‘Annual income 20 pounds, annual expenditure 19 pounds, 19 shillings and six pence, result in happiness! Annual income 20 pounds, annual expenditure 20 pounds ought and six, result in misery!’ David Copperfield, 1849, Charles Dickens
The world’s prevailing economic ideology is capitalism manifested in free markets with normative light touch government regulation in progressive climes.
From basic economics, springs forth the exposition that human wants are largely unlimited. However, the means of satisfying them are often delimited by one’s financial capacity, encumbrances, intellectual foresight; investment strategy, fiscal and monetary policy, and indeed, the philosophical inclinations of nation-states.
The latter conditionality invokes the imperative for debts by individuals and sovereign states. This article’s attention is on sovereign debts and the concatenation of domestic and international jurisprudence and best practice, with a view to distilling key principles which can enhance policy choices amongst forward-looking nations in managing their gearing commitments.
Equally, in the case of emerging economies, it is envisaged that the emanating outcomes will inform rational policy options, which can help reactivate underperforming markets and enhance their citizens’ economic prospects.
First off, there is nothing mysterious about sovereign debts. The expression simply means debts owed by nations to domestic, multilateral or international financial institutions, or a combination thereof. These may, for example, include loans from development finance institutions, domestic and external/foreign banks, the African Development Bank, the European Investment Bank, the International Monetary Fund (IMF) etc. Sovereign debts could also be obtained on a bilateral basis. Other forms of sovereign debts include bonds, syndicated loans, trade credit or even private creditors.
In developed and developing economies, sovereign commitments are typically incurred upon what, on the face of it, is the legitimate rationale of “borrowing to invest” according to strategic national priorities. In the main, subsist for infrastructure projects. Within the province of transport, these could entail debts for enhancing public transport, rail, road, ferries, and tram networks.
In the energy and natural resources sector, it could entail facilities for power generation, transmission, and distribution; enhancing upstream and mid-stream (processing and refining) capacity; whilst in telecommunications, these could entail transforming fibre-optics, satellite communications and connectivity infrastructure. Sovereign debts could also be accessed for upgrading defence infrastructures like reconnaissance equipment, fighter jets and sophisticated military hardware.
Sovereign debt commitments in 2014 accounted for over 25% of global debts, approximately $58 trillion, according to McKinsey’s 2015 Global Institute: Debt and (Not Much) Deleveraging, report. Some years later in 2021, global sovereign debt was $65 trillion.
Strict lending criteria underpin the sovereign debt regime although there is no definitive rulebook on the subject. Nevertheless, given an increasing rules-based global financial order and international cooperation, certain minimum standards apply.
Sovereign debt applications are generally considered by lenders upon their unique merits and are subject to robust due diligence upon objective metrics and a rigorous country risk assessment, which takes account of reports emanating from the world’s leading credit reference agencies such as Fitch, Moody’s, Standard & Poor. Plus, the relative socio-political stability and global integrity ranking play a part too. These variables, and each lender’s criteria, are pertinent in pricing the risk attached to each facility and, therefore, the applicable interest rate.
The challenge often encountered by developing economies in particular appertains to structural weaknesses. These range from underperforming markets to overdependence on commodities, which are subject to prevailing economic forces outside their immediate control – except with state intervention. Plus, because sovereign debts are generally priced in the world’s de facto reserve currency, US dollars, inherent structural weaknesses, opacity, realpolitik and underwhelming negotiating power on the international stage, sub-optimal markets imperil developing economies’ productivity.
Inevitably, they are barely able to generate sufficient revenue to meet domestic demand and priorities. The corollary is that they not only incur sovereign debts, but they quickly fall behind in meeting their repayment obligations, which again, attracts sanctions from lenders! This raises infernal outcomes within the precinct of adverse sovereign credit reference ratings, disproportionately high-interest rates and, crucially, stalled infrastructure projects.
To put this into some context, six mono-cultural economies within the Organisation of Petroleum Exporting Countries (OPEC), namely Angola, Gabon, Iran, Iraq, Nigeria and Venezuela, averaged 229.65% in gross sovereign debts as a proportion of Gross Domestic Product in 2020, according to the International Monetary Fund’s World Economic Outlook Data 2020. Angola’s sovereign debt as a proportion of GDP in that period was 136.8%, Gabon’s 77.3% and Venezuela’s 304.1%. Nigeria’s stood at 34.5%, India’s 90.1% whilst Iran and Iraq were 45.6% and 84% respectively.
The inference therein is that some of the world’s poorest countries are saddled with massive sovereign debts, which perversely, has the effect of impoverishing those countries the more. That’s because the opportunity cost of servicing these crippling sovereign debts are temporized infrastructure projects, unemployment, supply chain fragmentation and fiscal depletion, in that fewer people and organisations, are paying taxes.
