Thursday, July 2, 2009

The legitimacy of Zimbabwe:The case for a debt audit

The unpalatable fact is that the Republic of Zimbabwe is virtually bankrupt. As at December 1, 2008, Zimbabwe’s external debt stood at US$ 5,255 billion, with a current account balance of – US$597 million. As at May 31, 2009, Zimbabwe owed the International Monetary Fund (IMF) US$138 million and the World Bank US$676 million.
As at April 30, 2009, Zimbabwe owed the African Development Bank US$438 million. These statistics are startling and there is, therefore, an urgent need to interrogate Zimbabwe’s debt crisis and firstly ascertain how such a colossal debt was incurred and then strategise the way forward as to how this debt crisis is to be resolved. Put alternatively, the legitimacy or lack of it, of Zimbabwe’s debt has to be placed under the microscope if our country is to avoid being perpetually placed under a debt trap.
The main thrust of this paper is therefore to attempt to provide an objective analysis of Zimbabwe’s debt situation and then to propagate the need to have an apolitical, scientific and objective debt audit as a way of charting a new dispensation regarding how the debt crisis has to be handled henceforth. Odious debts are defined as those debts, incurred by the State, which debts are not for the needs or interest of the State but merely to strengthen the State’s despotic power as well as to repress the population that fights against despotism. The legal doctrine of odious debts is essentially derived from the writings of Alexander Nahum Sack, the world’s pre-eminent legal scholar on public debts. Sack authored two major works on the obligations of successor states and these are: “THE EFFECTS OF STATE TRANSFORMATIONS ON THEIR PUBLIC DEBTS AND OTHER FINANCIAL OBLIGATIONS” and “THE SUCCESSION OF THE PUBLIC DEBTS OF THE STATE.” The doctrine of odious debts is not per se favourable to the interests of emerging economies and also to the developing countries (hitherto contemptuously referred to as the Third World.) This is so because the doctrine of odious debts was created to further the interests of international finance by limiting the ability of governments to repudiate debts. Under this doctrine, three conditions must be present before a State can repudiate a debt: i) the debt must have been incurred without the consent of the people of the State; ii) the debt cannot have benefited the public in that State and; iii) the tenderer must have been aware of these two conditions. The overwhelming majority of the developing world’s foreign debts are odious in law. Being part of the developing world, Zimbabwe is thus inevitably caught up in this odious debts fiasco. My earlier humble submission was that Zimbabwe is bankrupt. This is mainly so because Zimbabwe has no capacity to service the afore-mentioned debt. In his inaugural address after being sworn into office on Wednesday, February 11, 2009 , Prime Minister Morgan Tsvangirai advised the nation that the inclusive government’s main priority was to heal the broken economy and supply food to the hungry millions of Zimbabweans. He stated that: “For too long, our people’s hopes for a bright and prosperous future have been betrayed. Instead of hope, their days have been filled with starvation, disease and fear. A culture of entitlement and impunity has brought our nation to the brink of a dark abyss. This must end today.” It is, without doubt, obvious that Prime Minister Tsvangirai was acutely aware of the state of despair, poverty, destitution and hopelessness that prevailed throughout the Zimbabwean society immediately prior to the formation of the inclusive government in February, 2009. At its formation in February, 2009, the inclusive government inherited approximately US$ 4,7 billion external debts owed to bilateral, multilateral and commercial creditors. This paper adopts the view that by the time the inclusive government was formed, Zimbabwe was virtually a failed State. The de facto government had ceased to operate as a normal functional authority. The economic challenges facing the country were such that the de facto government was clearly unable to meet essential State obligations such as the payment of civil servants’ salaries as well as the general running of public institutions such as government ministries, public schools and public hospitals. Zimbabwe’s economic collapse is not to be solely located in and restricted to the ineptitude, corruption and misgovernance of the previous government coupled with the chaotic and violent “land reform” program that began in earnest in February, 2000. There is a combination of several factors that eventually led to Zimbabwe becoming a failed state by the time the inclusive government was formed in February, 2009.The reasons behind Zimbabwe’s economic decline are numerous, complex and historical. The general assumption that the land