If Malawi had received its debt relief with no hidden reductions and cuts, it would have had $101 million extra per annum free in its budget (the UK, in comparison, gave $180 million in 2006: SID, table 16.2). What it has really had is less impressive even than this. At best Malawi’s debt relief amounts to nothing more than a marginal adjustment to its domestic debt interest bill; at worst it amounts to less than nothing.

In September 2006 Malawi completed the Heavily Indebted Poor Countries process. Goodall Gondwe set out his intention to use the money saved specifically for the benefit of the poor. “Mr Speaker, Sir, and Honourable Members”, he stated, “during the budget review in March, it was proposed to spend these debt relief resources on those social activities that would benefit the poorer segment of the population.” (2007/8 Budget Statement, para. 48 – link now broken.)

But this appears to be impossible, since the terms and conditions of the debt relief Malawi received actually reduce the amount of money available for “the poorer segment”.

Gondwe’s 2007/8 Budget Speech explains that the overall debt stock was reduced from $3.0 billion to $0.5 billion, leading to saving in interest and capital repayments of $101 million in 2007/8; however, Malawi had been receiving $36 million per annum since the year 2000 in interim debt relief; so extra value provided by debt relief in 2006 was around $65 million per annum

However, a large proportion of this new debt relief money was provided under the terms of the deal agreed at the G8 Summit in Scotland in 2005: and under these terms, countries receiving debt relief also get a cut-back in the amount of development loans they receive from the World Bank. One of the terms of the debt relief deal for Malawi was that its World Bank funding would be reduced by $27 million per annum (this is, apparently, because the US won out over the UK during the 2005 G8 Summit debt relief negotiations: download article here). Now, the World Bank provides money to Malawi, it says, specifically to help with reducing poverty; given this, it seems fair to say that this $27 million per annum reduction is money that would have been, and now is not, available to benefit the “poorer segment”.

Malawi has – or had, in 2006 – huge domestic debts; this is because the government under Muluzi shored up its budgets by borrowing large amounts from Malawian and Malawi-resident businesses. An agreement was made with the IMF that a large proportion of the money saved through getting debt relief in 2006 would be directed towards reducing domestic debt. This agreement, set out in the 2006 Article IV Consultation(para. 22) ringfences $26 million per annum for the Malawian budget, and directs the the remainder to reducing domestic debt.

This means that only $26 million per annum is available for spending specifically on projects that benefit “the poorer segment of the population”. But we have already seen that the World Bank is reducing the money available for reducing poverty by $27 million per annum So Malawi had less, not more, money available for spending against poverty as a result of getting debt relief.

Certainly, by reducing domestic debt, the Malawi government will have a lower domestic debt interest bill to pay, and this will improve its financial situation overall. The IMF Article IV consultation says it will reduce domestic debt by 1.4% GDP; I have not tried to calculate the significance of this for the annual domestic debt interest bill. However, the claim made by governments and NGOs alike, was that debt relief money would go directly to pro-poor spending. “The debt relief to be provided as a result of reaching completion point will provide a great push to Malawi’s poverty reduction efforts”, said Michael Baxter, World Bank country director for Malawi.

This is a tremendous overstatement. If Malawi had received debt relief without these underlying conditions, it would have made less difference than an ungenerous donor. As it is, the debt relief will result in less money available specifically for “pro-poor” spending, but with some circumstantial reduction in the pressure of the domestic debt interest bill.

Debt relief is a noble cause: but delivered in this form it is vitiated.

Jubilee Scotland

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Most of the ECGD debt cancellation that occurs is through the HIPC initiative.  HIPC only includes countries that qualify as having ‘unsustainable debt’ as calculated by the World Bank & IMF. So far only 23 countries qualify as having had unsustainable debt. This process is part of the big debt relief deal agreed in 1999 in the wake of the Jubilee2000 campaign.

The forum for ECGD debt cancellation is the Paris Club  an informal creditors club that meets to decide the fate of country’s debt problems. This forum includes all the export credit agencies owed debt by the country under consideration as well as other governmental representative. For the UK this includes someone from Dfid, FCO and the Treasury.

The debt cancelled at the Paris Club under HIPC owed to the ECGD is then counted as ODA by the UK government. This goes towards the government’s target of aid spending as a proportion of Gross National Income. By including debt relief as ODA the UK government (as well as many other EU governments) inflate the amount they spend on aid and by a huge amount. click here to see the UK aid chart and the proportion of this as debt relief

ECGD debt cancellation should not come from the aid budget! Not only is this a massaging of the aid figures and denying poor countries more aid but at the same time it subsidises UK exporters for their operations in the developing world- not for reducing poverty. Why should this come out of the aid budget? The biggest industry that the ECGD subsidises is the arms industry. For example the ECGD is owed over US$1billion by the Indonesian government for tanks and jets sold to Suharto in the 1990s.
Military debt cancellation is also not supposed to be counted as ODA even though about 45% of ECGD’s business concerns the arms industry. For more information on this see the Blog entry on NigeriaTherefore the UK government is moving towards its aid target at the expense of those that its aid is supposed to benefit. This is all despite constant calls from campaigns such as Jubilee Scotland but the OECD whose Development Assistance Committee (DAC) analyses ODA levels actually allows this practice to continue.

