Author Archives: DianaHulova

Myanmar’s debt: What’s behind the speedy efforts to restructure it?

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by Diana Hulova,

Myanmar (Burma), one of the world’s poorest countries, has been the subject of a number of debt restructuring and relief packages during the past few months. In January, debt owed to the World Bank and the Asian Development Bank was refinanced, and the bilateral creditors organised in the Paris Club followed Japan’s earlier example and agreed to relieve a substantial share of their claims, thereby clearing arrears of “phantom debt” that have piled up over the past decades.

The sudden creditor rush comes as a surprise. Myanmar’s debt indicators were below the International Monetary Fund’s (IMF) thresholds for debt distress, and the country does not appear on the list of the Heavily Indebted Poor Countries (HIPC) eligible countries.  

As Myanmar opens up, multilateral development banks and rich countries are increasingly interested in getting lending and investments back to the country. While the official justifications read that the ongoing transformation processes towards more democracy and a more liberal and deregulated economy shall be rewarded, there remain concerns that new lending will primarily serve the interests of foreign powers and local elites keen to exploit the geo-strategically important countries’ vast natural resources.

A need for the debt audit

The lack of information on the use of loans and their actual beneficiaries prevents us from assessing the legitimacy of creditor’s claims. There are indications that a substantial share of the cancelled debt fulfills the criteria for illegitimate or odious debt. The full picture is unclear however, as data is patchy and thorough project-level impact assessments did not take place.

The country’s debt to Norway, which dates back to Norwegian ship exports of the late 70s, is an example that some of Myanmar’s debt has actually been found to be illegitimate. A thorough debt audit would reveal the necessary information and provide the basis for fair burden sharing in a debt restructuring process.

The messy process demonstrates the need for a comprehensive debt workout

The Myanmar case proves once again that new mechanisms are needed that deal comprehensively with debt workouts – mechanisms that include all creditors along a set of clear criteria. In the Myanmar case, the new loans extended by multilateral development banks will be mostly used to repay the bridge loan provided by Japan, rather than providing fresh money. Different creditor groups negotiated different deals separately. Some bilateral creditors (in this case Norway) cancelled 100%; others (in this case China) did not participate at all in the bilateral debt restructuring.

The impact of the debt relief

The Paris Club debt relief will result in the reduction of about 40 per cent of Myanmar’s total debt, leaving the external debt stock at $9.4 billion. Neither debt relief, nor refinancing by multilateral institutions will free up resources for development and poverty eradication automatically. The main impact of the debt agreements is that they will open avenues for new lending.

Increased access to foreign finance, if used well, can increase a country’s development prospects. However, there must be caution with regards to lending from foreign creditors, so that Myanmar does not fall into a new debt trap. In a country with persisting governance challenges, responsible financing standards need to be strictly applied to ensure that resources are used for the benefit of Myanmar’s population, rather than that of creditors or ruling elites.

Read the full analysis of Myanmar’s debt. 

 

IMF fails to find consensus on quota formula reform

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by Bodo Ellmers,

The comprehensive review of the International Monetary Fund’s (IMF) quota formula failed to find consensus on a clear reform proposal. Controversies persist between the old rich and emerging economies on which factors should determine a country’s quota, and consequently its power in the IMF and access to IMF resources. Many stakeholders have fundamentally challenged the IMF’s plutocratic governance model which gives rich countries the power to decide over the fate of poorer nations and people, and propose alternatives such as a ‘double majority’ voting system which would greatly enhance the legitimacy of the IMF.

Keeping track? IMF quota and quota formula reform

In a new environment where new economic powers are emerging and old powers declining, the IMF has pursued several reform processes to keep up. On the one hand, it has already agreed to redistribute a very small share – less than 3 per cent by independent estimates – of IMF quotas to the marginal benefit of emerging economies. This process is currently stalled, as the initiative awaits approval by the US Congress.

But in parallel, a more fundamental reform of the formula that determines the quotas is ongoing, as part of a larger reform package of IMF governance agreed in 2010.  The IMF was mandated to conduct a comprehensive review of the quota formula, due to be completed in January 2013. The quota formula reform is supposed to reinforce the legitimacy and effectiveness of one of the world’s most influential international organisations, by setting new rules for realigning the member states’ shares with their changing relative position in the world economy.

