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.
It is not clear if sufficient courage will be summoned to even include the loans from the international organisations and significant and powerful donor countries. However, this is vital as nearly 45% of Bangladesh’s debt is owed to multilateral organisations, such as the Asian Development Bank (ADB), the World Bank and the International Monetary Fund (IMF), whereas about 27% of the total loans is from bilateral donor countries, such as Japan and European Union.
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.
The CAIC’s mandate was to conduct a comprehensive audit of the debts accumulated by Ecuador between 1976 and 2006. The term “comprehensive” is very important because the audit needed to avoid being limited to an accounting analysis of the country’s indebtedness. It was fundamental to measure the human and environmental impact of the policy of indebtedness.
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.
