Jubilee Debt Campaign and Jubilee Scotland Submission to IDC Inquiry “Extreme Poverty and the Sustainable Development Goals”, 16th February 2022

Tess Woolfenden, Senior Policy Officer at Jubilee Debt Campaign, Tess@jubileedebt.org.uk

Line Christensen, Executive Director of Jubilee Scotland, campaigndirector@jubileescotland.org.uk

Summary.

1. Jubilee Debt Campaign is a UK charity working to end poverty caused by unjust debt. We do this through research, education, organising and campaigning, in partnership with allies in the UK and globally. Our current areas of focus are the global South sovereign debt crisis and the UK’s household debt crisis.
2. Jubilee Scotland is a non-profit organisation which campaigns for the cancellation of unjust and unpayable debts. We conduct research and prepare briefs; we put on workshops for the public; we organise meetings, events and campaigns. Our current areas of focus are the use of Public Private Partnerships in Scotland and how the debt and climate crises intersect in the global South.
3. This submission highlights how addressing unsustainable debt levels is vital to address extreme poverty in lower income countries. The UK Government has shown global leadership by playing a role in the creation of the G20 Debt Service Suspension Initiative (DSSI) and the Common Framework for Debt Treatments, but these do not go far enough. Moreover, current climate finance and development finance efforts are exacerbating the debt crisis and thus undermining lower-income countries’ ability to address extreme poverty.
4. The Foreign, Commonwealth and Development Office (FCDO) has an obvious opportunity to address extreme poverty in lower-income countries by:
1. Using its role in the G20 to expand the Common Framework to all countries who need debt relief irrespective of their income status, and strengthening the scheme to enforce private sector participation, including ensuring the consistent use of the IMF’s lending into arrears policy.
2. Working with the UK Treasury to introduce legislation that would prevent minority private creditors from holding out on debt restructuring negotiations.
3. Increasing the amount of additional climate finance provided to lower-income countries, in the form of grants, including supporting a Loss and Damage finance facility so lower income countries do not need to go into more debt to adapt to, and mitigate, the impacts of the climate crisis.
4. Ensuring the FCDO’s in-country programmes and work through multilateral agencies it funds contributes to reducing debt risks and their impact on extreme poverty, rather than adding to them, including the reallocation of Special Drawing Rights to lower income countries as grants, not loans.
5. Leveraging its position in the World Bank to ensure that its debt sustainability assessments take into account a country’s ability to uphold the economic and social rights of citizens.

Unsustainable debt and extreme poverty.

5. The UK government has committed to the delivery of the United Nations Sustainable Development Goals (SDGs), including Sustainable Development Goal 1, Target 1.1, which calls for the eradication of extreme poverty by 2030[1]. Within Sustainable Development Goal 17, target 17.4 commits governments to “Assist developing countries in attaining long-term debt sustainability through coordinated policies aimed at fostering debt financing, debt relief and debt restructuring, as appropriate, and address the external debt of highly indebted poor countries to reduce debt distress.” However, the UK government has not prioritised the need to address unsustainable debt in lower-income countries as a part of its Sustainable Development Goals agenda. Unsustainable debt means many lower-income countries have no choice but to divert vital resources towards debt repayments over investing in poverty eradication and areas that directly impact on poverty, such as health care[2] and climate action[3].
6. Hidden debt in Mozambique leads to 2 million people being pushed into poverty: In 2013, London branches of Credit Suisse and VTB Capital made 3 loans to state-owned companies in Mozambique totaling $2 billion. None of the loans were agreed by Mozambique parliament as is required in the country’s constitution, and two of the loans were kept secret, only coming to light in 2016 causing a debt crisis in the country. As a result, the local currency crashed in value pushing up the price of imports and basic goods and increasing unemployment rates. According to the World Bank, increasing food prices led to 2 million more people being pushed into poverty. Research conducted by Mozambican campaigners shows how government spending on health and education reduced by $1.7 billion between 2016-18 compared to the previous three years[4].
7. Unsustainable debt undermines poverty eradication in Zambia: Research conducted by Zambian civil society in 2020 concludes that “it will not be possible for the Government of Zambia to adequately plan and finance national development needs, especially those related to human development and poverty reduction given its incapability to develop the economy, inability to generate adequate services but expected, at the same time, to meet its debt and debt service obligations.” The study highlights that debt repayments have been taking up an increasing amount of available government revenue in recent years, leading to declining investment in key public services like healthcare, education and water and sanitation. For example, they highlight how in 2020, only 8.8% of government revenue was allocated to health services, which was only sufficient to cover salary and wage commitments. Currently 54% of Zambians live in poverty[5].

The COVID-19 pandemic and increasing debt levels.

