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Pound drop not impacting short-term UK military spending, says MoD official

March 11, 2017 (Photo Credit: Gov.uk)
LONDON — The collapse in the value of the pound against the dollar has had only a minor impact on the British defense budget over the short-term and for the moment is not big a problem, according to the Ministry of Defence’s top civil servant.
 
“The hit on the near-term budget is in the small tens of millions of pounds. ... It’s not a big issue,” Stephen Lovegrove, the permanent secretary at the MoD, told reporters during a briefing in Washington earlier this week.
 
The pound dropped in the wake of Britain's vote to leave the European Union last June. It currently hovers at around $1.21 and has been weakening in the last few days. The MoD’s report and accounts for 2015-16, page 148, show the Bank of England currency hedging on behalf of the ministry for this financial year at $1.56 to the pound and $1.59 the previous financial year.
 
Last year, the Royal United Services Institute think tank reckoned a weak pound could cost an already stretched defense budget £700 million (U.S. $747 million) annually if the currency doesn’t recover against the dollar, and the euro, against which sterling has also weakened.   

The MoD is a major buyer of U.S. equipment, most notably the F-35 fighter. But the last nine months has also seen the exchange rate become even more crucial with significant purchases of additional American-made kit being made by the British.
 
Boeing’s P-8 maritime patrol aircraft and Apache attack helicopters as well as General Atomics' Certifiable Predator UAVs have all been selected by the British, and a deal is in the works to purchase Joint Tactical Light Vehicles from Oshkosh.
 
“We have a very prudent hedging program with the Bank of England and the Treasury and feel comfortable we’ve managed to mitigate most of the currency risk there. We certainly have thought about what might happen if the pound stays at its current low levels in three or four years' time, and clearly there would be some effect,” Lovegrove said.
 
“How that gets defrayed , whether or not that that activity will have to be undertaken through the Treasury, whether we seek to renegotiate [contracts,] these things are a couple of years hence,” he said.
           
“We have no concrete plans to do anything, it’s three years off, we are hedged for three years. ... There will no doubt be moments when we have to take decisions, but when that is will be the subject to a set of crystal balls,” Lovegrove added.
 
The principal goal at present is to fulfill the 2015 defense and security review, he said.
 
Lovegrove was making his first trip to Washington since being appointed defense permanent secretary last year. The official, who has day-to-day responsibility for running the MoD, including the £36 billion budget, said that one of the items on the agenda for his visit was to discuss potential global challenges from nations like Russia and North Korea.   

Aaron Mehta in Washington contributed to this report.


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