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§ Mr. Colin Moynihan (Lewisham, East)The timing of this debate could not be more significant, as this week the Paris Club initiative on Third-world debt is being discussed with the relevant committees of the World Bank and the International Monetary Fund.
They are discussing a plan for rescheduling the debts of the financially ruined sub-Saharan African countries. I understand that that plan has the British Government's full backing. That backing recognises that, in practical terms, the problems of the sub-Saharan African countries should no longer simply be left to the comforting words of the missionary whose vocation has often been to alleviate the suppression and depression of an often hungry people. Those people have experienced a deterioration in their standards of living while their Governments pay obeisance at the twin altars of low commodity prices—aggravated by western protectionism — and the immense burden of debt servicing, the worldwide value of which stands at over $1 trillion.
During those discussions, I hope that full consideration will be given to the rescheduling of Government-to Government debt to over 15 to 20 years or more. I hope that consideration will be given to further grace periods for repayment and substantially reduced interest rates. In my view, those considerations are critical to tackling the problems of Third-world debt, because so many African countries face a net outflow of capital in a period of unprecedented economic crisis. If those considerations are contained in the Government's initiative and the initiative resulting from the committee meetings of the IMF and the World Bank, nothing but good can come from it. It should receive the support of hon. Members on both sides of the House.
The subject that the Paris Club is considering has also been a matter for considerable attention and consideration by the sub-committee of the all-party parliamentary group on overseas development. It has been considering Third-world debt and the management of that debt. It has been sitting for some six months and has considered a whole range of issues in great detail related to new initiatives for debt. I congratulate everyone who has been working on that committee for the report which I hope will be published on 5 May and which will, I hope, make a major contribution to this subject.
The report concentrates, in part, on the problems of the sub-Saharan African debt which in 1985, was estimated by the World Bank to be $85.6 billion, of which $65 billion is public or publicly guaranteed. This debt burden required an outward debt service equivalent to 35 per cent. of exports. For some countries, the burden has been impossibly high. In 1984 it represented 146 per cent. of exports in the case of Somalia and 96.4 per cent. for Sudan. That figure is projected to rise to 151 per cent. in 1986–87. In the absence of economic growth, the figure of 96.4 per cent. represents a significant loss to the country. In 1985, imports were already well below the 1980 levels. Several countries similar to Sudan effectively defaulted long ago.
The debt burden has a dramatic impact on the countries in terms of their growth and their economic and political stability. It is vital that we tackle this problem. It is a crisis that affects us all and a crisis for which we are all responsible and for which we all hold a responsibility to 620 find a solution. Unless we tackle the debt problem faced by these countries we cannot hope to solve the central political problems that they lace, the appalling poverty levels and the famine conditions many have experienced in recent years. Regrettably, they will be matters for the future and will be experienced on a far larger scale than we have seen to date.
I hope that a number of important additional features will be considered by the Government regarding sub-Saharan Africa— they have already been considered by the all-party parliamentary group. Not only are official creditors dominant, but often over 50 per cent. of long term debt is owed to the IMF and the World Bank alone. The World Bank International Development Association credits are made on soft terms but they cannot, at present, be rescheduled. As a result, African debtors have less flexibility than their Latin American counterparts. I hope that that will be considered. By 1985, the African debtors were not only suffering a virtual suspension of new bank lending, but also a collapse of IMF net inflows—from more than $1 billion in 1981–83 to $118 million in 1985, with several countries in arrears.
As a result, Governments often have to raise private bank loans at high rates of interest to pay off the IMF arrears, start new reform programmes and gain access to fresh development finance. The social consequences of such austerity are clear. First and foremost, austerity and stabilisation programmes, applied anywhere in the world, which they have to service the debt, have led to recessive characteristics in respective economies, characteristics that add to the poverty and to the problems that sub-Saharan Africa has had to face.
However, even the Paris Club public debt reschedulings that have occurred have been far from the ideal solution. Short-term reschedulings, which have to be repeated year after year—there have been 65 by 18 countries up to 1986 — or which collapse as a result of being tied to IMF performance criteria, show a need for a new approach if fresh bunching is riot to occur in the late 1980s.
Many African Governments, including those faced with famine in 1984–85, have responded to international pressures to embark on reforms, even in politically sensitive areas of economic management such as privatisation, the introduction of incentive schemes, devaluation and the abolition of subsidies. They have done more than simply pursue policies of budgetary restraint, although that has also been necessary.
Exchange rates have moved to more realistic levels and producer prices to farmers have been raised to stimulate export crops and domestic food output, to the extent that many countries are now having to manage food surpluses. In return, however, Africa has not enjoyed the promised upturn in prices and world demand for the commodities on which it remains dependent for growth, nor have tighter fiscal and monetary policies ushered in the return of voluntary bank lending and foreign investment.
