TWN Info Service on Finance and Development (Oct06/09)

6 October 2006

NORWAY TO CANCEL “ILLEGITIMATE DEBT” OF 5 COUNTRIES

The Norwegian government has proposed to cancel US$80 million in debt owed to the country by five developing countries in acknowledgement that the debt was extended irresponsibly and without due regard for the developmental needs of the recipient countries.

Norway’s Development Minister announced that the government will propose that Parliament approve the renunciation of claims against Ecuador, Egypt, Jamaica, Peru and Sierra Leone in its national budget for 2007. If approved, this unilateral and unconditional debt cancellation will mark the first time that a creditor country has accepted responsibility for its negligence and contribution to the debt accumulation of developing countries.

NGOs have welcomed this move by the Norwegian government which they view as significant in light of the fact that creditors have traditionally been reluctant to accept responsibility for negligent, politically motivated or corrupt lending in the past.

Below is a report on the Norwegian debt deal and NGO responses.

It was published in SUNS #6112 Wednesday 4 October 2006

With best wishes
Martin Khor
TWN

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Norway to cancel “illegitimate debt” of 5 countries

By Celine Tan (TWN):  Warwick, 3 October 2006

The Norwegian government has proposed to cancel US$80 million in debt owed to the country by five developing countries in acknowledgement that the debt was extended irresponsibly and without due regard for the developmental needs of the recipient countries.

Norway’s Minister for International Development Erik Solheim announced yesterday that the government will propose that the Norwegian Parliament approve the renunciation of claims against Ecuador, Egypt, Jamaica, Peru and Sierra Leone in its national budget for 2007. If approved, this unilateral and unconditional debt cancellation will mark the first time that a creditor country has accepted responsibility for its negligence and contribution to the debt accumulation of developing countries.

The claims originate from a series of Norwegian ship exports to these countries under the Norwegian Ship Export Campaign from 1976 to 1980, a project that Norway now acknowledges to have been “economically unsustainable”. According to the Norwegian press statement, approximately US$400 million of the debt owed by developing countries to Norway stem from this one initiative which a government enquiry in 1988 – 89 criticized for failing to conduct proper needs analyses and risk assessments.

“This campaign represented a development policy failure. As a creditor country Norway has a shared responsibility for the debts that followed. In cancelling these claims Norway tales responsibility for allowing these five countries to terminate their remaining repayments on these debts”, Solheim said in the statement.

Sales of ships to developing countries under this campaign was motivated primarily by Norway’s need to anchor its ailing domestic ship building industry during that period and “not because these ships served the development needs of the countries concerned,”  says the European Network Debt and Development (Eurodad) in response to Norway’s announcement. “It is only fair therefore that Norway accept co-responsibility for the debts which resulted from these deals”.

Eurodad and other non-governmental organizations (NGOs) have welcomed this move by the Norwegian government which they view as significant in light of the fact that creditors have traditionally been reluctant to accept responsibility for negligent, politically motivated or corrupt lending in the past.

The Norwegian Campaign for Debt Cancellation (Jubilee Norway) called the move ‘simply historic’ and one that would close ‘an ugly chapter in Norwegian aid history – the Ship Export Campaign … an unfortunate episode in Norway’s aid history [which has] had the effect of cranking up debts in 21 countries’.

The remaining debt from the ship exports of as June this year was shared among the five countries and Myanmar and Peru. For Ecuador, Myanmar, Sierra Leone and Sudan, all or almost all of their debt to Norway is comprised of this ship export debt while for Egypt and Jamaica, this represents 75% of Norwegian debt and for Peru, it makes up 18%.

Myanmar and Sudan’s debt will not be cancelled until the two countries become eligible for the Multilateral Debt Relief Initiative (MDRI), the eligibility criteria including maintaining an ‘on-track’ programme with the International Monetary Fund (IMF) for six months or more and successful implementation of a Poverty Reduction Strategy (PRS) or similar programme. Sierra Leone’s debt will not be cancelled until the country completes its programme under the Heavily Indebted Poor Country (HIPC) debt relief initiative next year when all its debts to Norway will be cancelled under the initiative anyway.

The Norwegian government maintains that this ‘one-off debt relief policy measure’ will be additional to its bilateral aid allocations and will not be recorded as official development assistance (ODA) for the year.

NGOs have also welcomed this decision as creditor countries have often included debt relief operations as part of their ODA which, according to Eurodad, “has the effect of artificially inflating aid budgets and making out that more aid is being made available to poor countries than is really the case”.

Norway has also seemingly broken ranks with other creditors by breaking the unspoken rule of creditor solidarity. “Creditors have until now banded together to insist that poor countries repay their debts and have refused to admit that they share some responsibility for having extended loans irresponsibly, often for geopolitical strategic purposes”, explains Jubilee Norway.

“This is clearly a case of illegitimate debt. Norway broke its own rules by not assessing the development needs of the countries we were exporting our ships to,” says Kjetil G. Abildsness, chair of Jubilee Norway.

NGOs hope that the Norwegian announcement will prompt other creditors to conduct enquiries into their lending practices and to accept responsibility for their negligence or complicity in the build-up of unsustainable third world debt.

The Norwegian decision comes amidst debate in Washington over the World Bank’s proposed governance and anti-corruption strategy, the baby of Bank president Paul Wolfowitz, which suffered a setback at the institution’s annual meetings in Singapore last month. The proposal would have seen, among others, the Bank’s concessional lending arm, the International Development Association (IDA) withholding funds from low-income countries which failed to meet Bank-established targets for governance and anti-corruption measures.

Wolfowitz, who made tackling corruption and poor governance in developing countries his priority when he was appointed to lead the Bank by the US Bush administration last year, had hoped to be given a carte blanc to formulate and implement the proposed framework. However, he was overruled by the Bank’s shareholding governments which insisted on greater Executive Board oversight over the development of the strategy with governments expressing concern over the indicators for determining corruption and governance in countries as well as the proliferation of conditionality.

The Bank’s governance and anti-corruption framework also places the blame for corrupt and irresponsible borrowing practices solely on the recipient countries with little regard for the complicity of creditor governments in the financing unsustainable projects and programmes in developing countries.

NGOs have campaigned that the responsibility for unsustainable debt should be shared among creditor nations as well so that debt incurred through irresponsible, corrupt or negligent means may be considered illegitimate and repudiated. “If creditors are assured that they will always be repaid (as is the case under the current system) there is no incentive to act responsibly. This is the classic moral hazard problem and is one of the factors that contributed to the current debt crisis”, says Jubilee Norway.

Eurodad has urged the Bank and other creditors to follow the lead of Norway and undertake ‘critical examination of the Bank’s lending practices to poor countries in the past”, says a related article on its website. “How can any approach to weed out corruption be successful or comprehensive if it does not look critically at the lending practices undertaken by the institution in the past ?” the organization asks.

Further details on the Norwegian debt deal as well as more information on illegitimate debt can be found on the Eurodad website: http://www.eurodad.org and from the Norwegian government website: http://www.odin.dep.no/ud/english/news/news/032171-070886/dok-bn.html