Just before the UK parliament was dissolved for the May 6 general election, MPs approved a piece of legislation that should have a positive effect on the economies of hard-pressed developing countries. The private member’s Debt Relief (Developing Countries) Act is aimed specifically at operators of so-called vulture funds. These international loan sharks buy up debts of developing countries and then take action in the British courts to enforce payment.
They are mainly companies operating offshore, which already throws a shadow over their operations. The debts are bought at huge discounts while the country involved has to repay the full amount. The sickening aspect of this practice is that the vultures don’t act until the country is granted debt relief under the Heavily Indebted Poor Countries (HIPC) initiative. So, instead of the money saved on debt relief going to social services and other much-needed projects, the loan sharks insist on being paid.
This legislation will be of great benefit to Liberia, whose government was facing the prospect of forking out $20 million to two vulture funds following a ruling by the High Court in London last November. The loan sharks had bought Liberia’s debt at a fraction of the sum. The case dates back to 1978. Liberia, which is still recovering from a civil war, has said that it did not have the funds to pay back the debt.
These loan sharks are getting too predatory for comfort. According to a 2008 World Bank report, 54 lawsuits had been instituted by commercial creditors against 12 HIPCs over the past decade for claims amounting to $1.5 billion. Naturally, these companies did not pay anything near that amount to secure the debt.
But the British move would hopefully put a stop to such immoral dealings by companies that are themselves operating clandestinely. The most galling thing is that some of these companies are established to pursue one particular debt. And when they are successful, they are wound up.
This is a human rights issue, too. And this is the view of Cephas Lumina, the United Nations independent expert on foreign debts. “From a human rights perspective, the settlement of excessive vulture fund claims by poor countries with unsustainable debt levels has a direct negative effect on the capacity of governments of these countries to fulfil their human rights obligations,” said Lumina, noting that “unconscionable profiteering” steals funds which could be better spent on health, water and sanitation, food, housing and education.
The UK law will apply to existing debts of the 40 HIPCs which are eligible for relief and will prevent creditors holding these debts from recovering in excess of the rate of relief expected from all creditors under the initiative. It will also provide an incentive for debtors to cooperate in settling these debts on terms consistent with the initiative.
This last bit is important because some governments of developing countries that take a less than serious attitude to dealing with their debt problem. They think that by sweeping it under the carpet it would go away.
Debt-ridden countries in Africa might now want to turn to the UK legislation for respite. But the problem with this is that some of these countries have not dealt with the issue of loans in the right manner. The case of Liberia is understandable. Its problem arose as a result of long years of civil war.
In other African countries, there is no such excuse. Take Nigeria, for example.
You would have thought that the so-called Giant of Africa would have his debt problem under control. But when former President Olusegun Obasanjo established the Debt Management Office (DMO) in 2001 the findings were stunning. The country did not even know how much it owed to external creditors. So a reconciliation exercise had to be undertaken to get the figures right.
But the most astonishing finding was that 40 per cent of projects for which money was disbursed never got off the ground. This is incredible. A few rogue contractors had pocketed the money for projects without doing the job. And the poor Nigerian taxpayer had to foot the bill.
The irresponsible manner in which African countries treat loans is one reason why the loan sharks feel that they can buy up a country’s debt and get away with it. There has been no proper accounting and this leads to discrepancies that vulture funds exploit.
So how would the UK Bill affect lending to developing countries? Well, according to debt campaigners, it’s difficult to say. The legislation, however, does not affect new loans. So there will still be money available for loans to African and other developing countries. But this time one would hope that these loans are put to proper use and governments are responsible enough to monitor their loan repayments.
Having said all this, one must point out here that it is only a tiny proportion of bent international “businesses” that is involved in dubious vulture fund operations. Most commercial creditors already reduce their debts in line with what the HIPC initiative calls for. By Desmond Davies