April 2021, accessed 17 January 2023

38 In late 2022 Chad reached an ‘agreement in principle’ under the Common Framework, which calls for Chad’s official and private creditors to reschedule (but not reduce) external debt in 2024.

39 Q57 [Veda Poon]

40 International Monetary Fund, The G20 Common Framework for Debt Treatments Must Be Stepped Up, 2 December 2021

41 Q60 [Veda Poon]

42 Debt Justice (DEB0001) para 38

43 Debt Justice (DEB0001) para 39

44 Q20 [Sonja Gibbs]

45 Center for Global Development (DEB0015)

46 Q25 [Tim Jones]

47 World Bank, DSSI: Q&As, 10 March 2022

48 Clifford Chance LLP (DEB0021) para 2.1

49 International Monetary Fund, Back to Basics: What is Debt Sustainability?, September 2020

50 International Monetary Fund, IMF Annual Report 2022

51 Foreign, Commonwealth and Development Office (DEB0014) para 1

52 UNICEF, COVID-19 and the Looming Debt Crisis, April 2021, p 15

53 Foreign, Commonwealth and Development Office (DEB0014) para 1

54 Westminster Foundation for Democracy (DEB0007) para 2

55 Q33 [Jason Braganza]

56 WaterAid (DEB0011) para 2.4

57 Foreign, Commonwealth and Development Office (DEB0014) para 27

58 HM Treasury, Autumn Statement 2022, 17 November 2022

59 Oral evidence taken on 6 December 2022, Future of UK aid, HC 148 (2022–23), Q399

60 Q63 [Rachel Turner]

61 Cabinet Office, Global Britain in a Competitive Age: the Integrated Review of Security, Defence, Development and Foreign Policy, 16 March 2021

62 UK Government Press Release, Prime Minister to tell UN General Assembly: I will lead a new Britain for a new era, 21 September 2022

63 International Institute for Environment and Development (IIED) (DEB0016) para 1.2

64 International Institute for Environment and Development (IIED) (DEB0016) para 1.2

65 BBC News, Climate change: Low-income countries ‘can’t keep up’ with impacts, 8 August 2021

66 The London School of Economics and Political Science, IHLEG Finance for Climate Action, 8 November 2022, p 7

67 Oxfam GB (DEB0009) para 7.2

68 Westminster Foundation for Democracy (DEB0007) para 3

69 Oxfam GB (DEB0009) para 7.2. See also Save the Children UK (DEB0019) which states that “The challenge for governments in low income developing countries is the nature and sustainability of their debt, which affects their ability to respond to current and emerging crises of covid and climate change, as well as other risks such as conflict”.

70 See Rob Callender (Campaigner at Jubilee For Climate); Felix Barbour; Subham Kar Chaudhuri; Dirk Campbell (DEB0002) paras 6–7 and 10 and Oxfam GB (DEB0009) para 7.5.

71 Oxfam GB (DEB0009) para 7.5

72 UK Export Finance launches new debt solution to help developing countries with climate shocks, UK Export Finance press release, 8 November 2022

73 International Institute for Environment and Development (IIED) (DEB0016) para 3.1

74 Rob Callender (Campaigner at Jubilee For Climate); Felix Barbour; Subham Kar Chaudhuri; Dirk Campbell (DEB0002) para 14.2

75 Q39 [Paul Steele]

76 The Nature Conservancy (DEB0003) para 10

77 As above, para 10.

78 International Institute for Environment and Development (IIED) (DEB0016) para 4.2

79 The Nature Conservancy (DEB0003) para 11

80 Rob Callender (Campaigner at Jubilee For Climate); Felix Barbour; Subham Kar Chaudhuri; Dirk Campbell (DEB0002) paras 13.2, 14–14.1, 16–16.4.

