What is a debt audit and how might it work in Egypt

29 August 2011 by Nick Dearden

This paper is short explanation of what a debt audit is, where the idea comes from and how it might work in Egypt. For a full manual describing the process of organising an audit, read Let’s Launch an Enquiry into the Debt!: A Manual on how to Organise Audits on Third World Debts which can be downloaded here.

A debt audit is a public, participatory and comprehensive assessment of a country’s debts. Although it might sound like a bureaucratic endeavour a debt audit is, in fact, a popular and participatory step to creating greater economic democracy in a country. It is a key means of fighting the power of entrenched elites, global finance and wealthy countries over your economy.

A debt audit is:

- Part of a broad educational and mobilisation process in a country - helping citizens understand how their economy works and mobilising for it to work in a different way
- A vital step towards debt cancellation ‘from below’ and towards legal proceedings against those responsible for their country’s debts
- A means of bringing together as range of civil society groups behind a concrete demand for economic justice
- A first step towards holding governments to account for borrowing - and ensuring more democratic means of financing (like progressive taxation)
- A means of challenging national and international exploitation of an economy

Why do countries need debt audits?

For many years, civil society groups across the world have battled against their country’s foreign (and sometimes domestic) debts. Debt has been used as a means of Northern governments and financial institutions controlling Southern countries. Debt was often run up to odious, dictatorial regimes, shrouded in corruption and secrecy, for projects which did nothing to benefit the people. Those debts remain a noose around the people’s necks long after that dictator has fallen.

Even in countries which were not run by dictatorial regimes, debts have been a means of transferring wealth from ordinary people in society to the richest. Debts run up by banks and other private institutions or debts run up to buy rich country goods like arms, too often end up being paid by the poorest. Over the last 30 years, the debt system has drained Southern countries of wealth, as northern governments and banks have profited. To add insult to injury, it has also allowed those same governments and banks to dictate economic policies in Southern countries. You can download more information about the origins of Southern debt here.

A government can ‘owe’ several types of debt:

- Multilateral debts - owed to public international institutions like the International Monetary Fund 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.

or African Development Bank
- Bilateral debt - owed to foreign governments, often to ‘help’ the borrowing country buy the goods and services of the lending country
- Private debt - owed to banks and private institutions
- Bonds - issued by governments to generate money (often to repay old debts)

Contracting these debts is normally unaccountable and the people of a country have little idea what is being done in their name. A debt audit aims to lay bear the facts of this debt to the people of the country concerned. In particular they will look at whether a debt is legitimate. This means debts were:

- Illegal - debts were not authorised according to the law of the country concerned.
- Odious - 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.
is a legal doctrine shaped by Alexander Sack in the early nineteenth century. It refers to a loan given to an unrepresentative regime, for non-beneficial purposes with full knowledge of the creditor. More about odious debts can be found here. There is also a long report here. This concept has de facto been recognised on several occasions including when the US captured Cuba in 1898 and refused to pay outstanding Spanish debts, through to the majority of Iraq’s debts being cancelled following the US invasion. Most famously, in 1923 a US Supreme Court judge ruled that Costa Rica should not pay Britain or a Canadian bank for debts made when the country was under dictatorial rule.
- Payable Payable A sum of money that one person (debtor) or group of people owes to another (creditor). - a country cannot go bankrupt, based on the reasoning that it can always squeeze more out of its resources, including its people. However, the opportunity cost of continuing to pay debts can be widespread impoverishment, and even death. Time and again, the prescriptions of the International Monetary Fund for debt repayments has meant the decimation of employment and state support for people’s needs. Debts should not be paid when they do not allow a government to meet the needs of their people. It has been argued that this means a minimum poverty line of $3 a day.
- Has other problems associated with it - the notion of illegitimacy can also include: loans involving corruption, loans that did not benefit the people, or worse even harmed them (most obviously arms sales and mega-projects involving relocation), projects that didn’t actually take place, loans based on speculation or carrying extortionate rates of 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. , loans which damaged the environment or loans which carried conditions which harmed people or the environment (which includes most multilateral debt).

