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Developing World: Debt Reduction

Volume 836: debated on Tuesday 13 February 2024


Asked by

To ask the Secretary of State for Foreign, Commonwealth and Development Affairs what recent discussions he has had with international counterparts on a strategy to reduce debt in the developing world.

My Lords, we set out our commitments on developing countries’ debt in our international development White Paper. The Treasury and FCDO regularly engage with international partners to address rising debt vulnerabilities in developing countries. The UK also co-ordinates with other official creditors to provide debt restructurings where needed, both at the Paris Club and via the G20 common framework.

My Lords, after Covid, we had the common framework from the international community. Sadly, only four countries have applied. Certainly, the situation is getting worse, and not better, in terms of debt. Does the noble Lord accept that a huge step forward would be to agree with global partners on a workable definition of debt sustainability to provide countries in debt distress a more level playing field?

I thank the noble Lord for his question. We are happy to accept the IMF definition of debt sustainability and to use it as a baseline. We are happy to look at other ideas but, given the IMF’s role, that makes sense. I completely accept what lies behind the noble Lord’s question: 58% of low-income countries are now either in debt distress or at risk of it, so he raises an important point. However, I think the definition is done by the IMF.

My Lords, climate change is already hitting the poorest the worst and the most, often in indebted countries. Although it is welcome that a loss and damage fund was agreed at the last COP, does the Foreign Secretary agree that what has been pledged so far—including, I am afraid, by the UK—is totally inadequate? Does he further agree that it is not only right to scale this up but in our interest, as we seek to reduce the conflict and migration that are likely to be caused by climate change, which will be much more costly?

We have doubled our commitments to climate finance. One of the successes of COP was that the climate finance funds are now considerable, running into many billions. I identify the problem more as small countries, particularly island and developing states, not being able to access that money because they do not have the expertise, the lawyers, the bankers, the officials and so on. That is a problem that my officials are trying to solve. In the area of debt itself, the climate resilience debt clauses that we are now writing into debt, which give states a holiday from debt repayments if they suffer a climate disaster or some other unforeseen event, can be a big part of the future too.

Will the Foreign Secretary confirm that, through China’s belt and road programme, developing nations are estimated to be indebted to China to the tune of more than $1 trillion? Does he share the view of Parliament’s Intelligence and Security Committee that it would be naive not to see how such punitive debt in countries such as Sri Lanka—which is $47 billion dollars in debt, half to China—can be used by China to buy support in the UN, to expand its military presence and for leverage in domestic and international institutions? How are we countering this?

One of the most important ways to counter it is by offering an alternative, so that when countries are developing there are other offers on the table. That is why the expansion of British International Investment—what used to be the Commonwealth Development Corporation—is so important. We are also countering it through the expansion of the multilateral development banks, and in our White Paper we demonstrate how we can expand their balance sheets and get them to lend more. However, the noble Lord makes a very good point: if we look back 10, 15 or 20 years, when we were running debt forgiveness programmes to help highly indebted countries, we see that it was mostly Paris Club countries such as France, Germany, Britain and America that were responsible for the debt, so if we wanted to write it off then we could. Now that so much of the debt owed is to China, which does not believe in debt write-offs, we have to find other ways of delivering restructurings to help those countries which have got into trouble.

My Lords, if we write off the debt of these developing countries, what is to stop them running up more debt in future?

As ever, my noble friend makes a very good point. If we look back at the successful programmes that there were, such as the heavily indebted poor countries initiative, we see that they helped, but many of those countries have gone back into debt—although the situation is not as bad as it was before: the debt-to-GDP ratios in very indebted countries is some 60%, whereas it had got to 100%. One of the best things we can do for those countries is to help them to have better fiscal systems so they can raise their own taxes. I know that noble Lords like a Rwanda update: we have been working with that country since the 1990s and helped it to increase its tax revenue tenfold, and its ratio of tax to GDP has doubled from 8% to 16%, the highest in the region. That is a better thing to do in many instances than lending those countries money.

My Lords, a major reason for the indebtedness of developing countries is that too many multinational corporations operating in them dodge taxes by shifting profits to low-tax or no-tax jurisdictions. The IMF estimates that around $213 billion of taxes are lost each year. An earlier Prime Minister introduced the Finance Act 2016 and promised that companies would publish a public form of country-by-country reporting so that there would be some visibility of the profits shifted by UK companies, but later Governments never honoured that commitment. Could the Foreign Secretary have a word with the current leaders of the Government and try to revive that commitment?

I think that the noble Lord refers to what was agreed at the G8 in Northern Ireland in 2013, where a whole series of steps forward were made to make sure that companies were not doing what is known as base erosion and profit shifting and not paying their taxes in countries where they should. To be fair to the former Prime Minister, who is now the Foreign Secretary, we did make some progress, and I think the OECD would say that it has made a lot of progress, but I will certainly check up on the noble Lord’s point.

On the question of Sri Lanka, will my noble friend recognise the way in which Her Majesty’s Government, to whom I give particular thanks, through the IMF, were very firm to the Government of Sri Lanka about what they should do? The Sri Lankan Government responded, which means that the people of Sri Lanka can now move forward. I believe that that is as good a case history as we will find in recent times.

My noble friend is absolutely right that Sri Lanka is in debt distress; it has been working through a programme with the IMF. We wish the new Government in Sri Lanka well as they go through this and try to make sure that they can build a brighter future for that country.

My Lords, in introducing the White Paper, Andrew Mitchell said that it cannot be right for individuals in this country to borrow money at 4% or 5%, while for developing countries that are addressing such huge issues, the cost of borrowing is so high. What discussions have the noble Lord’s officials had regarding private creditors holding low-income country debt? Does he agree that a fairer system is needed between private creditors and countries in debt distress?

First, I congratulate the noble Lord on joining a club of which I am a member, in being personally sanctioned by Vladimir Putin. It is a badge I wear with honour, and I am sure he will too.

The noble Lord is in very good company—I follow these things very closely.

The noble Lord is absolutely right about the importance of making sure that we do not have so many private sector holdbacks that hold up the vital debt restructuring of countries that get into trouble. We are trying to use things such as collective action clauses that work on bond issues—so they cannot hold out against repayment —as well as the majority voting provisions in new debt issuances so that private sector lenders are not stopping a country getting the debt restructuring they need.

I agree with the Foreign Secretary about increasing the capacity of Governments’ treasuries and their finance ministries to collect their own revenues, as well as trade facilitation, so that those trade ministries have greater capacity to trade out of poverty. I declare an interest as the co-chair of the All-Party Group on Trade out of Poverty. Does the Foreign Secretary believe that it was a mistake by some of his predecessors to cut UK support for exactly those processes? Since he is now passionate about this, and I agree with him, will he restore that funding?

One of the great things that was done while I was out of government is one of the Government’s best-kept secrets, the developing countries trade system, which is more generous to the poorest countries in the world than the EU or the US. It is one of the most generous systems in the world, so in terms of helping countries to trade out of poverty, this Government have an excellent record.

Further to the question from the noble Lord, Lord Purvis of Tweed, surely we now need to double down on opportunities to sign bilateral trade treaties with different countries, in sub-Saharan Africa in particular. If they can increase their wealth through trade, obviously they will be able to pay off their debt in the future. Can my noble friend say something about those bilateral trade treaties that we are now able to sign post leaving the EU?

My noble friend asks an important question about how we prioritise the trade deals that we are trying to do. For the poorest countries, the DCTS—the Developing Countries Trading Scheme—is there. Our priorities in terms of trade deals are with India and the Gulf Cooperation Council, which are very complex and need a lot of work. I think that is the right way round.