Ecuador has suffered greatly as a result of illegitimate debt. Ecuadorian people successfully campaigned for a debt audit which publicly investigated past debts. Following the audit, Ecuador managed to cancel much of its debt. Ecuador has cleared a path that other indebted countries might choose to follow.
Accumulation of debt in Ecuador
Ecuador joined the Republic of Gran Columbia, and became a separate republic in 1830. Today it is a lower middle income country with a national income per person of $ 8,100 . Its debt to the rest of the world is 23% of national income.
In the 1970s Ecuador was recklessly lent large amounts from western banks, which had lots of money available at low interest rates. The country’s debt reached 50% of national income in 1980. When US interest rates rose, from 6% in 1979 to 21% in 1981, Ecuador’s debt payments shot-up, but the size of the debt continued to increase.
Over the years, Ecuador has made debt payments that far exceed the money it originally borrowed. Only 14% of all money loaned between 1989 and 2006 was used for social development projects. The remaining 86% was used to pay for previously accumulated debt. Between 1982 and 2006, the country paid foreign creditors $119 billion, while receiving $106 billion in new loans. Yet the total debt increased from $8 billion to $17 billion. In 2007 Ecuador’s government spent more on debt payments than on health care, social services, the environment, housing and urban development combined, all areas where money was badly needed. According to the UN’s independent expert on foreign debt and human rights
“A State’s obligations to respect, protect and promote the human rights of all people subject to its jurisdiction must take precedence over obligations to spend budgetary resources on debt servicing.”
Ecuador’s debt audit
Years of mismanagement by former regimes and irresponsible lending by international creditors left Ecuador with a foreign debt stock of $17 billion, 40% of the countries GDP in 2007.
In 2008 Ecuador became the first country to officially examine the sources and legitimacy of its foreign debt. Pressure by civil society in Ecuador was crucial in initiating this process called a “debt audit”. A panel of representatives from government and civil society judged whether loans had been arranged and used legally, honestly and transparently. The creditors were identified and the terms of loans were assessed. Debt restructuring and the conditions attached to this were also assessed. The audit concluded that overall the borrowing, debt restructuring and resulting conditions had caused “incalculable damage” to society. Many examples of predatory lending were found including loans which violated international law and domestic laws, in both the borrowing and the lending country.
In late 2008 Ecuador told foreign creditors it would pay back 30-35 cents for every $1 of illegitimate debt, which creditors eventually accepted. Ecuador thus repaid some debt, and had the remainder cancelled. Ecuador’s debt to the rest of the world fell to 23% of national income, saving $2 billion immediately and a further US$7 billion of future interest, allowing increased social spending. Ecuador set a major precedent by undertaking the debt audit and using legitimacy as an argument for defaulting.
The audit shows that creditors as well as borrowers should be held responsible for reckless, immoral or illegal lending. This is fair as often lenders know more about how money will be used than the communities who end up paying the money back.
Ecuador, export credit, dodgy deals and illegitimate debt
Before the audit, campaigners investigated loans made during the Norwegian Ship Export Campaign. To support its ship building industry between 1976 and 1980 Norway offered developing countries loans to buy Norwegian ships; Ecuador borrowed $57 million. Most of the money was paid to shipbuilders by the equivalent of Britain’s ECGD (ie the Department for Dodgy Deals), the Norwegian Guarantee Institute for Export Credits (GIEK) who were then owed the money by the government of Ecuador. Norway deliberately bypassed its own laws and procedures by not assessing the creditworthiness and development value of these loans.
By March 2001 $50 million had been spent paying the debt and a further US$50 million was still owed for vessels which hadn’t benefited ordinary Ecuadorians. In 2006, Norway agreed to cancel the debt of countries that it had sold ships to in this way, saving Ecuador around US$35 million. Other rich countries should follow Norway’s example and take responsibility for their reckless lending in the past. For instance, Ecuador owes the UK’s ECGD $50 million, but the UK government has not revealed where this debt comes from. Over this past five years, Ecuador has paid the UK $50 million.