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Debt Relief

Volume 476: debated on Wednesday 21 May 2008

On 18 May over 1,000 people gathered in Birmingham to mark the 10th anniversary of the formation of a human chain by over 70,000 people to demand an end to the debts of the world’s poorest countries. Since that day 10 years ago, we have made great progress in providing debt relief to the poorest nations. Debt relief has played an important role in helping these countries tackle poverty and progress towards the millennium development goals.

The enhanced Heavily Indebted Poor Countries Initiative (HIPC) was launched in 1999 to provide faster, deeper and broader debt relief and to make the poverty reduction strategies of poor countries central to HIPC. At Gleneagles, in 2005, we used our G8 presidency to go further and secure the Multilateral Debt Relief Initiative (MDRI). Excellent progress has been made under these initiatives and together they have so far provided over US$100 billion (£51 billion) worth of debt relief allowing the poorest countries to invest vital resources in health, education and infrastructure. In 2005, the Paris club agreed its largest ever African debt relief deal with Nigeria.

Since the last statement in January 2007 there has been further progress on debt relief for poor countries. Sao Tome & Principe and the Gambia are the most recent countries to complete the HIPC process and have most of their debt cancelled, bringing the total to 23 countries. These countries have received 100 per cent. cancellation of their multilateral debts owed to the World Bank, African Development Bank (AfDB) and the International Monetary Fund (IMF) under the MDRI. A further 10 countries are receiving interim relief, including Afghanistan and the Central African Republic, who entered HIPC during 2007, and Liberia who entered at the start of 2008. Another eight countries remain eligible for the debt relief provided under these international initiatives. The UK continues to exceed its HIPC commitments, providing 100 per cent. bilateral debt relief and holding in trust any payments received from HIPC countries yet to enter the initiative.

There are many good examples of the use countries are making of their debt relief savings. Burundi is using the extra US$75 million HIPC relief has provided towards the abolition of primary school fees and the building of 1,100 primary school classrooms. Nicaragua is using its savings to increase investment by US$54.3 million in health and US$121 million in education between 2007 and 2008. It also used funds towards supporting the construction of social housing, water and sanitation and social programmes aimed at children and families affected by natural disasters. Sierra Leone is using US$33 million freed up by the MDRI in 2008 to fund an emergency electricity generation programme which will double electricity supplies.

We remain committed to the full financing and implementation of the HIPC and MDRI initiatives. Our annual MDRI contributions to the World Bank and AfDB for 2007 and 2008 have amounted to £71 million. Since January 2007, we have provided £30.7 million to the HIPC trust fund towards debt cancellation costs for a number of HIPC countries including Sao Tome & Principe, Sierra Leone, the Democratic Republic of Congo and most recently the Gambia.

Under the Commonwealth Debt Initiative (CDI) we provided a further £5 million of debt relief for Jamaica in 2007-08 bringing the total we have written off under this initiative since 1998 to £51 million.

Countries with arrears to the international financial institutions must clear them before they can enter HIPC and receive debt relief. Last year, we contributed £1.3 million to help clear arrears owed to the AfDB by the Central African Republic and £500,000 to help clear the arrears owed by Comoros to the AfDB. More recently, the UK has contributed £20 million to help with the clearance of Liberia’s arrears at the AfDB and IMF.

We continue to believe that many poor countries, not just HIPCs, require additional support with their debt payments in order to achieve the MDGs. Under the UK MDRI we provide multilateral debt relief to poor countries not covered by HIPC that can use the savings for poverty reduction. We have recently changed the UK MDRI eligibility criteria to provide a clearer focus on good public financial management. This enables more of the poorest countries to benefit from debt relief.

Under the revised criteria, five new countries qualify to receive UK MDRI, in addition to the eight that are currently receiving support.

The UK has also been at the forefront of international initiatives to promote sustainable lending and borrowing. We played a key role in discussions of the Organisation for Economic Co-operation and Development (OECD) Export Credit Group in January 2008 to agree a set of principles and guidelines that promote sustainable lending to all low income countries. The UK continues work to improve the capacity of poor countries to manage their debt and to support the development of policy frameworks that promote sustainable lending and borrowing.

The benefits of debt relief can be reduced by the actions of so-called “vulture funds”. We have made concerted efforts to tackle this problem and secured international agreement on the need for action. To reduce the risk of debts falling into the hands of vulture funds we have been working with the World Bank to help poor countries buy back their commercial debts at a deep discount through the Debt Reduction Facility (DRF). Last year we provided £1.8 million to assist with Nicaragua’s US$1.3 billion commercial debt buy-back operation. This operation represented the elimination of over two thirds of all reported court judgements against completion point HIPCs. Last May, the UK called for assistance from the DRF to be available earlier for HIPC countries, a position supported in February by G7 Finance Ministers, and agreed last month by the World Bank board. We have recently announced our commitment of up to £10 million for future DRF country operations to help tackle the threat of vulture funds. In addition, with strong UK support, the board of the African Development Bank has agreed to promote the establishment of an independent legal support facility to advise countries on how best to tackle vulture fund activity.