We must create a new development framework that links debt relief much more explicitly to the reduction of poverty and that promotes sustainable development.

Next week, Gordon Brown and I will represent Britain at the spring IN meetings of the World Bank and the International Monetary Fund in Washington. We are both conscious that when we are in Washington, large numbers of people, both in the UK and across the world, will be following the discussions extremely closely. The reason for this is that the meetings will be of crucial importance to the issue of international debt relief for the world’s poorest, most indebted countries.

In the space of a few short years, debt has climbed dramatically up the political agenda. Much of the credit for that must go to the churches, NGOs and ordinary individuals, who have seen the impact that debt can have on the world’s poorest countries and who have demanded that the international community address this issue with the seriousness and urgency which it deserves. Their efforts are a telling riposte to the cynics who say that human compassion and political idealism are absent from today’s world.

It is particularly appropriate that we should be discussing unsustainable debt for the poorest countries here at the Commonwealth Secretariat because a significant number of Commonwealth countries are highly indebted. And many of the important initiatives on debt over the last decade and a half have been taken by and through the Commonwealth. I very much welcome this opportunity to outline and share our current thinking on debt relief for the poorest countries.

I have four main aims for my speech today. First, I want to try to dispel I. some of the common myths about debt – in order to try to ensure new proposals for debt relief will bring benefits to the poor. I am very concerned that some of the current arguments about debt are misleading and could lead to demands that will not help the poor. Second, I want to outline some of the limitations of the Heavily Indebted Poor Countries (HIPC) Initiative. I believe that if we can generate a more informed public debate we are more likely to achieve a better outcome from the current review of HIPC. Third, I want to set out what we hope will come out of that review – through our efforts at the spring meetings, at the Cologne G8 summit and beyond. And fourth, I want to suggest a new framework for addressing the debt issue – a framework that links debt relief much more explicitly to the reduction of poverty and promotes sustainable development.

I want to start by dispelling some of the common myths about debt. My purpose is to try to generate a more informed public debate which could help ensure that the outcome of the present review brings real benefits to the poor.

The first myth is the suggestion that debt is always bad. This is not so. All governments borrow to invest. Sensible investments will pay for themselves over time, help boost levels of economic growth, and help to reduce poverty. To attract the foreign investment necessary to speed up economic growth countries need to show future investors they can repay reasonable levels of credit. What went wrong for many developing countries in the 70s and 80s was that debts were incurred beyond the capacity of those countries to repay. It is these “unsustainable” debt burdens – a product of irresponsible lending and borrowing, adverse economic factors, misfortune or corruption – that have given rise to the debt problems of today, and to which we must respond. The second myth is that the debt is the result of wicked lending by commercial banks. This is not the case. The debt problems of the poorest countries hardly involve commercial banks. A substantial portion of the debt is owed to export credit departments of industrialised countries. They provide insurance guarantees so that commercial companies can make contracts with developing country governments. Debt accumulates when developing countries fail to make the payments on these contracts. And when this debt is written down, it is the taxpayer who carries the cost, if the relief goes beyond the provision made by these agencies for claims.

There is no doubt that many of these contracts were made for the wrong reasons and brought no benefits to the poor. Gordon Brown challenged other countries in the Mauritius Mandate not to extend export credits to HIPC countries for non-productive expenditure. He committed Britain to this policy for two years. This issue of export credits for non-productive expenditure in developing countries is of major importance and I do hope debt campaigners will take more interest in it.

There is also debt directly owed to governments, that provided aid as loans rather than grants. The UK has written off such debt but some countries have not and it is an issue in the international equation. The other debt is to the IMF and the World Bank. These are public institutions backed by taxpayers’ money worldwide, and they have never before written off debts. The point here is that it is the public sector that is required to pay the cost of debt relief. And for this reason we should ensure that it serves a public purpose and brings real benefits to the poor rather than simply facilitating new lending.

