Until debt tears us apart: Why the International Financing for Development must urgently prioritise transparency and oversight of public loans

Last month the UN Member States met in Ethiopia at the 1st Preparatory Committee Session for Financing for Development (FfD4) to stocktake the Addis Ababa Agenda and discuss its successor. It became evident from the meeting that the funding available is not enough to achieve the SDGs and critical reforms are needed to address the flaws in the current international financial architecture.

Debt management was at the core of the conversations. The global economy appears to be at historic levels weak, and rising levels of sovereign debt are posing a major challenge to public finances in many countries. In Sub-Saharan Africa alone, the volume of nominal public debt has more than tripled since 2010.

Alongside increasing debt levels, there’s a worrying trend of soaring interest rates, particularly affecting low- and middle-income countries (LMIC). On average debt service covers 30% of LMICs overall expenditure, a figure that escalates to 40% in African countries. Governments in these regions face the impossible dilemma of servicing their debt or investing in public services for the well-being of their citizens. Currently, 48 countries, home to approximately 3.3 billion people, are grappling with the impact of underinvestment in crucial sectors like education and health, primarily attributed to the large interest payments on their debts.

The COVID-19 pandemic, inflation and economic crises, among other factors, have contributed to the critical levels of debt distress affecting over 60 countries. However, none of these factors is as pervasive and central as corruption. The absence of robust anti-corruption measures and effective controls in loan negotiations and management has resulted in the misuse, embezzlement, and misappropriation of funds obtained through sovereign debt. Foreign loans are used for public official’s personal benefit and that of their cronies at the expense of future generations, victims of unsustainable debt and severe lending conditions.

In Sri Lanka, the 2022 debt crisis that led to the resignation of President Rajapaksa’s kleptocratic government was directly tied to a broader governance crisis, where resources borrowed for infrastructure projects were misappropriated to benefit government cronies. Similarly, between 2012 and 2016, a Swiss bank provided US$1.3 billion in loans to the Republic of Mozambique for maritime security projects and a state-run tuna fishery. Known as the tuna bond-loan scandal, the funds were kept hidden and used to pay significant kickbacks. As a result, the IMF halted its program in Mozambique, while donors cancelled direct budget support and other development aid, leading to a fiscal crisis and causing unemployment to soar and poverty to increase.

As in the hidden debt crisis in Mozambique, where public officials deliberately failed to disclose the contracted debt, sovereign loans negotiated behind closed doors and without scrutiny or controls, have been left at the mercy of corrupt rulers. Hidden and opaque debt not only destabilises economies but also lays fertile ground for corruption. Corruption raises unsustainable debt and perpetuates a system that's detrimental to both national economies and the international financial architecture.

Countries in debt crisis have an average score of 36/100 in Transparency International’s 2023 Corruption Perception Index (CPI), whereas countries without any risk score in average 50/100. The CPI ranks 180 countries and territories around the globe by their perceived levels of public sector corruption, scoring on a scale of 0 (highly corrupt) to 100 (very clean). The common denominator of Sri Lanka (34/100), Mozambique (25/100), Zimbabwe (24/100), Argentina (37/100), among other countries in or at high risk of debt distress is their thriving levels of corruption.

In addressing the complex challenges surrounding debt negotiations and management, three elements are crucial: enhancing transparency, strengthening oversight - including monitoring and scrutiny by civil society organisations-, and improving public financial management systems to track the funds coming from loans.

The Debt Transparency and Accountability Checklist for civil society organisations, launched by Transparency International and the National Democratic Institute, addresses these elements as it serves as a powerful tool to empower civil society and other accountability actors in effectively monitoring government borrowing and debt management practices. It focuses on 5 main topics:

• Strengthening legal frameworks: clear and unambiguous definitions, delineation of roles and competencies, and provisions for robust transparency and accountability.
• Enhancing operational arrangements: key documents, strategies for managing public debt data, and the critical role of the debt management office.
• Improving reporting obligations and coverage: public debt disclosure, transparency requirements and standards.
• Fostering robust accountability provisions: strengthening of institutional actors such as Parliaments and Supreme Audit Institutions (SAIs) and establishment of vertical accountability structures, encouraging civil society’s active engagement and scrutiny of public debt management.
• Advocating for Lender Transparency: lenders can contribute to greater disclosure in debt negotiations and restructuring processes.

Hidden and unscrutinised debt is a serious threat to the stability of national economies and the international financial architecture. As a critical part of the Financing for Development Agenda negotiations, it is time for lender countries, institutions and borrowing countries to break the vicious cycle of corruption and unsustainable debt. Achieving debt transparency and accountability requires a concerted effort from policymakers, regulators, lenders and civil society. It's time to shed light on hidden debts and hold those responsible accountable. The Debt Transparency and Accountability checklist is a first step towards meaningfully building a more transparent, accountable, and sustainable future.