World Bank releases paper on odious debt

As part of its work on debt-related issues, the Economic Policy and Debt Department of the World Bank (PRMED) released recently a draft discussion paper entitled “The Concept of Odious Debt: Some Considerations.”

Although international law does not generally provide for the repudiation of debts on the ground of their being “odious,” the World Bank paper suggests that this should not deter lenders and sovereign borrowers from acting in a variety of ways to ensure that loans are used for the benefit of the borrowing states and not to subjugate their populations or enrich the corrupt.

The discussion paper asserts that there is little agreement on a workable definition of “odious” debt and there are only a few examples where the concept has been used to justify the non-payment of sovereign debts. Most often, these have been cases when a successor state or government has refused to honor certain debts contracted by its predecessor state or government. The extension of the debate to cases other than those of state or governmental succession and the identification of a broader concept of “illegitimate debt” have “further complicated an already controversial concept and diminished its practical value in addressing real problems. Repudiating sovereign debts on this ground would increase the risk of reduced lending to sovereign borrowers, thereby affecting financial flows to developing countries as a result of the danger of ex post challenges to lenders’ claims.” The paper argues that countries can choose the middle path between paying their unsustainable debts or repudiating them by restructuring their debt when it has become unsustainable. Iraq and South Africa are recent examples of countries where new governments inherited large sovereign debts but, rather than repudiating them, chose instead to negotiate their restructuring with their creditors.

While it is encouraging that the World Bank has begun to engage in the extremely important discussion about odious debt, it has not yet asked the basic question, “Who owes whom?”

In response to the Bank’s paper, 15 nongovernmental organizations and networks from around the world working on debt-related issues wrote:

“We welcome the fact that the Bank has taken-up the important issue of odious debt following pressure from civil society organizations and financing from the Norwegian government.

“However both the paper itself and the process for producing and reviewing it are far below what is needed. The draft paper is missing significant sources and arguments, and is one-sided.

“We propose that the Bank spell out clearly what it intends to do with the document and the status of the final output, and that it institute a well-organized peer review process involving external experts. The Bank should actively solicit expert feedback from a range of external specialists in the fields of law, economics, and political science….

“Such a process is the best way to resolve the significant shortcomings and omissions in the current draft and to prevent the exercise missing the opportunity to make a significant contribution to improving the international debt architecture.
“The paper is largely dismissive of the concept of odious debt. It emphasizes that the concept is complex, given an over-wide scope by some analysts and not yet established in international law. The paper omits important cases where the concept has been recognized and also several political and judicial processes and concepts such as authority to borrow which are cited in many writings on the subject.

“There is no mention of the need for fair and transparent debt resolution processes, which would enable independent judgments to be made regarding the cancellation of odious debts.

“These are just some examples of many significant gaps in the paper. We do not have confidence in the current process that the Bank has initiated and believe that a formal external peer review process is the only way that the paper can be taken forward properly. We would be happy to provide suggestions of names of potential reviewers once this idea is accepted.”

The World Bank’s paper seems to miss completely the whole argument around odious or illegitimate debt, which is that such debt is not owed by borrowers to creditors at all for a variety of possible reasons, any one of which would render the loan agreement null and void.

Faith in action: Read the World Bank discussion paper at www. worldbank.org; use the search tool to find “The Concept of Odious Debt: Some Considerations,” and send your comments to Vikram Nehru (vnehru@worldbank.org).