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Africa: Debt Audits and Debt Repudiation
Nov 20, 2012 (121120)
(Reposted from sources cited below)
"Repudiation of odious debt, if properly implemented, is
selective rather than indiscriminate. Creditors who lend in
good faith for legitimate projects have no reason to fear a
fair and transparent process, and no cause to withhold new
lending. Indeed by freeing governments from the burden of
servicing illegitimate debts and strengthening incentives
for responsible lending, the strategy yields a better
climate for legitimate borrowers and legitimate creditors
alike." - James Boyce and Leonce Ndikumana
Today's two AfricaFocus Bulletins contain selected articles
from the newly released issue of the Bulletin of the
Association of Concerned Africa Scholars, on "Africa's
Capital Losses: What Can Be Done?" The full bulletin is
available at http://concernedafricascholars.org/bulletin/issue87/
This Bulletin contains an article on "Debt Audits and the
Repudiation of Odious Debts," by James Boyce and Lé:once
Ndikumana. The other Bulletin sent out today (available at
http://www.africafocus.org/docs12/cap1211a.php) contains the
editors' introduction and an overview article by Raymond
Baker of Global Financial Integrity, "Plundering a
For previous issues of AfricaFocus Bulletin on illicit
financial flows and related issues, visit
http://www.africafocus.org/docs11/cap1112.php, with excerpts
from the book "Africa's Odious Debts,"
http://www.africafocus.org/docs11/iff1112.php, on "Capital
Flight Updates," and http://www.africafocus.org/docs12/bank1208.php, "Global
Pirates vs. Tax Justice."
++++++++++++++++++++++end editor's note+++++++++++++++++
Debt Audits and the Repudiation of Odious Debts
James K. Boyce and Léonce Ndikumana, Department of
Economics and Political Economy Research Institute (PERI),
University of Massachusetts Amherst
from Africa's Capital Losses: What Can Be Done?
Association of Concerned Africa Scholars Bulletin
No. 87, Fall 2012
James Boyce and Léonce Ndikumana are co-authors of Africa's
Odious Debts: How Foreign Loans and Capital Flight Bled a
Continent (2011) and teach economics at the University of
Massachusetts, Amherst. Léonce Ndikumana is Director of the
African Policy Program at PERI. James K. Boyce is Director
of PERI's Development, Peacebuilding and Environment
The authors are grateful to Theresa Owusu-Danso for
excellent research assistance.
African countries continue to rely on external borrowing to
fill their resource gaps in financing development. By 2010,
the total stock of external debt outstanding for the
continent stood at $297 billion and its annual debt service
bill was $22 billion. To the extent that debts are used for
productive purposes, the direct and indirect returns for the
debt-financed investments should enable the debtor countries
to honor their debt obligations. In practice, however,
foreign loans are often either squandered on ill-designed
projects or even worse embezzled to finance private wealth
accumulation in offshore centers.
When African governments borrow in the name of their
countries and their people, they are expected to do so if,
ex ante, the expected benefits from the loans outweigh the
costs of loan repayment. They are supposed to act in good
faith in the interest of the people they represent. The
lenders, in turn, are expected to exercise due diligence so
that they issue loans when they have sufficient evidence
that the activities being funded will yield adequate returns
and that the borrower has established adequate institutional
arrangements to ensure proper execution of the projects.
Having issued the loan, the lender is expected to monitor
the use of the proceeds and take corrective measures as
needed. Due diligence and monitoring are key tools for
minimizing default, which ultimately is in the interest of
both the borrower and the lender.
In practice, however, public debts often benefit less the
people of the debtor countries than the government officials
entrusted to manage them as well as their bankers. Some of
the debts accumulated by African countries have financed
genuine projects that have contributed to economic and
social development. However, some of the debts did not.
Analyzing the relationship between inflows of external
borrowing and outflows of capital flight, we found that
roughly fifty cents on each borrowed dollar exits the
country in the same year - a finding that suggests
substantial debt-fueled capital flight (Ndikumana and Boyce
Debts from which the people derived no benefit, and which
were contracted without their consent, in situations where
the creditors knew or should have known these circumstances,
can be classified as 'odious' debts under international law.
In current practice, however, all debts are shouldered by
African populations until fully paid, whether they benefited
from them or not.