The third myth is that it would be helpful to the poor to write off debt unconditionally, regardless of the economic and political policies of the countries concerned. This is clearly wrong. Sudan, for example, is highly indebted and poor but spends most of its money on arms. It would never be right to reduce debt if the consequence was that the government simply increased spending on the military or on prestige projects, or if resources were corruptly siphoned off to foreign bank accounts.

Another common misconception is the suggestion that it would be best if the UK took unilateral action to cancel the debts owed to it. Again, this is not so. Export credit debt is best written off through what is called the “Paris Club”, where all government creditors meet and write off debt together – otherwise the least generous countries will benefit from the action of the others, without any guarantee that the indebted country gets relief. And unilateral action cannot deal with debt to the World Bank and IMF. By being at the table, the British Government can help push for faster and deeper debt relief bringing greater overall benefit to poor, indebted countries.

It is also sometimes suggested that debt relief is costless. It isn’t. Aid budgets are being used to provide poor countries with some of their debt relief. This reduces the money available for other, equally poor countries who managed themselves better and do not have debt. When the World Bank writes off debt, it has less to lend at very concessional rates to other poor countries. This means that other poor countries pay the price. While write down of export credit debt and IMF debt does not come from aid budgets, it is paid for by taxpayers. That is why it is particularly important that the money should be well spent and bring benefits to the poor.

Nor is debt relief an alternative to aid. Even with debt relief, countries like Uganda, Mozambique and Rwanda will remain some of the poorest countries in the world. If they are to make speedy progress to get all their children into school, provide healthcare and clean water for all, they will continue to need aid for some years. They also need shared expertise to get the services going and good economic management, so that the proceeds of growth will lift the poor out of poverty and help pay for public services in the future. Thus debt relief is only part of the answer for the poorest countries. It must also be remembered that some of the poorest countries do not have debt problems. They need other help. Many poor countries have debt problems because previous governments were corrupt and wasteful. Debt relief like aid must be used to support countries seriously committed to reform and poverty reduction. Otherwise the campaign will come to nothing. The result of debt relief will be more wasteful contracts and more corruption and the poor will simply get poorer. Avoiding this outcome is what drives the British Government’s approach to the HIPC review.

Having, I hope, helped to clarify some of the muddle in current debates, I want now to turn to the details of the problem of debt and most importantly the great opportunity we have – if we can seize it over the next few months – to use debt relief to help reduce poverty.

The HIPC initiative, agreed in 1996, was a serious attempt to address the problem of debt. By bringing together the debts owed to government export credit departments and those owed to the World Bank and IMF, and looking at them within a common framework, it marked an important step forward. It was also the first time that the multilateral institutions acknowledged that their debt was part of the overall problem of unsustainable debt, and that they would have to be part of the solution.

There is no question that some countries have received benefits from the initiative. Uganda’s debt stock has been reduced by $350 million, and Bolivia’s by $450 million. It has been agreed that this year Mozambique’s debt will be reduced by $1.4 billion, Guyana’s by $250 million and Mali’s by $130 million.

But three years on from the signing of the agreement, it is very clear that IIIPC has failed to achieve what was hoped. Relief under HIPC has been too slow and it has failed to secure that “exit’ from unsustainable debt that it was designed to achieve. Only two countries have so far received debt relief, and only three are due to get relief this year. And by 2002, six years after the start of HIPC, only seven countries will have received relief.

On top of this, the amount of debt relief has also proved inadequate to provide a reliable exit from debt. The two countries that have received HIPC relief so far are Uganda and Bolivia. In both cases, their debt has now risen back above the level deemed sustainable, due largely to falling prices for their exports. The fact that Uganda – one of the best performing HIPC countries – should have a worse debt to export ratio now than before the start of the HIPC process shows up quite graphically some of the weaknesses of HIPC.

