’Flood-hit Pakistan has the right to repudiate external debt’

27 August 2010 by Abdul Khaliq , Adnan Farooq

By ’state of necessity’ we mean a situation that jeopardizes the existence of a state. A natural calamity creates this state. Pakistan is passing through this state and has the just right to deny repaying its debts owed to IFIs, countries and clubs.

Pakistan must refuse debt servicing on external debt. In view of the devastation caused by floods, Pakistan has legal right to repudiate debt,’ says Khaliq Shah. He is Focal Person of Committee for Abolition of Third World Debt (CADTM), Pakistan chapter. The CADTM is an international network of individuals and local committees from across Europe and Latin America, Africa and Asia. It was founded in Belgium on 15th March 1990. It is a member of the international council of the World Social Forum. For further details, see http://www.cadtm.org/

Adnan Farooq : Can a country refuse paying back debts when hit by a natural calamity? If so, which institutions it can refuse? IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

, World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

, private banks, donor countries?

Abdul Khaliq: There are several arguments in internal law that can be invoked as legal justification to refuse the external debt. One of these justifications is called ’state of necessity’. By ’state of necessity’ we mean a situation that jeopardizes the existence of a state or its economic/political survival.

Such situations are symbolized by circumstances under which it becomes impossible to fulfill the very basic needs of the populations that is to say health, education, food, water, housing etc. The ’state of necessity’ justifies the repudiating of debt, since it implies establishing priorities among different obligations of the state. Therefore, a natural calamity creates the factor of “state of necessity”. There is no doubt Pakistan is passing through this state and has the just right to deny repaying its debts, owed to IFIs, countries and clubs.

The UN Human Rights Commission has adopted numerous resolutions on the issue of debt and structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/
. One such resolution, adopted in 1999, asserts that ’The exercise of the basic rights of the people of the debtor countries to food, housing, clothing, employment, education, health services and a healthy environment cannot be subordinated to the implementation of the structural adjustment policies, growth programs and economic reforms’.

Right now the state of Pakistan is no longer able to fulfill fundamental human needs of its 20 million citizens, therefore, she is unable to repay or service its debt responsibilities. Are IFIs and our creditors expecting Pakistan to close its schools, its hospitals, its courts and abandon the public services, creating chaos and anarchy in the communities? Simply we do not have the money to repay our foreign and national creditors.

Yes we can refuse to repay all IFIs, creditor countries and banks. The first and foremost thing in such circumstances (state of necessity) is the fulfillments of the all fundamental human needs of the populations hit by natural calamities and disasters. So this is high time for Pakistan to stand up to creditors and says a big NO. We already lost such just opportunity in 2005 when a devastating earthquake destroyed Kashmir and parts of Pakhtoonkhwa province.

What about the role of charities. They immediately arrive at calamity-hit countries. Do they serve donors by default or by intention? Is there connivance?

In my view, charities serve imperialism to a large extent. Here is very subtle aspect to understand from legal perspective. For example, their main focus is always huge and quick relief operations to create, as early as possible, a situation, where “state of necessity” cannot be evoked. As this international protocol favors the debtor country and before she thinks to invoke it, these charities have made the conditions favorable to creditor country.

Has any country ever refused debt servicing on the pretext of a natural catastrophe. If yes, which, if no why has no one refused it?

There are number of examples when debtor countries refused debt citing various reasons like ’odious debt Odious Debt According to the doctrine, for a debt to be odious it must meet two conditions:
1) It must have been contracted against the interests of the Nation, or against the interests of the People, or against the interests of the State.
2) Creditors cannot prove they they were unaware of how the borrowed money would be used.

We must underline that according to the doctrine of odious debt, the nature of the borrowing regime or government does not signify, since what matters is what the debt is used for. If a democratic government gets into debt against the interests of its population, the contracted debt can be called odious if it also meets the second condition. Consequently, contrary to a misleading version of the doctrine, odious debt is not only about dictatorial regimes.

(See Éric Toussaint, The Doctrine of Odious Debt : from Alexander Sack to the CADTM).

The father of the odious debt doctrine, Alexander Nahum Sack, clearly says that odious debts can be contracted by any regular government. Sack considers that a debt that is regularly incurred by a regular government can be branded as odious if the two above-mentioned conditions are met.
He adds, “once these two points are established, the burden of proof that the funds were used for the general or special needs of the State and were not of an odious character, would be upon the creditors.”

Sack defines a regular government as follows: “By a regular government is to be understood the supreme power that effectively exists within the limits of a given territory. Whether that government be monarchical (absolute or limited) or republican; whether it functions by “the grace of God” or “the will of the people”; whether it express “the will of the people” or not, of all the people or only of some; whether it be legally established or not, etc., none of that is relevant to the problem we are concerned with.”

