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3 things the UK can do to tackle poverty and the climate crisis

What is the problem?

Over the last 30 years the world made significant progress in increasing global prosperity. Developing economies have grown, health coverage has improved, more children – especially girls – have been able to go to school, and child mortality has fallen.

However, stubborn inequalities have meant that millions of children have been excluded from the benefits associated with global growth - a situation that was magnified by the COVID-19 pandemic, and now also by rising conflict and global economic turmoil. In addition, carbon-intensive economic growth - which aided poverty reduction in many economies - has driven the climate crisis. This is making everyday life harder for children facing poverty and compounds the impact of humanitarian disasters.  All too often, it is children living in the poorest countries who are already experiencing the harsh realities of poverty and who have contributed the least to global greenhouse emissions, that are suffering the most.

As a result of these interconnecting crises, overall global progress towards a world free from poverty is stalling. This was described well by Development Minister, Andrew Mitchell, in his recent speech at Chatham House: “After 30 years of unprecedented poverty reduction, when the benefits of technology and globalisation supported by aid and development lifted quality of life around the planet, we have come to the hard stop of COVID and Russia’s invasion of Ukraine. With 70 million people falling back into poverty, with millions of girls out of school, with famines stalking the lands of East Africa, with 5 seasons of failed crops due to drought, where at least 40,000 people have died and where children are starving to death.”

What can be done?

Save the Children will always make the case for an immediate return to meeting the UK’s commitment to spend 0.7% of GNI on aid; aid is a unique and much needed source of finance for investment in essential children’s services and protection from the climate crisis.  However, there are additional low-cost options the UK government can and should pursue to unlock more money to help children living in some of the world’s toughest places.

As one of the world’s richest nations and, in the City of London, home to one of the largest global financial centers, the UK has a disproportionately large influence over the global financial architecture, including where and how money flows around the world. As the world faces up to the overlapping challenges of inequality, conflict and the climate crisis, the UK has a real opportunity to harness its economic clout, capacity for innovation and all the policy options available to tackle the root causes of poverty and create a more prosperous, stabler and greener planet for us all. 

There’s lots of work to be done, but as a starting point here are three things the UK can do this year to unlock urgently needed money:

1. Advance legislative options to compel private creditors to participate in debt relief negotiations

According to the International Monetary Fund (IMF), more than half of lower income countries are either unable to meet the minimum level of their debt repayments or are at high risk of being in this situation in the future. Recent Save the Children analysis finds that debt burdens are contributing to constrained fiscal space across low and middle income countries, crippling their ability to properly fund public services. According to Debt Justice, between 2022-2028, 42% of external debt payments made by L/LMICs will be to private creditors. This makes the debt burden even worse for these countries because private creditors do not currently have to take part in debt relief negotiations that other creditors have agreed to (e.g. bilateral creditors, like the UK). Since private debt makes up such a large proportion of the overall debt landscape, this leaves a significant number of L/LMICs unable to get themselves out of precarious debt situations.

One of the major failures of past debt treatment frameworks, such as the Highly Indebted Poor Country Initiative (HIPC) launched in 1996 and it’s 2005 successor, the Multilateral Debt Relief Initiative (MDRI), is that they did not adequately address this issue around debt held by private creditors. The current G20 initiative to support debt restructuring and relief - the Common Framework – again, does not compel private creditor participation. We must learn from the mistakes of the past and ensure private creditors are included in debt relief negotiations.

When he was Secretary of State for International Development in 2010, Andrew Mitchell introduced legislation which proved it was possible to include private creditors in officially agreed debt relief. The 2010 Debt Relief (Developing Countries) Act was a response to ‘vulture funds’ who were buying cheap defaulted debt and then suing countries in UK courts, seeking full repayment. The Act prevented any private creditor from suing for more than would have been received if they had taken part in the HIPC debt relief process. The UK Government estimated that the Act would save lower income countries £145 million.