The perfect time to begin calls for a debt audit is soon after a regime has fallen. This point will very quickly pass. In Argentina, following the brutal military junta that ruled the country from 1976 until 1983, President Alfonsin promised to examine the country’s illegitimate debts. But strong pressures from outside meant that it took 18 years for a court case to show the debts were illegitimate - and even then politicians stalled further action. Similarly, South Africa had a strong case for illegitimacy when apartheid fell and the new government was left with debts run up in the face of the most serious internationally recognised human rights violations. Yet the government again came under pressure to pay. By paying their debts, governments have to take out new loans. In effect this recycles the debts - changing old debts for new ones.

How does this apply to Egypt?

Egypt’s external public debt is £30 billion. 25% of this is multilateral debt. It repays at a rate of £3 billion per year, of which 30% is multilateral and 39% is interest payments. Egypt currently owes nearly £100 million ($160 million) to the UK.

Hosni Mubarak left office with as much as $70 billion in his family’s bank account.
Since 1981, Egypt has paid the equivalent of $80 billion dollars in debt and interest repayments, helping redistribute money from Egypt’s poor to the global rich.

Most of Egypt’s debt comes from Mubarak’s time in office, with some from Sadat’s period in office. In addition, we know that Mubarak had a high military budget - often buying weapons via loans - and that IMF loans to Egypt were conditioned on far-reaching changes to Egypt’s economy that resulted in privatisation and liberalisation of agriculture. Thus a strong case can doubtless be made for the illegitimacy of at least a large portion of Egypt’s debt.

Egypt has already been offered new loans from various sources - international institutions like the IMF, rich and emerging economies and banks. These come in the guise of assistance to the revolution, but are actually no such thing. The G8 G8 Group composed of the most powerful countries of the planet: Canada, France, Germany, Italy, Japan, the UK and the USA, with Russia a full member since June 2002. Their heads of state meet annually, usually in June or July. meeting in France held 26-27 May 2011 announced up to $20 billion would be offered to Egypt and Tunisia. When support from the Gulf Arab states is factored in, Egypt alone was offered $15 billion - mostly in loans.

These loans will allow old loans to be repaid. Moreover, they will come with conditions which exert control over Egypt’s economic future. The United States has already said it will swap up to $1 billion of Egypt’s debt which it holds. This means Egypt will not repay these debts but will invest them in new projects as the US sees fit. Germany has agreed to do the same with $343 million. This might seem like progress, but these deals must be monitored very carefully. They allow the lenders who propped Mubarak in power to continue to use those debts to dictate policy to a future Egyptian government rather than taking proper responsibility. At the very least, such swaps need to be carefully monitored by an audit commission.

Case studies from Argentina and South Africa show that not only were illegitimate debts quickly recycled in those countries, but that a wave of new lending was unleashed which increased the debts of those countries enormously. Debt was used as a tool of control and a way of preventing alternative and democratic economic models being adopted.

How to organise a debt audit

The need for broad agreement

At all times it is important to remember audits are essentially about educating and mobilising society - allowing citizens to become actors in their own economy. As such it is vital to get agreement across a broad layer of civil society. In Greece, for instance, this agreement took many months, but the call for an audit commission is much stronger as a result. If a few groups had taken forward the idea alone, the call for an audit could have been easily dismissed. Working to get broad agreement is important before any official announcement is made or public conference.

