ARE SRI LANKA’S DEBTS “ODIOUS”?

by M. Sornarajah-2022/05/29

Emeritus Professor of Law

National University of Singapore

The economic crisis in Sri Lanka is due to massive borrowings by recent governments of the country. It is true that external factors, like the covid pandemic and, later, the war on Ukraine, contributed to the crisis but inability to service the loans was the primary and immediate cause of the economic crisis. The policies of the government like the reduction in taxation of high earners, the mismanagement of the covid pandemic and the banning of chemical fertilisers contributed to the situation. These were factors that operated on the primary cause, the unsustainable debts that had been incurred for purposes which lacked a clear public benefit and were tainted by corruption. Repayment of interests on the loans depleted the dollar resources of the state.

Sri Lanka now lacks resources to service the loans. The government has declared that it has no more than 50 million dollars in its coffers. That is less than the personal wealth of our corrupt politicians. Some arguments must be found for rescheduling the debts. Among them are the lack of public utility of the debts, the lack of transparency in the loan transactions, excess of authority of public officials negotiating the loan, the unfavourable interest rates and the complicity of the lender in making the tainted transactions. These reasons are encapsulated in the legal doctrine on “odious debts.” This article examines the possible application of the doctrine of odious debts to the debt obligations of Sri Lanka.

The restructuring of the existing debts so as to make repayments easier is necessary to ease the debt burdens of the country. In negotiating such restructuring, it is relevant to discuss whether the original purposes of the debts and the circumstances of their negotiations impact on the fairness of the debt obligations. A sovereign debt is unlike a commercial debt. A commercial debt is negotiated between private parties. The transaction is between the lender, usually a bank and a private person. The private person seeks the debt for a purpose of his own and the parties agree on terms relating to interest and repayment. The loan transaction is subject to the normal principles of contract law. Even in such private transactions, domestic legal systems are beginning to question the fairness of the terms of the loan.

The debt obligation of a sovereign state is different. For one, the sums involved in a sovereign loan is very large, unlike in private commercial transactions. The debt is negotiated between the government of the state through its officials with a foreign state or a foreign bank in order to serve the interest of a third party, the public of the state. It is the existence of this public interest that gives legitimacy to the debt obligation. Where that public interest is lacking, doctrine has it that the sovereign debt is an odious debt, particularly in the situations where the lender knew that the loan was tainted by an absence of public interest or corruption.

Creditor complicity in the taint exists where the creditor lent the money in order to achieve a purpose of its own, such as securing a political advantage or securing high interest rates using the ignorance of the sovereign borrower. The debt becomes odious also where the creditor is aware of the widespread culture of corruption in the state. The instances where the lender pushes the loans for securing monetary or political advantages for itself are regarded as instances of “predatory lending”, the existence of which supports a finding of an odious debt.

The doctrine of odious debts in international law casts doubt on the validity of debt obligations created by a government when it appears that the debt was not to be used and was not used for a project that benefited the people. In terms of Sri Lankan domestic law, the ministers or public officials who negotiate loans knowing that the public interest in the loan is non-existent or slim, exceed their bounds of authority. The sovereign loan, being an administrative transaction located in public law, would be treated as invalid due to excess of authority. The soundness of the premises on which the doctrine is based is unassailable.

The policy purpose of the doctrine is admirable in that it deters lending to states with corrupt leaders. It raises the question also as to whether lending states should use sovereign debts as instruments of diplomacy to further their influence with the state or the region. The legitimacy of a debt made to an authoritarian government by a lender who sought to cultivate a special relationship with a regime is an irksome idea. Why should such a debt be passed on to a later democratic government? Why should the people of the state have to bear the debt burden which is not to their advantage?

There are human rights issues that arise as well. The example of Sri Lanka indicates that such debts result in an increasing unavailability of the essentials of life, like medicines, electricity, cooking gas, transport, hospital facilities and schooling for children. They result in hunger and increase poverty. They implicate the violation of human rights such as the right to life. Such loans come into conflict with fundamental norms of international law and must be considered invalid on that count.

The debts that have been incurred by the Sri Lankan governments in the last few years do have hallmarks of odious debts. They were debts incurred by a government that the people allege was steeped in corruption. It is alleged that a part of the loans found their way into the pockets of ministers and public officials who negotiated the loan. Many of them lacked a public purpose, were not negotiated transparently and served the political interests of leaders of the borrowing state and the foreign policy interests of the lending state.

Many of the projects for which Sri Lanka sought loans lacked an overt public purpose. Many were projects which were objected to on grounds of feasibility, the harm they could cause the environment or the lack of potential to earn revenue. True it is that some projects involved the building of infrastructure such as roads and bridges but the raising of the loan as well as the tendering processes in these projects involved heavy corruption. The popular belief is that more than 10 percent of the sums involved in every government project found its way into the personal coffers of a particular minister. There are many projects that the public readily associate with corruption because of their obvious lack of utility to the public despite the high costs involved in their construction.

The megaprojects for which loans were granted have some common features. They are named after President Mahinda Rajapaksa, indicating that they were often vanity projects designed to keep the President’s name for posterity. Each one of them has been referred to as a white elephant in both the local and the international press. There was considerable local opposition to their construction. Besides the other common features, they were usually located in the Hambantota District, the native area of the Rajapaksa family. These debts were given by Chinese development banks which were influenced by the Chinese policy of securing a foothold in Sri Lanka. The projects so overtly lacked public interest that the lender should have known that the loans were tainted.

