Committee for the Abolition of Illegitimate Debt

While it would be important to find out the exact reasons for the failures that have occurred, it is equally important to find out how one can get out of the mess that is already created. When the Government of Sri Lanka decided to default on its debts amounting to some $ 51 billion in April 2022 – and the country is required to pay some $ 7 billion in debt for 2021 – it marked a dark day in the history of the country, as it indirectly gives the impression that the country is on the verge of bankruptcy or that it is indeed bankrupt.

In such a backdrop, it becomes crucial to determine how we got here and for what purposes have we borrowed. When one considers the sources from which the borrowings have been made, 47% of all the borrowings have been obtained from the open market, where the conditions are less favourable, as interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation. are high and the period of repayment is low.

However, one distinct feature is that when debts are incurred from the open market, there is almost no condition as to what to do with such borrowings, and no person or institute will monitor its expenditure. This gives ample opportunity for those wielding power to spend extravagantly on any of the things that they may wish to and make a profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. from such expenditure.

Only 22% of our borrowings are from the World Bank World Bank
WB 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.

and the Asian Development Bank, while 20% of the borrowings were from China and Japan, in equal proportions, respectively.

In the above context, it becomes pertinent to understand whether the 47% of the total borrowings that have been made through the open market can be considered as 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. . The concept of odious debt was discussed as far back as 1929 by Russian jurist Alexander/Aleksandr Nahun/Naumovich Sack/Zak, who in his book titled The Effects of State Transformations on their Public Debts and Other Financial Obligations hinted that any debt incurred by a State, which is not in the interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. of that State but in the interest of some others which is not in the stricto sensu “the State”, shall not make the State liable for such indebtedness.

The argument thus postulated speaks about the fact that such debt should be considered a regime’s debt and not the debt of the State, as such debts will lack the capacity to be called State debt – since such debts have not been incurred in the interest of the State in question. Sack/Zak has divided odious debts into several categories: war debt, subjugated or imposed debt, and regime debt.

Former International Court of Justice President Mohammed Bedjaoui has observed that the above categories are only examples, and that they are by no means exhaustive. He advances the idea that “an odious debt could be taken to mean any debt contracted for purposes that are not in conformity with contemporary international law and, in particular, the principles of international law embodied in the Charter of the United Nations”.

The Greek Public Debt Truth Committee that was established in April 2015 found four types of odious debt, namely odious, illegal, illegitimate, and unsustainable debt. It defined odious debt as debt which the lender knew, or ought to have known, was incurred in violation of democratic principles (including consent, participation, transparency, and accountability) and used against the best interests of the population of the borrower State, or is unconscionable and whose effect is to deny people their fundamental civil, political or economic, social, and cultural rights.

The said committee was mandated with finding out the creation and growth of public debt, the way and reasons for which debt was contracted, and the impact of the conditionalities attached to the loans contracted by Greece on its economy and population. Such a fact-finding mission could be considered from a Sri Lankan perspective as well for the proper understanding of the debt crisis, since there are many speculations as to how much has been borrowed and for what purpose such borrowings have been utilised.

Moving forward with the right of a State to make a claim for odious debt and to relieve itself from having to repay such debts is something that is not well settled under international law. However, one can link the right to not pay odious debts with the concept of economic or fiscal sovereignty of a State. Given the fact that Article 3 of the 1978 Constitution of the Democratic Socialist Republic of Sri Lanka vests the power of sovereignty with the people, if there is a breach in the said sovereignty by those who yield Yield The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value. such powers as elected representatives, in such similar circumstances, they would not only be breaching its Constitutional and treaty obligations but the lender would also not be entitled to enforce the agreement with a subsequent Government because of its unconscionable character. In making an odious debt claim, a country may be able to extinguish either wholly or partly its debt, demand a set-off, or in rare cases, make a claim for redress or reparations because of odious debt. The most favoured out of the three is the extinguishing of such debt either wholly or partly. In doing so, it would be potent to show that the State that is trying to extinguish its debts would not be unjustly enriched as a result.

While this article is only published with the aim of informing the public about the possibility of making a claim for odious debt, the reality may not be as smooth as what is mentioned here. Therefore, it can be suggested that the authorities in power and who are responsible for making the decisions should at least look for the possibility of making such a claim, if one is ever possible.