Should Bangladesh repay the ‘odious debt’ incurred by its previous regime?

Back in 1898, after the US established a protectorate in Cuba and took over Puerto Rico following the Spanish-American War, the victor opposed paying off creditors of the former colonies.

Terming the loans as 'odious', the US asserted that neither it nor Cuba should be responsible for debt the colonial rulers had incurred without the consent of the Cubans or Puerto Ricans and not for their benefit.

Later, in 1927, the concept of odious debt was formalised in a treatise by Alexander Nahum Sack, a Russian-origin legal theorist, who wrote, "When a despotic regime contracts a debt, not for the needs or in the state's interests, but rather to strengthen itself, to suppress a popular insurrection, etc, this debt is odious for the people of the entire state. This debt does not bind the nation; it is a debt of the regime, a personal debt contracted by the ruler, and consequently, it falls with the regime's demise."

Today, more than six months after a mass uprising threw the Awami League regime out of power, Bangladesh finds itself in the shoes of Cuba and Puerto Rico, with the country's gross external debt standing at $104.36 billion as of September 2024, according to Bangladesh Bank data.

Government loans from external sources — taken usually from development partners, including the World Bank, the International Monetary Fund (IMF) and the Asian Development Bank (ADB) — stood at $73.4 billion in the same month.

Of course, comparing international lenders to colonial creditors is a far-fetched notion, given their immense contributions in keeping many struggling nations afloat.

After all, when Bangladesh was facing a foreign reserve crisis, it was a $4.7 billion loan approved by the IMF in January 2023 that helped the country keep its head above water. Later on 21 June 2024, the World Bank approved two projects worth $900 million. And the ADB, which has been a major source of external financing in Bangladesh, has provided us an average of$2 billion per year since 2016. As of 31 December 2023, ADB has committed 726 public sector loans, grants, and technical assistance totalling $31.8 billion to Bangladesh.

But it is important to note that the country was then being ruled by the Awami League, during the 15-year tenure of which an average of $16 billion was siphoned out of the country annually, according to the White Paper Committee formed by the interim government.

The burden of repayment, however, now falls upon a very different Bangladesh. So, can these loans approved to a regime whose corruption and oppression were well-documented not also be considered odious?

Some economists believe so.

In a 16 September 2024 opinion piece for Inter Press Service, Anis Chowdhury, emeritus professor at Western Sydney University and former director of UN-ESCAP's Macroeconomic Policy and Development Division, termed such loans as "'odious' — they stink and are detestable".

Co-written with Khalilur Rahman, High Representative on Rohingya Problem and Priority Issues Affairs to Chief Adviser Professor Muhammad Yunus, former secretary of the UN Secretary-General's High-level Panel on Technology Bank for LDCs and former head of UNCTAD's Trade Analysis Branch and its New York Office, the article went on to say the multilateral organisations and countries continued to irresponsibly provide life-lines to the AL regime despite fully knowing its wide-scale corruption and abuse of human rights, including suppression of democracy.

"It was public knowledge that the kleptocrats took large sums of ill-gotten money illegally out of the country," the duo wrote in the article titled 'Odious Debts: What Can Bangladesh Learn from Ecuador?'

Odious debt yet to receive international acceptance

Despite the concept having a solid theoretical framework, this doctrine has gained little momentum within the international law community, and countries are held responsible for repaying illegitimate debt under the international system's current norm.

In a June 2002 article for Finance & Development, a quarterly journal of the IMF, Michael Kremer and Seema Jayachandran wrote, "Currently, countries repay debt even if it is odious because if they failed to do so, their assets might be seized abroad and their reputations would be tarnished, making it more difficult for them to borrow again or attract foreign investment."

For instance, in the case of South Africa, the apartheid regime borrowed from private banks throughout the 1980s. But a large percentage of its budget went to finance the military and police, which were used as tools of repression against the African majority.

The Archbishop of Cape Town called for the declaration of apartheid-era debt as "odious and written off", a call that was also echoed by South Africa's Truth and Reconciliation Commission. But the post-apartheid government decided to honour the debt, fearing that defaulting would hurt its chances of attracting FDI.

The burden of that debt incurred by their oppressors was later carried by the South African people.

