Unilateral action on debt cancellation

The Board of the UK Jubilee 2000 Coalition has called on Britain to take unilateral action on debt cancellation. The following paper examines the main arguments for the policy, considers the technical feasibility, and offers rebuttals for likely opposition to it.

Reasons for

It highlights and isolates the UK government's own responsibility

The main reason for turning to a call for unilateral action is that it will highlight the UK government's own role and responsibility in the debt crisis. It will put additional pressure on the government to treat the issue of debt with the urgency that it deserves. The UK government, like all other creditors, is partly responsible for the mountains of debt, but it is able to deflect criticism from its own role as a creditor by saying that only a multilateral solution will end the debt crisis (“multilateral” in the sense of all countries acting together) ^[1]. However, despite the Labour government's rhetoric of how seriously it views the debt crisis, the reality is that debts owed to Britain by the poorest, most indebted countries fell by only 3.8 per cent during Labour's first year in power. ^[2] This is not a record to be proud of.

Multilateral action has not delivered

Multilateral action has failed to deliver debt relief on the scale that is necessary to lift the burden of unpayable debt. The debt crisis has been in existence since the 1980s, and it has caused incalculable damage to the most indebted countries, in terms of human lives lost, missed education opportunities and damage to development prospects. Only when the crisis threatened to bring down the economic system (notably in the mid-1980s) was there a concerted action by industrialised countries to mitigate its effects. Visits to the Paris Club by a debtor nation are in theory designed to provide a lasting exit from debt. The practice has been very different with many countries returning on a regular basis in need of further and deeper debt relief. Mozambique for example has visited the Paris Club no less than six times since 1984.

Unilateral action can break the logjam, and can be complementary to the multilateral initiatives ongoing through the Paris Club and the HIPC initiative and the proposals being prepared by the German government for the G8 summit in June. Creditors reacted to Hurricane Mitch by declaring their individual, unilateral intentions. These then led to the multilateral decision taken at the Paris Club of a 3-year debt moratorium for Honduras and Nicaragua.

Action by the British government would carry huge political weight

Britain would be the first G7 country to say through its own action that HIPC is not providing enough debt relief, that Britain wants to go further and that it invites other countries to do the same. It would set a tremendously powerful example. This is exactly what the Norwegian government has done. The statement of the Norwegian Minister of Human Rights and Development, Hilde Frafjord Johnsen, to the Parliament in May 1998 explicitly makes this point.

“The implementation of the HIPC initiative according to the plan will be a decisive factor for the poorest and most indebted countries in reducing their burden of debt to a manageable level. However, there is a need for further improvements. Owing, among other reasons, to the caution shown by some industrialized countries, the work involved in achieving this is taking its time. Meanwhile, interest and compound interest on old debts continue to accumulate so that, for many countries, the debts continue to grow...We will work to persuade other countries also to write off debt in addition to the debt relief provided for by multilateral agreements. Both the United Kingdom and Switzerland are planning unilateral debt relief for certain countries, and are therefore of interest as partners.”

Britain has the power to act on its own debt

Another significant strength of the argument for calling for unilateral action is that it is a policy that the British government can deliver on. It is debt owed to the British government, and the government therefore has the power to cancel it, immediately if it chooses to do so. There are no international restrictions to prevent it from acting in this way. In response to a written parliamentary question in December 1998, the Economic Secretary to the Treasury, Patricia Hewitt, said that “the UK is not restricted in acting unilaterally to reduce debt owed by developing countries by either the EU, the OECD or any other international agreements.” ^[3]

It is technically feasible

Unilateral action is technically feasible, with the Norwegian government giving a clear example of how the “burden sharing” ^[4] problem can be solved (see below). It is the view of Debt Relief International, which deals closely with the technical aspects of debt management, that unilateral action is both technically feasible for the British government and an appropriate campaigning issue for the Jubilee 2000 Coalition. ^[5] There is a strong argument for all Jubilee 2000 Coalitions adopting a call for unilateral action from their own governments, as the principles for such an approach apply equally in all creditor countries. Clearly, if all major creditor governments respond by taking unilateral action, then de facto there is a multilateral response, and the problem of burden sharing vanishes.

Norway

The Norwegian policy shows how the problem of “burden sharing” can be circumvented. Last year the government announced its intention to cancel the debt of 22 of the most indebted countries. These are mainly export credit debts.

