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Debt Cancellation

Volume 454: debated on Monday 11 December 2006

To ask the Secretary of State for International Development what assessment he has made of the impact of conditionality upon the effectiveness of debt cancellation. (105321)

The very high levels of debt owed by some of the poorest countries has raised widespread concern. It has prevented countries from investing in basic services and building the infrastructure neededto reach the millennium development goals. It has constrained economic growth, and undermines the compact between a government and its people, with large shares of the government's resources being needed to service its debt. Tackling this problem has been a top priority for the Government.

The right conditionality is essential to ensure thatwe can have confidence that debt relief will benefit poor people. In my view, the approach taken underthe Heavily Indebted Poor Countries Initiative is appropriate. It specifies that there should be a track record on macroeconomic management and an established commitment to reduce poverty. Macroeconomic management is important for ensuring that government resources are used effectively, and provides the basis for sustainable economic growth.

The commitment to poverty reduction has been specified in terms of a government developing and implementing a national poverty reduction strategy, and through the implementation of a number of agreed actions. These actions include measures to improve public financial management, and they may include actions on education, health, or economic growth. In my view, the choice of conditions has not always been wholly appropriate. In some cases, the number of conditions has been too high, making it hard for countries to complete the process. In others, there were conditions for which there was too little government ownership and commitment. The UK has argued for the World Bank and the IMF to take a flexible approach in assessing whether countries should qualify for the irrevocable debt relief that is granted at the end of the process, and several countries have already benefited from this.

Given the demands of the HIPC Initiative, the Government took the view that no additional conditionally should be attached to the Multilateral Debt Relief Initiative. We were successful in achieving this.

Both the HIPC Initiative and MDRI provide irrevocable debt cancellation. This is important to ensure that debt burden is removed and so that governments have a predictable stream of resources that they can invest. Of course, there are no guarantees that countries will remain committed to reducing poverty, but a balance needs to be struck between having confidence that debt cancellation will benefit the poor and not setting the standards unreasonably high. Debt relief remains a small proportion of overall aid provided by donors, and donors can change the form of other aid if there are setbacks, for example withdrawing budget support and providing other assistance.

At HIPC Decision Point, countries receive flow relief on their debt payments. This can be removed where there is evidence that a country is not committed to poverty reduction. A track record is therefore built up before qualifying for irrevocable debt relief at Completion Point.

Recent reports from the World Bank and IMFhave shown that countries that have qualified for debt relief have increased their spending on poverty from US$ 6 billion in 2000 to nearly US$ 15 billion in 2005. This is projected to increase further following the implementation of Multilateral Debt Relief Initiative in 2006, which is freeing up an additional US$ 38 billion. I have seen for myself the impact of some of this relief, such as schools in Ghana. Zambia is using savings (US$ 2.8 million) in 2006 to increase spending on agricultural projects on smallholder irrigation and livestock disease control, as well as eliminate user fees for healthcare in rural areas.

Analysis also shows that the performance of HIPCs has improved, as measured by the World Bank's Country Policy and Institutional Assessment. This looks at 16 different aspects of policy, within the categories of economic management, structural and social/poverty policies, and public sector management. And economic growth rates in sub-Saharan Africa are increasing. This cannot be attributed only to the HIPC process; however the top performers in 2005 amongst non-oil producing countries are HIPCs that have already benefited from debt relief.