FCO in pressure over falling pound

With so much of its activity taking place abroad, the FCO is "likely to be more adversely affected than other government departments by the fall in sterling", and it has been left even more exposed by the recent withdrawal of Treasury protection against currency fluctuations, said the House of Commons Foreign Affairs Committee.

The FCO uses "hedging" arrangements to limit its exposure by securing foreign currency in advance at a fixed rate, but in evidence to the committee it acknowledged that it will face "a tougher challenge" to fund its activities in 2009/10.

Meanwhile, the FCO warned that anticipated increases of more than £3 million a year in the cost of subscriptions to international bodies like the United Nations may force it to cut other programmes.

The committee's chairman, Labour MP Mike Gapes, said it was "deplorable" that the department was forced to shoulder alone the cost of subscriptions which benefit the whole government, and urged the Treasury to cover them.

The pound slid to near-parity with the euro at the turn of the year and is now trading at around 1.10 euros, compared with 1.50 less than two years ago. Meanwhile, sterling has crashed to around 1.45 US dollars after topping two dollars as recently as July.

And the Foreign Affairs Committee heard that the FCO is also facing "emerging budgetary pressures" this year because of the Treasury's decision to withdraw its support for the Overseas Pricing Mechanism which previously protected departments from any weakening in sterling.

In its report,published on Sunday, on the FCO's Annual Report for 2007/08, the committee warned: "We are deeply concerned that as a result of the Treasury's decision to withdraw its support for the OPM, the FCO may not be able to meet higher international subscriptions over the next two financial years unless it cuts its activities.

"We conclude that it is deplorable that the FCO should have to shoulder the financial burden from within its already tight budget to pay for subscriptions which also benefit other Government departments, and we recommend that additional non-discretionary costs should properly be met by the Treasury."

The committee also voiced concern that funding for FCO programmes to tackle crime and drugs had been cut in order to switch cash to new goals like tackling climate change.