World Debt (Hansard, 21 January 2004)

§ John Healey

The International Monetary Fund (IMF) lends to low-income countries through the Poverty Reduction and Growth Facility (PRGF), a lending instrument offering softer terms than conventional IMF lending. Loans under the PRGF are based on a Poverty Reduction Strategy Paper (PRSP), which is prepared by the country in co-operation with civil society and other development partners, in particular the World Bank. The UK believes that IMF loan conditions should reflect only what is necessary for the success of a program, to ensure the protection of IMF funds, and to meet the core requirements of the Fund's mandate. Conditions should be appropriate for a particular country. This is upheld in new guidelines on conditionality introduced by the IMF in September 2002 and the UK will work to ensure these guidelines remain appropriate and that they are upheld in practice.

The UK continues to be fully committed to the rapid and full implementation of the Heavily Indebted Poor Countries (HIPC) Initiative to ensure that it delivers a robust exit from unsustainable debt for the world's poorest countries. To change the underlying dynamics of those countries in which debt indicators are deteriorating, it is important that—in addition to receiving debt relief—countries implement the reforms necessary to allow them to grow faster, to increase poverty reduction expenditure and to enable them to diversify their export bases and better absorb macroeconomic shocks, such as a decline in specific commodity prices. So far 27 countries have started to receive debt relief under the initiative, worth over US $70 billion. To be eligible for the HIPC Initiative, countries must be eligible for highly concessional assistance from the World Bank and the IMF, face an unsustainable debt situation after the full application of traditional debt relief mechanisms (such as application of Naples terms under the Paris Club agreement), and must make a commitment to poverty reduction through the implementation of a Poverty Reduction Strategy.

The HIPC Initiative has an important role to play in maximising the resources available for poverty reduction in developing countries. However, unless there is an increase in the volume of resources available from donors to poor countries, additional debt relief would simply reallocate resources from one form of financing to another, and from non-HIPC poor countries to HIPC countries, without adding to the overall financing available for poverty reduction. Furthermore, all HIPC countries would still need additional aid to meet the Millennium Development Goals even if all of their debt from the World Bank and IMF were cancelled. That is why the UK's proposal for an International Finance Facility is so important. It could provide the much-needed substantial increase in resources which debt relief alone would not achieve and which could be disbursed by way of grants and additional debt relief.