HC Deb 21 June 1965 vol 714 cc1196-200
The Minister of Overseas Development (Mrs. Barbara Castle)

Her Majesty's Government have had under consideration for some time the terms on which aid is provided in the form of loans to the developing countries. The importance of the general question of the terms of aid was emphasised at the United Nations Conference on Trade and Development in Geneva last year, and one of the recommendations agreed without dissent was that in establishing repayment terms and interest rates, the overall repayment capacity of the borrowing country should be taken into account.

Her Majesty's Government have had the opportunity, since the conference, of discussing the problem with fellow members of the Development Assistance Committee of the Organisation for Economic Co-operation and Development.

The terms of aid provided by the United Kingdom have been progressively softened over the last few years. A substantial amount has always been provided in the form of grants. Since 1958 the maturity period of development loans has lengthened from a norm of 15 years to between 20 and 25 years. Grace periods on the repayment of capital during periods extending up to the first seven years of the life of the loan have been granted on a widening scale.

In 1963, we announced our readiness to grant waivers for periods of up to seven years of the interest payable during the early years of loans by countries whose position justified such a concession. This has had the effect, in some cases, of reducing the effective rate of interest payable over the life of the loan by nearly half, compared with the normal rate, which is based on that at which Her Majesty's Government can themselves borrow, plus a small management charge.

Her Majesty's Government recognise, however, that the value of the waiver is in some respect limited and that some more flexible means are needed of giving relief in certain cases. They have decided, therefore, to make loans free of interest to certain developing countries. This concession, combined with appropriate arrangements for the repayment of capital, will give us greater freedom in the determination of terms, and, in particular, will enable us to lighten the burden of debt service in the middle and later years of the loan.

The concession will be applied in selected cases, and with due regard to the economic position of the country concerned and to its capacity to achieve balanced and effective development. It will be understood that we naturally cannot afford to extend these very liberal terms to all developing countries. Since interest-free loans will take the place of loans which would otherwise be made under the waiver arrangements, there will not, of course, be any additional burden on Britain's balance of payments during the first few years of the loans.

When circumstances warrant it, countries which do not receive interest-free loans may receive waivers of interest for the initial years of the loan. We have decided to make a similar concession in appropriate cases to the Commonwealth Development Corporation. To help the Corporation to undertake a greater variety of projects, the Government has decided to waive the interest on selected projects during the period when the investment is fructifying, instead of merely postponing the interest as at present.

This concession will apply to certain agricultural and local development projects, both in cases in which the Corporation invests in the equity and in cases in which it makes loans.

Mr. Maudling

The right hon. Lady is, of course, right in pointing out that the terms of aid given by this country have been eased progressively in recent years, a fact for which this country has probably not been given anything like enough credit overseas. I should like to put three questions to her.

First, is she convinced that it is wise to go all the way to making the loans completely free of interest in view particularly of the importance of ensuring the proper and efficient spending of the money borrowed. Secondly, has any other country gone as far as completely interest-free loans? Thirdly, can she tell us a little more about the method of choosing between those countries which do and those countries which do not receive the concession, because my experi- ence is that once one gives this type of concession to one country, it is very hard to refuse it to others?

Mrs. Castle

I could not accept the last statement by the right hon. Gentleman, for the simple reason that we already discriminate between countries in giving waivers of interest. This is merely deciding to adopt an even more realistic approach to the needs of certain countries. The basis on which we shall decide whether a country qualifies for an interest-free loan will be the degree of need of the recipient country reckoned largely on the basis of income per head and the prospective burden of debt. In addition, we shall take into account the capacity of the country to achieve an effective and balanced development.

I cannot agree with the right hon. Gentleman that this will prevent us from securing effective management of our aid. We have no reason to believe that it will be more difficult to do this in the case of an interest-free loan than in the case where a waiver of interest is given during a certain period.

The only organisation currently giving interest-free loans is the International Development Association, which charges merely a small management charge of ¾ per cent. Canada has recently followed the Association's example. Of course, at one time the United States gave a lead in this respect, but had to withdraw because other countries did not follow suit. I am sure that all these countries and organisations will warmly welcome our move.

Mr. P. Noel-Baker

Is it not the case that the economic and social progress of developing countries is a major interest of our own country and, indeed, of all the other advanced nations of the world? Have not Her Majesty's Government done rightly in following the example set by the International Bank, which has found it wise to do this?

Mrs. Castle

I entirely agree with my right hon. Friend. The realities of the situation are that while we may seek to impose interest burdens on these countries, their economic situation means that they simply connot carry them. This has meant in many cases merely postponing events through refinancing operations, thus neither giving them interest-free loans nor getting our money back.

Mr. Frederic Harris

To what extent will the Government give interest-free loans for the remainder of this financial year? Can she name any of the countries which will soon enjoy this facility?

Mrs. Castle

I would not like to specify any particular country at this stage. It will be a matter for negotiation on the basis of the criteria I have mentioned. The application of the principle will start as from now.

Mr. Snow

Has it been considered necessary or relevant in this case to consult the International Monetary Fund?

Mrs. Castle

We have consulted the other donor countries, some of whom are also our creditors, about this move and it has been welcomed. Above all, it has been welcomed by the World Bank.

Mr. Geoffrey Lloyd

While I approve of the right hon Lady's efforts in this direction, particularly the help to the Commonwealth Development Corporation, may I ask her whether she also proposes to help the Commonwealth Development Finance Corporation, an important organisation which, like the C.D.C., will suffer from the Finance Bill?

Mrs. Castle

I have no statement to make on that at this stage.

Mr. Dalyell

What steps are the Government taking to initiate talks with other advanced countries which may similarly give interest-free loans?

Mrs. Castle

We have already had such talks and there is, I believe, no doubt that, when the Development Assistance Committee of the O.E.C.D. meets at Ministerial level next month, this whole question of the terms of aid will be one of the major items discussed and I hope that the step we have taken may encourage other countries to do the same.

Mr. Thorpe

Is the right hon. Lady aware that this will be welcomed by all who believe that economic progress depends on low interest rates? Since this concession will be of restricted application, will preference be given to Commonwealth countries which seek loans for development? Secondly, do her remarks about the Commonwealth Development Corporation mean, in effect, that it will be able to get interest-free capital for selected projects?

Mrs. Castle

I hope that this move will be welcomed by all who have a realistic approach to the needs of development. It will not be limited to Commonwealth countries. It will be available to all developing countries on the basis of the criteria I have just laid down. That will be the basis of qualification. It is not a question of giving preference to the Commonwealth as against non-Commonwealth countries, but of preference to the poorer; the needier nations as against those who can service a more commercial type of debt.

The proposal is not to give the Commonwealth Development Corporation interest-free loans, but merely to ensure that, at the end of the waiver period of interest which is currently allowed during the fructifying period, the borrowing country will have no retrospective interest to pay. At present, interest accumulates during the fructifying period at a compound rate and this falls as a heavy burden in about the eighth year.

Several Hon. Members rose—

Mr. Speaker

Order. This is a very wide subject, but we cannot debate it now.

Sir C. Taylor

On a point of order, Mr. Speaker. Are not we to be allowed to debate this statement properly at a later date? Are we to be given time to debate if if we cannot ask supplementary questions now?

Mr. Speaker

Order. I cannot answer the hon. Gentleman's question. I have to exercise a difficult judgment about when we stop these questions on statements.