Imagine waking up one day to learn that someone has taken out a huge loan in your name and in the name of your children without consulting you. In fact, you still don’t have all the details about the loan. The person who made off with the money won’t tell you what they’ve done with it. All you know is that the loan is so big that you and your children will spend the rest of your lives working to pay it back.
This dystopian plot is a reality for hundreds of millions of people in countries from Sri Lanka to Zambia where presidents and prime ministers have, without the knowledge or approval of their parliaments or voters, taken out massive loans.
For example, the former prime minister and president of Sri Lanka, Mahinda Rajapaksa, moved forward with borrowing $1.1 billion to build a port in Hambantota, his hometown, despite the fact that the plan was rejected by the government’s expert panel. The former president of Mozambique borrowed at least $2 billion in secret – much of the funds were misappropriated.
Globally, debt is at record levels – the highest in 50 years and triple 2008 levels. Many of these loans are contracted without public or parliamentary scrutiny. And in the worst cases the existence of the loans has not been disclosed at all or disclosed only through murky leaks – depriving parliaments and the public of any voice or oversight in the process. According to the World Bank, 40 percent of low-income countries have not published any data about their sovereign debt for more than two years.
The consequences of these unsustainable debts are hard to overstate.
In 2021, according to the United Nations, 25 of the world’s poorest countries spent more on debt service payments than on health, education, and social protection combined. According to the UN, nearly half of low income countries, 44%, are at "high risk of external debt distress or already in debt distress." Defaulting countries often lose access to financial markets and are faced with higher borrowing costs in the future.
Research shows that, while often a result of corruption, accumulated and non-transparent debt only fuels further corruption. The funds often allow executives to expand their power and authoritarian influence at the expense of democratic checks and balances.
What’s more, many of the ill-advised projects financed by loans are unproductive white elephants – such as massive stadiums or ill-equipped fishing fleets – that will continue to require funding for maintenance for years to come.
A growing percentage of these loans – about 10 percent of loans from 2004 to 2018 – are resourced backed loans. This extremely troubling trend means that governments are securing the loans by putting up future revenue streams as collateral. They are the national equivalent of payday loans – offered at, when the final math is done, shockingly high interest rates.
These backroom deals also erode the social contract between citizens and governments.
The global public debt system is badly broken and in urgent need of a democratic reset. This challenge cannot be solved by low- and middle-income countries alone. International financial institutions, debtor nations, creditors, and other stakeholders all have a role to play in solving this urgent problem.
Unfortunately, today, routine disclosure by lenders is not standard. And the single largest bilateral creditor, China, typically requires strict nondisclosure clauses that impede the publication of the contracts or even their terms – creating an opaque system primed for corruption and mismanagement at the public’s expense.
Last month, the Open Government Partnership, the National Democratic Institute, and the Chandler Foundation brought together a high-level panel of experts and practitioners to discuss how the global public debt system could be reformed to address these concerns.
The webinar featured Hon. Gladys Ganda, chair of the Budget and Finance Committee for the Parliament of Malawi; Arturo Herrera Gutierrez, global director for governance global practice at the World Bank; Tim Hanstad, chief executive officer of the Chandler Foundation; Nadishani Perera, executive director of Transparency International Sri Lanka; Sanjay Pradhan, chief executive officer for the Open Government Partnership, and Rosarie Tucci, acting deputy assistant administrator for the Democracy, Rights, and Governance Center at USAID.
Sanjay Pradhan of OGP explained that leaders have an opportunity to invert the current dynamic with China and other donors who require non-disclosure. Rather than allowing China to dictate the terms of the loans and undermine rule of law, countries should pass legislation that requires transparency and accountability with approval from the legislature.
Transparency has a number of benefits, he added. Not only does it support democratic systems and reduce the opportunity for corruption. Research shows that debt transparency reduces the amount of debt assumed by government leaders. It also tends to lower the cost of borrowing.
Bulgaria and Malawi have used OGP action plans to create a roadmap for commitments to support broader access to information, open data, civic participation, integrity, and to accelerate the fight against corruption.
Rosarie Tucci of USAID observed that all countries needed to make standard practice the routine auditing of public debt and parliamentary approval of all borrowing plans and agreements. Gladys Ganda, of Malawi, added that transparency and accountability need to be maintained throughout the debt negotiation process.
Nadishani Perera, of Transparency International, shared the devastating impact when those best practices are not followed, such as when her country, Sri Lanka, found itself burdened with unsustainable and unreported debt.
“The bankruptcy of our nation is intrinsically connected to a governance crisis,” she said. “This is a preventable disaster… [that has] bonded our children and grandchildren to debt.”
She urged lending institutions such as the World Bank and IMF to stop propping up corrupt governments with loans until the governments commit to governance and anti-corruption reforms. “You have the ability to ensure that certain conditions come along with your support, conditions that make it mandatory for essential anti-corruption reforms” Perera told participants.
“People have lost trust in their public representatives,” Perera told participants. “If there was any transparency in the debt system, this would not have happened.”
Watch the panel discussion on YouTube.