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New Clause 1

Volume 927: debated on Tuesday 8 March 1977

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Limit On Borrowings From The International Monetary Fund

'(1) Treasury borrowings from the International Monetary Fund may not exceed 145 per cent, of its quota with that Fund, except as provided in subsection (2) of this section.

(2) The Treasury may by order raise the limit imposed by subsection (1) of this section on borrowings from the Fund.

(3) The power of the Treasury to make orders under this section shall be exercisable by statutory instrument, and no such order shall be made until a draft has been laid before and approved by a resolution of the House of Commons.'.—[ Mr. Hordern.]

Brought up, and read the First time.

3.40 p.m.

I beg to move, That the clause be read a Second time.

The purpose of the clause is to put in order, if possible, the Government's borrowing from the International Monetary Fund. As the House knows, the Government have borrowed 145 per cent. of their quota with the IMF while the permitted amount is only 125 per cent. The Government had to obtain special consent from the Jamaica Conference in order to do that. The Government's total borrowing, of which this 145 per cent. of the quota forms part, now amounts to $12·9 billion, which is a huge sum. The Financial Secretary was good enough to tell us that that was the total indebtedness for which the Government have been responsible since March 1974. Of that, $3·1 billion came from the IMF, $2·5 billion was a direct loan to the Government, and $7·3 billion has been borrowed by various sections of the public sector.

We were told that we were allowed the temporary increase in our quota in order to accommodate the Government's appetite. This was agreed in the Standby Agreement that was signed on 3rd January 1976. We had to go above our quota of 125 per cent. I assume that we shall have to revert to 125 per cent. when we repay our loans to the IMF. We have asked the Financial Secretary on a number of occasions how this is to be done technically. I assume that the mode of operation will be that as loans are repaid we shall get down to the quota figure or when we reach the new quota at the beginning of 1978 our borrowings will form the new proportion of that quota and in those circumstances will not amount to 145 per cent. We are by far the largest borrowers from the IMF. We have been borrowing far more than the developing countries.

I want to take up a point that was made by the Financial Secretary on Second Reading. He said:
"The problem of dealing with surplus revenues acquired by the oil producers is still with us and is likely to remain with us for a long time. It will remain with us as long as those countries do not use this money, which comes from the sale of oil, for imports and their own development projects."—[Official Report, 31st January 1977; Vol. 925, c. 51.]
That is typical of the Government's approach to the imbalance with the OPEC countries. It is as though it were the fault of the oil countries for being able to obtain what the market will give for their products.

It seems quite clear that, while other developed countries—with the sole exception of Italy—have been able to get into reasonable balance with the OPEC countries, we are the only developed country unable to do so. There is no reason why we should not have put ourselves in a position similar to that of other Western European countries and the United States in relation to the OPEC countries and the balance of payments. It is as though the OPEC countries were, to some extent, held to blame for obtaining the market price for their oil. We shall not be complaining when we come into the 1980s and have a surplus of oil to export. I cannot imagine the Government—if it still is a Labour Government, and I hope that it will not be—complaining then about excess oil and the embarrassment it gives to other countries.

We have had a chance to sell industrial goods to OPEC countries—and that is more of a chance than the developing countries have had because of their inability to produce industrial goods of the kind wanted by the OPEC countries. The developing countries built up a deficit of $31 billion in 1976.

Now the World Bank is talking about replenishment of $9 billion for the IDA. The Government have already borrowed far more than that. So far, this problem of imbalance between developed and developing countries has been met by the Euro-currency market and not by recourse to the IMF. We now find that 40 per cent. of the Euro-currency market has been engaged with COMECON or developing countries' loans and on both accounts—both for the COMECON countries and the developing countries—according to any normal banking criteria, these must be adjudged as doubtful risks. It may be said that this is merely the market's risk and that it is the market's responsibility to decide whether to engage in such risks, but that is to ignore the extent of the existing commitments that the Euro-currency market has in developing countries and, indeed, with COME-CON countries. It seems right, therefore, that, at least for the developing countries, the IMF should be the bank of last resort.