Of course, sorting out which loans served legitimate
development purposes and which were odious can be a
monumental task. But a well-organized systematic audit of
external debts can help shed light on the legitimacy of
external debts and establish objective grounds for selective
repudiation of odious debt. This paper discusses how this
can be done and the potential benefits for Africa, its
creditors, and the global financial system.
Debt audit, its scope and purpose
International networks and organizations, including the
Jubilee Movement, continue to press for an international
system of fair and transparent arbitration for dealing with
illegitimate debt and default. Debt audits would be an
indispensable tool for making such a system effective.
A national debt audit involves a thorough examination of a
country's external debts with the aim of establishing their
legitimacy and identifying the benefits derived in terms of
social and economic development as stated in the official
initial justifications of the loans by the debtor government
and its lenders. A debt audit focuses on three important
sets of principles:
(1) Legal principles: This analysis scrutinizes the
conditions of the debt contracts and assesses whether they
conformed to the laws of the borrowing country, the laws and
rules of the lending institutions and governments (e.g.,
provisions of the Securities and Exchange Commission in the
case of the United States), and international law.
(2) Equity and ethical principles: A debt audit also
investigates whether the loan procedures followed the
principles of responsible lending, including due diligence
and monitoring of the use of the loan proceeds, and whether
appropriate measures were taken to protect the interests of
both the borrowing nation and the lenders. It also
investigates any evidence of undue coercion on the borrower
and aims to establish whether external debts were contracted
with the consent of the people, i.e., through appropriate
authorization, such as parliamentary approval.
(3) Developmental criteria: Finally, a debt audit seeks to
establish whether loans were utilized to serve the interest
of the people, i.e., whether they financed bona fide
development programs. The audit examines whether the loans
were in line with the country's overall development strategy
and the lenders' stated developmental goals, and whether
they ultimately benefited the people.
To be successful, debt audits must be implemented
objectively, methodically, thoroughly, and transparently.
Success requires strong political leadership in addition to
popular support. Table 1 summarizes the key steps of the
debt audit process, the material covered, and the areas and
subjects to be investigated.
The most significant example of a systematic debt audit was
that of Ecuador in 2007-2008. Following sustained
campaigning by civil society organizations, in July 2007
Ecuadorian President Rafael Correa established the Internal
Auditing Commission for Public Credit, an independent
entity, to undertake a comprehensive audit of the country's
foreign debts. In September 2008, the Commission submitted
its report, which showed critical issues for some of the
country's debts. The report found numerous irregularities,
ranging from the use of two-thirds of borrowing to finance
military expenditures by the dictatorship that ruled the
country in the late 1970s to the negotiations over the
subsequent restructuring of the debt as global bonds
(Jubilee USA 2008).
The report concluded that creditors imposed unfair
conditions on the country in connivance with corrupt
national leaders: "Multinational organisms, foreign banks
and other lenders, with the participation of national
authorities and officials, imposed their conditions on the
country, forced it to accept a higher level of debt and
successive 'restructuring' procedures that were not
transparent and that generated the transfer of private debts
to the State." (Ecuador, Internal Auditing Commission for
Public Credit 2008, 132)
On the basis of the findings of this report, Ecuador
unilaterally defaulted on more than $3 billion in global
bonds. In June 2009, the country reached an agreement with
foreign creditors to buy back more than 90 percent of its
defaulted debt at 35 percent of its face value (Economist
2009). President Correa announced that this would save the
government approximately $300 million per year in interest
payments. In 2010, Ecuador's total external debt service
payments were less than half their average level in the
previous four years.
Table 1: Key Components in National Debt Audits
General Conditions - Evolution of the rules and regulations
of the monetary authority; evolution of the debt stock;
financial flows of resources and associated conditions; main
creditors, intermediary agents, final borrowers.
Legal Analysis - Approval procedures; general conditions of
contracts; special conditions of contracts; clauses and
conditions under the law and international principles.
Analysis of evidence - Volume and destination of resources;
characteristics of funded projects; objectives; time of
execution; rate of return; verification of necessity;
criteria of prioritization of projects; beneficiary sectors.
Procedural aspects - Audit period; scope of the debt to be
analyzed; Composition of the audit commission and technical
expertise; information sources; reporting; publicity;
The example of the Ecuadorian experience has not been lost
on other indebted countries. In Latin America, the President
of Paraguay has decided to initiate an exhaustive audit of
his country's external debts. Similarly, the Bolivian
Parliament has passed a resolution to set up a commission to
review Bolivia's debts.
