(April 27, 2011) Egypt’s period of political transition presents an ideal time to examine the odious nature of debt accrued by deposed President Hosni Mubarak’s government, whose time in power amounts to almost 30 years in the borrowing.

Lisa Peryman

In ‘Debt, Dictatorship, and Democratization [PDF] ’  international law experts Robert Howse and Ruti Teitel take up the call for an odious debts assessment to uncover how much of Egypt’s estimated $35-$37 billion in external debt went to meritorious development projects and how much went to propping up the country’s regime and lining its leaders’ pockets.

The authors note that where lenders were aware their funds might be used for corrupt or oppressive ends, they should take responsibility, “at least for relieving taxpayers of the burden of debt contracted against, or with indifference towards, their interests.”

The World Bank, for instance, publicly ranked Egypt as one of the most corrupt countries in the region, yet continued to hand over money to Mubarak’s government—a leading customer—through its private lending arm, the International Finance Corporation (IFC).  Howse and Teitel compare the situation to Tunisia, another heavy borrower perceived as corrupt and becoming more so, whose foreign borrowings—managed and manipulated by a a narrow elite—nevertheless increased significantly in recent years.

The authors say that while debt relief would enable new regimes to build the country’s job market, infrastructure and human capital, debt cancellation is “fundamentally about transitional justice”. They warn against a “hasty bargain” with creditors because debt forgiveness could “preclude a process of accountability for the past”.

The distinction between debt relief or forgiveness and debt cancellation is a very important one for citizens. Foreign-aid watchdog Probe International, a leading advocate of odious debt challenges, has long argued that forgiveness would not resolve the issue of accountability and would allow both lenders and borrowers to escape culpability for their negligence and corruption. The beauty of a successful odious debts challenge, Probe’s Executive Director, Patricia Adams, says, is that citizens would be absolved of having to pay for the crimes of their leaders. Lenders, meanwhile, could still chase payment from the dictator or regime they loaned to. The lenders and the borrowers deserve each other, she says, and they should resolve their dispute together, but leave the public out of it.

Critics of odious debt arbitrations say legal challenges would discourage lending to countries that desperately need capital for development. A false argument to which Howse and Teitel respond: back off, then.

“Where oppressive regimes are using foreign credit to postpone needed domestic political and economic reforms, that may be a good outcome,” they say. “At a minimum, creditors would have to examine more carefully those to whom they are lending, and where the money is really going. If creditors turn a blind eye to corruption and oppression, they should have to pay a price.”

By Lisa Peryman, Probe International

Further Reading:

The Doctrine of Odious Debts: Using the Law to Cancel Illegitimate Debts

Odious Debt: Seminal Sources