distribution program that gained momentum from the year 2000 is the sole reason for the country’s economic decline and food insecurity is flatly inaccurate. According to a study by the Trans Africa Forum, there are several factors that brought about Zimbabwe’s economic collapse. In a Congressional Testimony to the United States House of Representatives Committee on Foreign Affairs Subcommittee on Africa and Global Health on Thursday, May 7, 2009 submitted by Nicole C. Lee, Esq; the Executive Director of the Trans Africa Forum, many political economists identify Zimbabwe’s unresolved structural weaknesses and systematic inequality built into the apartheid -like system constructed by the Rhodesian settlers as the primary root cause. A South African-based scholar, Patrick Bond, points to the related crises of Rhodesia’s “over-consumption” of the early 1970s.Analysts agree that at the time of Zimbabwe’s independence in 1980,the country’s economy was skewed, for example: i) The entire national economy was designed to support the maintenance and enrichment of a small white minority. At independence in 1980, fewer than 7000 white farmers each owned, on average, more than 100 times the land available to the average African peasant.; ii) Industry, mining and the manufacturing sector were in the hands of multinational corporations and the white settler economy: iii) The majority of the population had been systematically excluded from the pool of skilled labour as well as the formal economy through a variety of legal and abusive measures. In present-day Zimbabwe, economic distortions continue. Mining, manufacturing and most industry remain in the hands of external corporations, the white minority and a small clique of black indigenous Zimbabweans.Zimbabwe is at the crossroads. The country is caught up in a debt trap. Zimbabwe is burdened by both short and long-term external debts that inevitably militate against the inclusive government’s concerted efforts to jump-start the economy. Zimbabwe has no choice but to adopt the modern approach to international relations; which approach essentially dictates that developing countries should be given a platform where they can challenge the legitimacy of their debts to creditors with a view to ensuring that their development is not stifled by otherwise odious and/or illegitimate debts which militate against sustainable development. The inclusive government should come out clearly in the open and join the global voice that seeks the establishment of an international debt arbitration mechanism. The Zimbabwe government should promptly utilize the doctrine of odious debts by establishing a judicial debt arbitration panel, preferably composed of respected and eminent Zimbabwean and international jurists. This panel would then invite creditors to submit claims, including documentation that the loans were indeed used in the interests of the Zimbabwean people and, not, in the words of the US Deputy Secretary of State Paul Wolforito, “to buy weapons and to build palaces and to build instruments of repression.” It is pointless to take the alternative route of going to the Paris Club. The Paris Club is composed of die-hard capitalists whose major interest is to remain the world’s economic giants at the expense of the developing world. Put bluntly, the Paris Club will never push the agenda of developing and highly-indebted countries. The Paris Club is an informal grouping of the world’s largest creditor nations. This club uses Western taxpayer dollars to rescue misplaced loans by public lenders. Zimbabwe should never approach the Paris Club; at least before establishing the legitimacy or otherwise of its colossal external debt. Recent news reports are to the effect that France is mulling the possibility of cancelling Zimbabwe’s debt to that country which is in the region of €400 million. This is a very encouraging starting point. The World Bank’s article of agreement imposes a fiduciary duty on the bank to ensure that the proceeds of any loan are used only for the purposes for which the loan is granted. If the World Bank breaches this fiduciary duty it should be held liable and the debtor nation must be entitled to challenge the odious debt at international law. In his paper: “CRIMINAL DEBT IN THE INDONESIA CONTEXT”, Northwestern University Professor Jeffrey Winters provides shocking insight into the World Bank’s weak supervisory practices. Winters presents overwhelming evidence that the World Bank breached its fiduciary duty to Indonesia by granting loans which, it knew, would be used for corrupt purposes. As a result, Indonesian legislators have since asked the International Monetary Fund (IMF), to write off the country’s foreign debts, including those to other donors recommended by the IMF. The Indonesian government had a foreign debt of around US$67 billion as at July 13, 2001. The breach of its fiduciary duty