The reform was pursued half-heartedly at the beginning but gained new traction when in April 2012 the BRICS countries (Brazil, Russia, India, China and South Africa) committed an extra USD 75 billion to the Fund, using a channel which did not increase their share of the votes. But this came under the condition that the IMF embarks on a governance reform process that would give a larger share of votes to the emerging economies.

The quotas’ relevance comes from the fact that they determine a member states’ financial contributions to the IMF, their access to IMF resources, and voting rights within the IMF. In contrast to the United Nations’ “one state – one vote” principle, decision-making at the IMF remains based on the plutocratic “one dollar – one vote” concept. Currently, the quota is mainly determined by a member states’ gross domestic product (GDP, weight of 50 percent). As well as by economic openness measured primarily on the basis of gross financial flows (30 percent), the economic variability (15 percent), and the currency reserves it holds (5 percent). Only complex the so-called “compression formula” helps smaller members to gain some weight. Member states have basic votes too, this gives poorer countries a little more weight, but historically their share of the total has been shrinking thus gradually marginalising their influence.    

The quota formula review: dissent throughout

The IMF Executive Board failed to find a clear consensus at its last meeting on 30 January. All that was achieved, according to the IMF’s official communication, is “identifying key elements that could form the basis for a final agreement on a new quota formula”. The work will have to continue under the 15th General Review of Quotas, due to be completed by January 2014.  

Conflict lines are drawn roughly between three factions: The old economic powers which do not want to see their share of quotas reduced the emerging markets which recently contributed massively to the Fund’s resource increases and want to see their new power reflected in the IMF’s governance structure, and the remaining developing countries which fear being even further marginalised.

The public report from the IMF Executive Board states that all components of the current quota formula were contested during the session.  The positions of different parties are not easy to identify as attributions are not made public, this lack of transparency is part of the IMF’s wider democracy deficit. Some parties argued that purchasing power parity should play a stronger role in calculating a member state’s GDP, and that the voluntary contributions to the IMF should have an influence on the quota too. Both approaches would massively increase the emerging market countries’ share. There was agreement that the voice and representation of the poorest members should be protected, but the report does not contain a clear proposal on how this is supposed to work in practice.   

The IMF Executive Board is missing the point

More fundamentally, many stakeholders including civil society organisations argue that the reform proposals currently debated in the Executive Board are missing the point. All proposals currently discussed remain within the outdated concept that money and economic weight should be the central criteria for determining influence of certain member states in an international organisation. Even under application of these criteria, it is obvious that the old North-Western economic powers need to give space. With a quota of 29.42%, in particular advanced Europe is overrepresented. The US share of 17.69% is justified from the point of view of economic relevance, but this quota gives the USA the privilege of a de facto veto right, as most decisions require a 85% majority. This right of veto by one single member degrades the IMF from an international to a de facto unilateral organisation in which IMF staff and other members are permanently obliged to please just one of the 188 Member States, in order to preempt an exercise of the veto.       

A more fundamental reform of the decision-making system is needed: this should include a double majority system, in which the current quota-based voting system would be complemented by a state-based system. Such a new decision-making process would essentially marry the current “one dollar – one vote” principle with the “one state – one vote” model that is used by the United Nations. The poor but numerous developing countries would gain substantially more influence.  The ongoing ‘gentleman’s agreement’ that ensures that a European is always head of the Fund and an American head of the World Bank was completely ignored by the Executive Board’s review exercise. This carve up of the leadership positions continues to undermine the Fund’s legitimacy as a global institution.

If legitimacy and effectiveness are the quota formula’s stated aims, the governance reform cannot be limited to cosmetic changes that leave the fundamental flaws of IMF decision-making unaddressed. Key step is to move on from the plutocratic governance regime that has distorted the IMF’s operations from when it was founded, right up to today.

 

Paris Club to write off 60 % of its claims on Burma

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by Diana Hulova,

The Paris Club and the government of Burma met in Paris last week to agree on a treatment of the country’s outstanding debts to its western creditors. A deal was agreed, which offers a cancellation of half of Burma’s arrears owed to Paris Club creditors.  

Burma’s debt owed to Paris Club presents two thirds of country’s $15 billion public external debt. The majority of the country’s foreign debt stock is in arrears, which has accumulated since Burma stopped servicing it in 1997. About 80 per cent of the external debt in arrears is owed to bilateral creditors. Burma’s main bilateral creditors are Japan and China. Besides Japan, the five largest Paris Club creditors are Germany, France, Norway, Australia and the UK.