Developed economies are not immune from the sovereign debt albatross either. Non-OPEC countries like the USA, UK and China 2020, averaged 101.6% in national debts as a proportion of GDP. The USA metrics were 134.2%, UK’s 102.6% and China’s 68.1% within the same period. A key distinction between this triptych and the OPEC countries cited is that they have larger, highly diversified, knowledge-driven and technologically based economies.
That implies that they are less susceptible to the shocks and vagaries of commodity prices in global markets for example. Thus, in 2021, US GDP was $22.9 trillion and sovereign debt was $30.8 trillion.
The UK’s GDP in the same period was $3.1 trillion and the debt profile was $2.17 trillion. China’s GDP was $17.7 trillion whilst its sovereign debts were approximately $5.14 trillion. Within the same period, Nigeria’s GDP was $407 billion whilst sovereign debt was $95.7 billion. Angola’s GDP was $72.5 billion whilst sovereign debts were in the region of $65.9 billion.
Inevitably, these dynamics can, and often do, generate conflict amongst sovereign debtors and lenders on the one hand, and nations and citizens on the other, albeit for different reasons. Sovereign nations complain about the crippling debt burdens and high-interest rates; whilst citizens complain about dithered projects which although may have been budgeted for, but nevertheless, may no longer be deliverable to time and cost specifications!
Accordingly, in arbitral proceedings and/or litigations across different jurisdictions, political trade-offs, which may not be economically justifiable, are, oftentimes, the inescapable consequence. Regarding litigation, the preliminary question of jurisdiction in external sovereign debt is important, applying the principle of Nemo judex in causa sua (no one should be judged in his own cause).
By convention, domestic courts will often decline jurisdiction in external sovereign debt disputes involving their own countries because that establishes a conflict, or the risk of a conflict, in that the domestic court is, by law, bound to interpret acts of the domestic parliament in accordance with public policy. How then, is a domestic court to objectively interpret an external sovereign debt dispute which risks impoverishing the citizens of that very country where, for example, the nation has consistently failed to make repayments owing to the severe economic crisis?
It is largely for this very reason that external sovereign loan contracts or related arbitration agreements specify the UK or New York as the seat of dispute resolution relative to external debt repayments and restructuring. This assertion is reinforced in Spillada Maritime v Consulex [1987] AC 460, where there the English court asserted jurisdiction on the grounds of justice given the perceived risk of injustice at a foreign court.
Likewise, public policy considerations feature significantly in sovereign debt disputes. The case of Export-Import Bank of the Republic of China v Grenada 2012 US Dist LEXIS 116531 (SDNY 2012) illustrates the point. Here, Grenada sought to set aside restraining notices over its immune assets and highlighted the significant risk of financial insolvency to a government parastatal. The court decided in Grenada’s favour against retaining the said notices over the state’s assets largely on public policy grounds.
Another seminal case on this score is Camdex International Limited v Bank of Zambia (Nos 2) [1997] 1 WLR 632. Camdex, a receiver pursuant to an agreement with the Kuwait Central Bank, secured judgment against the Zambian Central Bank for breach of contract regarding the printing of high-value currency denominations. Camdex obtained a freezing order against the Zambian Bank restraining the transfer of the assets out of England and Wales. Again, largely on public policy grounds, the Court of Appeal varied the freezing order of the lower court.
A number key points emerge from the foregoing including the fact that there is no definitive global mechanism for resolving sovereign debt disputes. Each case is undertaken on its unique merits. The concatenation of contractual principles, public policy and the assertion of courts’ equitable jurisdiction is very much an issue in the quest for resolving sovereign debt cases.
Upon those foundations stem these concluding recommendations. Whilst the principle of pacta sun servanda (contractual sanctity) is germane, the lack of global uniformity creates real challenges for lenders and sovereigns, in that there are no guiding precedents for arbitral panels and courts. It is recommended that the United Commission on International Trade Law (UNCITRAL), considers the adoption of model compacts. Two, overburdened sovereign states should seek renegotiation or outright debt cancellation, with creditors on more pragmatic terms on a win: win basis. Three, economic growth, enhanced productivity, sound policy choices and strong leadership are non-negotiable.
Four, nation states should embrace free market principles which drive innovation and creativity which, in turn, catalyse productivity, increasing the prospect of enhanced fiscal revenues. Five, greater coordination is required between national and sub-national bodies prior to obtaining external debts. Six, robust mitigation strategies need to underpin stress-tested business cases for sovereign debts prior to signing off at the highest political levels.
After all, avoiding the ‘misery’ Charles Dickens alluded to above, demands prudent economic management.
Ojumu Esq is the Principal Partner, of Balliol Myers LP, a firm of legal practitioners based in Lagos, Nigeria.
