Norway: first debt audit to assess the legitimacy of developing countries’ debt

By Mona Niemeyer

Is the debt developing countries owe to Norway fair?

In order to answer this, Norway has, as the first country ever, exposed itself to an external assessment of its foreign aid policy based on the guidelines from the UNCTAD  Principles on Promoting Responsible Sovereign Lending and Borrowing. On 15 August 2013, the audit report  was launched finding that 4 out of the 34 loans assessed are not justifiable.

Norway took the lead in developing the freshly established (2012) UNCTAD Principles on Promoting Responsible Sovereign Lending and Borrowing and took the next logical step by ordering an external debt audit of its foreign aid. The audit describes 4 agreements from Indonesia, Myanmar, Pakistan and Zimbabwe to be illegitimate. Will Norway conclude to cancel these debts like they did in 2006 for 7 countries on the basis of their co-responsibility as creditor?

More broadly, the observations found an overall compliance with UNCTAD Principle 6 International Cooperation (compliance with UN sanctions) and 7 Debt Restructuring. The agreements generally do not conform to Principle 5 Project Financing. Principle 5 affirms that countries financing specific projects have to assess and monitor the “likely effects of the project, including its financial, operational, civil, social, cultural, and environmental implications.” The report recommends UNCTAD to specify the aim of the assessments, for example as to prioritize and sustain projects which benefit the public, and to provide procedural guidelines on investigations and monitoring.

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When in a country like Ethiopia debt repayment amounts to 45% of its total exports profits this will be a major obstacle for the provision of basic social services and economic, social and cultural rights, like education or health services. Generally, aid dependency and conditionality often force developing countries to prioritize externally imposed issues over domestic demands. In order to regulate lending and borrowing behavior in the name of development the UNCTAD principles could develop into an effective “naming and shaming” instrument. However, the principles are merely dealing with Sovereign lenders and borrowers which exclude powerful multilaterals like the World Bank.

Additionally, it has to be noted that the UNCTAD Principles are still very general and broad in nature and in order to be applied and have concrete implications they will need to be developed further.  In this sense, the Norwegian audit is the first example of their implementation and provides important recommendations on their improvement. It can be hoped that Norway’s commitment to donor accountability will put peer pressure on other states to follow its example.

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