Under the debt deal agreed on Friday, the Paris Club creditors (other than Japan) will provide a 50 per cent write-off of Burma’s debt owed to them in two phases, with the remainder rescheduled to be paid over 15 years, with a 7-year grace period. Moreover, Norway committed to cancel 100 per cent of its $534 million debt owed by Burma. Together with Japan’s $3.7 billion write-off agreed in April last year, the Paris Club debt relief will total $5.9 billion, which is about 60 per cent of its claims on Burma.

As a precondition for the Paris Club debt relief, Burma must first clear its multilateral arrears. On Sunday, the World Bank and the Asian Development Bank (ABD) agreed to clear Burma’s arrears using a bridge loan of $960 million provided by Japan. Subsequently, the World Bank and the ADB have approved their first loans of $440 million and $512 million respectively, which will be used to repay the Japanese loan and finalise the arrear clearance.

These moves are to reward the political and economic reforms initiated by the government of U Thein Sein, who seeks increased donor’s assistance and foreign investment to help boost the country’s economy. Earlier this month, Burma requested the support of the International Monetary Fund in pursuing reforms under the government’s economic program.

A comprehensive debt workout?

The messy way how the arrears are dealt with is proof that new mechanisms are needed that deal comprehensively with debt workouts – mechanisms that treat all creditors equally along a set of clear criteria. From a developmental perspective it makes no sense to use new loans to clear old debts. New loans should provide fresh and additional resources.    

Moreover, the debt relief granted will likely be included in some donors’ aid budgets. In the UK, debt relief will be accounted as ODA, thus shifting huge amounts of money away from development and poverty eradication.

Cancelling illegitimate debt

For civil society groups, debt relief for Burma at this point of time is a mixed bag. Debt relief is a prerequisite to free up resources for development and poverty reduction and would enable Burma to kick-start its development. The lion’s share of Burma’s external debt will probably qualify as odious debt as it comes from loans contracted with oppressive military regimes, and little evidence exists that the people of Burma benefited from these loans. This raises serious concerns about the legitimacy of the donor’s claims. If debt is odious, it should be cancelled as the citizens and taxpayers of Burma cannot be expected to pay back loans taken out by a government that they never formally legitimised in fair and free elections to act on their behalf.

Some argue however that it may be too early to reward the process of democratisation by cancelling the country’s debt. Although some of the government’s progress on reforms cannot be denied, much remains to be done to set the country on its path to democracy and stop the repression against ethnic groups.

The recent debt deals will make Burma eligible for new lending. Although fresh resources are needed for the country’s development, there must be caution with regards to the new loans and investments, to make sure that the debt cycle does not continue and that new resources are used for the benefit of the people of Burma, rather than that of creditors or ruling elites. It is increasingly acknowledged, including by the United Nations, that development borrowing and lending needs to comply with responsible financing standards.

Eurodad briefing on Burma’s debt will be published soon. 

Bodo Ellmers

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Bodo joined Eurodad in 2009 as Policy and Advocacy Officer. He is now leading Eurodad’s work on debt, financial governance, and responsible financing. This involves research and advocacy, coordinating members and liaising with partners. Before he took over this portfolio, he was in charge of Eurodad’s work on aid and governance for several years, leading among others the campaigns on the OECD aid effectiveness process and the UN Development Cooperation Forum.
 
Before Bodo joined Eurodad, he was the Policy Officer of “Deine Stimme gegen Armut”, the German branch of the Global Call to Action against Poverty campaign which is hosted by the national NGO platform VENRO. He also worked as an independent advisor for different civil society organizations such as Concord, VENRO, Global Policy Forum Europe, Eurodad member WEED, and for the UN Millennium Campaign.
 
Bodo has studied political science and development economics at Free University Berlin. German is his mother tongue, he is proficient in English, and speaks some Spanish and French.  

Exportable? – How To Make The Norwegian Debt Audit Transferable To Other Countries

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Eurodad member the Norwegian Coalition for Debt Cancellation (SLUG) has recently launched the report “Exportable? – How to make the Norwegian debt audit transferable to other countries.” The report takes a quick look at debt audits throughout history, explores weaknesses and strengths in the Norwegian model, and outlines what elements of this model need to be changed in order to make it transferable to other countries.