A similar scenario also occurred in Nicaragua, where former president Anastasio Somoza was reported to have looted $100 million to $500 million before being deposed in 1979. Sandinista leader Daniel Ortega had told the United Nations General Assembly that his government would repudiate Somoza's debt, but ultimately reconsidered the move when Cuba advised against it, suggesting it would anger western capitalist countries.

The Ecuador playbook

In the same September 2024 article, Chowdhury and Rahman discussed how Ecuador dealt with its "illegitimate debts".

Seven months into his presidency, Rafael Correa established the Comprehensive Public Credit Audit Commission in July 2007. Its goal was to halt repayment of part of Ecuador's sovereign debt accumulated between 1976 and 2006.

The Commission found that the amount Ecuador spent to service its external debt exceeded the amount that Ecuador had received from external lenders to begin with.

In November 2008, Ecuador halted interest payments on its Wall Street-traded securities, labelling the debt as "odious." By June 2009, 91% of bondholders agreed to the government's offer to repurchase the bonds at 35% of their face value. This move saved Ecuador over $7 billion, which was then redirected toward increased social spending, particularly in health and education.

Between 2007 and 2017, the Correa administration doubled social spending. By 2016, poverty had decreased by 41.6%, and inequality had dropped by 16.7%.

"Despite predictions of chaotic and painful days ahead by the international financial press, nothing bad happened. Ecuador's victory over its private foreign creditors was total. When the country decided a few years later to issue new debt securities on the financial markets, the investors crowded in to buy them. That is because they were convinced that the country's situation had improved," Chowdhury and Rahman wrote.

Bangladesh's playbook: A modern draft and an old edition

Though the latest IMF-World Bank analysis finds Bangladesh's external debt sustainable, there are concerns that the situation could turn into a debt crisis.

Moreover, wiping off odious debt could provide Bangladesh with additional fiscal resources for urgent social programmes.

But how do we actually go about doing it?

"In the case of Ecuador, President Rafael Correa had asserted that this action was justified because these obligations were illegitimate. Bangladesh must argue the same," Chowdhury and Rahman suggested, adding that the government must not fear pushbacks.

They recommended reviewing all loan agreements, including those with China. The Interim Government could request the UN Secretary-General to set up an UN-led independent commission to review all debts incurred by the Awami League regime.

"If found dubious and the proportion lost in corruption should be declared as 'odious'. The burden of odious debts of the repressive regime and irresponsible lending must not weigh on rebuilding of a new Bangladesh," the duo wrote.

And if this draft of the playbook casts doubts, fret not, for we have been here before, albeit under different circumstances; this is not Bangladesh's first encounter with odious debt.

Back in 1973, international lenders had come knocking on Bangladesh's doors, suggesting that the newly independent country take over the liabilities for debts, foreign debts and foreign loans spent in East Pakistan.

Former finance secretary M Syeduzzaman, who was a part of the negotiations, recounted in a 1991 interview with the World Bank History Project that at the time, the relationship between the Bangladesh government and the donors was difficult.

"Obviously the position of the Bangladesh government was that we were not willing to take this; this was the legal liability of the government of Pakistan… And the donors were indicating that unless the government of Bangladesh agreed on this, there would be difficulty in pledging new aid for Bangladesh, which Bangladesh badly needed," he told the interviewers.

Later, the Bangladesh government agreed to only take over the liabilities of projects which were "visibly located" in the country. But if the project or structure had suffered any damage during the Liberation War, then Bangladesh would have to deduct from the loan the value for the damages.

"...Originally the figure that the donors were holding before us was $1,200 million… Now, after these negotiations, getting rid of the programme loans, getting rid of damaged projects which were not visible, getting rid of partly damaged projects, ultimately, we came down to a figure of $400 million," M Syeduzzaman recalled.

World Bank Vice President for South Asia Martin Raiser, during his visit last week, reaffirmed the lender's support for economic reforms critical for the country's inclusive and sustainable growth and development.

Perhaps that support could come in the form of debt swapping, leaving the country with sufficient funds for the aforementioned growth and development.

Debt swap for development is not a new concept; it was used previously by the World Bank and IMF in the case of Highly Indebted Poor Countries (HIPC) for poverty reduction programmes in the late '90s. And most recently, the IMF used it during the Covid-19 pandemic to help debt-distressed low-income countries.

Furthermore, debt swap might also help absolve the lenders from irresponsible lending and serve as a deterrent against providing irresponsible loans in the future.

SM Abrar Awosaf. Sketch: TBS