South Sudan should not be born into debt February 2011 For further information contact: Tim Jones, Senior Policy and Campaigns Officer Email: tim (at) jubileedebtcampaign.org.uk Phone: +44 (0)20 7324 4725 1) Sudan’s debt Sudan owes a huge $35 billion debt to the rest of the world (65 per cent of the country’s national income).1 Deciding how this debt will be split between North and South Sudan is one of the key decisions to be made if South Sudan is to secede in July 2011. Jubilee Debt Campaign says: “South Sudan should not be born into debt.” Sudan’s debt to the Western world originated in the 1970s and early 1980s when the dictator Gaarfar Nimeiry was supported by Western countries during the Cold War. These debts have increased massively due to high interest rates, such as the 10%+ interest rate charged by the UK.2 Almost 60 per cent ($20 billion) of Sudan’s debt is interest.3 More recently, loans have been given to the dictatorship of Omar Al-Bashir by lenders such as Kuwait, Saudi Arabia and China. Nick Dearden, Director of Jubilee Debt Campaign has said: “South Sudan should not inherit unjust dictator debt from the north. Current debt relief processes are not acceptable – they will simply force south Sudan into a time consuming programme, full of illegitimate conditions, which allows borrowers to collect interest on deeply unjust debts. Moreover, as popular protests reach Khartoum, the debts of the northern government also needs to be audited to identify past unjust lending and increase transparency.” 2) What we want to happen South Sudan should not start its existence burdened by debt given to Khartoum-based dictators. Much of this debt is ‘made-up’ money based on high interest rates, while much of the principle is based on unjust and irresponsible lending. There is a chance the North may agree to keep all the debt, which would ensure South Sudan starts its existence debt free. If for political reasons, South Sudan is assigned a portion of debt, this debt must be cancelled immediately and unconditionally on independence, without requiring the taking out of any new loans or debt repayments, acknowledging there is no reason why the new country should be burdened by past dictator debt. In addition, South Sudan will need substantial grant money in order to combat poverty, ensure development and institute accountability and transparency. Agreeing the process of cancellation of debts now for the North is also a key part of supporting a peaceful secession. As part of the process of increasing accountability and transparency in the North, creditors should support an official audit of debts in North Sudan. Such an audit must include representatives from civil society as well as the Government. A debt audit would show why loans had been given and what they were spent on, increasing public transparency of the creation of debt. Debts found to be unjust, based on high interest rates, or preventing the meeting of basic needs in the country should then be cancelled as unjust. The process of holding a debt audit would by necessity require the North Sudanese government to make major improvements in accountability and transparency.
South Sudan’s should not be born into debt: Jubilee Debt Campaign 3) Where Sudan’s debt comes from: Reckless Western lending in the Cold War Most of Sudan’s debt to the West, whether financial institutions such as the IMF and World Bank, or rich country governments, originated in the 1970s and 1980s when Sudan was ruled by the dictator Gaarfar Nimeiry. During the 1970s Sudan’s economy was strong, with good prices for its major export, cotton. With lots of cheap money in the world economy following the 1970s oil price spikes, private banks lent recklessly to Sudan in anticipation of future revenue from oil.4 Western powers also supported loans to Sudan, for instance lending in order to buy western company exports. However heavy flooding in 1978 and the rise in US interest rates in the early 1980s meant Sudan could not meet payments on its debts. Rather than banks taking some responsibility for their reckless lending, the IMF bailed them out by giving Sudan new loans in order to pay its old debts.5 Despite Sudan’s difficulties paying its current debts, more loans were given by banks and governments due to, as the IMF’s official history puts it, “respect for Sudan’s strategic role in the region”6 Just as in other African countries such as Zaire (now Democratic Republic of Congo), Western powers continued to loan money to an already highly indebted dictator, in order to keep him on side in the Cold War. In 1983 major drought struck devastating exports and food security. As the country plunged into economic crisis, Nimeiry imposed Islamic law across the country, including the previously autonomous South. Despite the start of the civil war, the IMF lent more money but with the drought, civil war and falling prices of commodities, Sudan defaulted on its debts in 1984. Few repayments have been made on debt to the Western world since, and Sudan’s debt has subsequently increased massively due to interest rates. Omar Al-Bashir came to power in Khartoum in 1989. His regime has been accused of very serious human rights abuses, and the International Criminal Court has issued an arrest warrant against Bashir for war crimes. He has continued a policy of repression towards the South and West of Sudan. However, there are still ways the debt issue could be moved forward: • Sudan has been in default on most of its debts throughout Al-Bashir’s Presidency. Hence these debts are not acting as an effective ‘punishment’ on the regime. If anything, they might make the regime more intransigent. Foreign governments need to make clear what movement Al-Bashir has to make on human rights in order to start a process of debt cancellation. • A real purpose of keeping Sudan’s debts on the books and accumulating interest is so that debts can be held over the heads of a future government. While Western countries and international institutions have agreed to relieve this debt, that relief will be dependent on a government instituting an IMF and World Bank programme and set of economic conditions. It would also require the taking out of new loans, keeping North Sudan in debt. A successor government in North Sudan should not have to start life burdened with the unjust loans of its predecessors – loans which in many cases have fuelled Sudan’s problems. • Creditors should support and enable the holding of a genuinely independent audit of Sudan’s debts. Whether taking place with a reforming or new regime in Khartoum, a debt audit can identify unjust debts. A debt audit could also be part of the process of increasing accountability and transparency over public finances. A first step towards this would be for governments such as the UK to reveal what loans originally led to debt being created.