That is the view of the all-party parliamentary group on overseas development. I hope very much that the Minister will find agreement with that view and that the Government will continue to take new initiatives to tackle the sub-Saharan countries' debt problems, and not regard it as a matter of precedent that should be avoided on the grounds that it will have repercussive effects on Latin America. The problem should be looked at in isolation. On 621 a case-by-case basis, to assess how best to handle the extremely difficult problems posed by the international debt crisis.
Government innovatory interventions are particularly necessary for the poorer countries. New funds from the commercial banks are not likely at present, so national creditworthiness is unlikely to suffer significantly from official debt write-offs. In many cases, Sudan being the most extreme, there is some frank admission that the debt outstanding can never be paid off and that continued attempts to service it are undermining recovery. Solutions to the low-income countries' problems will necessarily differ from those of stronger debtors such as Nigeria and the Ivory Coast. To that extent, it is important to endorse the case-by-case approach that I mentioned, which the main creditors have at last adopted.
Low-income sub-Saharan countries tend to owe the buld of their debt to official creditors, so there is greater opportunity for Governments to play a part. Although some are now in serious arrears, those forms of debt have not traditionally been eligible for rescheduling. As a result, African solutions have focused on increasing concessional bilateral and multilateral aid flows, except for the handful of countries that borrowed heavily from the banks.
I hope that due consideration will be given to the need to look at rescheduling and to extend the important work that this country has done and the initiative that it has taken through the Overseas Development Administration in appropriate write-offs on a case-by-case basis, which have been necessary and which I believe have signalled to the world community the importance of extending that initiative in the admirable way that the Government have done to date. Each country's financial problems are different, so there are bound to be different financial solutions, not just for the big Latin American debtors, but for the poorer countries, especially those in Africa the debts of which are owed not mainly to banks but to Governments and international institutions. All share responsibility for the crisis of the debt problems facing the Third World.
The central paradox faced by many of those poorer countries is that developing countries are now paying back to their creditors more in interest on the principal than they receive in new loans. Countries that are already very poor are suffering. Imports are being curtailed and world recovery — not just that of developing countries — is being undermined. The largest debtors are in Latin America. However, the debt burden is intractable for many of the poorer African countries upon which I am concentrating in this part of my speech. Their debt is mainly owed to Governments and multilateral organisation rather than to banks, as in the case of the majority of Latin American debt. In many cases, it is a struggle for those African countries even to pay the interest.
An innovative approach is required that will extend beyond narrow financial solutions and share the burden of adjustment between the debtor countries, banks and the creditor Governments. Debt has ceased to be purely a banking problem and now requires a political solution. With firm political will, the Government could again lead an international initiative to provide debt relief. I understand that the discussions currently being held in Washington show that that is possible. I am delighted also to learn—and I hope that we will hear more about this 622 from the Minister—that the British are taking a very important lead in tackling the kind of political and practical solutions to the problems of managing Third-world debt.
I want to consider a subject that has taxed the minds of a number of hon. Members and Ministers and express gratitude to the civil servants who have spent many hours considering a specific concept upon which I think we should concentrate—debt development swaps. I do not want to lead further down the technical road on which we have already embarked in correspondence and in the House. However, I want to place on record the concept of debt development swaps, not only within the Bolivian context which I have particularly pursued, of linking the debt problems faced by Bolivia with, I hope, an imaginative solution to tackle its drug problem through the triennial narcotics programme which seeks to eliminate all cocaine from Bolivia within three years.
I want to describe the concept of debt development swaps. A country whose commercial debt is already heavily discounted can negotiate with a donor agency to trade debt relief for an agreed development programme. The example I have used is Bolivia, whose outstanding debt of 2.5 billion—f which $800 million is owed to commercial banks — is today trading on the London secondary market at 8 per cent. of its nominal value. The banks holding that debt have already made provision for substantial losses and could be persuaded to sell the $800 million debt for around $80 million if there were a willing Government purchaser or group of Government purchasers.
A donor Government or several donor Governments who already want to spend $80 million on an aid programme inside Bolivia could thus purchase the debt at a deep discount, while, to implement the domestic aid spending—in this case, the drug eradication programme in Bolivia—the Bolivian Government would simply have to raise $80 million-worth of local currency through taxation or other means. Commercial creditors would receive hard currency in redemption of the debts that they hold at or above the market rate. The donor Governments would have to raise no new money to fund the development programme, as, hopefully, plans will have been made in advance.
