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June 17, 2019
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August 10, 2019

The Ecuadorian remedy

 AMONG other recommendations, an earlier article (‘Stabilising external finances’Dawn,) had suggested that: “the government should establish a high-level Debt Audit Committee, following Ecuador’s … example, to look into the possibility of repudiating or renegotiating our ‘odious’ debts, among other initiatives”. By contrast, the government has recently announced the formation of a high-powered commission to investigate how corrupt politicians incurred enormous public debts during the last 10 years.

This article suggests that the scope of the commission’s inquiry should include not just those who accepted bribes but also those who offered them; and, more generally, following Ecuador’s example, go beyond persons to identify transactions involving debts contracted odiously (or illegally), in other ways. In this way, the commission would establish the facts on which a legal case can be made in due course, that may strengthen the nation’s public finances, economy and politics.

It is a venerable principle of law that one person cannot be punished or bound for the misdeeds or personal debts of another. Extended to the people, the debt of a state is odious (or illegitimate) if: (1) it is contracted against the interests of the population, (2) without their consent, and (3) with the creditor’s full awareness. If all three conditions — benefit, consent, and creditor knowledge — are met, then the debt is unenforceable under international law.

Pakistan should note that Ecuador was able to secure a write-off of up to two-thirds of some of its debts.

Once so established, these debts can in principle be repudiated by Pakistan — relieving the nation of some of the onerous burden of illegitimately contracted public debt. In practice, under threat of repudiation, lenders agree to write off much if not all such obligations. Also, governments can often buy back their private debt at substantial discount.

In presence of the Debt Limitation Act (2005), all debts contracted over its ‘60pc-of-GDP’ limit are prima facie illegal debts, meeting all three conditions of odiousness, and therefore not the legal obligation of the people of Pakistan. Equally, many of the energy sector debts — with evidence of collusion and corruption — may qualify as odious debts. The commission may find other such debts, which Pakistan may be able to persuade some if not all its lenders to write off or reduce.

In this connection, and otherwise, the commission may wish to look closely, if critically, at the experience of Ecuador where a Commission for the Comprehensive Audit of the Foreign Debt (Comisión de Auditoría Integral de la Deuda Externa) was appointed in July 2007, although with different objectives. Its report is public and while there is little common between Ecuador and Pakistan, the problems the government faced and the strategic approach they adopted may be a source of fruitful ideas. Based on the commission’s work, Ecuador was able secure a write-off of up to two-thirds of some of its debts and, more importantly, recover much of its national sovereignty and dignity.

Briefly, by 2005, almost 50 per cent of Ecuador’s budget was devoted to servicing debt (this ratio is 55.8pc in Pakistan’s 2019-20 federal budget, currently before parliament), while almost nothing was spent on health, education, social services and job creation (again, like Pakistan). In the wake of public protests, a socialist-sounding government (of ex-Col Lucio Gutiérrez) took over, but it immediately signed a new IMF agreement imposing extreme austerity (again, like the course Pakistan is following). Protests broke out (as expected soon in Pakistan) and Gutiérrez fled. Vice President Alfredo Palacio took over, but again succumbed to the IMF. More protests followed, and Palacio’s finance minister, Rafael Correa, who had resigned in 2005 (rather than give in to World Bank demands), took office as an extremely popular president in January 2007.

Declaring that “Our only debt is to the people” one of Correa’s first acts, after election, was to deport the World Bank representative from Ecuador. He also asked the IMF staff to vacate the central bank premises (in Pakistan, the IMF representative occupies a plush suite in the ‘Q’ block where its poor client, the Ministry of Finance is located). Correa also cancelled many loans and closely scrutinised wasteful government borrowing (unlike Pakistan where while borrowing from IMF to avoid imminent default due to excessive borrowing, the government has borrowed $918 million from the World Bank to pay for foreign consultants, software and systems, ostensibly for tax reform — madness).

In July 2007, Correa established the Debt Audit Commission, with a mandate to audit the process by which public debt was contracted, with the objective of determining its legitimacy, legality, transparency, quality, efficacy and efficiency, while considering legal and financial aspects, and its impact on the economy, society and ecology, separately by gender, nationalities and other social groups.

The commission’s report, released in November 2008, found that much of Ecuador’s debt represented refinancing of debt that would not otherwise have been serviced (as Pakistan’s present IMF loan does). It also identified major non-economic damages traceable to Ecuador’s public debt: undermining the state’s sovereignty and international rights, the citizen’s fundamental rights, and promoting usury and “anatocismo” (charging interest on interest payments). Although, with Correa’s departure in May 2017, his successor Lenin Moreno has reversed his policies completely, Ecuador’s Correa-era experience merits careful study.

While the odious debt doctrine has been usually invoked (since the late 19th century) by successor regimes to repudiate the debts of previous regimes — like Bangladesh did, forcing Pakistan to assume the debts associated with projects located in former East Pakistan — it was the US that most recently invoked it to revoke most of Iraq’s Saddam-era debts. Taken up by Ecuador, it has been extended in recent years, albeit with much resistance by creditors, to other cases as well.

In short, if in the course of its work the commission could gather evidence with an eye also on the requirements of international law on odious debts, they would do the nation a great service by laying the groundwork for enabling a write-off, or substantial reduction, of odiously contracted debts should a future government so choose. But this will take time, and to do this the commission should liaise with the law and finance divisions to associate experts in international law — and other relevant fields — to carry out the work needed.

The writer is a retired economist.

Published in Dawn, June 24th, 2019