The first ever creditor debt audit: Will it set precedence?

In the summer of 2012 the Norwegian government announced that it would carry out the first ever creditor debt audit. This means that the government will audit developing countries’ debts owed to Norway, in order to evaluate Norway’s co-responsibility for the contraction of these debts. The debt audit is an important step towards increased creditor co-responsibility. It is also a step in the right direction towards establishing a relationship based on mutual respect between Norway and the citizens of the debtor countries, who are ultimately the ones repaying the debt. Additionally, it can identify flaws in current lending practices and promote responsible lending practices. If other creditors follow Norway´s example, this initiative could be a watershed in international finance.

Perspectives from Tunisia on the Norwegian model

Tunisians have been debating the launch of their own debt audit ever since the Jasmine revolution of January 2011, which resulted in the ousting of the dictator Zine El-Abedine Ben Ali. This report therefore presents Tunisia as a case study, as it is an example of a country that the Norwegian audit could be transferable to. This report presents views from the Tunisian civil society, parliament, government, central bank and academia on the transferability of the Norwegian debt audit to other countries.

The perspectives from Tunisia illustrate that there is no single way forward when it comes to debt audits. Disagreements are to be found on whether the audit should be separated from a debt cancellation process, on the scope of the audit, on the breadth of the steering committee, as well as on the methodology. These issues are discussed in depth, and are relevant for other countries that wish to carry out debt audits as well.

Gaping deficiencies

Worryingly, the perspectives from Tunisia show that the Norwegian debt audit has some serious deficiencies as a model for other countries. Employing a methodology based on a desk study is pointed out as insufficient in the case of Tunisia, as the effects of the loans on the ground need to be evaluated. Additionally, corruption in loan-funded projects needs to be investigated by following the money through the procurement processes. Furthermore, it is difficult to understand how social and environmental implications will be considered by studying contracts and documents in an office in Oslo, Norway. These deficiencies will not just make the audit less transferable to Tunisia and other countries; it will also weaken the legitimacy of the findings of the audit.

Timely to audit export credit debts

With debt crises now affecting many major creditors in the US and Europe, there is hope that creditors will take measures to ensure better regulation of lending and borrowing across borders. The Norwegian debt audit examines debt that originates from export credit guarantees. This is of great importance to developing countries as today almost 80 percent of poor countries’ debt to other governments comes from export credits, not development loans.

In a time when many OECD countries are issuing more export guarantees than ever in order to boost their domestic industries, Norway examining its practices to determine if they are in line with UN Principles for responsible lending is timely and internationally relevant. Thus, the Norwegian debt audit can be an important first step towards more responsible practices for export credit agencies.

Download the Exportable report.

Reforming sovereign debt management: Big bang or incremental steps?

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by Diana Hulova,

As the debt crisis in Europe and the Global South moves into a new year, Eurodad and German member organisation Erlassjahr organised a seminar on global debt management in Berlin. I attended the seminar which brought together civil society, academics and some government officials to debate the current global governance of sovereign debt crises and the idea of establishing an international debt workout mechanism.

A new debt management structure urged

The workshop was timely coming amidst increasing calls for alternative solutions to sovereign debt problems, which continue to be a major challenge for global financial stability. The debt crisis hitting hard in Europe and the Global South and the rising vulnerabilities of indebted countries are a proof of the shortfalls of the current approaches for dealing with sovereign debt problems.  Current structures are messy and unpredictable, and do not respond to new realities, such as the more complex debt structures resulting from the wider range of creditors and debt instruments which now exist. This complexity underlines the need for a debt workout mechanism that is able to deal comprehensively with all stakeholders, thus avoiding such risks as vulture fund activity.

As we were debating new debt workout mechanisms at the seminar, the Financial Times published an article on how Argentina’s legal battle with vulture funds has shed a light on the weaknesses of the current approaches and increased calls for a more systematic framework to deal with sovereign debt crises. If the New York Court ruling in favor of vulture funds is enforced, the consequence would simply be more power in the hands of creditors. The FT article concludes: “it is time to revisit the sovereign debt restructuring mechanism proposed by the IMF in 2002.”

