Loans made outside normal parliamentary channels and held offshore may soon find themselves less likely to be repaid.

By Patricia Adams, Special to Financial Post

In Brief

A Nairobi courtroom is testing whether billions in sovereign debt can simply be declared illegitimate—and if citizens should ever have to repay loans they never approved and never saw.

Patricia Adams, a leading authority on illegitimate or odious debt, notes the the doctrine of odious debt has lurked in the shadows of international finance for nearly a century. Formalized by Russian legal scholar Alexander Nahum Sack in 1927, it holds that debts piled up by unaccountable rulers—without the people’s consent and without delivering public benefit—are not true obligations of the state. History has occasionally given the idea teeth, and now a Kenyan three-judge High Court bench has greenlit a full hearing on roughly US$54 billion of public debt, with particular fire aimed at approximately US$7.1 billion in Eurobonds raised under former president Uhuru Kenyatta and current president William Ruto.

Petitioners argue that much of the borrowing bypassed Parliament, never appeared in appropriation laws, funded no identifiable public projects, and instead vanished into offshore accounts—violating Kenya’s constitution and public-finance laws. Kenyan citizens, they say, should not be on the hook. In a striking twist, the Central Bank of Kenya has sided with the petitioners, calling the issues of “undoubted public importance.” If the court brands any of this debt odious, the shockwaves will travel far beyond Nairobi. Outside Kenya, analysts observe the petition could “produce the first African judicial precedent on the enforceability of the odious debt doctrine.”

Lenders beware.

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Patricia Adams is executive director of Probe International, a Toronto-based China watchdog.