Although that may not necessarily be completely accurate with regard to Bolivia — I urge Ministers to increase spending programmes on drug initiatives in Bolivia—the principle could be established where we are financing development programmes in advance and using the debt development swap and the purchase of secondary market debt as a financial mechanism.
In other circumstances, part or all of a country's commercial debt could be brought back in that way and agreed development programmes could be a target for counterpart spending. My hon. Friend the Minister is aware that I am keen to see the Government take an initiative on this matter. Even if there are difficulties over its implementation in a specific programme such as drug eradication in Bolivia, I hope that due consideration can be given to using the secondary market in debt to a far greater extent than we have to date as Governments for the funding of development programmes.
There is clearly a large and growing market for secondary market debt in less developed countries. I have before me a recent document that shows debt trading in a whole range of countries. It reveals commercial debts 623 from Honduras at an indicated bid price of 40, while the Dominican Republic is at 45. There is an indicated bid price to Bolivia at 8 with Rumania at 88, Turkey at 97 and the Ivory Coast at 76 cents to the dollar. I am glad that the Government seem to be supporting the initiative.
On 29 January, I asked my right hon. Friend the Chancellor of the Exchequer whether he agreed
that the existence of a discounted secondary market in debt offers substantial opportunities for the Government to use this financial mechanism to fund developing countries' programmes.I was delighted when he replied :My hon. Friend is right. The debt problem is still a very serious one, which all the major countries are addressing. A number of methods such as those that he has suggested need to be brought into play." —[Official Report, 29 January 1987; Vol. 109, c. 481]I hope that the initiative will lead to further consideration of this financial mechanism for funding development programmes, and that on 5 May serious attention will be given in the House and in the country to the new report on managing Third-world debt which will be published by the all-party parliamentary group on overseas development. I have read the report in draft, and I believe that it will make a significant contribution to the debate on overseas development not only in the House but internationally.I hope that my hon. Friend the Minister and his colleagues will study the report in depth and will respond positively and publicly. I hope that they recognise that, together, we can consider new initiatives, as my right hon. Friend the Chancellor did this week in Washington, and move forward to tackle the problem of Third-world debt, which is central to the future of any development programme in any developing country which suffers under the overhang of outstanding debt.
§ The Economic Secretary to the Treasury (Mr. Ian Stewart)I congratulate my hon. Friend the Member for Lewisham, East (Mr. Moynihan) on obtaining another debate on this important issue. I was interested to have confirmation from him that the report from the working party on debt of the all-party parliamentary group on overseas development will be published in less than a month, and I shall study carefully its comments, which he has foreshadowed today.
As my hon. Friend said, it is especially appropriate this week, when international economic issues are being discussed in Washington, to debate this subject in the House. My right hon. Friend the Chancellor of the Exchequer has launched his new proposal for the debtor countries of sub-Saharan Africa. I am glad to have the opportunity to give the House more information about that important initiative. We have set the process in train. It will be carried forward with other creditor nations in the Paris Club and elsewhere, and I am glad to say that some have already responded sympathetically.
Let us consider the debt problem more generally. Since the crisis of 1982, the policy has been to provide financial support to debtor countries in return for their adopting policy reforms. That was given additional impetus at Seoul in 1985 with the Baker initiative. But our strategy since 1982 has been to consolidate several achievements. So far, those achievements are that many countries have adopted reform programmes; the International Monetary Fund and the World Bank have expanded their role in 624 supporting countries that adopt sustainable policies; and, since 1985, those two international institutions have been working much more closely together. That is a welcome development.
The banks, for their part, have strengthened their capital base and have increased their debt provisions, which are now at a more realistic level than they were. In the meantime, the world economy has continued to grow : since 1982, growth has averaged over 3 per cent. per annum, and inflation has fallen overall by about five points.
Although many developing countries suffered from the fall in commodity prices, including the price of oil, most have stood to benefit from faster growth of imports into OECD countries, and interest rates are now six points lower than in 1982. The United States dollar is down from the abnormally high levels of a while ago.
There should, however, be no delusions that the debt problem does not remain acute. In particular, the British Government have become increasingly concerned over the past year at the progressive weakening of IM F conditionality. We must insist that the fund management will always require adequate adjustment measures in its programmes, including adjustment on the supply side. Creditors in the Paris Club should likewise not reschedule debt repayments without firm assurances that adequate policies are in place.
My hon. Friend talked about debt development swaps and other related market aspects. I acknowledge the helpful role that market mechanisms can play in the debt strategy as a whole. Secondary markets in debt can allow claims to be spread more widely, and market prices can give useful indications of the progress that various debtors are making. Even where market transactions result only in the redistribution of fixed claims within the international banking system, those transactions are a useful channel through which individual banks can adjust their portfolios.
