Blog: Calling in Ecuador’s debt

Ecuador owes foreign creditors $11bn. Guardian Weekly reader Gail Hurley, a commissioner on Ecuador’s debt audit commission, launched in July 2007, explains the work she is doing to reduce the country’s debt burden

This article was originally published by the Guardian

In June 2005, when G8 Heads of State announced that US$40bn of debt owed by some of the world’s poorest nations would be cancelled, I remember my grandmother joyfully calling me up to announce that, “the debt has been cancelled”. As debt campaigners, “we’d done it!” Imagine her confusion, two years later, as I still seem to be working on exactly the same thing.

I spoke to her recently, when I was leaving for Ecuador to be part of a new commission set-up by the Ecuadorian Government to audit nearly US$11bn in external debt owed to foreign creditors. “Didn’t they cancel the debt after all?” she asked. “Ecuador wasn’t on the list,” I replied, “it was considered too rich”. “That doesn’t sound a very fair,” she said.

It seems that there are many others who don’t consider this fair either. One of these is the government of Ecuador’s new and charismatic president, Rafael Correa. His is one of a new wave of leftist and more assertive governments in Latin America which are challenging the orthodox economic policies prescribed by the IMF and World Bank and even moving towards setting-up their own rival regional financial architecture in the form of the “Banco del Sur”.

Correa inherited a scenario where a massive 38% of the government budget was devoted to external debt service. On 23 July 2007, Correa launched a “debt audit commission”. In it, around a dozen local and international experts – myself included – drawn from academia, civil society organisations, indigenous and environmental movements have been invited to work with the Ecuadorian State over the next twelve months to investigate the country’s debt burden with foreign creditors on a loan-by-loan basis.

Commissioners have been mandated to audit loans “comprehensively”, i.e. we have been asked not just to provide a simple financial technical assessment of credits, but to look into legal questions, financial terms and conditions, and any social and/or environmental impacts which may have resulted from the loan. The group will report its recommendations to the government.

Although the concept of a debt audit is not new – with experiences in Brazil, Argentina, Uruguay and the Philippines – this commission is something of a first because it is the world’s first debt audit commission which has the full backing and involvement of the government.

I have met mixed reactions to the initiative. In NGO circles, it has generated many expectations that it will help to generate an international debate into the concept of “illegitimate debt”. Illegitimate debts have been described as those loans which were extended to finance “white elephant” projects (such as the Bataam Nuclear Power Plant in the Philippines which was constructed on an earthquake fault line), loans which contained grossly unfair terms or conditions (such as unfair interest rates), or loans which were extended to corrupt and dictatorial regimes who never used the funds in the interests of the people and importantly where the creditor was fully aware that this was likely to happen. Under the current system, the debtor nation must always repay even if the people never benefited from the loan and the creditor failed to exercise due diligence.

In private sector and official circles, there is some confusion however as to why a debt audit commission has been set up at all. In conversations with a number of individuals, a common reaction has been, “this is not 1999, when Ecuador really couldn’t pay its debt. Ecuador is in a position to pay, so why a debt audit commission now?”. In defence of this hypothesis, Ecuador’s increased oil revenues (up from US$2.18bn in 2000 to US$5.2bn in 2006) and relatively low debt-to-GDP ratio (of 38%) are quoted. But the audit commission has been established to assess not whether Ecuador can pay but whether Ecuador should pay. Arguing that Ecuador can afford to pay and can use its increased oil revenues to pay foreign creditors suggests that this should be the priority expenditure for revenues from such resources.

Thinking about this question as I was taken around the shanty towns outside Guayaquíl – home to over one million people – you would be hard pressed to tell people who struggle by on just a couple of dollars a day that forking out 38% of the government’s revenues to pay external creditors doesn’t matter and is “affordable”.

The difficulties which the debt audit commission – and commissioners –face are considerable however and became only too apparent in my first day at the Ministry of Economy and Finance. Ricardo Patiño resigned as Economy and Finance Minister in the first week commissioners began their work. He was forced to step down following fierce allegations (which he denies) of manipulating bond prices. His resignation reflects continuing political turmoil in the small Latin American nation which has seen nine presidents come and go over the past ten years. There are also a vast number of files to be examined. Record-keeping on the Ecuadorian side has been poor in the past and human resources are being pushed to the limit as the new government seeks to put some semblance of order to muddled documentation. Creditors meanwhile are well-resourced and well-organised whether you’re talking about the Paris Club or bond traders with their representatives on Capitol Hill.

I have been allocated responsibility for analysing bilateral loan agreements between Ecuador and its sovereign creditors. This will include creditor countries such as Spain, Italy, Germany, France, UK, Belgium, USA, Canada and Japan. On my first day on the job, as I began to sift randomly through various credit agreements, what I discovered probably shouldn’t have surprised me, but the scale of the problem certainly did. As I glanced at loan agreements between Ecuador and Belgium, Italy and Germany, I quickly saw that all loan contracts – randomly selected from a large pile – represented tied aid of the worst kind: the funds were to be used exclusively for the purchase of materials from the lender nation, to be assembled in-country by workers from the lender nation, with advice provided by consultants from the lender country, to be transported to Ecuador via transportation companies registered in the lender country, with repayments to be made in the currency of the lender.

Ecuador foots the bill from start to finish, even though much of the funds clearly wind up straight back in the economies of the lender. And despite official rhetoric on changes to tied aid policies, I saw little evidence of real change between contracts signed in 1995 and those signed in 2005.

Perhaps these loan agreements aren’t “illegitimate” per se, but they contain seriously questionable clauses which help us to understand the cries of many commentators who argue that “aid doesn’t work”. The fundamental question I have asked of these loans is, “in whose interest?” One of the questions commissioners will now ask is whether prevailing market prices were charged for the goods and services which were part of the loan agreement.

One of Rafael Correa’s election pledges was to reduce the amount of annual debt service from 38% of the government budget in 2006 to 11.8% by 2010 in order to free-up far greater resources for investments in the social sectors and research and development in the country. The debt audit commission can be viewed as an important step towards keeping this commitment, as well as challenging the prevailing orthodoxy that all debts should be paid, no matter what the human cost and no matter whether negligence, fraud, extortion or corruption was involved.

Because this initiative is unique in the world, the process will surely be a steep learning curve for all those involved. But Ecuador is certainly taking a historic step and when thinking about this initiative, we should remember the central premise behind it: people before creditors.

Gail-Hurley-Eurodad Correa Ecuador
Me with then-President Rafael Correa of Ecuador, former Finance Minister Ricardo Patiño and fellow debt audit commission member Maria Luisa Fattorelli in 2007. I was asked to serve on Ecuador’s debt audit commission: “Comisión de Auditoría Integral del Crédito Público (CAIC)” launched in Ecuador on 23 July 2007.


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