The timing is important. After a country has passed its “exit” point, then the Norwegian government will assess the level of debt remaining, and then write off all or part of the debt still owing to it. An “exit” point is either a HIPC completion point, or a Paris Club Naples Terms agreement if a country is declared not eligible for HIPC.

The Norway paper states:

“If unilateral debt relief is provided after completion of an exit operation, it will not be possible to take it into account in the debt sustainability analyses on which the multilateral debt relief operation is based. It must therefore be stressed that a Norwegian decision to provide unilateral debt reductions must be taken after a binding agreement on the various elements of the exit operation has been concluded. ... For HIPCs the exit operation takes place at the completion point.”

For countries still awaiting an exit point, Norway proposes to cancel interest payments as they fall due. The paper goes on to note that “the danger, mentioned above, of unilateral debt relief only benefiting other Paris Club creditors would be avoided if the reduction is provided as amounts fall due in a situation where a country is servicing its debts.”

Although not designed to circumvent the burden-sharing problem, a similar mechanism is already in place in Britain for many of the poorest most indebted countries, which still owe money to DFID. DFID has granted almost all HIPCs (the exceptions are Cameroon, Laos, Liberia and Nigeria) Retrospective Terms of Adjustment (RTA) or Mauritius Mandate debt cancellation. For these countries, while the debt owing is kept on the books, the principal is cancelled when it becomes due, and the small amounts of interest are paid by DFID to the Treasury.

Norway also supports payments into national debt funds, of the sort established in Uganda and Mozambique, which can be used to make payments to multilateral institutions before and after HIPC completion point.

The negative response from the UK government

Logically, if the government adopts unilateral action, it is making one of the following statements: it believes that current debt relief is too slow, that current debt relief is inadequate, or that it has a lack of confidence in the existing mechanisms. Although, this is very likely the government's (Gordon Brown's) private opinion, it will view a call from Jubilee 2000 for unilateral action with some hostility. Early soundings have already provoked such a response from DFID and the Treasury. This is only to be expected, and should not be a reason for non-adoption. It is worth remembering that domestically the government is in favour of “naming and shaming” “failing” institutions, whether they are schools, education authorities, hospitals or prisons. The named institutions do not respond favourably to such a policy.

The arguments that will be used against

There are several arguments that are or would be used to counter a Jubilee 2000 call for unilateral action. Perhaps the most frequently used is that the amount owed to the British government is too small to be enough to reduce debt levels to sustainable ones. The Economic Secretary to the Treasury, Patricia Hewitt MP, replied to Andrew Reed MP in a written House of Commons answer (see footnote 3), as follows:

“However, lasting solutions to the problems of heavily indebted poor countries require a multilateral effort. Since the UK holds only a part of the total debt owed by these countries, it cannot by itself reduce their debts to sustainable levels. That is why the UK has been making such efforts in international forums to ensure that all creditors co-operate in giving poor countries a permanent solution to their debt burdens.”

It is true that Britain acting on its own will not be enough. The total debt owed to the British Government by the poorest countries (Jubilee 2000 52 countries) is £5.1 billion, or $8.4 billion. ^[6] Total debt of the 52 countries is $370.6 billion (1996 figure). British debt represents about 2.3 per cent of the total, and therefore British cancellation on its own certainly will not reduce debt to sustainable levels.

Jubilee 2000 response to this:

Even small amounts of debt cancellation have a significant effect. If the money paid to Britain by Zambia (£1.8 million in 1997-98) were invested in healthcare in Zambia, based on calculations carried out by the United Nations Development Programme, this would reduce child mortality enough to save the lives of 400 children. ^[7]

In addition, the Jubilee 2000 Coalition expects all major creditors to respond to the calls for a solution to the international debt crisis. By acting unilaterally the UK government will set a tremendously powerful example and lead the way towards debt relief on the scale that is necessary.

A second argument is that Britain will lose its place at the negotiating table, i.e. the Paris Club, if the government acts unilaterally. It will also lose its ability to influence positively development in the debtor country.

Jubilee 2000 response to this:

There are many forums within which Britain can continue to have an influence on debt. There is the G8, the European Union, the United Nations, the Commonwealth, the IMF and the World Bank, not to mention numerous bilateral meetings that occur each year. Most of the initiatives on debt have emerged from G7 summits (hence the so-called Toronto, London, Naples, Lyons terms of debt rescheduling agreements, all named after the G7 meetings where they were agreed).