81 Westminster Foundation for Democracy (DEB0007) para 30

82 Catholic Agency for Overseas Development (CAFOD) (DEB0010) para 11

83 Foreign, Commonwealth and Development Office (DEB0014) para 77

84 Q65 [Veda Poon]

85 Foreign, Commonwealth and Development Office (DEB0014) para 25

86 Debt Justice (DEB0001) para 2

87 Q18 [Sonja Gibbs]

88 BlackRock (DEB0012)

89 Q16 [Tim Jones]

90 Foreign, Commonwealth and Development Office (DEB0014) para 55

91 World Bank, Reversing the Inequality Pandemic: Speech by World Bank Group President David Malpass, 5 October 2020

92 World Bank Group, Potential Statutory Options to Encourage Private Sector Creditor Participation in the Common Framework, 2022 p 7–11

93 International Monetary Fund, Transcript of the IMFC Press Briefing, 21 April 2022

94 Debt Justice (DEB0001) para 23

95 Legislation.gov.uk, Debt Relief (Developing Countries) Act 2010, accessed 12 December 2022

96 Government acts to halt profiteering on Third World debt within the UK, HM Treasury press release, 16 May 2011

97 International Monetary Fund, Factsheet - Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative, 30 November 2022

98 Debt Relief (Developing Countries) Act 2010 (Permanent Effect) Order 2011

99 Q105 [Veda Poon]

100 Q96 [Veda Poon]

101 International Development Committee, Oral evidence: Future of UK aid, HC 148, 6 December 2022, Q452–453

102 See correspondence with HSBC (DEB0023) and Legal & General Group Plc (DEB0025).

103 Foreign, Commonwealth and Development Office (DEB0014) para 4

104 Q64 [Rachel Turner]

105 Foreign, Commonwealth and Development Office (DEB0014) para 4

106 Q62 [Rachel Turner]

107 Paris Club website, accessed 15 December 2022

108 Foreign, Commonwealth and Development Office (DEB0014) para 2

109 Foreign, Commonwealth and Development Office (DEB0014) para 31(c)

110 Foreign, Commonwealth and Development Office (DEB0014) para 31(e)

111 Foreign, Commonwealth and Development Office (DEB0014) para 31(a)

112 Foreign, Commonwealth and Development Office (DEB0014) para 6

113 Action for Southern Africa (DEB0017) para 8

114 Catholic Agency for Overseas Development (CAFOD), Christian leaders urge IMF and World Bank to cancel debts for developing countries, 12 October 2020

115 Westminster Foundation for Democracy (DEB0007) para 7

116 Catholic Agency for Overseas Development (CAFOD) (DEB0010) para 12

117 Institute of International Finance (DEB0008). The IIF referred to the absence of timely disclosure of public debt obligations, limited coverage of contingent liabilities (including SOE liabilities) and the extensive use of confidentiality clauses in non-bonded debt as “the major impediments causing information asymmetries between creditors and debtors.”

118 Institute of International Finance (DEB0008)

119 Institute of International Finance (DEB0008)

120 Center for Global Development (DEB0015). This is on the debtor and creditor sides.

121 Westminster Foundation for Democracy (DEB0007) para 8 and World Bank, Report: Debt Transparency in Developing Economies, 10 November 2021

122 Center for Global Development (DEB0015)

123 Christian Aid (DEB0018) para 4.3.4

124 Foreign, Commonwealth and Development Office (DEB0014) para 11

125 HM Treasury, Report on outstanding debt owed by other countries to His Majesty’s Government in 2022, 15 December 2022

126 Foreign, Commonwealth and Development Office (DEB0014) para 11

127 Foreign, Commonwealth and Development Office (DEB0014) para 11

128 Foreign, Commonwealth and Development Office (DEB0014) para 11 and para 85. See also OECD, OECD announces the launch of a Debt Transparency Initiative, 29 March 2021.

129 OECD, OECD announces the launch of a Debt Transparency Initiative, 29 March 2021. See also the challenges faced by the initiative in the OECD, OECD Debt Transparency Initiative - Trends, challenges and progress, 26 March 2022, p 31 and 33.

130 The ONE Campaign (DEB0013) para 9

131 Save the Children UK (DEB0019)

132 The ONE Campaign (DEB0013) para 9