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Is Sri Lanka burdened by ‘odious’ debt?

  • The nation may be able to seek relief if it can prove debts were not incurred in its people’s best interests

BY Akalanka Thilakarathna

The current economic situation in the country can be linked to its political instability. While economic and political instability go hand in hand, the current dilemma facing the country can be attributed to bad planning and decision making, especially concerning its economy. 

While it would be important to find out the exact reasons for the failures that have occurred, it is equally important to find out as to how one can get out of the mess that is already created. When the Government of Sri Lanka decided to default on its debts amounting to some $ 51 trillion in April 2022 – and the country is required to pay some $ 7 billion in debt for 2021 – it marked a dark day in the history of the country, as it indirectly gives the impression that the country is on the verge of bankruptcy or that it is indeed bankrupt. 

In such a backdrop, it becomes crucial to determine how we got here and for what purposes have we borrowed for. When one considers the sources from which the borrowings have been made, 47% of all the borrowings have been obtained from the open market, where the conditions are less favourable, as interest rates are high and the period of repayment is low.

However, one distinct feature is that when debts are incurred from the open market, there is almost no condition as to what to do with such borrowings, and no person or institute will monitor its expenditure. This gives ample opportunity for those wielding power to spend extravagantly on any of the things that they may wish to and make a profit from such expenditure. 

Only 22% of our borrowings are from the World Bank and the Asian Development Bank, while 20% of the borrowings were from China and Japan, in equal proportions, respectively. 

In the above context, it becomes pertinent to understand whether the 47% of the total borrowings that have been made through the open market can be considered as odious debt. The concept of odious debt was discussed as far back as 1929 by Russian jurist Alexander/Aleksandr Nahun/Naumovich Sack/Zak, who in his book titled The Effects of State Transformations on their Public Debts and Other Financial Obligations hinted that any debt incurred by a State, which is not in the interest of that State but in the interest of some others which is not in the stricto sensu “the State”, shall not make the State liable for such indebtedness. 

The argument thus postulated speaks about the fact that such debt should be considered a regime’s debt and not the debt of the State, as such debts will lack the capacity to be called State debt – since such debts have not been incurred in the interest of the State in question. Sack/Zak has divided odious debts into several categories: war debt, subjugated or imposed debt, and regime debt. 

Former International Court of Justice President Mohammed Bedjaoui has observed that the above categories are only examples, and that they are by no means exhaustive. He advances the idea that “an odious debt could be taken to mean any debt contracted for purposes that are not in conformity with contemporary international law and, in particular, the principles of international law embodied in the Charter of the United Nations”. 

The Greek Public Debt Truth Committee that was established in April 2015 found four types of odious debt, namely odious, illegal, illegitimate, and unsustainable debt. It defined odious debt as debt which the lender knew, or ought to have known, was incurred in violation of democratic principles (including consent, participation, transparency, and accountability) and used against the best interests of the population of the borrower State, or is unconscionable and whose effect is to deny people their fundamental civil, political or economic, social, and cultural rights. 

The said committee was mandated with finding out the creation and growth of public debt, the way and reasons for which debt was contracted, and the impact of the conditionalities attached to the loans contracted by Greece on its economy and population. Such a fact-finding mission could be considered from a Sri Lankan perspective as well for the proper understanding of the debt crisis, since there are many speculations as to how much has been borrowed and for what purpose such borrowings have been utilised.

Moving forward with the right of a State to make a claim for odious debt and to relieve itself from having to repay such debts is something that is not well settled under international law. However, one can link the right to not pay odious debts with the concept of economic or fiscal sovereignty of a State. Given the fact that Article 3 of the 1978 Constitution of the Democratic Socialist Republic of Sri Lanka vests the power of sovereignty with the people, if there is a breach in the said sovereignty by those who yield such powers as elected representatives, in such similar circumstances, they would not only be breaching its Constitutional and treaty obligations, but the lender would also not be entitled to enforce the agreement with a subsequent Government because of its unconscionable character. In making an odious debt claim, a country may be able to extinguish either wholly or partly its debt, demand a set-off, or in rare cases, make a claim for redress or reparations because of odious debt. The most favoured out of the three is the extinguishing of such debt either wholly or partly. In doing so, it would be potent to show that the State that is trying to extinguish its debts would not be unjustly enriched as a result. 

While this article is only published with the aim of informing the public about the possibility of making a claim for odious debt, the reality may not be as smooth as what is mentioned here. Therefore, it can be suggested that the authorities in power and who are responsible for making the decisions should at least look for the possibility of making such a claim, if one is ever possible. 

(The writer is an Attorney-at-Law and as a Probationary Lecturer in Labor Law, Commercial Law, and Industrial Law at the Institute of the Human Resource Advancement of the University of Colombo)

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The views and opinions expressed in this column are those of the author, and do not necessarily reflect those of this publication.