Africa debates odious debt

Lisa Peryman

March 19, 2005
A non-binding resolution passed by Nigeria’s House of Representatives last week to halt payments on the country’s $35 billion external debt has provoked some strong responses.

Making a case for debt repudiation, two recent opinion editorials published by the Lagos independent daily, This Day, rallied Nigerians to get behind the government’s continued push for debt cancellation.

In “The verdict: to hell with our creditors?” This Day columnist Olusegun Adeniyi considered whether Nigeria should invoke the international legal Doctrine of Odious Debts, basing his case in part on a 2002 paper by US scholars James K. Boyce and Léonce Ndikumana.

In their paper, “Africa’s debt: who owes whom?” the authors argued that a substantial fraction of foreign loans to Africa intended for domestic investment or consumption have instead been “captured by African political elites and channeled abroad in the form of capital flight.” In this way, they said, “public external debts (contracted via borrowing by African governments or by private firms with government guarantees)” have been “transformed into private external assets.”

The authors say African countries rich in natural resources, particularly those “headed by corrupt regimes,” have experienced large-scale capital flight the most. For example, they estimate former president Mobutu Sese Seko during his 32-year rule over the Democratic Republic of Congo salted away billions in borrowed funds, foreign aid and revenues from state-owned mineral companies.

Responsibility for the diversion of borrowed funds falls not only on past African governments, but also on their creditors, including private bankers as well as bilateral and multilateral institutions. According to Boyce and Ndikumana:

“Knowingly or unknowingly, these creditors financed the accumulation of private assets with their loans. In many cases, creditors continued to pour loans in the hands of corrupt regimes, despite ample evidence that these funds were not being used for legitimate purposes. Sound banking practice would have dictated a moratorium on lending to such governments. Failure to halt lending suggests either that creditors were shielded from losses or that they were pursuing other objectives. On the one hand, private lenders were shielded from risk by guarantees provided by governments and international institutions. All too often, these guarantees encouraged irresponsible lending. On the other hand, official creditors continued to lend to client regimes for political and strategic reasons. The Mobutu regime and the military regimes in Nigeria are examples of instances where lending supported dictatorships in the region.”

The writers suggest African countries could invoke the Doctrine of Odious Debts to selectively repudiate liability for public debts incurred by past regimes that were not “used to finance bona fide domestic investment or public consumption.” They also called on creditors to substantiate their claims for repayment by showing where their money went and how it was used to benefit the citizens of the borrowing country.

A similar argument was put forth this month by Iraqi debt campaigners in a letter [anotherPDF here] to the country’s creditors and, before that, by the Iraqi National Assembly’s (INA) Economic and Financial Committee, which late last year recommended the interim Iraqi government and the citizens of Iraq refuse to recognize debts incurred by the corrupt regime of Saddam Hussein – a move also endorsed by the Union of Iraqi Jurists.

Perhaps Nigeria is ready to follow suit?

Last week, Africa’s “odious” debt was officially acknowledged by a member of British Prime Minister Tony Blair’s Commission for Africa.

Responding to the release of the Commission’s final report, K.Y. Amoako, the executive secretary of the United Nations Economic Commission for Africa, acknowledged Africa had accumulated “odious debt” as a result of “irresponsible borrowing and irresponsible lending.”

“Aid,” said Mr. Amoako, “that was more designed to help wealthy donors than the poor recipients and the Cold War’s fuelling of African conflicts and backing for dictators who were hostile to their own people.”

It has been well argued that throughout the Cold War era, Western powers helped sustain a number of corrupt and despotic African governments in order to secure their loyalty against the former Soviet Union.

Referring to the recent resolution passed by Nigeria’s House of Representatives as a “wake up call to creditors,” David Ugolor, president of the African Network for Environment and Economic Justice (ANEEJ), said the resolution challenged creditors to take action on Nigeria’s demands for cancellation of its “odious” debts, or run the risk of debt repudiation if they did not.

Another This Day columnist, Kayode Komolafe, denounced the standard argument marshalled against debt forgiveness as “untenable.”

“[Critics] say it would affect the credit-worthiness of the debtor-nation adversely while having the potential of rupturing the international financial system. They also point to the irresponsibility of the governments that incur these debts,” he said.

But, he argues, the Boxing Day tsunami in Asia demonstrates how debt forgiveness can become “a veritable instrument of foreign policy”:

“[After the tsunami] compassion superceded technical economic calculations . . . the affected countries were offered debt forgiveness in the light of the distress they found themselves. Now, that was not an economic decision, it is a laudable foreign policy informed by clear socio-political considerations.”

Mr. Komolafe also made reference to a comment made by Nigeria’s Finance Minister, Dr. Ngozi Okonjo-Iweala, when she said creditors should not require a tsunami to occur before they are able to appreciate the “excruciating pains” of external debt. She also argued that the cumulative consequences of disease, ignorance and hunger are also destructive in the lives of people living in debtor-nations.

During an interview last week on Nigeria’s House resolution to stop servicing its external debt, Dr. Mansur Muhtar, the director-general of Nigeria’s Debt Management Office, said Nigeria’s creditors had often been “more interested in giving out money” and recycling their “petro-dollars,” in order to prevent interest rates from sliding, than they had been in exercising due diligence.

“[Creditors] kept encouraging these monies to be taken without due regard to the fact that these monies were not being judiciously used, that there could have been leakages in the system. There was no proper due diligence in essence, which should normally be the case. Any responsible [lender] should have made sure that the projects [the loans financed] were viable and that the money was channeled to those projects and I think that was not appropriately done,” he said.

In response to an article opposing the Doctrine of Odious Debts published late last year by the IMF magazine, Finance & Development, Patricia Adams of the Canadian-based, foreign-aid watchdog Probe International pointed out that the private sector has had “no trouble grappling with the law and figuring out how to ‘odious debt-proof’ its loans.” The private sector she said were already “careful to establish their due diligence and evidentiary basis to defend today’s loans” in the future.

In much lending and project finance today, she said, “the lenders know the purpose of the loan and an elaborate set of representations and warranties binds the borrower.”

Referring to the 1898 US “odious debt” repudiation of “Cuban debts” after the Spanish-American War – on the grounds that the debts were spent contrary to the interests of the Cuban people, Ms. Adams said:

“If a lender doesn’t exercise the due diligence to establish whether the steel imported is used for cannons rather than cradles, or for guns to shoot innocent civilians rather than criminals,” as the IMF article warned, “then I say, as the American commissioners to the Spanish-American War peace conference said, ‘the creditors from the beginning, took the chances of the investment.'”

Categories: Africa, Odious Debts

Tagged as:

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s