Home

Recommendations for the Export Credits Guarantee Department (ECGD) on Debt and Export Credits

by Romilly Greenhill and Ann Petifor, Jubilee Research

first published 23 May 2002

Summary

Export Credit Agencies have contributed to unsustainable levels of debt in developing countries. Over 95% of the total debt owed to Britain by developing countries is owed to the Export Credits Guarantee Department (ECGD). Although the British government has agreed to write off the ECGD debt owed by the world’s poorest countries, the department has not learned lessons from the past. For example, the ECGD still underwrites arms sales to developing countries, many of which are heavily indebted. This was a presentation at an NGO Seminar on Export Credit Reform, House of Commons, London.

Contents

Background

Export credit agencies including ECGD have long been accused of contributing to the build up of unsustainable levels of debt in developing countries. While it does not lend directly to developing countries, ECGD plays a role in creating debt because when businesses and governments in developing countries default on payments to UK exporters, ECGD pays off the UK exporter and takes on the debt itself. In most cases, the developing country government guarantees the debt, thus creating a bilateral (government-to-government) debt. In this way, developing countries have built up substantial debts to the UK government without any explicit oversight by the developing country government. Now, over 95% of total debt owed to the UK by developing countries is owed to ECGD.

The UK government has played a leading role in writing off the bilateral debts, including ECGD debts owed to it by the 42 countries included within the World Bank and IMF's Heavily Indebted Poor Countries (HIPC) initiative, and other IDA only countries.

Moreover, all IDA only countries are now only provided within export credits for expenditures deemed 'productive,' and under IMF programmes are not officially allowed to take on commercial loans. According to the ECGD annual report 2000/01, very few guarantees are currently being made to this group of countries, although the ECGD hopes to increase the number of guarantees issued for this group of countries under the 'Good Projects' scheme.

However, Jubilee Research and other NGOs remain concerned about several aspects of ECGD processes, including:

  1. The definition of 'productive expenditure'
  2. The number of countries for which the 'productive expenditure' criteria apply
  3. Lack of analysis of the potential impacts of increased ECGD debt on overall debt sustainability;
  4. Lack of consistency between export credits granted and overall government strategies in recipient countries, including failure to ensure that all guarantees have a direct or indirect impact on poverty.

1. Application of 'Productive Expenditure' Criteria

Since September 1997, the UK has refused to issue Export Credit Guarantees for any expenditures which are not defined as 'productive.'1 However, the 'productive expenditure test' is only applied to IDA only countries. This means that ECGD is continuing to provide export credits for defence expenditures in other developing countries, many of which are also heavily indebted. Overall, the share of ECGD business in 1998/9 which was used for defence contracts was more than 50%.2

In 2000/01, for example, the ECGD guaranteed an export credit of around £1.7bn for trainer/fighter aircraft being sold to South Africa by BAE systems.3 While South Africa's external debt of $24.5bn4 is lower, as a proportion of her GDP, than that of the HIPCs, she does have a significant domestic debt problem. In total, her domestic debt is now at $40.6bn, or a little under one third of her Gross National Income. She is now spending about $4.6bn per year, or 16% of her total budget, in servicing her domestic and external debt, in contrast to about 11% of her budget on health.5 In other words, in a country where 20% of the adult population is infected by HIV, debt service is about one and a half times the level of spending on health. In a country with no major external threat, a guarantee for fighter aircraft can hardly be described as 'productive.'

Recommendation: The revised criteria for productive expenditures should be applied to all developing countries, not just the HIPCs. This would effectively preclude any export credits for arms deals with any developing country.

2. Definitions of Productive Expenditures and Sustainable Development

Even for IDA countries, the definition of productive expenditure is in practice only used to exclude guarantees for arms sales.

In their Mission Statement, ECGD state that all their activities should promote 'sustainable development' which is defined as projects which will

  • Assist social and economic development
  • Or are of maximum benefit to areas most affected by poverty
  • Or tackle problem areas where private investment is not available
  • Or, wherever possible, earn foreign exchange
  • Or encourage viable self-financing projects.