A citizens’ versus an official debt audit

There are several types of official debt audits:

- A legislative audit means the parliament plays a key role in investigating previous debts. Such an initiative has been taken by the Congress in Peru.
- A judicial audit is a type of court case. On the initiative of a complaint lodged in 1982 by an Argentine lawyer and journalist, Alejandro Olmos, federal judge Ballesteros, engaged criminal proceedings against those responsible for the Argentine State’s indebtedness under the military junta. During the investigation the judge confronted the argument of secrecy surrounding the debts, and ordered all documents, minutes, financial accounts and statements to be handed over. The Olmos verdict revealed the illicit character of the external debt.
- A governmental audit is one sanctioned by the Government, such as happened in Ecuador. In 2006, President Correa inaugurated an audit commission leading to recommendations for action on his government. After more than a year of research by a committee comprising civil society representative, international observers and government representatives, the audit commission issued a long report which declared many of Ecuador’s debts illegitimate - some even illegal. This gave President Correa the justification to default on a portion of Ecuador’s debts, achieving a large write-down. Movements in Ecuador remain mobilised around further action to regain the government’s sovereignty from its foreign lenders. More government audits are planned in Bolivia, Nepal and Argentina. In both Argentina and Brazil audits have been planned for many years.
- A citizens’ audit is one which civil society groups undertake themselves, possibly with support from high profile figures. Such an audit will face difficulties in obtaining information, but the main purpose is to build awareness and engage support. A citizens’ audit can include research into a limited number of debts and the overall impact of debts, hearings and testimonies, media work and a final report.

Currently Greek and Irish civil society are both organising citizens’ audits. A citizens’ audit should push for an official audit, but does not need to be disbanded when an official audit in announced. It can be a central way of ensuring ongoing citizens’ participation in an official audit and radicalising the official audit process. It can also form a permanent basis for better accountability.

All official audits must be supported by a wide popular mobilisation and participation if such a process does not become a bureaucratic procedure which de-mobilises ordinary people. Civil society must fight for its representation, and for any recommendations to be taken forward in policy. Therefore there should not be a question of whether to hold a citizens’ audit or an official audit. A citizens’ audit might be a vital step towards an official audit, and an important ingredient in ensuring a successful outcome.

How can a debt audit be organised?

The specific form a debt audit takes might change from country-to-country. In the case of Ecuador, a commission was put together comprising governments and citizen representatives, expert advisors and international civil society advisors.

Most audit commissions, be they official or citizens’ commission, will need to divide up their work and form sub-committees. A commission might want to form working groups to examine specific types of debt.

The full manual on debt audits mentioned at the beginning gives full details of this process, but in brief an audit commission will want to consider :

- General analysis of the process of getting into debt. To be seen in its full context, this analysis could stretch back to colonial times, but will certainly need to go back to the 1970s when the world was pushed into a debt crisis by Northern banks. It will require looking at the evolution of 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.
, as well as looking at private debt and how such debt is often ‘nationalised’ in times of crisis. It will require a detailed examination of the ways debts are ‘recycled’ - new loans to pay for old debts - including the issuance of government bonds.

- Analysis of the contracts. This requires assembling specific debt contracts and analysing them in detail to find out whether they contain unjust or secretive clauses and whether they were signed off according to law and the constitution. These contracts will be very difficult to obtain in a citizens’ audit, though multilateral projects might be easier to ascertain information on.

- Examination of the real destination of the funds. This means asking what the loans were used to fund and how useful or not these projects were. Did the projects even take place? Did they go over budget? Which companies and countries actually benefited from the projects? What impact did the project have on people and the environment (e.g. did it breach international law or regulations)? It also means looking at the conditions attached to loans, especially the 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/
conditions of the IMF and World Bank.

A citizens’ audit might decide to focus on just one sort of debt or even just a handful of credits in the first place, depending on capacity. Multilateral credits are relatively easy to find out about - where the World Bank has given loans for instance. It is then for the audit to examine the impact of these loans and the resulting debts. Bilateral debts can often be discovered by working with a group in the relevant lending country - excellent case studies of specific loans have been worked up in collaboration with debt campaigners in European countries for instance, which can then be used to put pressure on governments at both ends for cancellation.

Finally, this is the technical process of the audit, but of course a vital element of the audit is also the constant engagement of the public and the media in the process.

What might the results be?