Donor countries can influence the use of debt relief money because of their aid negotiations. Most debtor countries are also major aid recipients. Debt Relief International argue that in their experience cancelling debt up-front can increase the leverage of a donor country in ensuring that good mechanisms are set up in the debtor country.

A third argument is that unilateral action will benefit other creditors and not the intended debtor country because of the burden sharing rules. At Paris Club meetings, the IMF representative recommends that a country's debt service obligations are reduced by a certain percentage. If creditors accept this, they then agree to provide debt reduction by the same percentage on their own individual debt (see footnote 4). If a creditor country acts unilaterally and provides a greater reduction on its own debt, then the other creditors need not make such a large reduction for the level recommended by the IMF to be reached.

This is the classic argument—but one never put to the test by the UK, as no ECGD debt has ever been cancelled unilaterally.

Jubilee 2000 response to this:

It is easily circumvented by the timing of the unilateral action. The Norwegian policy does so, but there are other examples too. Japan recently decided to cancel unilaterally some of its aid debt to Bolivia. By only including a part of its aid debt in the collective negotiation at the Paris Club meeting on Bolivia in September 1998, $50 million of extra debt relief went to Bolivia.

The level of debt sustainability chosen by the IMF is not written in stone. Originally for Bolivia they had suggested a target of debt (net present value) to exports ratio of 217 per cent. However, the Paris Club respected the wishes of Japan, and the result was that the extra relief unilaterally supplied reduced this target level to 202 per cent. This is a clear example of “burden sharing” not applying. These sustainability levels will also be considered in the HIPC review, and almost certainly lowered.

A fourth argument is that because of the ECGD mission statement, which is to act with exclusive regard to the British taxpayer and maximise returns, DFID will have to compensate ECGD for debt relief given. This is not the most effective use of aid money. There is not enough Parliamentary time to change the mission statement.

Jubilee 2000 response to this:

The cancellation of payable debt (debt that has a reasonable chance of being repaid) to the ECGD would probably require a change in the Export and Investment Act 1991.

The legislation could be changed and amended so that there is no requirement for compensation from DFID or any other department. Where there is political will, such a change is relatively simple. Time was rapidly found to ratify the international treaty banning the sale of landmines when the anniversary of Princess Diana's death approached, and Norway found a method of cancelling debt which made no demands on its ODA budget ^[8]. It is worth remembering that the cancellation of a debt costs nothing up-front—it is only accounting procedures that dictate that government departments must be compensated—and the true cost is measured only in future payments foregone. If the government insisted on compensating ECGD for debts cancelled, this could be done by Parliament giving approval to set up a special public spending programme for debt cancellation, and new funding from the Treasury. (The UK public sector finances are currently looking very healthy. In the first nine months to December 1998 the public sector achieved a net cash surplus of £1 billion, £7.4 billion better than the performance over the same period in 1997-98, and likely to go higher still by the completion of the financial year.)

Examples of unilateral debt reduction

There have been numerous examples of unilateral debt cancellation. Britain's (ODA and) DFID has cancelled £1.2 billion in debt since 1979. All of this has been unilateral action. As Mozambique reached its decision point in the HIPC process in March 1998, Britain showed that it was ready to offer additional relief, going above the standard HIPC ceiling of 80 per cent, to ensure Mozambique reached the level considered sustainable.

France has also given debt relief on a unilateral basis, mainly to former French colonies in Africa. To soften the negative consequences of the CFA (Communaute Financiere Africaine) devaluation, France granted debt relief to the countries of the CFA zone. ^[9]

As detailed above in 1998, following pressure at the G8 summit in Birmingham, Japan announced that it would be cancelling $500 million of its overseas aid debt.

Following the devastation carried out to Central America, many countries acted unilaterally, before the Paris Club announced a moratorium on debt payments that would last for three years. ^[10]

Press Comment

We can be confident that Janet Bush, the Times Economics editor, will support such a call. In the Times (Wednesday 11^th November), she criticised the British government's argument against unilateral cancellation. “Gordon Brown has argued repeatedly that unilateral cancellation is pointless because debt payments to other creditors would simply go up by the same amount. The truth of Britain's thinking is far more unedifying. The government we are told is against cancellation, because this would mean losing the influence that creditors enjoy and prevent us pushing them along on the road to economic reform. This is IMF orthodoxy at its control-freak worst and is deeply disappointing from a government that has done relatively well on development issues.”