South Sudan should not be born into debt: Jubilee Debt Campaign 4) UK portion of debt The UK claims Sudan owes £650 million ($1 billion) to the Export Credit Guarantees Department, but does not say what projects these ‘loans’ originally supported. This debt originates from before 1980. Since 1984 an interest rate of between 10 and 12 per cent has been charged on the debt, wildly inflating it.7 This suggests the debt in 1984 was around £55 million; 90 per cent of the claimed debt today is interest. In contrast, if ECGD had charged it’s usual interest rate,8 Sudan would today owe just £167 million. If and when this debt is cancelled, the UK will claim all of the cancelled debt counts as overseas aid, helping the UK to meet its international aid targets. Nick Dearden, Director of Jubilee Debt Campaign has said: “The UK is claiming Sudan owes £650 million for a debt which may have been as small as £55 million in 1984. If this debt is cancelled the UK will call the whole amount aid, and use it to meet aid targets. Yet the debt is made-up money based on ridiculously high interest rates. The UK government needs to conduct an audit of all debts owed by developing countries to reveal if loans damaged human rights, development or the environment, and to expose usurious interest rates. There is no reason such an audit cannot be undertaken immediately.” 5) Other lenders With Sudan in default to western powers, Al-Bashir’s regime has borrowed primarily from Arab governments and funds, and other states such as China. Exact amount owed to these creditors are unclear. Some of this debt has also been defaulted on, but repayments are being made to creditors which have continued to give new loans. 6) Who is calling for Sudan’s debt to be cancelled Both the North and South Sudanese governments are arguing that all the debts should be cancelled. President Omar al-Bashir has said splitting the debt between the north and south is of “no use” because the new southern state would not be able to service the debt.9 John Gai Yoh, Head of the Southern Sudan mission in South Africa, has said: “We believe the best option is for the two parties to convince the international partners to cancel these debts.”10 Former US President Jimmy Carter has called on the international community to cancel Sudan’s external debt, so that it does not become an issue which blocks peaceful secession from taking place.11 Carter has said: "There is maybe $39 billion of debt and the World Bank tells us that maybe $30 billion of that is in arrears. That is a very serious burden. I don't see anyone on the list who can't afford to forgive it."12 7) Precedents of splitting debt Various precedents exist from the creation of new states. The debt of the former Yugoslavia was divided between states on the basis of which new state was the final beneficiary of a loan. Where debts were unable to be allocated in this way, they were split up on the basis of tax revenues, export earnings, population and territory. When Bangladesh won its freedom from Pakistan in 1971, a dispute lasted three years between creditors, Pakistan and Bangladesh over division of the debt. In the end, some debts were cancelled, but Bangladesh accepted $350 million of debt resulting from projects the new Bangladeshi government had not agreed to.13 When Timor-Leste gained independence from Indonesia it started life debt free, as effectively did Eritrea when it became independent from Ethiopia in 1993.
South Sudan’s should not be born into debt: Jubilee Debt Campaign 8) The IMF and World Bank debt relief scheme Debt relief for the poorest countries is done through the IMF and World Bank’s Heavily Indebted Poor Countries (HIPC) initiative, created in 1996. Thirty-two countries have so far had around $90 billion of debt cancelled through HIPC and the related Multilateral Debt Relief Initiative (MDRI) (which was created in 2005).14 The list of countries is closed so a new country such as South Sudan would not automatically qualify. Similarly, North Sudan would only qualify if it is legally agreed as the continuing state of Sudan. If lenders did decide to create a HIPC style process for debt inherited by South Sudan, this would be likely to take several years.15 South Sudan would have to make debt repayments in the meantime, taking valuable resources away from the new country. Moreover, new loans would have to be taken out to clear arrears to the IMF and World Bank. These new loans would not be eligible for cancellation, and so would leave South Sudan saddled with debt for years to come. The debt cancellation process would also give the IMF and World Bank unprecedented control over South Sudan’s economic policies.