Turning to the IMF letter of intent, with which the new clause is inextricably bound, I ask the Financial Secretary what the Government's decision is on the sale of BP shares. In the letter of intent, the Government engaged to sell £500 million of BP shares. That was a condition of the loan. But we now hear—through the usual subterranean channels that the Government employ—that the project is in some doubt. The Financial Secretary should take this opportunity of confirming that the sale of the shares remains Government policy as one of the commitments under the letter of intent. I do not know whether the Government may change their mind about the sale of the shares. I understand that they believe that the position has changed a good deal for the better since the letter of intent was signed. There is some evidence that this is so, and it looks as though the public sector borrowing requirement may be less than was at first feared. Will the Financial Secretary tell the House what the position is?

It would not be unusual for the Government to have second thoughts about the disposal of the shares. They have had second thoughts on a number of occasions recently, for example, about councils employing direct labour, about ship repairing and about devolution. For my part, I much prefer the Government's second thoughts to their first thoughts. But what is the position now? The House ought to be told what it is and what the Government intentions are about the letter of intent and particularly about the sale of the BP shares.

I understand that there will be a further increase in the IMF's quota by February 1978. We do not know how large future quotas will be, but they will not require legislation by the House because of the terms of this Bill. We make it clear that we regard this as a most retrograde step. Previously, IMF Bills were introduced by the Chancellor. IMF quotas have always been increased by virtue of the passage of a Bill.

The amounts to be provided in future will be far greater and will exceed anything that has been put before the House in the past. But they will be brought forward by affirmative resolutions that allow just one and a half hours for debate and that the House can only take or leave. It would, of course, be serious for the Opposition to turn down such a proposition. This is a most retrograde step because the House will lose the opportunity of discussing IMF policy towards quotas, the developing world, the rôle of gold, SDRs and exchange rate policy.

There are few occasions when the House is able to discuss important aspects of these policies. These policies are not important just because of their size or content. They have importance for every person in the country. It seems to be a retrograde step if we have reached the state of affairs where huge sums of borrowed money, expressed in SDRs or in terms of exchange rates, will be brought before the House by affirmative resolution late at night. It is disgraceful that the Government should attempt to cut out all future debates on these important matters by means of this Bill.

In Committee and on Second Reading we touched on the important question of surveillance. The Government are about to sign a formal treaty which says in Section 3 of Article 4 under the title "General obligations of members" that they will avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.

How can the Government square this undertaking with their present policy? It is difficult to know what the Government's policy is and impossible to make any sense of it. For example, they are taking out a loan to fend off hot money in the official balances, only to encourage an enormous increase in the inflow of funds over the exchanges on privately-held balances which could be just as volatile as were the old official balances.

A few months ago, the Chancellor of the Exchequer said that an exchange rate of $1·80 was far too low for sterling. Why then is he so busily employed in keeping sterling at $1·70? It is difficult to make any sense of the Government's financial and exchange rate policy. It has the effect of keeping the exchange rate down and deliberately increasing prices far more than would otherwise have been the case. This causes higher unemployment than we would otherwise have. I am reminded of the song from "South Pacific" which goes:
Who can explain it,
Who can tell you why?
Fools give you reasons,
Wise men never try."
That is the only piece of wisdom that the Government have so far shown in their total inability to explain their economic, monetary and exchange rate policy.?

I do not think that they are able to make any sense of their policy. Money is still coming into this country, attracted by levels of interest rates which have been deliberately held too high in order to encourage foreign funds. I do not know why the people of this country should be expected to take on this extra burden of debt and face increased prices and unemployment because of a deliberate act of policy. I hope that the Minister will be able to make some sense of what seems to be an inexplicable policy.

I support the important new clause. At the heart of all our considerations of the relationship between this country and the International Monetary Fund is our experience in the recent past and the way in which the Government have had to have access to the facilities of the fund in order to cope with our economic problems.

As the rôle of the IMF has become more important in the world economy, as its means of currency—special drawing rights—have been given a greater rôle and as the new amendments, which will have United Kingdom authority if the Bill is passed, are approved, the functions of the IMF are being extended. We have no quarrel with that. We argue that alongside this increase in the significance and involvement of the IMF parliamentary control over the Government's relations with the fund is being diminished.

If the Bill is enacted without the new clause there will be little restraint on the amount that any Government can borrow under the fund arrangements. Even now, our quota is abnormally high. It is still more than one-third above the quota of the United States and is larger than the quota of West Germany. Yet it is Government policy to reduce the rôle of sterling as a reserve currency.