In Tunisia, following the fall of the Zine el-Abidine Ben
Ali regime in 2011, the new government vowed to challenge
the legitimacy of inherited debts (Madraud 2012). In June
2012, President Moncef Marzouki refused to endorse a
proposal for an increase in Tunisia's quota share in the IMF
(by about $370 million), pending passage of a bill to audit
the debts incurred under the Ben Ali regime. The bill
authorizes an investigation to determine whether the debts
were used in the interest of the country or as an
"instrument of dictatorship and repression," the new
President told the Agence Tunis Afrique de Presse (Ennouri
2012). If Tunisia follows through, this will set a historic
precedent that other African countries may emulate.
On the donor and lender side, the Norwegian government has
been in the forefront of efforts to address the issues of
responsible lending and odious debt. In August 2012, it
announced plans for an independent audit of all bilateral
debt that nine developing countries have with Norway. The
aim is to promote financial transparency and to test the
Principles on Promoting Responsible Sovereign Lending and
Borrowing, which were launched by the United Nations
Conference on Trade and Development (UNCTAD) in April 2012.
Odious debt repudiation
Debt audits can help distinguish between debts which are
legitimate and those that are not, on the basis of the
legal, ethical, procedural and developmental criteria
described above. They can thus establish a basis for
declaring selected debts as odious and therefore fit to be
considered for unilateral repudiation.
Historically the term 'odious debts' was first used in
reference to 'war debts' or 'hostile debts.' Thus at the
conclusion of the Spanish-American War, the United States
Government, which had gained control over the colonies of
Cuba, the Philippines, Puerto Rico, and Guam, rejected the
Spanish claim that the new Cuban government should repay the
debts inherited from the past regimes. The key argument
advanced by the U.S. negotiators was that the debt "had been
imposed on the people of Cuba without their consent and by
force of arms" and that "the creditors, from the beginning,
took the chances of the investment." The United States
prevailed, and the new Cuban government was relieved of the
debt inheritance, while the creditors were left to attempt
to recover their dues from the Spanish government (Wong
More recent cases include the write-off of Iraq's debts
following the fall of Saddam Hussein. It was argued that it
would be unethical to require the people and the new
government of Iraq to bear the burden of repaying the loans
incurred by a dictatorship that used borrowed funds to build
its repressive apparatus. The debts were repudiated and the
successor government was given a clean slate to begin
mobilizing financing for development.
The legal doctrine of 'odious debt' was first codified by
the scholar Alexander Nahum Sack (Sack 1927). In the most
commonly used definition, a nation's debt can be considered
odious if (1) the debts were incurred without the consent of
the people; (2) the loans were not used for the benefit of
the people; and (3) the creditors were aware, or should have
been aware, of the above two conditions.
Some debts are virtuous in the sense that the benefits to
the people of the country exceed the costs. One would hope
that is the case for the majority of loans that finance bona
fide economic and social development programs. Other debts
are onerous in the sense that the costs exceed the benefits.
Onerous debts take two types. The first is imprudent loans,
where the funds were used to finance ill-designed projects
or 'white elephants,' but the loans were actually used in
the country for arguably legitimate purposes. The second
type is odious debts, which include loans that financed the
criminal accumulation of private wealth and loans used to
finance a dictator's repressive apparatus. Systematic debt
audits can help to categorize past debts and provide an
objective and transparent basis for repudiation of odious
debts (Ndikumana and Boyce 2011a).
Arguments and counterarguments
Criticisms of debt audits and debt repudiation, whether well
founded or not, have held back efforts to address the legacy
of illegitimate debts and advance the agenda for responsible
lending. As of today, there is no international body
formally charged with debt arbitration. Debtor countries are
left at the mercy of the powerful creditor clubs and
vulnerable to exploitative transactions and claims.
One criticism is that debt audits may amount to a
politically motivated 'witch hunt' used by current
governments to settle scores against former rulers.
Secondly, it is sometimes alleged that the audit process
cannot be fair if audit commissions include representatives
of anti-debt organizations with biased views against
lenders. Thirdly, critics argue that it is not really in the
best interest of debtor countries to engage in debt audits,
let alone debt repudiation, because they would be penalized
by financial markets and lose access to further loans.
