WRITTEN QUESTION P-1534/03

by Anne Van Lancker (PSE) to the Commission

(30 April 2003)

Subject: Implications of the cancellation of the debts of third world countries for the excessive deficit procedure

The cancellation by Member States of the debts of developing countries represents an important means of achieving the Community's development cooperation policy objectives, in particular the fostering of the sustainable economic and social development of the developing countries, the harmonious integration of those countries into the world economy and the fight against poverty.

However, in accordance with ESA 95, debt cancellations are entered in Member State budgets as capital transfers, which have an impact on the balance of claims outstanding against other countries. In other words, the budget balance suffers, with possible adverse implications for the Member States concerned under the excessive deficit procedure. This procedure (Article 104 of the EC Treaty), as now implemented, thus acts as a serious deterrent to those Member States wishing to carry out such debt cancellation operations.

The EC Treaty also stipulates that, when implementing policies which may have implications for developing countries, the Community must take account of development policy objectives. Although this is not a policy area which has direct implications for the developing countries, the indirect impact is clear. Community policy on excessive deficits should therefore take account of this objective, for example by amending Regulation (EC) No 2223/96(1) on the European system of national and regional accounts in the Community, by analogy with the steps taken in 2001 by means of Regulation (EC) No 2558/2001(2) as regards streams of payments under swaps arrangements. Is the Commission prepared to take action on this matter?

(1) OJ L 310, 30.11.1996, p. 1.

(2) OJ L 344, 28.12.2001, p. 1.

Answer given by Mr Solbes Mira on behalf of the Commission

(26 May 2003)

The Commission considers that addressing developing countries' debt problems indeed represents an important means of achieving the Community's development co-operation policy objectives. In the context of the heavily indebted poor country (HIPC) initiative, it also actively participates in it, with some EUR 1,3 billion pledged so far for the poorest and most highly indebted countries.

As regards the accounting of Member States' debt cancellations, the methodological reference for national accounts in the Community is the European System of National and Regional Accounts (ESA95). It was adopted by Council Regulation (EC) No 2223/96 of 25 June 1996. According to the ESA95 rules, debt cancellations are recorded as capital transfers. Capital transfers are a component of government expenditure which contribute to the government deficit. Paragraph 4 165 (f) of ESA95 specifically quotes the cancellation by the government of a debt owed to it by a foreign country as an example of a capital transfer. Other accounting systems, such as the worldwide System of National Accounts of 1993 (SNA93) of the United Nations or the International Monetary Fund's (IMF's) Government Finance Statistics Manual of 2001 also provide for similar accounting recordings.

The Commission considers that the aim of government deficit and debt accounting should be to give a picture as faithful as possible of economic reality. To remain credible and useful for economic analysis and policy-making, the government deficit and debt must be compiled on the basis of scientific and technical criteria irrespective of the merit of the government expenditure categories or of any ethical consideration, e. g. the cancellation of the debts of the highly indebted poor countries. Debt cancellation is not without cost for the creditor countries. It is, therefore, appropriate that the act of debt cancellation implies a higher fiscal deficit.

The analogy between the debt cancellations and the recording of swap-related flows does not seem to be warranted. The specific accounting treatment of swap-related flows for the excessive deficit procedure established by Regulation (EC) No 2558/2001 of the Parliament and of the council of 3 December 2001 amending Council Regulation (EC) No 2223/96 as regards the reclassification of settlements under swaps arrangements and under forward rate agreements, was not for any consideration about the merit of swaps but exclusively for technical reasons. On this latter issue, the Honourable Member is referred to the explanatory memoranda of the Commission proposal(1) that led to Regulation (EC) No 2558/2001 and of the respective Parliamentary Report (A5-0071/2001 Kauppi).

(1) OJ C 116 E, 26.4.2000.