John Garrett

June 1999

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Footnotes

^[1] The existing mechanisms for debt relief are primarily multilateral, in the sense that creditors act together in reaching decisions on how much debt relief to provide. This is the case in the London Club, the Paris Club and within the Heavily Indebted Poor Countries Initiative.

^[2] In 1997 the 52 Jubilee 2000 countries owed Britain £5.265 billion, in 1998 this fell to £5.065 billion. Jubilee 2000, In Our Own Backyard, 1998.

^[3] Response to the Parliamentary Question from Andy Reed MP. 7. 3 Dec 1998 : Column: 237 Developing Countries (Debt)

Mr. Reed: To ask the Chancellor of the Exchequer what restrictions are placed upon the Government's ability to act independently of other creditors to reduce debt owed by developing countries by (i) the European Union, (ii) the Organisation for Economic Co-operation and Development and (iii) other international organisations or agreements. [61491] Ms Hewitt: The UK is not restricted in acting unilaterally to reduce debt owed by developing countries by either the EU, the OECD or any other international agreements.However, lasting solutions to the problems of heavily indebted poor countries require a multilateral effort. Since the UK holds only a part of the total debt owed by these countries, it cannot by itself reduce their debts to sustainable levels. That is why the UK has been making such efforts in international forums to ensure that all creditors co-operate in giving poor countries a permanent solution to their debt burdens.

^[4] The following stylised account explains the potential problems of burden sharing. A debtor country with only USD 100 at its disposal in one year will not be able to pay more than 25% of a debt total for that year of USD 400. The creditors will have to be satisfied with only partial payment that year, while the rest will have to be forgiven or paid at a later date. If there are four creditors with equal claims, each of them will receive a maximum of USD 25, provided there is equal treatment. If one of the creditors should choose unilateral cancellation of the debt, this will have no other effect than to provide better coverage for the remaining claims. In the above example, cancellation of 100% of a claim from one creditor would mean that the three remaining would receive 33%, rather than only 25% of the debtor's total payment. Oxfam, Tony Burdon, 3/11/98.

^[5] Matthew Martin's comments on 5/11/98.

^[6] 96 per cent of this is owed to the ECGD. The 41 Heavily Indebted Poor Countries owe Britain £4.75 billion. Source: ECGD and DFID 1998.

^[7] In Our Own Backyard, 1998, page 9, Jubilee 2000 Coalition.

^[8] As regards the writing off of debt to Norway associated with old export credit guarantees (GIEK's old portfolio), large amounts have already been allocated from the Foreign Ministry's budget, including development assistance, to cover payment of compensation. If, in order to manage the “old” portfolio, the GIEK needs further allocations in excess of those previously granted plus the GIEK's own income, this will be ascertained and submitted to the Storting in connection with the presentation of the debt relief plan in the fiscal budget in the autumn. According to the calculations made by the GIEK itself, there will be no need for such additional allocations. As far as I can see at the moment, the appropriate debt relief measures that apply to the GIEK's old export credit guarantees may therefore be carried out without further allocations from the Foreign Ministry, including the development assistance budget. Extract from a speech made in 1998 by Minister of Human Rights and Development, Hilde Frafjord Johnsen, to the Norwegian Parliament.

^[9] World Credit Tables, Eurodad 1996, page 119

^[10] France cancelled bilateral aid debts of Honduras and Nicaragua, and called for a 2-3 year moratorium on all debts owed by the countries. France and Britain set up a Trust Fund to be administered by the World Bank, into which they will each pay $16 million. Debts to the multilateral institutions, the IMF, World Bank and the Inter-American Development Bank will be paid out of this fund. Norway has also pledged $16 million, and Switzerland, Denmark and the Netherlands have all responded positively to the proposal. Spain announced that it would cancel the debt service of bilateral debts owed by Honduras, El Salvador, Nicaragua and Guatemala for 1999, 2000 and 2001 (a total of $US 63 million). The Netherlands waived the servicing of aid debts. The USA announced debt relief of up to $54 million for Nicaragua and Honduras by allowing them to suspend bilateral debt payments for two years. Cuba cancelled all debts owed to it by the region, a total of $50 million.