Britannia Radio

FINANCIAL TIMES 9.4.09
UK Foreign Office scrambles to plug £150m hole
By Alex Barker and Jim Pickard

The Foreign Office is scrambling to plug a hole in its budget of up 
to £150m this year as the recent collapse in sterling threatens to 
cripple the spending power of its embassies.

The budgetary troubles follow what the Conservatives have dubbed a 
"botched experiment" in currency hedging that has left the department 
facing higher overseas bills than expected.

The FO has long been shielded against falls in sterling by the 
Treasury, which guaranteed its purchasing power was steady.

However, the Treasury withdrew this protection in late 2007, just as 
the pound began a sharp decline, dropping about 30 per cent from its 
peak in November that year against the dollar.

Even as the pound fell, FO officials were locked in talks with the 
Treasury for more than six months to win permission to hedge their 
exposure. This was finally granted in May 2008, allowing the "forward 
purchase" of dollars and euros, which helped mitigate rising costs.

The "rolling programme" protected the department for about a year. 
The FO hedged for 2009 and 2010 but it was forced to sell sterling 
while it was in the doldrums - meaning the department's overseas 
costs are now much higher than when its three-year budget was set.

The policy was cleared by the FO board, headed by Sir Peter Ricketts, 
permanent secretary, after it took advice from the Treasury, 
independent advisers and the Bank of England.

The department has already been stretched by the rising cost of 
running embassies and paying dues to international organisations. If 
the pound remains low this financial year, the core FO budget of 
about £1.1bn will have to absorb £150m of added costs.

Officials have cut back "conflict prevention" work in low priority 
areas and reduced by a third the number of UK police seconded to 
civilian stabilisation missions.

An extra £79m will be made available to the UK's network of 280 
embassies, which use foreign currencies to pay local staff and 
maintain buildings, in an effort to help plug the shortfall.

William Hague, shadow foreign secretary, said: "We urgently need to 
know how much of this is caused by the chancellor's decision to strip 
the FO of the mechanism which protected it against currency 
fluctuations."

An FO official said extra funds would be found by saving money and 
reallocating resources. "While it has not been easy, we believe this 
has allowed us to maintain the service.