Breakdown of Sudanese government debt (end-2009):16 Creditor Multilateral, primarily IMF and World Bank Western country governments (primarily Austria, US, Denmark, Italy, UK, France, Belgium) Other governments (primarily Kuwait, Saudi Arabia, China) Private banks Private companies
Sudan bilateral government creditors17 Country Amount Kuwait $6 billion Saudi Arabia $3.1 billion Austria $2.2 billion US $2.1 billion China $1.7 billion Denmark $1.3 billion Italy $1.2 billion UK $1.2 billion France $1.1 billion Belgium $1 billion
‘Other government’ ‘Other government’ ‘Western government’ ‘Western government’ ‘Other government’ ‘Western government’ ‘Western government’ ‘Western government’ ‘Western government’ ‘Western government’
Amount $5.3 billion $11.2 billion $13.3 billion $4.5 billion $1.4 billion
South Sudan should not be born into debt: Jubilee Debt Campaign References 1
World Bank and IMF. (2010). Sudan: Joint IMF/World Bank 2009 debt sustainability analysis. IDA and IMF. 07/06/10. 2 ECGD. (2011). Response to Freedom of Information Request. ECGD. 07/01/11. 3 World Bank and IMF. (2010). Sudan: Joint IMF/World Bank 2009 debt sustainability analysis. IDA and IMF. 07/06/10. 4 Boughton, J. (2001). Silent revolution: The International Monetary Fund 1979-1989. 01/10/01. http://www.imf.org/external/pubs/ft/history/2001/index.htm 5 Boughton, J. (2001). Silent revolution: The International Monetary Fund 1979-1989. 01/10/01. http://www.imf.org/external/pubs/ft/history/2001/index.htm 6 Boughton, J. (2001). Silent revolution: The International Monetary Fund 1979-1989. 01/10/01. http://www.imf.org/external/pubs/ft/history/2001/index.htm 7 ECGD. (2011). Response to Freedom of Information Request. ECGD. 07/01/11. 8 ECGD’s normal interest rate is 6-month floating interest rate of London Inter-Bank Offer Rate (LIBOR) corresponding to the currency of the debt plus 50bps 9 AP. (2011). Sudan president offers to relieve south of debt. Associated Press. Khartoum. 12/01/11. 10 Singh, A. (2010). Splitting Sudan: Questions and Answers. Financial Mail. 23/12/10. 11 Straziuso, J. (2011). Carter urges nations to erase Sudan’s $39bn debt. Associated Press. 14/01/11. http://www.boston.com/news/world/africa/articles/2011/01/14/carter_urges_nations_to_erase_sudans_39b_debt/ 12 AFP. (2011). Carter says Bashir wants all Sudan debt forgiven. Juba, Sudan. 13/01/11. http://news.yahoo.com/s/afp/20110113/pl_afp/sudanreferendumeconomydebt_20110113141140 13 Leo, B. (2010). Sudan debt dynamics: Status Quo, Southern Secession, Debt Division and Oil – A Financial Framework for the Future. Centre for Global Development Working Paper 233. December 2010. 14 IMF and IDA. (2010). Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt relief Initiative (MDRI) – Status of Implementation. IMF and IDA. Washington DC. 14/09/10. 15 Leo, B. (2010). Sudan debt dynamics: Status Quo, Southern Secession, Debt Division and Oil – A Financial Framework for the Future. Centre for Global Development Working Paper 233. December 2010. 16 Leo, B. (2010). Sudan debt dynamics: Status Quo, Southern Secession, Debt Division, and Oil – A Financial Framework for the Future. Centre for Global Development Working Paper 233. December 2010. 17 Leo, B. (2010). Sudan’s Bumpy Debt Road Will Run Through Where? Vienna? 14/12/10. http://blogs.cgdev.org/globaldevelopment/2010/12/sudan%E2%80%99s-bumpy-debt-road-will-run-through-whereth vienna.php from Bank of Sudan. And Central Bank of Sudan. (2010). 49 Annual Report. Khartoum. http://www.bankofsudan.org/