The Government wish to encourage the market process and the greater securitisation of debt, especially where it spreads risk outside the banking system where it is now concentrated. Although they are not a panacea — the Government support the development of market mechanisms for handling debt, especially the growing number of schemes involving the transformation by various routes of fixed debt into equity so that risks and rewards are shared between creditors and debtors.
From the debtor's point of view, debt buy-back schemes such as that envisaged for Bolivia, and debt-equity schemes, which exist in a number of countries, can reduce the amount of debt outstanding where it is repatriated or converted into equity at a discount. It is, of course, for individual banks to decide whether they wish to participate by selling their loans to developing countries. Some may not wish to do so for a variety of reasons connected with their overall banking relationships with the country or countries concerned, and that must be taken into account.
The adjustment process that many debtors must undertake can be helped enormously by adequate flows of private direct and portfolio investment, and a stemming of the flight of capital out of debtor countries. That requires those countries to adopt sensible economic policies : positive real interest rates, realistic exchange rates and sensible tax policies. Above all, if capital flows are to be encouraged, it makes no sense for either creditors or 625 debtors to maintain barriers that impede them. The British Government abolished all controls on such flows in 1979, and Britain is second only to the United States in its scale of direct investment in developing countries.
As for sub-Saharan Africa, what we are urging is essentially a reinforcement of the present strategy. First, there should be a strengthening of policy reform by debtor countries, supported by finance from creditors, the World Bank and the IMF. Secondly, industrial countries should maintain policies for sustainable growth and open markets. Thirdly, there should be support for the increasing development of market mechanisms.
Middle income debtors ought to have sufficient resources to enable them eventually to service their debt, once appropriate reform policies are firmly in place. However, there is one group of debtors for whom all this will clearly not be enough—the poorest countries of sub-Saharan Africa. Some of these countries have so few natural or human resources that they have no hope of servicing all their debt in the foreseeable future. These countries typically have a gross domestic product per head of below $350. Many of them have less than $200. We must recognise that they have a special problem.
My hon. Friend compared those countries with the countries of Latin America and pointed to the fact that solutions are not necessarily to be transferred from one group to the other. He was absolutely right to make that important point.
Governments can take the lead in helping those countries in Africa that I have described, particularly because most of their debt is official, whereas most of the debt of the middle income countries is owed to commercial banks. In putting forward our initiative, we are not the first to pick out sub-Saharan Africa for special treatment. The famine of two years ago again reminded us all of Africa's particular problems. The United Nations recognised this, with its special session on Africa in May 1986, and the World Bank has had its special facility for Africa.
Although I acknowledge the needs of those African countries, I must emphasise the need for their commitment to reform. Their problems have been caused, in part, by reliance on one or two commodities for export earnings, 626 by weak administrative capacity and by the legacy of mistaken policies in agriculture, industry and urban subsidy. A growing number of these countries now recognise the need to adopt adequate policies for economic adjustment and to work closely with the IMF and the world Bank. Where the poorest and most heavily indebted countries of sub-Saharan Africa are prepared to adopt appropriate policy reform, all creditor Governments should, in their turn, be prepared together to offer a reduction in their debt service burden. My right hon. Friend the Chancellor of the Exchequer has been making that proposal this week in Washington.
The proposal has three elements. The first is the conversion of aid loans to grants. Britain has almost completed this process for the poorest sub-Saharan countries. The second is the rescheduling of debt by the Paris Club on more generous terms, with longer grace and repayment periods. The third is the reduction of interest rates to several percentage points below commercial rates. The British Government would be prepared to consider funding interest relief in such a way as not to affect existing aid programmes to those countries.
A debt package along those lines would give the poor countries of sub-Saharan Africa a better chance to get on the road to economic recovery. As my right hon. Friend the Chancellor of the Exchequer said yesterday in the interim committee, that would provide them with some light at the end of the tunnel. There is now an urgent need for the richer countries of the world to recognise the plight of the poorest countries in Africa. Britain has already played a constructive role in converting aid loans to outright grants, an example that I hope will be more widely followed.
Now, with this new initiative for the sub-Saharan countries, the British Government are again taking the lead by putting forward a three-point plan to tackle the problem of the accumulating debt of those countries. In the poorest African countries, the point has been reached where any proposal that does not include a measure of relief from the relentless burden of debt servicing cannot be regarded as realistic. If such a scheme is to succeed, it goes without saying that the Governments of all the other creditor countries will have to do their share. Therefore, I hope that they will be prepared to consider our proposals seriously.