Any audit eventually aims to get some sort of redress for the wrongs created in society be illegitimate debt. This could take several forms:

- Limited cancellation. The very process of conducting an audit is likely to worry lenders, so that they offer some type of cancellation or ‘debt swap’. In 2005, Nigeria received a large debt cancellation when it’s parliament threatened to default on its debts. However, it also had to pay a large amount of money up front (in essence, it received $18 billion of cancellation for a $12 payment). Any such deals must be scrutinised by citizens’ movements to ensure unjust debts are not simply being recycled or that more unjust conditions are not being placed on the country by lenders.
- Default/ repudiation. A country refuses to pay it’s debt or a portion of its debt. ChristianAid has produced a report showing why this can be necessary. In 2008 President Correa of Ecuador defaulted on illegally issued bonds based on the audit carried out in his country. This made those bonds lose a significant amount of value and wiped several billion dollars off Ecuador’s debt. In 2001, Argentina carried out one of the largest defaults in history after years of following IMF advice which pushed that economy further into economic crisis. Within 3 months, Argentina’s economy started pulling out of recession. Repudiation might well be the best option, politically and economically. In fact, it is likely to be an essential step to the country being able to overcome debt dependency and forge a more sovereign economic policy. However, it is not without pain. A country’s population should be prepared for hardships and isolation. A thorough understanding built on the experience of a debt audit is an essential prerequisite. Such an understanding is also necessary if a default is to become a genuine first step towards wider change. Many activists lament the failure of Argentina’s government to build on their default by creating a different form of development.
- Legal proceedings against members of the previous government. A debt audit can uncover all manner of corruption and illegal activity on the part of previous regimes. These are matters for legal redress. They can also assist a government in taking action to return so-called ‘stolen assets’ which have been corruptly transferred abroad.
- International legal proceedings on behalf of affected communities. Where damage has been done to communities, individuals or the environment by specific projects or by the impact of debt on a society, cases may be brought against foreign lenders. This will be a difficult process but could be important in throwing off a period of injustice and changing the debt system.

An alternative economic vision

Ultimately a debt audit can be the first step in ushering in a new, democratic economic policy. A heavily indebted country has no genuine political freedom. Its budget and economic policy-making are subject to the conditions placed on it by its lenders. The real victors of the debt system are the creditors - who earn huge amounts in interest and gain financial access - and the dictator, who can generate money without relying on their people. Even in a democratic system, large amounts of debt can have the effect of moving capital out of a country and divorcing the aspirations of people from the actions of their governments. The creation of debt must be completely accountable if it is not to erode democracy.

A debt audit helps a people to understand this. It allows people to understand the nature of economic exploitation in their society and to develop alternative ideas of economic democracy. These might include:

- An end to the influence of the World Bank and IMF, as is happening right across Latin America.
- More reliance on progressive taxation than foreign debt to finance the economy. This includes clamping down on tax flight and utilising income and asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). -based taxes, rather than sales taxes.
- Preventing the privatisation of state welfare provision and strategic industries, and rather making such provision democratic and accountable.
- Adopting an industrial strategy to promote national development and trade with countries on a similar development path.

Such far-reaching policy will be resisted by international markets and Northern governments. Only well mobilised citizens will be able to ensure governments resist this pressure.

What is the international debt movement?

The international debt movement works for an end to unjust debts and towards a just and democratic economic system based on people’s needs. Groups across the world have struggled against the injustices of debt for over 20 years. It includes the Jubilee movement of groups, many of which come together as Jubilee South, the Committee for the Abolition of Third World Debt (CADTM) and debt and development groups.

Many of activists and groups from these movements will be pleased to offer solidarity to Egypt in creating a more just and democratic economy. CADTM-Tunisia has already established a call for a debt audit in that country. They also have a wealth of experience in organising their own debt audits - at citizen or official level - and of the pitfalls that might arise. A debt audit is not an easy thing to organise, but it can provide a vital first step towards a more democratic society. There is no better time to build support for this than in the immediate aftermath of the toppling of a dictator.

Other articles in English by Nick Dearden (31)

0 | 10 | 20 | 30



8 rue Jonfosse
4000 - Liège- Belgique

00324 60 97 96 80