Above all – and my biggest concern – HIPC has failed to free up resources for spending on anti-poverty programmes. On average these countries are paying only 2% less than before on debt. Some are actually expected to pay more after HIPC. Take the cases of Uganda and Mozambique -both with governments with a strong commitment to tackling poverty. Uganda and Mozambique qualify for substantial HIPC relief. But in both countries the reduction in levels of debt service on a yearly basis is relatively minor. For Uganda, the reduction in debt service is around 13 per cent. For Mozambique, while there has been some reduction from earlier years, there will be no significant reduction in actual debt service paid, after the completion point, from what Mozambique is paying today. This is according to the latest World Bank figures. Post HIPC relief, Mozambique will continue to spend $100 million a year on debt service -twice what it spends on running its health service.

This creates not just a budgetary problem but a political one. People in I IIPC countries hear the publicity about the huge reductions in debt – but experience very little improvement in government services. What will they think? That the international community has been fooling them? That the government has pocketed the reductions? There is a real danger that if we go on with HIPC as it is people in poor countries, and campaigners across the world, will feel cheated because debt relief is not producing the improved services for the poor that was promised.

These weaknesses in the HIPC initiative are the reason why the British Government argued last year at the IMF/World Bank annual meeting for a fundamental review of HIPC.

A major breakthrough came when a new government was elected in Germany, and Chancellor Schroder announced a debt initiative in his very first speech to parliament. We very much welcomed this change in approach. The UK Government has also challenged the international community to agree to increasing debt cancellation from $30 to $50 billion.

We also supported the call for the selling of at least $1 billion of IMF gold to pay the IMF costs of debt relief, and we have called for a worldwide boost to aid levels. The Chancellor has also launched his Millennium gift aid scheme where government tax repayment will match increased charitable giving. He has challenged the development charities to raise $1 billion by the year 2000.

There is a growing consensus internationally. When President Clinton met African leaders last month, he proposed action on debt. So did President Chirac when he addressed the Inter-American Development Bank. More recently, Canada has presented a further initiative.

The challenge that faces us in Washington and in Cologne is to forge these various initiatives into a common plan, which is costed and credible. What the British Government wants out of such a common plan is twofold. First, agreement on a new conceptual framework for debt. Arid second, an agreed package that will deliver more substantial debt relief to countries which are adopting policies which are demonstrably pro-poor.

For too long, debt has been viewed from the perspective of the external creditors, as a means to re-establish the creditworthiness of indebted countries, so that governments, international institutions and the private sector can lend to them once again. It is obviously extremely important that poor countries should establish their creditworthiness. But viewing debt entirely through this lens has distorted the debate.

It has made the international community look at debt problems primarily in terms of what a country can afford to pay from export earnings, rather than in terms of what governments can afford to pay from budgets which also have to finance programmes for social and economic development.

We need a new, more comprehensive approach that looks at these wider dimensions of debt, and which strengthens the link with poverty reduction and sustainable development.

It is of course extremely important that indebted countries themselves should be part of the solution to the debt problem. Within the HIPC process, Uganda and Bolivia conducted very capable negotiations. Indebted countries increasingly want to understand their own debt position, take control of it, and adopt the right policies on new borrowing. We and other countries are financing an excellent HIPC Capacity Building Programme which is working with no less than 21 HIPCs to improve their debt management capacity.

In a series of UN conferences over the last decade the major I governments of the world have committed themselves to a set of targets for poverty eradication. The main goal is to halve the proportion of the world’s population living in abject poverty by 2015. Additional targets include universal primary education, basic healthcare and reproductive healthcare for all – all to be achieved by 2015.

These targets are not plucked from the air. They have been re-endorsed as practical and achievable by the Development Committee of the OECD. We live at a time when it is possible to achieve the biggest reductions in poverty the world has ever seen. But to do this we must generate the necessary political will, mobilise the resources required and adopt the appropriate policies, nationally and internationally. Debt relief – sensibly introduced – can help us make progress towards these targets.

The British Government supports reform to the existing structure of HIPC that will deliver more substantial debt relief for countries that are pursuing economic policies that will lead to a reduction of poverty. We need successful models of development that demonstrate that rapid poverty reduction is achievable in the poorest countries. As part of this debt relief must be linked to economic policies that benefit the poor. FIIPC is currently linked to IMF-approved programmes and therefore to the Enhanced Structural Adjustment Facility (ESAF). The task therefore is to improve the link between ESAFs and poverty reduction.