8. Lower income countries have been facing increasingly unsustainable debt since the 2008 financial crisis, with debt payments increasing by 120% between 2010 and 2021, reaching their highest level since 2001[6]. The economic shocks imposed on lower income countries from the pandemic have exacerbated the situation. For the 69 countries they assess, the IMF say 39 are in debt distress or at high risk of being so, up from 17 in 2013[7].These numbers are likely to increase in the near future as the US and other rich nations start to increase interest rates as their economies recover from the pandemic[8].
9. For many countries, debt repayments make up a significant amount of government revenue. For example, in 2021 Jamaica diverted 29% of revenue to debt repayments, while Suriname diverted 30% and Ghana diverted 44%. Jubilee Debt Campaign research has found that when external debt payments exceed 15% of government revenue, this tends to lead to a decline in government spending[9]. Even before the pandemic, 64 lower-income countries were spending more on debt repayments than they were on healthcare[10].

Response to the debt crisis.

10. The UK Government has recognised the need for debt relief in lower income countries following COVID-19 and has shown global leadership in this area by playing a role in the creation of the G20’s debt relief initiatives. Unfortunately, these initiatives do not go far enough and continue to leave many lower-income countries diverting vital resources away from poverty eradication to debt servicing. 
11. Debt Service Suspension Initiative (DSSI): In April 2020, the G20 announced the DSSI, which allowed up to 73 of the world’s poorest countries facing debt problems because of Covid-19 to request the suspension of repayments to bilateral and private creditors. However, the scheme has done very little to address the long-term sustainability of debt as what has been suspended is due to be paid in the future, creating an even bigger debt problem for those countries a few years down the line. Furthermore, the scheme is only eligible for 73 of the world’s poorest countries, meaning many countries with both high levels of poverty and unsustainable debt levels were excluded, such as Jamaica and Suriname. The scheme also did little to ensure the participation of private creditors. The countries who have applied to the scheme have had on average just 23% of debt payments suspended, primarily because private lenders refused to take part and only suspended 0.2% of what was owed to them, meaning much of the bilateral debt suspended through the scheme was used to continue paying private creditors[11]. The participation of private creditors in debt relief is critical: 47% of lower-income country external debt repayments are due to private creditors in 2022, compared to 27% to multilateral institutions and 12% to China[12]. The DSSI expired at the end of 2021 and will not be extended.
12. Common Framework beyond the DSSI: The Common Framework was established by the G20 in November 2020 and aims to go beyond the DSSI to act as a mechanism for broader debt treatment on a case-by-case basis for any DSSI-eligible countries that request it, again leaving many countries with high poverty rates excluded. To date, three countries have applied to the Common Framework, Chad, Ethiopia and Zambia[13], but so far, no debt restructuring agreements have been agreed. While the Common Framework does call on private creditors to offer debt relief on comparable terms to those agreed by bilateral creditors, the G20 have failed to include any robust mechanism to enforce this. As a result, private creditors have been stalling negotiations, leaving countries forced to either continue to service unsustainable debt or default on their loans, exposing them to the risk of being sued. The refusal of private creditors to participate is especially unjust given that they lend to lower income countries at high interest rates to cover the risk of not being repaid.
13. IMF lending into arrears policy: This existing policy within the IMF stipulates that if private creditors are unwilling to reach an agreement during a debt restructuring, the IMF and G20 can support the borrowing country to default on their debt payments to private creditors so they are not forced to continue servicing unsustainable debts and so a restructuring is not unnecessarily delayed by private creditor holdouts. The policy creates a credible risk of borrowing countries being able to default on private creditor debt repayments, and therefore increases pressure on private lenders to accept a debt restructuring at risk of receiving nothing otherwise. However, this policy is not widely known and not consistently implemented.
14. Debt Sustainability Analysis: Debt restructurings are based on World Bank analysis of a country’s debt sustainability, which typically focus on a country’s financial ability to repay without factoring in required investment in key areas such as poverty eradication and addressing the climate crisis. For example, in 2020, climate change was only cited as a consideration for debt sustainability in one country report (Samoa)[14]. Without factoring in climate and other vulnerabilities, a country’s debt sustainability may be overstated and thus lead to inadequate debt restructuring.  
15. Development finance as loans. In August 2020, the IMF created $650 billion worth of Special Drawing Rights (SDRs) - a unit created by the IMF which, when allocated, gives countries more access to finance by boosting their reserves - intended to support countries with the pandemic response[15]. As SDRs are allocated to countries based on their IMF voting quota, a large proportion of them were allocated to rich nations[16], including the UK, prompting global discussions on how best to reallocate SDRs to lower income countries who have greater resourcing needs. It is expected that many SDRs will be reallocated via loans through the IMF, either through the Poverty Reduction and Growth Trust or the soon-to-be established Resilience and Sustainability Fund, the latter of which is designed to support lower-income countries with their response to both the pandemic and the climate crisis[17]. Reallocating SDRs via loans will add to already unsustainable debt burdens, and many could be used to make high interest payments to private lenders. Furthermore, loans provided by the IMF to lower-income countries typically come with the requirement to make austerity-based economic reforms, which have been shown to exacerbate poverty levels according to the IMF’s own research[18].

