In 2006, Norway made history by deciding to unilaterally and unconditionally cancel its debts associated with the Ship Export Campaign of the late 1970s, due to the fact that the funded projects had not benefited the debtor, and the lender shared the responsibility for the failed experiment. For the first time, an official lender had admitted its share of responsibility in the failure of a lending operation. Traditionally, lenders have wanted the world to believe that failure of lending lies only with the borrower.
This past summer 2012, Norway made history again, by initiating an audit for its bilateral loans to developing countries. In a number of cases and on an ad hoc basis, calls for debt audits have been made by members of Parliament or civil societies in donor countries. The Norwegian debt audit is unprecedented and unique as an independent audit of official loans to developing countries initiated by the creditor government. As the new report by the Norwegian Coalition for Debt Cancellation (SLUG) – “Exportable? How to Make the Norwegian Debt Audit Transferable to Other Countries” – indicates, the Norwegian debt audit model is unique, particularly inasmuch as it promotes increased “co-responsibility” for debt by lenders and borrowers as well as “mutual respect” between creditors and debtors.
With this history-making innovation, Norway offers an opportunity for other bilateral donors as well as multilateral lenders to embrace a new era of increased transparency and accountability in international lending and borrowing practices. The Norwegian model also gives vital impetus to calls for debt audit from the debtor side. The SLUG report discusses in detail the applicability of the model using the case of Tunisia. The time could not have been more opportune, as the post-revolution Tunisian leaders have vowed to inquire into the legitimacy of the debts inherited from the Ben Ali regime by conducting a debt audit. There will certainly be resistance from donors and debtors against debt audit. In “Debt Audits and the Repudiation of Odious Debts” we review some of the arguments that have been advanced against debt audit and we explain how these arguments are unfounded, and only serve as excuses for delaying the process. It is clear that the pressure on donors and debtor governments is rising and that the world is moving forward, not backward, towards more accountability and responsibility in lending and borrowing, which will benefit lenders as well as borrowers.
The objective of an audit of sovereign debts is to establish three main principles: (1) Legal principles: conformity of loan procedures and conditions to the laws of the borrowing country, the laws of the lending governments or institution, and international law. (2) Equity and ethical principles: conformity with responsible lending rules, including due diligence and monitoring of the use of the loan proceeds; absence of undue coercion on the borrower; consent of the people, i.e., through appropriate delegation mechanisms, such as Parliament’s approval. (3) Developmental principles: whether loans were utilized to finance bona fide development programs. In that sense, a debt audit is an instrument for responsible development financing as well as social justice.
To fulfill the above principles, the debt audit needs to be comprehensive and sufficiently informed by input from the debtor country. The audit must especially assess: (1) whether the laws and procedures in the borrowing countries were followed properly; (2) whether the representative bodies such as Parliament were properly consulted (this is important to assess the “people’s consent” requirement); (3) whether the loans were used for bona fide development purposes, i.e., whether they financed legitimate development programs that benefited the people of the borrowing country.
Bilateral loans are only a fraction of external debts owed by developing countries, the rest being in the hands of multinational institutions to which individual donors contribute resources. Thus, the audit of bilateral sovereign loans addresses only part of the problem. Given that international lending institutions are owned and indirectly controlled by donor governments, it is hoped that by embracing the principle of debt audit at the national level, donors will also instill this practice into the international institutions that they fund. Only then will co-responsibility in lending and borrowing become a reality.
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