There was a very helpful review of ESAF last year, which emphasised the need for countries themselves to be centrally involved in the design of the programme. And it recommended that ESAF programmes should be designed to have a positive social impact and must be more focused on poverty reduction. Since ESAF programmes rely on aid inputs, development departments have some leverage here. We have been very active in supporting the implementation of these recommendations, and we are seconding one of our Social Development Advisers to the IMF to help with this. But I believe that the HIPC review must now look further at how we link these programmes more closely to the achievement of the international poverty targets.

We also want changes to HIPC that lead to the freeing up of more resources for indebted countries. The present HIPC arrangement does not do this. HIPC focuses on cancellation of debt stock. But the loans actually cancelled often have repayments due over many years ahead – so that the savings in the first few years are quite limited. That is why we are proposing that any new scheme should also provide a substantial reduction in actual debt service paid to external creditors in the early years – so that the social spending essential to development can be increased. And that’s why we believe that when the international community is looking at the concept of debt sustainability – how much debt relief a country needs and how much it can afford to pay – it should look directly at the Government budget. This is not simply a call for more debt relief. It is a call for the relief to flow in a way that enables governments to increase spending on social programmes in the early years, rather than receive just one large cut in debt owed which takes effect over many years.

It is not widely appreciated that there is already such a ‘fiscal ratio’ in HIPC. But at the moment there are limits on which countries are eligible to be judged on fiscal grounds. Only countries with high tax takes and high exports qualify. We are seeking more use of fiscal indicators in determining debt relief, so that HIPC has a more direct impact – freeing up resources to be switched to anti-poverty spending. We believe that this would bring real benefits to some of the poorest, most indebted countries.

In summary, what we want from the HIPC review is:

• lower levels of debt servicing in the early years.

• deeper debt relief overall so that countries can secure a permanent exit from their debt problems.

• a stronger link with poverty reduction and the international development targets.

• faster debt relief – countries should not have to wait six years to see a reduction in their burdens of debt.

Clearly providing the enhanced debt relief needed will require the ~ international community to find additional resources. It is important that donors and the International Financial Institutions approach this problem generously – but also creatively. For any given sum of money there arc options as to how we maximise the capacity of governments to free up resources for anti-poverty spending.

I have already said that the British Government is committed to the sale of IMF gold, as one part of an overall funding package. Export credit departments, too, have a part to play. And additional bilateral contributions will also be necessary. We have already committed £30 million to the IIIPC Trust Fund, and would be prepared to make a further substantial contribution along with other donors when the time is ripe. But we need to tap other sources of funding too.

Our Government is calling on the European Commission to make a substantial contribution to these costs. To date, the EC has not been part of the solution to the debt problem, because it is not a major creditor. But we believe that the people of Europe would welcome the EC spending part of its large development budget on providing enhanced debt relief for the poorest countries – rather than some of the poor quality spending in which it is currently engaged. The Chancellor and I have written to European Development Commissioners asking them to consider making a significant contribution to HIPC, and we will following this up with our European partners in the coming weeks.

1999 is an absolutely crucial year for the debt issue. The spring .1 meetings in Washington and the Cologne G8 summit in June provide the opportunity to take decisive decisions on debt. It is very important that heavily indebted countries take the opportunity provided by the World Bank’s Development Committee meeting in Washington to push their own agenda.

The risk is that this moment of opportunity will not be fully seized, that debt relief will remain primarily focused on enabling the poorest countries to make new contracts, and public opinion will be bitterly disappointed. That would be a tragic error. The forthcoming meetings are the opportunity to focus the debate more sharply on debt relief to reduce poverty. But to achieve this we must urgently get beyond slogans. We need an informed public opinion focusing on the details of the link between debt relief and poverty. I hope that this speech will in a small way help to inform the debate and secure the necessary outcome.

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