It was in the middle of the Argentine crisis (2001-2003), when the International Monetary Fund (IMF) came up with the sovereign debt restructuring mechanism (SDRM) proposal which, however failed in getting political support. Today, amid the growing calls for revisiting the IMF proposal, it is important to reflect on the role of the IMF in this process. If impartiality and neutrality should be the underlying principles of a new mechanism it is doubtful that the IMF would be an appropriate host institution. No lending institution can ever be an impartial judge in debt disputes.

Multiplicity of reform proposals

Besides the SDRM, many other reform proposals have been tabled by civil society, academia, the UN, and even the private sector. These range from ad-hoc proposals for debt arbitration mechanisms to the permanent debt courts under auspices of the UN, the Permanent Court of Arbitration in Hague or other neutral bodies. Despite the lack of agreement on the institutional set up of a debt restructuring mechanism, there has been a consensus among many experts on a number of fundamental principles that should govern such mechanism.

Civil society groups call for a mechanism that is comprehensive, fair and transparent, and that includes structures to provide for independent judges as well as independent assessment of the legitimacy of creditor’s claims. But the financial crisis showed that it is mainly reckless lending which leads to recurring debt crises, the new architecture for sovereign debt management should also enshrine preventive measures such as the responsible lending and borrowing standards, which are set out in the Eurodad Responsible Finance Charter and the Afrodad Responsible Finance Charter.

It’s time to advance the agenda

The long history and politicisation of this debate, as well as the past failures of proposals such as the SDRM, give the impression that the establishment of a sovereign debt restructuring mechanism is a challenging task. Even some participants at the seminar argued that CSO-anticipated “big bang” in sovereign debt management is unlikely to happen.

However, civil society groups meeting in Berlin agreed on some important steps to capitalise on various opportunities at the UN, and the upcoming G20 meetings. Despite some resistance from the USA, Brazil and China, the prospects for getting the debt issue on the St. Petersburg’s agenda are promising. There is also room for CSO participation as Russia is opened to an interactive process with global civil society ahead of the summit. The G20 process is an opportunity to secure political commitment from some of the world’s biggest debtors and creditors. However, a new global debt governance system should be endorsed by all nations in order to be globally applicable. That is why the processes at the UN are encouraging. In October, delegates from 150 countries agreed on the need for a new mechanism at the Special Event at the UN General Assembly. The event was an initiative of UNCTAD, whose work on the design of a debt workout mechanism and the implementation of responsible lending and borrowing principles offers another important window of opportunity.

The ongoing Eurozone crises and the disastrous crisis management that did not cushion the negative social and economic consequences have also triggered debates on the need of new debt management architecture. 2013 thus offer good prospects for advancing the work on a fair and transparent debt workout mechanism.  

How Export Credit Agencies create debts and inflate aid budgets: the example of Sudan

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Export credit debts constitute the largest component of the external bilateral debt of developing countries. Last year, Eurodad research revealed that almost 80% of poor countries’ debts to European governments come from export credit guarantees, which are in most cases driven by commercial, not development objectives.[i] The weak responsible finance standards for Export Credit Agencies (ECAs) fail to prevent the harmful development and environmental impacts of their activities and allow for creation of often illegitimate debts in developing countries.

Moreover, when developing country debts are cancelled, ECAs are compensated for their losses, using Official Development Assistance (ODA). As a result, huge amounts of money are being transferred from aid budgets to boost the coffers of ECAs, draining away resources much needed for poverty eradication. Between 2004 and 2005 global ODA increased by 69 per cent, largely as a result of the cancellation of old export credit debts to Iraq and Nigeria.[ii]

The next export credit debt cancellation?

Sudan, one of the biggest debtors of European ECAs, is likely to be the subject of an export credit debt cancellation that draws money away from aid. Sudan’s external debt stock is estimated at $37.8 billion.[iii] About 70 per cent ($26.4 billion) is owed to other governments.[iv] Although data is difficult to obtain, it is estimated that the majority of Sudan’s external debt is created by export credit guarantees.

Most of Sudan’s debt is made up of interest accumulated since 1984 when the country stopped servicing its debts. The donors are charging exceptionally high interest rates of 10 per cent or more.  The interests and penalties constitute at least 90 per cent of Sudan’s total $11 billion debt to Paris Club Creditors.[v]

The process of negotiations on how to split the Sudan’s national debt has been delayed due to the ongoing conflict between Sudan and South Sudan. Earlier this year Khartoum has offered to assume all external debt liabilities in return for both countries working jointly on reaching out to international creditors to secure debt relief.[vi] However, if governments decide to cancel these non-performing debts made up of arbitrary high interest rates, the aid budgets will be used to cover losses incurred by their national ECAs. In practice, this will mean that aid money will be transferred from development ministries to trade and finance ministries instead of being channeled for poverty eradication.

