Bangladesh’s White Paper committee will review foreign loan deals signed by the fallen kleptocratic regime. We recommend that it identifies and declares the loans or portions of loans that did not benefit the nation as unpayable, because they were siphoned off the country by corrupt politically powerful elites, or worse used to buy deadly weapons and surveillance equipment to oppress people. Such loans are “odious” – they stink and are detestable.

Anis Chowdhury

These multilateral organisations and countries continued to irresponsibly provide life-lines to the autocratic Hasina regime despite fully knowing the regime’s wide-scale corruption and gross abuse of human rights, including suppression of democracy. It was public knowledge that the kleptocrats took large sums of ill-gotten money illegally out of the country.

Bangladesh can learn from Ecuador in dealing with these powerful organisations and significant donor countries with a view to cancelling or substantially reducing its odious debt burden.

Ecuador’s bold steps
Ecuador provides an example of a government which officially decided to investigate the process of indebtedness in order to identify its illegitimate debts and to make its debts sustainable for the sake of development. In July 2007, about seven months after winning the Presidency, President Rafael Correa created the Comisión para la Auditoria Integral de la Deuda Pública (CAIC – Comprehensive Public Credit Audit Commission). Rafael Correa’s idea was to take action to end repayment of a portion of the debt identified as fraudulent and illegitimate.

The Commission included representative of Ecuador’s social movements (e.g., indigenous peoples, feminists, labour unions and social-environmental activists) as well as international campaigners for cancellation of illegitimate debts. The government side was represented by the Ministry of Finance, the Comptroller’s Office, the Anti-Corruption Commission and the Public Prosecutors’ office.

Khalilur Rahman

Starting in November 2008, Ecuador suspended repayment of a large part of its debt deemed “odious”. Specifically, the country ended payment of interest due on the Ecuadorian securities traded on Wall Street amounting to approximately US$3.2 billion.

Quite unsurprisingly, the international financial press fed a lot of negative publicity and fear mongering that the action would severely impact Ecuador’s credit rating and foreign investment. However, in June 2009, the holders of 91% of the bonds in question accepted the Ecuador government’s proposal to buy them back at 35% of face value.

Thus, Ecuador repurchased US$3.2 billion worth of debt while disbursing US$900 million. This meant a saving of US$2 billion on the capital due, and the savings on the interest that would no longer had to be paid. The total amount saved is a little over US$7 billion.

Rafael Correa declared in his inaugural speech on 10 August 2009 that this “means a gain of more than US$300 million annually over the next 20 years – amounts that will go not into the creditors’ portfolios but will go to national development”.

Positive impacts
The debt reduction enabled the government to greatly increase social expenditures, in particular in the areas of health and education. Between 2007 and 2017, the Correa Government doubled social spending. By 2016, poverty had been reduced by 41.6%. Inequality, measured by the Gini coefficient, had fallen by 16.7%.

Despite predictions of chaotic and painful days ahead by the international financial press, nothing bad happened. Ecuador’s victory over its private foreign creditors was total. When the country decided a few years later to issue new debt securities on the financial markets, the investors crowded in to buy them. That is because they were convinced that the country’s situation had improved.

Lessons for Bangladesh
Bangladesh is not included in the list of debt-distressed countries and the latest IMF-World analysis finds Bangladesh’s external debt sustainable. The World Bank’s Country Director Abdoulaye Seck has recently said that the Bank is not concerned about Bangladesh’s debt payments.

However, concerned observers believe that the situation can quickly turn into a debt crisis. Thus, urgent actions are needed, including identifying odious debts and refusing the illegitimate obligation to repay them.

It is arguably unprecedented for a sovereign with a sustainable level of debt to refuse to honour existing obligations. President Rafael Correa asserted that this action was justified because these obligations were illegitimate.

Bangladesh must argue the same. We have good reasons to believe it will. Unlike Sheikh Hasina’s former Finance Minister Abul Maal Muhith, who famously declared that embezzlement in the order of US$ 40 million from the banks amounted to nothing, the Head of the Interim Government Prof. Yunus regards every taxpayer penny as valuable. We trust he will not hesitate to lead from the front.