The part that sterling has played as a reserve currency in the past has been one of the main factors in ensuring that our quota has been so high. If this rôle is reduced we can expect our quota to be lower, if not in absolute terms at least in relation to the increasing quotas of other nations, whether industrialised, non-industrial or Third World countries.

The problem affecting a country such as our own is not that we have too little credit but that we have too much. The more credit that anyone has, whether an improvident Government or an improvident person, the greater is the encouragement to spend now and pay later, and this is what has happened with our economic affairs.

When resort to the IMF is unavoidable, it is better that it should take place sooner rather than later. Had our ability to draw from the fund not permitted an increase of 45 per cent. last year on an already high figure the Government would have had to contemplate resort to the fund much earlier, and that would probably have meant that instead of the half-baked measures of last July and another dose of the cuts in December we could have got the whole thing over in one go and saved ourselves a great deal of pain and misery in the process. Had it been necessary, because of a reduced ability to borrow from the fund, to meet the fund's loan conditions at the time of the July measures, it would have saved us from six months of worsening crisis.

In June last year the minimum lending rate was 11½ per cent. In September it was 13 per cent., and by October it had reached 15 per cent. We are still not back to the level of interest rates that prevailed immediately before the July measures.

Before the July measures, the sterling exchange rate against the dollar was 1·80. Following the lack of success of those measures it fell, at one point, to 1·57 and, although it had recovered to the 1·60s by December, only since the IMF measures at the end of last year has the pound achieved reasonable stability.

We see the effect of all this in the recent performance of the retail price index. We were all pleased to note that the exceptional increase of last month has slackened off, but it is disgraceful that by July last year the increase was still double the rate that applied just before the General Election in October 1974. This is a direct result of the decline of the sterling exchange rate and the fact that the July measures, without the sanction of the IMF, were insufficient to restore financial stability and economic confidence.

It would be a great advantage if we could tighten parliamentary control over the Executive, rather than the other way round. The fund is a lender of last resort and is not an easy-going finance house that splashes out undisciplined credit to all comers. Special drawing rights are not plastic money that can be spent by extravagant Governments without concern. The IMF is a serious institution and its purpose is to provide loans under difficult circumstances to the unfortunate and the improvident. But no one can claim that it is misfortune that has brought the Government to their IMF borowings. They have been brought there by their own mismanagement and extravagance.

4.0 p.m.

It is a disgrace that twice within 10 years Labour Governments have been forced to resort to conditional finance from the IMF. That is unparalleled for a trading country of our international standing. We should guard against allowing future Governments—not necessarily Labour Governments; any sort of Governments—in this country and in other countries having more credit available to them from the IMF than is good for them.

If we do not retain more direct parliamentary control over the way in which Governments can borrow when they have resort to the IMF, it is a direct encouragement to them to overspend and to put off the evil day as long as possible. There is no doubt that had the right measures been taken in the middle of last year they would have saved us from six months of worsening unemployment, worsening inflation and a deteriorating foreign exchange position.

I strongly support the new clause, in the hope that it will retain for the Houses of Parliament some control over the Executive in this important area.

The hon. Member for Horsham and Crawley (Mr. Hordern) began by discussing the problems arising from the oil surplus. The hon. Gentleman considered that the difficulties occasioned by those countries with surplus funds arising from the enormous increase in the price of oil had been overstated by the Government and were wrongly attributable as a cause of our problems. I do not say that our problems are entirely due to the increase in the price of oil as that would be to take an absurd position. We have many long-term problems that have little to owe to that occurrence. At the same time, it would be a mistake to underestimate the importance to the developed and the developing countries of the enormous increase in revenues obtained by the OPEC countries as a result of oil price increases.

I shall give some indication how the problem arose and how it is still with us. Although it is generally believed that the problem is declining—certainly it has been coped with extraordinarily successfully—we would be wrong to fail to understand the nature of the continuing problem that is still before us.

I do not want to weary the House with figures but essentially the argument depends upon the surpluses that can be revealed only by the quotation of a selected number of figures. In 1973 the OPEC countries had a current balance of $863 million. In 1974, it rose to $60 billion. In 1975 it declined to $32 billion. In 1976 it rose again to $36 billion. The indications are that it will continue at around that level. That is a measure of the liquidity that has been created in the OPEC countries. The developed countries and the developing countries have had to absorb the surpluses and the unspent parts of the moneys that the OPEC countries have received.