Sudan’s debt to the UK

Despite claiming for many years that the origins of loans were unknown, UK Export Finance (UKEF) has recently published data on the original amount of debts owed to them by developing countries. Data shows that the original debt owed by Sudan is $208 (£130 million), 55 per cent of which comes from export loans for vehicle spare parts and industrial plants and machinery.[vii]  The UK is charging interest rates of about 10 to 12 per cent annually, which results in significant increases of this debt. The debt owed to UKEF by Sudan currently stands at around $1 billion (£681 million), three quarters of which is interest accrued since 1984.[viii]

The UK’s Department for International Development confirmed that if Britain writes off the debt owed by Sudan, this money will be accounted for as aid. Eurodad member Jubilee Debt Campaign has calculated that if the UK cancelled the debt owed by Sudan in 2014 the debt relief would total $1.18 billion (£740 million), inflating the UK aid budget by seven percent.  This means that significant amounts of money will be shifted away from real aid, and used instead to boost the UK’s export industry.

The same would apply to other western countries, like Denmark, to which Sudan owes huge debts as a result of export credit guarantees. The cancellation of Sudan’s unsustainable and unjust debts is much needed. However, the aim of debt cancellation should be to free up public resources for essential services and development rather than to subsidise the export industries of rich countries. 



[i] Eurodad, 2011: Exporting goods or exporting debts? Export Credit Agencies and the roots of developing country debt.
http://eurodad.org/uploadedfiles/whats_new/reports/exporting%20goods%20or%20exporting%20debts_final%20for%20print.pdf

[ii] World Bank, 2008: Aid architecture: An overview of the main trends in official development assistance flows. http://siteresources.worldbank.org/IDA/Resources/Aid_Architecture-May2008.pdf

[iii] IMF, 2010: Sudan, Article IV Consultation. http://www.imf.org/external/pubs/ft/scr/2010/cr10256.pdf

[iv] The remaining balance is almost equally divided between multilateral and commercial creditors.
IDA and IMF, 2010: Sudan Joint World Bank/IMF 2009 Debt Sustainability Analysis, http://www.imf.org/external/pubs/ft/dsa/pdf/dsacr10256.pdf

[v] According to the Norwegian Ministry of Foreign Affairs at a meeting with Norwegian NGOs, September 2011

[vi] If the two countries fail to secure a commitment from the creditors on debt relief, new negotiations would start on how to split up the debt liabilities, which is a problematic issue as Juba claims the loans taken by Khartoum were used primarily for financing military efforts during the north-south civil war.

[vii] UK Export Finance’s sovereign debt data, 2012. http://www.ukexportfinance.gov.uk/assets/ecgd/files/publications/plans-and reports/sovereign-debt-data/ukef-sovereign-debt-data.pdf

 [viii] UK Export Finance Submission to the All Party Parliamentary Group Inquiry into UK Export Finance. appgicr.files.wordpress.com/2012/07/ukef.docx

 

 

Generating terror: The role of international financial institutions in sustaining Guatemala’s genocidal regimes

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Eurodad member Jubilee Debt Campaign has published a new report which examines the way that western-backed institutions, such as the World Bank, supported the government of Guatemala as it terrorised its own people in the late 1970s and early 1980s.

Although the story of Guatemala’s genocidal regimes has been told before, and individual projects have been extensively criticised, there has not been an attempt before to analyse the role that debt and lending from International Financial Institutions played in supporting these governments.