So clearly for Sack, all regular governments, whether despotic or democratic, in one guise or another, can incur odious debts.
’, ’illegitimate debt’. Burkina Faso and Latin American countries including Peru, Mexico, Paraguay, and Ecuador have taken a stand successfully in the past. But as far as natural calamity is concerned, right now I do not have any solid example of unilateral action by debtor country. However, very recently the IMF had to cancel all its debt worth US $ 366 million, owed by quake-hit Haiti. The reason for the debtor countries not standing up against creditors in situations of calamities is probably the hope or indication by creditors to cancel some part of their debt.

Is the debt a reason for destruction caused by natural calamities in third world countries as that does not allow countries to build infrastructures? Your comments.

Yes of course! The time has gone when funding was extended to poor countries for exclusive infrastructure development. External funding patterns have changed after the introduction of neo-liberal agenda and structural adjustment program, the more stress is on economic reforms, privatization, free market. Especially in case of IMF loans, it is indeed true. The IMF does not extend project loans. The main purpose of IMF funding is to support structural adjustment programs and anti-people economic reforms in developing countries.

What about corruption of the indigenous ruling elites? Even when aid money comes, it does not reach victims. Your comments.

The indigenous or national elites is the most appropriate tool of the international financial elite by which I mean IFIS, bankers, finance institutions. In many cases donors’ money finds its way to the pockets of the local elite and does not reach to the deserving people, this is true, especially in case of Pakistan. We have stories of corruption by military generals during 2005 earthquake in Kashmir, during drought in Baluchistan in 1998. But the more important question is that international donors are not unaware of this fact. In many cases, they are aware and actually let corruption occur to prop up their friends.

Army in Pakistan at present is proving effective in delivering relief. Don’t you think it is building an image at the cost of elected politicians?

This is very important question and a real dilemma for Pakistan. Calamites always provided Pakistan Army with a golden opportunity not only to absolve itself of its wrong doings but also to undermine the democratic setups and systems. In fact army is the only organized, experienced and so-called well-equipped force to cope with calamities at such a huge scale. Unlike many other countries, we do not have strong civilian institutions to rescue and provide relief to the people. The apparently civilian body National Disaster Management Authority is also headed by a general. Unfortunately, Pakistani media are also projecting army’s ’heroic role’ in providing relief and castigating the role of civilian politicians who are in fact powerless. Like always, I fear, the politically tarnished army will emerge as the sole savior of the people in distress, while politicians will be discredited.

Often the financial aid promised to calamity hit countries, does not materialize. Tsunami-hit countries (2004), earthquake-hit Pakistan (2005). earthquake-hit Haiti (2010). Why so? Is there no mechanism to hold the countries accountable for making false promises?

You are right, it has been observed that commitments made by various countries and donors at donors’ conferences hardly materialized. Only a small portion of the promised funds is materialized. In case of Pakistan, we have experienced it twice. In 2005 after the earthquake and in 2009 when ’war on terror’ rendered millions of people internally displaced. Pakistan is still waiting for the funds committed by “Friends of Pakistan”, a consortium of various countries formed by the USA. There are number of reasons when the promises by rich countries are not fulfilled. One is the failure in successfully pleading your case before international donors and lenders, second is lack of trust in recipient country. That is to say when donors believe money will be misappropriated. There are political reasons as well. For example, ’Friends of Pakistan’ had committed $ 5 billion. About $ 1.5 billion were materialized. Therefore, a helpless Pakistan had to seek additional $ 3.5 billion from the IMF. We should not forget that some ’Friends of Pakistan’ wanted to benefit IMF, not Pakistan.

’Multinational NGOs’ and charities have been criticised as their CEOs draw huge salaries. Their bureaucracy is very costly and ineffective too. Is it a good idea for ordinary people to donate them money?

No doubt, international charities’ senior staff has hefty salaries. This is one of the strong observations about their working pattern. One important factor behind this fact is a policy followed by certain countries. These donating countries when give financial support, they also recommend the NGOs that will implement the support. In case of Kashmir earthquake in 2005, over 80 INGOs were engaged in relief and rehabilitation process. The involvement of world charities and INGOs is usually perceived as inevitable on account of their experience and management capacity. It is difficult to ignore them but in case of Pakistan our local NGOs’ capacity to cope with devastation at such a huge scale is not bad as many of them have now good experience after working in quake-hit areas of Kashmir.

This time, West is not promising Pakistan help. Why?

May be the on-going international financial crisis is the reason.

From Viewpoint online issue no. 13, AUGUST 13, 2010.

Adnan Farooq did his Masters in Political Science and has worked with daily The Nation, Lahore and daily Jang, Lahore. He has also volunteered for Milieudefensie, Amsterdam. Friends of the earth, Europe, on environmental issues. He has been working with ON FILE, an Amsterdam-based publication run by journalists from all around the world. He studied Conflict Resolution at University of Amsterdam and is living in Paris. He is the editor.

Abdul Khaliq

CADTM Pakistan



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