This is an international problem. We are fortunate in having a body of the reputation and expertise of the IMF. We should be wrong to assume that the problem is, as some have put it, almost on its way out because one or two of the OPEC countries have been spending an increased proportion of their surpluses.

The hon. Member for Horsham and Crawley asked me about the letter of intent and the Government's position in respect of BP shares. As he rightly asserted, our position was spelt out in the letter of intent. The PSBR target, of which this was a part, finds its way into that letter. The Government have accepted the PSBR target but it is up to the Government to decide how to reach it. That will be among the other matters for further consideration.

The hon. Gentleman asked that important matters such as IMF quotas and their negotiation be part of the legislative process of this House. The hon. Gentleman rightly pointed out the way in which such matters have been treated by the Chancellor of the Exchequer on previous occasions. Those occasions were quite rare. In 1944, there was the Bretton Woods Agreement. The first fundamental change came in 1968. That change came after 24 years. We know already that there will be the changes that we are now discussing and the changes that will arise from the further negotiations that will take place in a year or two.

The pace of change reflects some of the increasing problems that we find in international monetary affairs. It seems that the pace will increase and that it is unnecessary to arrange the same provisions. At one time changes were rare and much more significant events in the life of the IMF but the conditions have changed.

The hon. Gentleman asked about Article 4, which deals with the firm surveillance of changes in exchange rates and imposes upon member countries the rights of obtaining information and of consulting the IMF. The details have yet to be worked out, but the article lays down the principles that will be followed and the various discussions that will take place to provide the pattern that will be followed, although that is some way ahead of us.

Although I can say something about exchange rate policy I fear that it will not come as any surprise to the hon. Gentleman to hear that it will be little more than a restatement of what I have already provided for him. The hon. Gentleman, the hon. Member for Hitchin (Mr. Stewart) and all members of the Committee will be aware that these are delicate matters and that I can speak about the Government's position only in broad outline. It will be recognised that at the end of the day exchange rate policy is determined, crucially, by the market's reaction—namely, by those overseas who want sterling and are prepared to hold it. Accordingly, the value of sterling is determined by the views of those who want it and hold it.

The Government's rôle, which is much diminished, is to avoid excessive fluctuations, realising that ultimately the competitiveness of our goods will be determined by the exchange rate that outside forces determine.

The hon. Member for Horsham and Crawley asked about our debt as a percentage of our quota. The hon. Gentleman will know that as foreign exchange is repaid over the period envisaged the percentage of the quota that is measured by the debt will be reduced, and that whether it is a percentage of the present or the future quota is a matter of little significance as it will be reduced as it is paid out.

The hon. Member for Hitchin asked about the reason for borrowing. I shall try to give some explanation in terms of our own position and the position generally. It may be that if we had adopted more strongly deflationary measures at an earlier stage the deficit would have been made much less. But the hon. Gentleman must also understand that as long as these OPEC countries were not reducing their own levels of liquidity, it would only have found its way into some other country's increasing deficits.

It was the hope, and at one time the expectation, that there would be a great concert of action by the developed countries on these matters. Unfortunately, that did not work out. The international co-operation was not as great as many of us hoped for at the time. But the problem is still with us.

It must be hoped that both the IMF and the developed countries, bearing in mind their need to assist the developing countries which are themselves carrying the major burden of the surplus funds for OPEC, will come to some suitable arrangement which will retain the international advantages that we have had of stability in the foreign exchanges. But the future is by no means crystal clear, and the hope that I have expressed has yet to be converted into the reality which we shall need if we are to be able to obtain the kind of stability in the future that we had in the post-Bretton Woods years.

The object of the new clause is to place a limit on the amount the Government can borrow from the International Monetary Fund. Our quota to the IMF is fixed in the Bill, under which Parliament retains the right to have a say about any increase in that quota. The Treasury can increase the quota only with the permission of Parliament.

We have three reasons for the new clause. The first was mentioned by the Financial Secretary when he talked about the problems of the developed and the developing countries. One of the first results of the new clause, if incorporated into the Bill, would be to limit this country's call on the IMF's scarce resources without the permission of Parliament. As I said on Second Reading, we believe that this is extremely important. It is wrong that a country with such a relatively high standard of living compared with that of many countries in the developing world should be pre-empting a huge slice of the IMF's scarce resources, and we get no pleasure from the fact that Britain is the biggest borrower in the history of the IMF. The new clause would thus enable Parliament to limit the amount of borrowing by the Government from the IMF.