The report finds that:

  • There was a very dramatic increase in lending to Guatemala in the late 1970s and early 1980s – the period of the highest wave of terror in the country. Loans of over $100 million a year were made in 1978, 1979 and 1980, and then over $300 million a year in 1981 and 1982 at the height of the terror. By 1985 the country’s debt had reached $2.2 billion – an increase of over $2 billion in 10 years.
  • The most significant element of this lending was accounted for by multilaterals like the World Bank, which reached nearly three-quarters of total debt in some years. From 1977 to 1982, multilateral institutions were responsible for 60 per cent of the lending to Guatemala. By the time the peace agreement was signed in 1997, Guatemala was repaying multilateral institutions nearly $130 million a year, rising to over $400 million today.
  • One project funded by the World Bank and the Inter-American Development Bank, the Chixoy Dam, was a major factor in the massacre of 400 people, mass displacement, torture, rape and starvation. Despite these horrific events, the banks gave further support to the project 7 years later.
  • The Guatemalan government appears to have repaid almost all of the loans that funded the Chixoy Dam, costing the country significantly more than was lent because of interest charges. Some of the debt remains on the books in ‘recycled’ form, as Guatemala was given new loans to repay old debt. These new loans were conditioned on implementing economic policies which opened the country to international corporations.
  • Although there is acceptance by government and institutions involved that communities affected by the construction of the Chixoy Dam should receive reparations, they have yet to be compensated. Moreover, no wider reparations have been agreed for the odious lending that sustained Guatemala’s governments during the period of terror.
  • Few broader lessons appear to have been learnt by the World Bank, as Guatemala’s economy today is opened up to massive mining operations and mega-dams that threaten to further impoverish people.

Guatemala remains a highly impoverished and unequal country, its people subject to high levels of violence, discrimination and human rights abuses. Unlike the majority of countries in Latin America, the number of people living in poverty in Guatemala has increased in recent years from 51 per cent in 2006 to 53 per cent in 2011. Tax revenue remains the lowest in Central America – which itself has the lowest tax revenue of any region in the world.

The report calls for:

  • All projects from the period from 1954 onwards – and especially between 1978 and 1997 – to be audited. Payments on all loans from this period should be immediately suspended.
  • Projects such as the Chixoy Dam should be audited so that proper reparations can be made to those affected and to the Guatemalan economy as a whole.
  • There must be an audit of all ongoing mega-projects, driven by the communities who are being or will be affected, to see whether and on what terms they should continue.

The resistance taking place to mines and dams in Guatemala, and the experiments with popular forms of consultation and democracy which have come out of this resistance, is a cause for great hope. But Guatemalans have a long way to go to combat the racism, poverty and injustice that confronts them. The world has a duty to stand with Guatemala’s people.

Read the report Generating terror

Also available in Spanish:  El origen del terror

Ethical Deficit: How requiring transparency from borrowers can make the Norwegian Government Pension Fund Global a more responsible lender

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Eurodad member SLUG has launched a new report “Ethical Deficit” on the Norwegian Sovereign Wealth Fund’s investments in government bonds.

This summer the Norwegian Minister of International Development announced that the Norwegian Government would carry out the first ever creditor debt audit. It is important to note, however, that while the debt covered by the Norwegian audit is less than 1 billion NOK owed by 7 countries, Norway has outstanding loans held by the Norwegian Government Pension Fund Global (GPFG, or the Oil Fund) worth 600 billion NOK, spread across 44 different countries.

The debt owed to the Norwegian Oil Fund is in the form of government bonds, which makes up about 17% of the Fund’s portfolio. The rest is invested in companies and businesses, based on comprehensive ethical guidelines that ensure the Oil Fund a first place on the Truman Scoreboard for Sovereign Wealth Funds year after year. The Truman Scoreboard ranks Sovereign Wealth Funds’ management and governance, considering structure, governance, accountability, transparency and behavioral rules. Less well known is it that investments in government bonds, which mean practically lending to another country, are not covered by these guidelines, or any form of rules for responsible investment or responsible lending. The only guideline for these investments is that the Fund cannot purchase bonds from countries that are subject to international sanctions that Norway support. To this date, this only applies to Burma.

The need for regulation

The financial crisis of 2008 and the ongoing debt crisis in Europe have illustrated that irresponsible lending and borrowing does not only affect poor countries. Up until now, the international market for lending and borrowing has largely been excluded from international regulation. This does not, however, legitimize that the Norwegian Oil Fund’s lending is exempt from guidelines for responsible lending.

On the contrary, in order for Norway to live up to its goal of being a responsible creditor, the government should take the lead as a responsible lender and ensure that accountability criteria are applied to all investments in government bonds made by the Oil Fund. This would be a logical extension of the government’s efforts to promote responsible lending and creditor co-responsibility.