The climate crisis and unsustainable debt.

16. It is well established that the climate crisis impacts poverty globally. According to the World Bank, “climate change will push up to 130 million people into poverty over the next 10 years”[19]. Lower income countries need to be able to access resources now so they can adapt to and mitigate the impacts of the climate crisis and prevent increasing poverty rates, but many are stuck in the cycle of climate devastation and borrowing, leading to both worse climate outcomes and increasing debt levels. The below outlines the ways in which debt and the climate crises intersect:
17. Unsustainable debt levels mean lower income countries do not have the resources they need to invest in climate action. 34 lower income countries are currently spending five times more on debt repayments than they are on addressing the impacts of the climate crisis[20].
18. A lack of climate finance from rich countries is forcing lower-income countries to borrow to invest in climate action, often at much higher interest rates because of the climate vulnerability they experience. Higher interest rates based on climate vulnerability are predicted to cost the most vulnerable countries $168 billion over the next decade[21].
19. This is especially clear in the case of climate-extreme events given the lack of any Loss and Damage finance for climate vulnerable countries. For example, in 2017, Dominica was struck by Hurricane Maria, which destroyed over 90% of the islands’ structures[22]. Lacking other sources of finance, the Dominican government took on new loans to finance reconstruction. As a result, Dominica’s debt as a percentage of GDP rose sharply from 75% of GDP before the disaster to 100% by 2020.
20. Furthermore, there is currently no internationally agreed mechanism to suspend debt payments when a climate related disaster takes place. Days after hurricane Maria, Dominica had to find several million dollars for a debt repayment that fell due[23].
21. Lastly, the small amount of climate finance that is provided predominantly comes in the form of loans, often with non-concessional interest rates once again adding to lower income country debt burdens and essentially outsourcing the cost of the climate crisis onto the most vulnerable countries. Currently, 74% of climate finance comes in the form of loans[24].
22. Addressing debt is a fundamental part of addressing the climate crisis, yet the UK government have failed to incorporate debt as a part of the climate agenda. This is despite lower income country governments raising debt as a key issue in the run up to, and during, COP26.

Recommendations.

23. Unsustainable debt is significantly undermining the ability of lower income countries to address extreme poverty, and key issues that impact on poverty. There are several steps that need to be taken collectively by the international community, alongside civil society and impacted communities, to address unsustainable debt. We call on the FCDO to:
24. Use its role in the G20 to strengthen the Common Framework, including expanding the framework to all countries who need debt relief irrespective of income status, and strengthening the scheme to enforce private sector participation, including ensuring the consistent use of the IMF’s lending into arrears policy. Reducing debt levels is a vital part of ensuring lower income countries have the resources they need to address poverty and vital areas that impact on poverty. Any funds freed up from debt relief should be considered additional to existing financial commitments, such as Overseas Development Assistance and climate finance.
25. Work with the UK Treasury to pass legislation that compels private creditors to participate in debt restructurings, including within the Common Framework. The UK should introduce legislative reform which would prevent private creditors from holding out on debt restructurings as a way of incentivising their participation in the Common Framework and other debt restructuring negotiations. 90% of the bond contracts of countries eligible for the Common Framework are governed by English law, so there is an important opportunity for the UK to take the lead[25].
26. Increase the amount of additional climate finance provided to lower income countries, in the form of grants. This should include making annual financial commitments to a Loss and Damage finance facility, as demanded by the G77 at COP26. Without significantly increasing levels of climate finance as grants, lower income countries will continue to be forced to take on more debt to address a crisis they did not create. Some have estimated that the UK government’s climate finance contribution should be as high as £33 billion per year based on historic emissions[26].                      
27. Use its position in the World Bank to strengthen and expand how debt sustainability is assessed, ensuring that a country’s ability to protect the economic and social rights of citizens, including the poverty eradication, climate crisis and other locally determined needs, are factored into the process.  
28. Ensuring the FCDO’s in-country programmes and work through multilateral agencies it funds contributes to reducing debt risks and their impact on extreme poverty, rather than adding to them. The FCDO can show global leadership on this issue by reallocating SDRs as grants, not loans, so that they do not add to debt levels. There are no legal or technical barriers preventing the FCDO doing this[27].