Essays and Reports

Debt aspects related to Export Credit Agencies

Jubilee Research
May 23, 2002

Paper for UK Seminar on Export Credit Agency Reform – “Beyond Business Principles” House of Commons, UK: Recommendations for the Export Credit Guarantee Department (ECGD) on Debt and Export Credits

The cancellation of Third World debt has been a rallying cry of social movements for years, gaining in volume and numbers in 2000 as a result of the global Jubilee movement. Much attention has been focused on the debts owed by poor countries to the World Bank and the International Monetary Fund.

Export credit, especially compared with the financing available from the international financial institutions like the World Bank, has grown to predominate in developing economies. While lending from international financial institutions has remained relatively stable in recent years, export credit lending has soared. Export credit agencies globally increased their commitments fourfold in eight years, from US$26 billion in 1988 to US$105 billion by 1996.

While the policy of many OECD countries is to provide all development assistance to the poorest countries as grants only, rather than loans, export credit agencies financing is in the form of loans, most of which are on non-concessional (market) terms, designed to make profit for the export credit agencies.

Developing countries incur debt from export credit agencies by either borrowing directly from export credit agencies, or by guaranteeing a project that may not be productive. Export credit agencies universally require the government to guarantee their investment or to counter-guarantee their own guarantee extended to the project.

Export credit agencies operate in secret. Therefore, people do not know that the government is incurring new debt, or guaranteeing a particular private sector project.

Impacts

Like the World Bank, export credit agencies often support projects with questionable or negative development impacts. Mines, large-scale dams, pulp and paper, all kinds of development debacles are financed by export credit agencies. Developing countries therefore also incur social and ecological debt as a result of export credit agency-supported activity. And because export credit agencies are in a form of tied aid, export credit involvement in development projects impedes local partnership or ownership and the use of local producers and suppliers.

Debt owed to export credit agencies is factored into the overall indebtedness of countries by creditors such as the World Bank and the International Monetary Fund. Countries not able to make debt payments must turn to the International Monetary Fund (IMF), which offers further loans with stiff conditions, known as Structural Adjustment Programs (SAPs). SAPs require governments to privatize industries, devalue the currency and cut spending on health, education and jobs.

As the World Bank and the IMF are preferred creditors to developing countries (in other words, the World Bank and the IMF get paid first), often developing countries are in arrears on payments to ECAs. However, unlike commercial lending institutions, export credit agencies do not write-down debt that is uncollectable from developing countries. Instead, the taxpayers in the home countries of export credit agencies pay the ECAs so that they do not take a loss. This practice of reimbursing ECAs for irresponsible lending, diverts resources in First World countries that could be put to social or environmental purposes and it contributes to moral hazard (continued irresponsible lending).

From DEBT ASPECTS RELATED TO EXPORT CREDIT AGENCIES, prepared by the NGO Working Group on the Export Development Corporation, a working group of the Halifax Initiative Coalition, in Canada.

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