by the World Bank is ordinarily a legal basis to challenge the legitimacy of the debts. The hurdle to be encountered by the inclusive government in Zimbabwe is to prove that the lending institutions knew or ought to have known that the funds would not be used in the interest of the people but solely for the benefit of the ruling regime’s members in their personal capacities. A classic scenario on odious debts is demonstrated when officials are indicted on corruption charges relating to funds from the multilateral lending institutions. Examples are cases like CROWN v HAHMEYER INTERNATIONAL CIMBA where a Lesotho senior public servant was bribed to influence his decision on a major construction project undertaken by the appellant corporation. There was ”reasonably sufficient” evidence to indicate that Acres International engaged in a corrupt practice by paying monies to Mr. Mosupha Sole to influence him in connection with the work performed by Acres International for the Lesotho Highlands Water Project. This trial is important because it may open the door for the government of Lesotho to challenge the legitimacy of loans tainted by corruption. Another case involves an action by the International Centre for the Settlement of Investment Disputes (ICSID) tribunal to strike out a lawsuit against the Kenyan government over a contract after it discovered that the contract had been secured illegally through a US$2 million bribe paid to the former President Daniel Arap Moi. Although the complainant alleges that the payment was a “personal donation” made to Mr. Moi for public purposes, the ICSID tribunal ruled that this constituted a breach of international public policy as well as both English and Kenyan public policy. Mr. Ali, the complainant, could, therefore, not turn to a legal body as a means to enforce his rights secured through a breach of international public policy or in the tribunal’s words, he could not “found a cause of action on an immoral or illegal act.” The tribunal ruled that “claims based on contracts of corruption or on contracts obtained by corruption cannot be upheld by this arbitral tribunal.” As aptly noted by Jeffy King of the Canadian Centre for International Sustainable Development Law (CISDL), the tribunal’s ruling is an important one for the global campaign and “adds to precedent such as the Tinoco Arbitration (1924) and numerous international conventions in clarifying that contracts for personal enrichment, or those procured by bribery, are against international public policy and are thus, unenforceable.” By distinguishing between the acts of the Kenyan President and those of the Republic of Kenya, the ruling contributes an important precedent to the odious debts jurisprudence. The decision by the World Bank-established tribunal upheld the principle that the President of Kenya was acting as an agent of the state and thus, his actions are automatically deemed to be the acts of Kenya. This decision thus, dissolves the fiction that a head of state is capable of binding the state to any sort of contract. In July 2000, the Argentine Federal Court set out a landmark ruling that is supposed to have far-reaching repercussions for odious debt campaigners worldwide. The court held that a substantial portion of Argentina’s foreign debt is rooted in fraudulent and illegitimate loans abused during the military period. In his decision, Judge Jorge Ballestro held that many loans to Argentina were part of “a damaging economic policy that forced Argentina to its knees through various methods….and which tended to benefit and support private companies- national and foreign-to the detriment of society and state companies.” Judge Ballestro’s ruling puts blame on the shoulders of corrupt civil servants as well as international financial institutions such as the IMF. In his speech to the International Jubilee 2000 Conference in Bamako, Mali, debt activist Alejandro Olmos Gaona, argues that the court’s decision exposes how international creditors helped ensure that money lent to Argentina was not used in the interest of the state. As such, the court’s ruling is an invaluable resource for campaigners in other countries who are trying to challenge the legality of their own odious debts. It is, therefore, imperative for the inclusive government in Zimbabwe to urgently institute a debt audit as suggested in this paper. It would be pointless for the inclusive government to move around with a begging bowl, asking for about US$8, 2 billion to jump-start Zimbabwe’s comatose economy whilst remaining deafeningly silent about the need to interrogate the country’s colossal external debt. Zimbabwe should not honour any debts that have not been properly audited and proved to be lawful and legitimate. Honouring debts that are clearly odious will be the inclusive government’s kiss of death.

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