Finally, there are concerns that debt repudiation would
encourage irresponsible borrowing by governments in the
expectation that debts might not have to be repaid in the
Concerns about the objectivity of debt audits can be
alleviated by ensuring representation of all key
stakeholders from both the debtor country and the lending
institutions and governments. The credibility of the process
rests on transparency, independence, fair representation,
and appropriate expertise.
The threat of credit rationing is in practice a paper tiger.
Many severely indebted countries currently pay more to their
creditors than they receive as new loans. The result is a
negative net transfer. For these countries, a zero net
transfer would be an improvement.
In addition, a well-executed debt audit can be a mark of
strong and effective national leadership. By freeing
resources from the servicing of odious debt, the government
becomes better able to support productive investments that
will improve its economic performance in subsequent years.
Such positive effects were demonstrated in the case of
Ecuador, which recorded higher growth in the postrepudiation
period, despite condemnations from financiers
who labeled President Correa a 'leftist' and Ecuador a
member of the 'axis of evil' in Latin America' (Anderson and
Watkins 2008). If economic conditions improve, lenders will
in fact return to seek higher returns on their investments.
Finally, repudiation of odious debt, if properly
implemented, is selective rather than indiscriminate.
Creditors who lend in good faith for legitimate projects
have no reason to fear a fair and transparent process, and
no cause to withhold new lending. Indeed by freeing
governments from the burden of servicing illegitimate debts
and strengthening incentives for responsible lending, the
strategy yields a better climate for legitimate borrowers
and legitimate creditors alike.
But if debtor countries are likely to benefit from debt
audits and selective debt repudiations, why have African
governments not taken advantage of this opportunity? If the
process is likely to lead to lower risks in international
lending, a more stable global financial system, and
increased gains from international development assistance,
why have more lenders and donors not supported it?
These are good questions. The answer lies in large part with
leadership. The gains from debt audit and selective
repudiation will accrue mostly in the medium to long term
through improved fiscal governance and economic performance.
Investing in these gains requires a future-oriented
leadership that is committed to the interests of the people.
If, in contrast, leaders are more concerned about meeting
short-term financing needs-or worse, about profiting
personally from more irresponsible borrowing at the people's
expense-it may indeed make more sense to placate the
Lenders and donors, in addition to fearing the write-down of
assets from debt repudiation, may be reluctant to set
precedents even when they believe that some debts are indeed
odious. But such fears that debtor governments may abuse the
privilege of debt repudiation can be alleviated by
establishing an independent international arbitration
agency, as part of the international financial architecture.
Such an agency, the creation of which is long overdue, can
assist in the debt audit process and in the adjudication of
contentious cases of debt repudiation.
Anderson, Sarah, and Neil Watkins. 2008. "Ecuador's Debt
Default." Foreign Policy in Focus December 15. Available at
Economist. 2009 "Ecuador's winning strategy." June 17.
Ecuador, Internal Auditing Commission for Public Credit.
Final Report of the Integral Auditing of the Ecuadorian
Debt. Quito, Ecuador: Internal Auditing Commission for
Public Credit, October 2008. Available at
Ennouri, Anouar. 2012. "Tunisian President Moncef Marzouki
Refuses to Increase Investment in IMF" Tunisia Live, June
Jubilee USA. 2008. Quick Facts: Ecuador Debt Timeline and
Commission Findings. Washington, DC: Jubilee USA. Available
Madraud, Isabelle. 2012. "La Tunisie refuse les dettes
h?rit?es de la dictature." Le Monde, 17 July.
Ndikumana, L., and J. K. Boyce. 2011a. Africa's Odious
Debts: How Foreign Loans and Capital Flight Bled a
Continent. London: Zed Books
Ndikumana, L., and J. K. Boyce. 2011b. "Capital flight from
sub-Saharan African countries: linkages with external
borrowing and policy options." International Review of
Applied Economics 25(2): 149-70.
Sack, A. N. 1927. Les Effets des transformations des ?tats
sur leurs dettes publiques et autres obligations
financi?res. Paris: Recueil Sirey.
Wong, Yvonne. 2012. Sovereign Finance and the Poverty of
Nations: Odious Debt in International Law. Northampton, MA:
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