Our second reason is that the new clause would limit the Government's ability to pledge the credit of the country. We believe that it has been much too easy for this Government—and Labour Governments in the past have also taken advantage of it—to pledge this country's credit without having to discuss with Parliament the amount they were trying to borrow. The third principal reason for the new clause is that it would strengthen Parliament's control over the Executive in taking vital decisions about overseas borrowing by this country.

4.15 p.m.

One of the features of the Bill is that it contains within it no fewer than eight separate guillotines. If the Bill becomes law, the Government will be permitted, by means of eight debates of one and a half hours each, to increase the limit of our quota to the IMF, to increase the limit of the ECGD, and to increase the lending to the Commonwealth Development Corporation. If the Bill becomes law as it stands, Parliament effectively will have surrendered its ability to have a full debate about any plan of the Government to increase any of the limits under those three headings. We have these eight individual guillotines built into the Bill because, by using Statutory Instruments, the Government will be able to avoid having a major debate about the IMF or the ECGD or the CDC for several years.

We feel this to be slightly alraming. It is a common argument by Governments that parliamentary time is so precious that they are doing Parliament a favour by finding it ways of saving its own time. But what they are saying, in effect, is that they are finding ways to fill up our time with new legislation and to limit discussion about past decisions. We feel that this is a deplorable trend. We feel that the argument is unsound. We feel that Parliament should spend less time legislating and more time reviewing some of the Government's previous less-than-welcome decisions.

Under our new clause, one limit would be placed on the Government. They would not be able to pledge this country's credit beyond a certain level without the approval of Parliament. It is absurd that the Government should have to come to the House should they wish to increase our quota to the IMF but not if they make arrangements with the IMF to borrow 200 per cent. of our existing quota. There is no limit in the Bill for controlling the Government's ability to borrow from the IMF, but there is an ability to control the Government's lending to or depositing with the IMF. Since, in recent years, we have been notable borrowers and not notable depositors, we think it important that our control of the Government's powers to borrow should be strengthened.

We also believe that it is wrong that the Chancellor of the Exchequer should come to the House, having conducted his negotiations with the IMF and made all the arrangements, and say to us "This is the arrangement I have made—take it or leave it. I warn you that if you leave it, the bottom will fall out of the pound." In the words of the Godfather, the Government, under the present arrangement, have the ability to make the House an offer that it simply cannot refuse.

We do not think that that is proper. We feel that the Government should have to come to the House and discuss with it their intention to borrow more than the amount already fixed by Parliament. We feel that, if the Government want to exceed that limit, they must explain their motives and get parliamentary approval before they do it. Anyone treating with the Government would then know that only if they got approval could the limit be changed.

My hon. Friend the Member for Blaby (Mr. Lawson), in an interesting speech in Committee, pointed out that there is a gap in our parliamentary controls. I know that the Financial Secretary does not agree, but he has not produced a convincing answer. My hon. Friend pointed out that in theory Parliament is in control of expenditure, that in theory it fixes the taxes, and that in theory it therefore controls the gap—the difference between the Government's expenditure and the Government's income. But, as he also pointed out, Parliament's methods or ability to control that gap are severely circumscribed.

In fact it is very difficult for Parliament to be able to claim that is is in control of Government spending plans, as the Financial Secretary pointed out to the House over and over again in his previous incarnation as Chairman of the General Sub-Committee of the Expenditure Committee. He knew just how inadequate Parliament's controls of Government expenditure were. It is said that Parliament fixes taxes, but Parliament does not control expenditure, although it tries to do so. Parliament has no control at all on how the Government fund the gap. We feel that Parliament should have some control.

We do not think that it is any sort of measure of Parliament's control of the Government and of the Executive that the Financial Secretary should be able to come to the Committee two weeks ago to tell us that the present Government have increased this country's overseas borrowing from £7 billion to £20 billion in under three years. Parliament was not consulted about the borrowing. This debate, on the Floor of the House, is the first chance that Parliament has had to comment.

Were our new clause to be accepted by the House it certainly would not be a perfect system for extending Parliament's control over a wide range of Government activity, but we suggest that it would be one way of controlling one element in the Government's plans which is at present outside Parliament's control, namely, the ability of the Government to pledge this country's credit overseas.

Question put and negatived.