I have today laid a departmental minute outlining updated details of a contingent liability of the US dollar equivalent of £360 million which the Department for International Development (DFID) has undertaken, in respect of the World Bank Group.
On 25 October, I laid a departmental minute setting out DFID’s intention to guarantee a portion of a forthcoming development policy loan from the International Bank for Reconstruction and Development (IBRD) arm of the World Bank to the Government of Iraq, subject to finalising the details of the terms of the guarantee. Further consideration of the implications of the original arrangements for the treatment of the World Bank by credit rating agencies has led me to amend the element of the proposal relating to the treatment of any payments recovered from the Government of Iraq, in the event of a default and the guarantee subsequently being triggered.
The revised proposal entails the World Bank transferring the right to pursue and retain recoveries to the UK Government, should it wish to do so. This amendment to the guarantee arrangement will avoid undermining the Bank’s preferred creditor status, which is so critical to its ability to borrow at very favourable rates from the market and pass these on to its borrowers.
The change to the treatment of recoveries should have minimal, if any, impact on the probability of a default by the Government of Iraq. There remain strong incentives for Iraq avoiding entering into arrears as doing so would lead to the IBRD not agreeing any new lending, and not providing any lending agreed under existing loans; it would also entail the payment of penalty charges by the Government of Iraq.
In the event that a default did occur, and the guarantee is called, the UK would still provide compensation to the World Bank, in proportion to the UK’s guaranteed share of the overall IBRD loan. If this liability is called, provision for any DFID payment would be sought through the normal Supply procedure.