In 2005 there was international recognition that global aid spending needed to be increased by at least US$50 billion a year to meet anti-poverty targets(the Millennium Development Goals). THIS FIGURE DID NOT INCLUDE DEBT RELIEF.

However in the same year,the UK as well as other creditors implemented two of the biggest debt relief deals outside of HIPC. Debt cancellation for Iraq and Nigeria. Iraq’s situation was spurred by reconstruction efforts after the war and calls by the US administration for debt relief. In Nigeria the government threatened to default on their debt payments resulting in partial cancellation in return for a one-off payment. Most of the debt owed to the UK by both countries was through the ECGD.

This has meant that the UK and global aid figures are even more inflated than usual:

“ODA was exceptionally high in 2005 due to large Paris Club debt relief operations (notably for Iraq and Nigeria) which boosted ODA to its highest level ever at USD 107.1 billion. In 2006, net debt relief grants still represented a substantial share of net ODA, as members implemented further phases of the Paris Club agreements, providing USD 3.3 billion for Iraq and USD 9.4 billion for Nigeria. Excluding debt relief, ODA fell by 0.8%.”

http://www.oecd.org/dataoecd/7/20/39768315.pdf

|In the UK 24% of ODA was spent on Iraq and Nigerian debt cancellation in 2006 http://www.concordeurope.org/Files/media/internetdocumentsENG/Aid%20watch/1-Hold_the_Applause.FINAL.pdf

For more information here is a few links to reports on Export Credit Agencies and debt.

http://www.whiteband.org/resources/issues/debt/debt-cancellation/Export%20Credit%20DEBT(final).doc <http://www.whiteband.org/resources/issues/debt/debt-cancellation/Export%20Credit%20DEBT%28final%29.doc>

http://www.eurodad.org/

Other organisations that scrutinize Export Credit Agencies

ECA Watch www.eca-watch.org <http://www.eca-watch.org/>

EURODAD www.eurodad.org <http://www.eurodad.org/>

The cornerhouse www.thecornerhouse.org.uk <http://www.thecornerhouse.org.uk/>

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We’ve long complained that debt relief should not be counted as aid, on the grounds that debt cancellation is not new money going into a country, but old money not leaving the country. It’s a difference that can’t be captured just by looking at the accounting, though: one has to think about the history and ethics of the money. This makes the argument slightly shakey.

But recently we’ve been concerned about it for another reason. According to the international accounting rules for debt cancellation (set by the OECD), cancellation of military debts cannot be counted towards overseas aid targets. The UK has made some fairly significant steps towards reaching the 0.7% GNI target, going from about 0.36% GNI in 2003-04, to 0.51% in 2006-07. We been wondering, though, whether this level has been reached by counting the write-off of military debts towards the 0.7% target – that is, by breaking the OECD rules.

All of the debt cancelled for (or rather: bought back from) Nigeria was export credit debt, that is, old commercial debts that had been guaranteed by the UK and Nigerian governments. On average, around 40% of export credits are for arms. If this percentage held for Nigeria’s debts, then around 40% of Nigeria’s debts should not be counted towards the UK’s 0.7% aid target. This would mean that, potentially, the UK would have to reduce its ODA by £700 million (about 40% of £1.7 billion).

Given Nigeria’s history of military dictatorships, and the vast amounts of money that elites in that country have had for prestige projects, it surely would not be surprising if Nigeria had military debts to the UK.

We asked DFID whether they had gone through Nigeria’s debts before cancellation, and excluded the military debts, but they didn’t have the information. So Gavin Strang MP asked a Parliamentary Question on our behalf, which was answered very promptly, which was great, and the answer came back:

Arms Trade: Nigeria

Dr. Strang: To ask the Secretary of State for Business, Enterprise and Regulatory Reform what proportion of export credit outstanding at the end of financial year 2004-05 for Nigeria was for military goods. [180895]

Malcolm Wicks [holding answer 28 January 2008]: Information on ECGD business supported prior to 1991 is not held on a basis which enables defence to be identified separately from other sectors. ECGD has however supported no defence business on Nigeria since that date. (29 Jan 2008 : Column 202W)

The first part of the answer means that military debts cancellation may have been counted towards the 0.7% target, but that there is no record of what this is. The second part of the question, though, would be great news if true, since it would mean that the Abacha regime received no official military support from the UK. UK arms sales to Africa, however, according to the Observer:

UK arms sales to Nigeria [are] up tenfold since 2000 to £53m, including armoured vehicles and large calibre artillery. (June 12, 2005)

Now, Nigeria is surely a risky market (though markets warmed to it immediately after the debt cancellation); and the Export Credit Guarantee Department exists to support UK exports into risky markets. Furthermore, export credits were being provided well into the 90s for exports to Indonesia, so why baulk at Nigeria?

It therefore seems absolutely incredible that the Export Credit Guarantee Department has guaranteed no loans to Nigeria since 1991. Absolutely, mind-stunningly, incredible. Totally, discombobulatingly, extra-terrestrially incredible. However, there can be no doubt that the answer to the Parliamentary Question is entirely accurate.

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