Debt relief could ease effects of UK aid cuts

CAFOD analysis, drawing on research from the University of St Andrews and Save the Children, finds that reducing debt-servicing to about 10% of revenue could create fiscal space large enough to offset many impacts of the UK’s 40% cut to its aid budget and help restore funding for health, education, water and sanitation.

UK aid reductions and rising developing-country debt are being discussed together after new analysis suggested debt relief could offset some harm from cuts. A year ago the UK reduced its aid target from 0.5% to 0.3% of GNI. Many low-income governments now devote far more revenue to servicing external debt than they did in the past. The CAFOD-led analysis, using research from the University of St Andrews and Save the Children, models a cap on debt-servicing around 10% and reports potential funding gains for basic services. Key points: - The UK announced a 40% reduction in its aid target, from 0.5% to 0.3% of GNI, one year ago. - Low-income countries now spend an average of about 18% of government revenue on foreign debt servicing, up from roughly 5% in 2014. - CAFOD’s analysis estimates that capping debt-servicing at about 10% could free resources to restore schooling, water and sanitation services and reduce some projected health harms, with an estimated annual lives-saved figure reported by the study. - Campaigners and some MPs say the UK has a role to play because a large share of sovereign debt contracts are governed under English law, and the UK’s 2027 G20 presidency is cited as a possible moment to pursue broader debt-relief reforms. Summary: The analysis reported here presents fiscal and legal options that campaigners argue could reduce the funding shortfalls from the UK aid cut and improve public services in low-income countries. Undetermined at this time is which specific debt-relief reforms will be adopted and how creditor coordination will be achieved.