Zimbabwe: the case for a debt audit

9 July 2009 by Senator Obert Gutu

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 Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. of US$597 million.

As at May 31 2009, Zimbabwe owed the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

(IMF) US$138 million and the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

US$676 million. As at April 30, 2009, Zimbabwe owed the African Development Bank US$438 million.

These statistics are startling thus there is an urgent need to interrogate Zimbabwe’s debt crisis to ascertain how such a colossal debt was incurred, and then strategise 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 article 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.

Odious debts are defined as those debts incurred by the state which are not for the needs or interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. 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: 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. This is so because the doctrine 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:

* The debt must have been incurred without the consent of the people of the State;

* The debt cannot have benefited the public in that State and;

* 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.

Zimbabwe is bankrupt because it has no capacity to service the afore-mentioned debt. At its formation in February, the inclusive government inherited approximately US$4,7 billion external debts owed to bilateral, multilateral and commercial creditors.

By the time the inclusive government was formed, Zimbabwe was virtually a failed state. 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” programme that began in February 2000.

The general assumption that the land distribution programme is the sole reason for the country’s economic decline and food insecurity is flatly inaccurate.

In a Congressional Testimony to the US House of Representatives Committee on Foreign Affairs Subcommittee on Africa and Global Health on May 7 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 Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. , 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:

lThe entire national economy was designed to support the maintenance and enrichment of a small white minority. At independence in 1980, fewer than 7 000 white farmers each owned, on average, more than 100 times the land available to the average African peasant;

lIndustry, mining and the manufacturing sector were in the hands of multinational corporations and the white settler economy.

Zimbabwe’s 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 burdened by both short and long-term external debts that inevitably militate against the inclusive government’s concerted efforts to jump-start the economy.

The inclusive government should join the global voice that seeks the establishment of an international debt arbitration mechanism.

It should promptly utilise 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”.

Recent news reports suggest that France is mulling the possibility of cancelling Zimbabwe’s debt which is in the region of 400 million euros. 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 Odious Debt According to the doctrine, for a debt to be odious it must meet two conditions:
1) It must have been contracted against the interests of the Nation, or against the interests of the People, or against the interests of the State.
2) Creditors cannot prove they they were unaware of how the borrowed money would be used.

We must underline that according to the doctrine of odious debt, the nature of the borrowing regime or government does not signify, since what matters is what the debt is used for. If a democratic government gets into debt against the interests of its population, the contracted debt can be called odious if it also meets the second condition. Consequently, contrary to a misleading version of the doctrine, odious debt is not only about dictatorial regimes.

(See Éric Toussaint, The Doctrine of Odious Debt : from Alexander Sack to the CADTM).

The father of the odious debt doctrine, Alexander Nahum Sack, clearly says that odious debts can be contracted by any regular government. Sack considers that a debt that is regularly incurred by a regular government can be branded as odious if the two above-mentioned conditions are met.
He adds, “once these two points are established, the burden of proof that the funds were used for the general or special needs of the State and were not of an odious character, would be upon the creditors.”

Sack defines a regular government as follows: “By a regular government is to be understood the supreme power that effectively exists within the limits of a given territory. Whether that government be monarchical (absolute or limited) or republican; whether it functions by “the grace of God” or “the will of the people”; whether it express “the will of the people” or not, of all the people or only of some; whether it be legally established or not, etc., none of that is relevant to the problem we are concerned with.”

So clearly for Sack, all regular governments, whether despotic or democratic, in one guise or another, can incur odious debts.
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 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 IMF to write off the country’s foreign debts, including those to other donors recommended by the IMF.

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.

Another case involves an action by the International Centre for the Settlement of Investment Disputes (ICSID ICSID The International Centre for the Settlement of Investment Disputes (ICSID) is a World Bank arbitration mechanism for resolving disputes that may arise between States and foreign investors. It was established in 1965 when the Washington Convention of that year entered into force.

Contrary to some opinions defending the fact that ICSID mechanism has been widely accepted in the American hemisphere, many States in the region continue to keep their distance: Canada, Cuba, Mexico and Dominican Republic are not party to the Convention. In the case of Mexico, this attitude is rated by specialists as “wise and rebellious”. We must also recall that the following Caribbean States remain outside the ICSID jurisdiction: Antigua and Barbuda, Belize, Dominica (Commonwealth of) and Suriname. In South America, Brazil has not ratified (or even signed) the ICSID convention and the 6th most powerful world economy seems to show no special interest in doing so.

In the case of Costa Rica, access to ICSID system is extremely interesting: Costa Rica signed the ICSID Convention in September, 1981 but didn’t ratify it until 12 years later, in 1993. We read in a memorandum of GCAB (Global Committee of Argentina Bondholders) that Costa Rica`s decision resulted from direct United States pressure due to the Santa Elena expropriation case, which was decided in 2000 :
"In the 1990s, following the expropriation of property owned allegedly by an American investor, Costa Rica refused to submit the dispute to ICSID arbitration. The American investor invoked the Helms Amendment and delayed a $ 175 million loan from the Inter-American Development Bank to Costa Rica. Costa Rica consented to the ICSID proceedings, and the American investor ultimately recovered U.S. $ 16 million”.

) 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 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. 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, 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”.

It is therefore imperative for the government in Zimbabwe to institute a debt audit. Zimbabwe should not honour any debts that have not been properly audited and proved to be lawful and legitimate.

This paper was presented by Senator Obert Gutu at the “Economy In Transition Dialogue Conference: Towards A Sustainable Public Debt For Zimbabwe” in Harare on Tuesday.



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