In pursuing the matter, the government must not be discouraged to act for fear of pushbacks, especially when the parties mostly affected involve multilateral financial institutions.

Nevertheless, Bangladesh does not have to take a hostile position as Ecuador did when it declared the World Bank’s country representative as a person non-grata and expelled him, and withdrew from the World Bank’s International Centre for Settlement of Investment Disputes (ICSID). A more measured approach involving quiet negotiations should yield considerable benefits.

As a practical step, the Interim Government should immediately request the UN Secretary-General to set up an UN-led independent commission to review all debts incurred by the repressive autocratic regime that it replaced.

Actions on odious debt are absolutely doable and will not only provide Bangladesh additional fiscal resources for urgent social programmes, but also will incentivise all types of lenders to act responsibly. It will also give the lenders an opportunity to clear their names.

While Ecuador’s case was unique in dealing with commercial lenders in contemporary history, Bangladesh’s firm stance on odious debt will be an exceptional case involving official lenders – both multilateral and bilateral. Both Bangladesh and Ecuador cases can be powerful examples of ensuring developing countries’ debt sustainability and continued socio-economic progress.

Anis Chowdhury, Emeritus Professor, Western Sydney University (Australia) & former Director of UN-ESCAP’s Macroeconomic Policy & Development Division.

Khalilur Rahman, former head of economic, social and development affairs at the Executive Office of the UN Secretary-General; former head of UNCTAD’s Technology Division and Trade Analysis Branch and its New York Office; founder of East West University, Bangladesh.

IPS UN Bureau

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Bangladesh has become increasingly indebted since 2009. The country’s external debt stock increased from US$23.3 billion in 2008 to US$100.6 billion in December 2023 (see figure below). Thanks to the country’s mega-projects led so-called development with borrowed money under the now deposed authoritarian regime of Sheikh Hasina.

Anis Chowdhury

Odious debt is a concept in international law that refers to debt “incurred by rulers who borrowed without the people’s consent and used the funds either to repress the people or for personal gain”. There are moral, economic and legal arguments for not re-paying the odious portion of debts.

Autocrat’s debt bonanza
Bangladesh’s average external debt stock jumped from US$10.7 billion over more than 3 decades (1972-2008) to US$52.6 billion during 2009-2023 when Hasina’s autocratic regime consolidated power by unprecedented machinating three consecutive elections, making State institutions partisan and unleashing brutal repressions.

Corruptions, money laundering, and poor project management as well as selections meant that the revenue flows or returns from these mega-projects are far less than what is required for servicing the debt. Gross external debt-GDP ratio increased from around 28% in 2016 to around 37% in 2023. Likewise, external debt-export earnings ratio increased from 56.3% in 2016 to 116.6% in 2023. These key indicators indicate that Bangladesh is heading for a corruption induced debt crisis, temporarily given respite by the International Monetary Fund (IMF).

The IMF’s loan will have to be repaid with interests; paying debts by borrowing; or using one line of credit to pay for another line of credit cannot be sustained for long. There are better ways to deal with unstainable debts, especially when the indebtedness is due to creditors’ continued lending despite well documented evidence that the borrowed money is misused and siphoned off the country.

Khalilur Rahman

Such debts are odious, and violet the “Principles on Promoting Responsible Sovereign Lending and Borrowing”, developed by the United Nations Conference on Trade and Development (UNCTAD). These Principles demand that lenders refuse to lend to the regime, thus preventing wasteful or harmful spending. These Principles not only make a repressive regime less likely to survive, but also ensure debt sustainability.

Core international legal norms and principles, such as Good Faith, Transparency, Impartiality, Legitimacy and Sustainability are applied in the UNCTAD Roadmap and Guide to Sovereign Debt Workout Mechanisms and in the UN General Assembly resolution A/RES/69/319 on Sovereign Debt Restructuring Processes, adopted in September 2015.

Moral, economic and legal arguments for repudiating odious debts
The prospect of yoking innocent generations of citizens to the repayment of a corrupt and repressive regime’s profligate debt is simply distasteful; morally repugnant; economically untenable, and legally indefensible.

The moral case for repudiating odious debts arises from the premise that some regimes are so repugnant that they should be actively condemned by the international community. The world should not stand by silently as a regime murders its own people or loots the country’s wealth while ordinary citizens starve.