Many of the loans were raised in the context of a new foreign policy initiated by President Mahinda Rajapaksa. There was a tilt in foreign policy towards China. China itself was fast rising as an economic power. China was keen to establish links with Indian Ocean States. Sri Lanka provided strategic advantages in securing a foothold in the Indian Ocean. China also began a Belt Road Initiative, the object of which was to restore Chinese influence along the old land-based silk route as well as the maritime routes that the Chinese Admiral Zheng He had used in the fifteenth century. (It is a matter of our history that the Chinese Admiral visited our island on two occasions. He captured one of our kings, Alekeswara, and took him to China as a hostage. A regime change resulted. (See The Island, 31.05.2021 on the “Trilingual Inscription on the Galle Stela”. The inscribed stone left behind by the Admiral was found in Galle. It is kept in the National Museum.) Recovering the past influence was an object of the BRI in the context of which China is said to pursue a policy based on loans to the countries of the BRI region. If so, there was a political objective behind the giving of these loans.

Several loans were given by the Chinese Exim Bank. The Export-Import Bank of China is chartered to implement the policies of the Chinese state in the areas of international trade, industry and foreign aid. It was a principal source of loans to several projects in Sri Lanka. The Magampura Mahinda Rajapaksa Port (Hambantota Port) was built with large loans given by the bank. The economic feasibility of the Port is suspect. As a result of problems in the repayment of loans, a 99-year old lease was given to a joint venture company in which a Chinese state corporation had 80 percent of the shares. There was a lack of transparency in the transaction.

The Mattala Rajapaksa International Airport was also built with loans from China. It was described by Forbes Magazine as the “world’s emptiest airport”. It provides a home for wildlife in the area and was used for storage of rice. The Mahinda Rajapaksa International Cricket Stadium is another white elephant built near Hambantota. It cannot attract sufficient spectators to make playing international matches there viable. The Stadium was built by the Sri Lankan cricket authorities though a Chinese company which is owed money for its construction. The Lotus Tower sticks out like a thumb in the Colombo skyline. It was built with loans. It is difficult to discover a public interest in its construction.

The Nelum Pokuna Mahinda Rajapakse Theatre was built to resemble the Nelum Pokuna in Polonoruwa, built by Parakramabahu The Great in the twelfth century. It was built with borrowed money. There is also the building of the DA Rajapaksa Museum concerning which a case is pending. These projects could not have promoted public welfare. The loans to construct them must be regarded as odious debts.

Other projects connected with Hambantota, like the Southern Expressway (on which I recently drove comfortably from Colombo to Kataragama), though little used due to high tariffs, do have public utility. The same would apply to the improvement of road networks under the Rajapaksa regime. Though their construction involved much corruption, they were useful to the public. To the extent that the odious debt doctrine may have partial application, the doctrine may affect these projects as well.

Much is made in newspapers about the Chinese debt trap. There does not seem to be a case for that. But, there seems to have been an eagerness to court the Rajapaksas and give loans for unwise projects. There may also have been a need to show the success of the Belt Road Initiative behind the making of these loans.

China has used the odious debt doctrine in the past to deny its debt obligations. Immediately after the success of the Chinese Revolution, China used the odious debt doctrine to justify default on bonds issued in connection with the building of the Huguang Railway during the previous regime in litigation arising before US courts in 1952.

The odious debt doctrine can be used to justify default on payment of some debts. Strategically, it would be best to use the doctrine to renegotiate or reschedule the debt obligation. The doctrine will enable an argument that some debts which carried little public benefit should be rescheduled in a manner favourable to Sri Lanka. The countries that are using this doctrine will increase. The doctrine has been discussed in connection with Greece, Ecuador and Venezuela. The doctrine featured in the rescheduling of Argentine debts during its economic crisis in 2000.

In 2003, the Bush administration favoured the cancellation of Iraqi debts partly on the ground that the debt obligations were created during a dictatorial regime. Many Iraqi debts were cancelled. Debts incurred by colonial governments were renounced by the newly independent states, Algeria and Indonesia providing examples. In the immediate post-colonial period, developing states made the argument that they do not succeed to debt obligations incurred during colonial rule. The affinity with such past situations with the current debts of states exist when an authoritarian leader clothed in the vestiges of democracy commits his country to unwise loans that do not further the public interest but advance his personal interests.

The odious debt doctrine is not supported by extensive case law because it is an argument used largely for the restructuring of debts. It provides a useful tool to base an argument for cancellation or renegotiation of unsavoury debts. In the Sri Lankan case, the debts owed to China do attract the application of the doctrine. The Chinese debts form only 10% of our debts. The extent to which loans by private institutions can be subject to the doctrine is uncertain due to lack of information. Given the context in which Sri Lanka finds herself, exploration of the use of the application of this doctrine to the Sri Lankan debts is necessary.

The potential finding of the Sri Lankan debts as odious debts also requires reform of the rules that regulate the raising of loans by the state. In a country ruled by successive authoritarians, maintaining power through ethno-religious chauvinism, the practice of securing corrupt loans will be rife. There should be constitutional and other regulatory mechanisms controlling future governments raising loans from foreign banks. Besides complete transparency, there should be demonstration of clear public benefit objectives that are secured by the loan and the spending of the money.