To find lasting solutions to the issues around private creditor debt in L/LMICs, the International Development Committee (IDC) has suggested that the UK Government should consult on either:

  • Replicating the Debt Relief (Developing Countries) Act 2010 for the Common Framework and beyond, making it impossible for creditors to sue for more than they would have received if taken part in internationally agreed debt restructuring. Or,
  • Legislating to make debt restructuring agreements binding for all private creditors, if the agreement is supported by at least two thirds of private creditors.

The vast majority of private creditor bonds are held under New York or English law. The New York Senate is currently considering legislation that would compel private creditors with debt contracts under New York law to participate in debt relief at the same level as other official creditors.

In line with the IDC recommendations, we urge the government to undertake public consultations assessing the legislative options around private creditor participation in official debt relief negotiations. Further, the UK should work with New York to ensure complementary legislation is introduced across both jurisdictions. Even just signalling interest in pursuing legislative options could alter incentives and behaviours by private creditors.

2. Match Japan’s commitment to recycle 40% of Special Drawing Rights

Special Drawing Rights (SDRs) are an important financing tool that can be used to support development across low- and lower middle-income countries. They are a type of financial reserve asset issued by the IMF to all countries, and they can be used to balance payments in central banks or be traded in for currency to address cash flow needs.

The recent allocation of SDRs in 2021 was $650 billion. However, they were not allocated based on need but rather based on IMF quotas (e.g. the maximum amount of financial resources that a country is obligated to contribute to the IMF). This meant that rich countries received the most SDRs. The entire continent of Africa received only 5% of the allocation.  

As a result, high income countries – including the UK – promised to ‘recycle’ a collective $100 billion SDRs to lower income countries. Despite representing a relatively small proportion of the SDR allocation, most of which is sitting unused in richer countries, two years later this promise still has not been met. According to the ONE campaign – only $76 billion have been pledged for recycling to date.

The UK have pledged to recycle 20% of their SDR allocation, which, while welcome, falls short of pledges made by Australia (39%), China (34%), France (30%) and more recently Japan (40%). The UK should show leadership by at least matching Japan’s commitment to recycle 40% of SDRS. 

3. Stop using the UK’s international development budget to pay refugee costs in the UK

The UK aid watchdog, ICAI, estimates that last year the UK spent approximately £3.5 billion on costs for hosting refugees and asylum seeks in the UK. This is equivalent to around a third of the UK’s total aid spending in 2022. While an additional £2.5 million of funding was announced in the Autumn Statement in 2022 to cover domestic refugee costs, this is less than the likely cost of supporting refugees in the UK for the next 12 months.

While it is right that the UK hosts refugees and asylum seekers in need, it is not right that the cost burden is coming at the expense children and communities in lower income countriesThe way the UK is using ODA to fund refugee hosting costs is exacerbating the catastrophic impacts of the reduction of the total UK aid budget to 0.5% of GNI.

Although technically eligible to be counted as official aid under the OECD’s DAC rules, no other G7 countries are funding the costs of hosting Ukrainian refugees from their existing aid budget. The UK is an outlier here and should follow the lead of the other major global economies to ensure in-country costs for supporting refugees does not disrupt our ability to fund poverty reduction and climate adaptation programmes overseas.

What impact could this have?

If the UK were to adopt these three policies, as part of a wider holistic agenda to unlock finance and restore the 0.7% aid commitment, the UK could unlock billions of pounds which are desperately needed in lower income countries whilst having a minimal impact on the UK’s own fiscal balance sheet.  There are a number of moments this year – including the Summit for a New Global Financing Pact in Paris, the SDG Summit during UNGA, the G20 Summit, and COP 28 - that offer a real opportunity for the UK to announce concrete progress on these proposals. Doing so would show that the government is serious about using its global position to help create a fairer, greener and more stable world for children, and about building a global financial architecture that will protect long term sustainable prosperity for us all.

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