This provides substantial leeway for projects which only fit into one of these categories. In other words, projects are not required to promote social and economic development or to reduce poverty provided that they earn foreign exchange or are self-financing.

Recommendation: The definition of productive expenditures and of activities which promote sustainable development should be limited to:

  • Projects which will directly reduce poverty;
  • Projects which will indirectly reduce poverty through social and economic development.

3. Assessment of impact of export credits on long term debt sustainability

The UK, as with all bilateral donors included within the OECD Development Assistance Committee, has committed itself to meeting the Millennium Development Goals. Within these goals, there is a commitment for all DAC members to 'deal comprehensively with the debt problems of developing countries through national and international measures in order to make debt sustainable in the long term.' The ECGD has also committed itself to 'ensuring that debt sustainability will be a prime determinant of the provision of support for its exports.6'

However, Jubilee Research is concerned the export credits are still being issued for countries with significant debt burdens, including the South African example given above. Unlike the environmental and social impacts of projects, potential exporters face no requirement at present to demonstrate that the impacts of their credits on long term debt sustainability have been assessed by the recipient government.

Recommendation: When ECGD guarantees involve a public guarantee of the loan on the recipient country side, all exports must prove that a full assessment of debt sustainability from the potential liability has been undertaken by the recipient country government and that the results of this assessment have been made publicly available.

4. Consistency of guaranteed projects with government's strategic priorities and poverty reduction strategy papers (PRSPs).

In their White Paper on Globalisation, released in December 2000, the UK's Department for International Development stated that the poverty reduction strategy process (PRSP) approach is becoming the main mechanism for supporting poverty reduction for both multilateral and bilateral agencies. Furthermore, it was stated that the UK government 'believes that the principle of a country-led poverty reduction strategy should apply to middle income countries and to other developing country regions [as well as the HIPCs.]' It was stressed that 'the process of developing poverty reduction strategies is putting developing countries in the lead, devising and driving forward their own development strategies.7'

However, at present there are no mechanisms to ensure that ECGD guarantees to developing countries are consistent with PRSPs, where they exist, or otherwise with other government poverty reduction strategies.

Recommendation: All requests for export credits to any country which already has a full or interim PRSP should be passed to DFID for an assessment of whether the credit is consistent with the recipient government's PRSPs. Ideally, such an assessment should take place through a participatory process within the recipient country.

5. Provision of Debt Relief

As already noted, the UK Government including the ECGD is committed to providing 100% debt cancellation for all Heavily Indebted Poor Countries (HIPCs) whenever they reach 'Decision Point' under the HIPC initiative. The UK Government has also committed itself, as from December 2001, to holding all payments from pre-decision point countries in trust, to be returned to the HIPC once they reach decision point.

However, it appears from the ECGD Resource Accounts that debt service payments were still in 2000/01 being received from some of the HIPCs, including those that had reached Decision Point. For example, Burkina Faso is not listed as having received full debt cancellation despite having reached Decision Point in July 2000. Some pre-decision point HIPCs are also listed as making payments to the ECGD in 2000/01. It is hoped that in the 2001/02 report these countries will not be shown as making any payments to ECGD.

Recommendation: ECGD should implement the UK Government's commitment to providing 100% debt cancellation for all HIPCs, including those that have not yet reached Decision Point.

Notes and References

1 'Eliminating World Poverty: Making Globalisation Work for the Poor' DFID White Paper, December 2000.

2 'The Subsidy Trap': British Government Financial Support for Arms Exports and the Defence Industry' by Paul Ingram and Ian Davis.

3 ECGD Annual Report and Resource Accounts 2000/01

4 Global Development Finance 2002

5 'A People's Guide to the Budget' South African National Treasury

6 ECGD Business Principles, December 2000.

7 Globalisation White Paper, 2000, op.cit.