The economic justification for repudiating odious debts rests on the prospect of increasing the welfare of the country in at least three ways: (1) there will be a lower debt burden to service; (2) odious regimes, which reduce welfare, are less likely to emerge; and (3) should they emerge, they are less likely to survive for a long time.

The legal argument for repudiating odious debts is consistent with the accepted view that equity constitutes part of the content of “the general principles of law of civilized nations”, one of the fundamental sources of international law stipulated in the Statute of the International Court of Justice. Thus, the international law obligation to repay debt can never be absolute, and has been frequently limited or qualified by a range of equitable considerations, some of which may be regrouped under the concept of “odiousness.”

In many countries legally individuals do not have to repay if others fraudulently borrow in their name, and corporations are not liable for contracts that their chief executive officers or other agents agree to without any authority.

An analogous legal argument is: sovereign debt incurred without people’s consent and not benefiting the people should not be transferable to a successor government, especially if creditors are aware of these facts in advance.

Historical precedence
The doctrine of odious debt originated in 1898 after the Spanish-American War. The United States argued during peace negotiations that neither it nor Cuba should be held responsible for debt the colonial rulers had incurred without the consent of the Cuban people and not used for their benefit.

Other historical cases of repudiating odious debts include: Soviet repudiation of Tsarist debts; Treaty of Versailles (1919) and Polish debts; Tinoco arbitration (1923) – (Great Britain vs Costa Rica); German repudiation of Austrian debts (1938); Treaty of Peace with Italy (1947).

In recent decades, major shareholders forced the IMF to cut all lending to the former President of Croatia, Franjo Tudjman, in 1997, after he was accused of resorting to political violence and appropriating public funds.

The Khulumani Support Group, representing 32,000 individuals who were “victims of state-sanctioned torture, murder, rape, arbitrary detention and inhumane treatment” filed a law suit in 2002 in the New York Eastern District Court against 8 banks and 12 transnational companies demanding apartheid reparations.

In 2003, the concept of odious debts was used by the US to argue for cancelling Iraq’s debts of over US$125 billion incurred by Saddam Hussain after his overthrow. It was argued that such debt not only impeded a successful rebuilding of post-authoritarian States, but that the debts were never legitimate inheritances of the new government.

Treasury Secretary John Snow held “the people of Iraq should not be saddled with those debts incurred through the regime of a dictator who has now gone.” Undersecretary of Defence Paul Wolfowitz emphasised that much of the money borrowed by the Iraqi regime had been used “to buy weapons and to build palaces and to build instruments of oppression.”

After an evaluation, the Government of Norway in 2006 determined that obligations arising out of lending to certain developing countries as part of the Ship Export Campaign of 1976–1980, and guaranteed through the Norwegian Institute for Export Credits, should be cancelled on grounds that Norway ought to share responsibility with debtor countries for the programme’s failure.

The Norwegian case is not an example of “odious debt”, but is due to the notion of co-responsibility and reflect the idea that repayment may be subject to broader considerations of the equities of the debtor–creditor relationship.

What needs to be done
The Interim Government of Bangladesh should immediately put a stop to external debt servicing and request the UN Secretary-General to set up an UN-led independent commission to review all debts incurred by the repressive autocratic regime that it replaced. The UN-led review commission must not include lenders – multilateral and bilateral – due to likely conflict of interest, especially when they irresponsibly continued to lend to the regime, knowing its corruptions and usurpation of democracy.

This requires political will as powerful countries and international financial institutions may be offended.

The people have expressed their strong will to build a new country based on the principles of accountability, fairness, equity, inclusiveness and justice.

The burden of odious debts of the repressive regime and irresponsible lendings must not weigh on rebuilding of a new Bangladesh.

Anis Chowdhury, Emeritus Professor, Western Sydney University (Australia) & former Director of UN-ESCAP’s Macroeconomic Policy & Development Division.

Khalilur Rahman, former Secretary of the UN Secretary-General’s High-level Panel on Technology Bank for LDCs; former head of UNCTAD’s Trade Analysis Branch and its New York Office.

IPS UN Bureau

 

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