In the report “Ethical Deficit”, Leon Du Toit explains how requiring transparency from borrowers can make the Norwegian Government Pension Fund Global a more responsible lender. Today, there is no guarantee that the Oil Fund is not investing in illegitimate debt. Du Toit examines various dimensions of transparency, and applies measures of these dimensions to China and South Africa.

Read the “Ethical Deficit” report

Scale of UK arms loans to dictators revealed for first time

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Ed Davey may have misled parliament over Egypt’s dictator debts

5 Nov 2012 – The UK coalition government’s official export credit insurer UK Export Finance has revealed information about the origin of ‘Third World Debts’ owed to the UK for the first time.1 The new figures show that three-quarters of Indonesia’s £400 million debt comes from loans for military equipment. This includes exports of aircraft and tanks later used against the Indonesian people – who currently pay £50 million a year on this debt. 

The figures only reveal the proportion of debts by sector, not details on the actual exports and projects supported, nor the dates they took place.

Around a quarter of Egypt’s debt of £95 million comes from loans for military equipment. The UK government is still demanding that Egyptian people should pay this debt, which was inherited from General Mubarak. £14 million is being paid this year alone.

Almost 70% of Kenya’s debt comes from loans for ‘power sector projects’. These are thought to be loans for British companies to work on the Turkwel Dam in the 1980s. At the time, the European Commission noted the Kenyan government was paying double the competitive price, because of “high personal advantages” for politicians.2

Tim Jones, policy officer at Jubilee Debt Campaign, said:

“For years the UK government has claimed it is not possible to find out where debts come from. The figures released today show this was a lie. They reveal a past history of horrendous loans to dictators such as General Mubarak, General Suharto and Saddam Hussein for military equipment. People in these countries should not have to pay these unjust debts.”

The Liberal Democrats have a policy, which is to “conduct our own audit of all existing UK government and commercial debts, ruling invalid any past lending that was recklessly given to dictators known not to be committed to spend the loans on development”.3 In August, the Norwegian government announced it is auditing all the debt owed to it.

Until now, the UK government has often said that finding out this information is not possible. For example, in February 2011, when asked about the debt owed by Egypt, then Business Minister Ed Davey misled parliament when he said: “Details of the goods or services supplied under the individual contracts are no longer held nor the specific amount of outstanding debt under each contract.”4

Tim Jones, policy officer at Jubilee Debt Campaign, said:
“Vince Cable should implement Liberal Democrat policy and hold a full audit into these debts, to find out what the real impact of the projects was in the countries concerned. The government should then cancel all those debts which are unjust, which did not benefit the people who are now repaying them. Furthermore, steps need to be taken, such as ending loans for arms sales, so that unjust debts never arise again in the future.”

FURTHER INFORMATION

For more information, contact Tim Jones at the Jubilee Debt Campaign on + 44 (0)7817 628916.

The figures released on 5 November show that:

  • 38% of Argentina’s debt comes from loans for military equipment. Previous research by the Jubilee Debt Campaign revealed that, in the late-1970s, the UK government lent the brutal Argentinian dictatorship money to buy two warships, helicopters and missiles, which were later used to invade the Falkland Islands.
  • 56% of Ecuador’s debt comes from loans for military equipment.
  • 23% of Egypt’s debt comes from loans for military equipment. Previous research by Jubilee Debt Campaign has revealed loans for military equipment to dictators Sadat and Mubarak in the 1970s and 1980s.
  • 74% of Indonesia’s debt comes from loans for military equipment. This includes aircraft and tanks used by General Suharto against Indonesian people in 1998. The Foreign Secretary at the time, Robin Cook, admitted weapons supplied by Britain were used against civilians.
  • 11% of Zimbabwe’s debt comes from Land Rover vehicles, which were later used in internal repression.
  • Only 1% of Iraq’s debt is said to come from military equipment. However, the Scott Report and investigations by journalists have previously revealed that some exports were classified as exports such as construction, which were actually used for activities such as building a chemical weapons factory.

Notes

1. http://www.ukexportfinance.gov.uk/publications/plans-and-reports/sovereign-debt-data

2.http://www.jubileedebtcampaign.org.uk/REPORT373A3720The3720Department3720for3720Dodgy3720Deals+6700.twl

3. Liberal Democrats. (2010). Accountability to the poor: Policies on International Development. Policy Paper 97.

4.http://www.theyworkforyou.com/wrans/?id=2011-02-09a.38816.h