n april, the G-20 agreed to defer interest payments on loans for 6 months that the 77 poorest nations including Uganda owe it. To be clear this wasn’t a cancellation but a suspension of debt. At some point it will have to be paid. This is just government debt. But hitherto, there hasn’t been talk of postponement or cancellation of debt acquired from private lenders.
For this to be possible, the U.S and U.K should be lobbied to push for some kind of change in their law to make it impossible for private lenders or creditors to use their court systems to sue African countries due to non-payment of their money that is in line with the original schedule. This is specifically relevant to New York and the U.K because majority of developing country debt contracts are governed by English and New York law. So in case of conflict, arbitration takes place in the legal systems of those 2 jurisdictions.
In the recently read budget, Parliament appropriated 4 trillion shillings for just interest payments on its government debts. What government isn’t telling the public is that of this 4 trillion, about 3 trillion is budgeted for interest payments on debt government contracted from commercial banks and other private lenders.
What makes the situation worse, this debt isn’t denominated in our currency. It’s in foreign currency. Uganda, like most developing nations doesn’t enjoy a fully sovereign currency. Yes, we have a central bank that issues the shilling but we can’t use the shilling to trade with the rest of the world because there isn’t trust that it will keep its value. So we are forced to raise debt in mostly U.S dollars.
This leaves Uganda vulnerable because on top of having no control over the interest rates we pay on our foreign currency debts, the currency exchange rate can easily change. This stands in total contrast to countries like UK, U.S and Japan that borrow in their currency. They have total control over how much interest the pay on their debts.
A case in point, just this financial year that came to an end, government tabled a request to Parliament to borrow 600 million euros (Shillings 2.4 trillion) from Stanbic bank and the trade and development bank at a 7 year maturity at London Interbank Offered Rate (LIBOR)+ 4.5 percent. This is a kind of syndicated loan.
Most of these sydicated loan facilities are modelled on documentation from the The Loan Market Association (LMA). The Loan Market Association (LMA) is the trade body for the Europe, Middle East and Africa (EMEA)
syndicated loan market and was founded in December 1996 by banks operating in that market.
Its intention was to develop industry best practice and standard documentation. The LMA is active in the primary market as well as the secondary market.
The LMA documentation is produced after extensive consultation with leading loan practitioners and law firms so as to represent an agreed common view of documentation structures of loans. It therefore wouldn’t be a surprise if the syndicated loan facilities govt has acquired are modeled on such LMA structure.
Syndicated loans started as a way of allowing lenders to lend large sums of money to a single borrower, where the sums involved went far beyond the credit appetite
of a single lender. Whilst the precise year is disputed, it is thought that the frst syndicated bank loan agreement was executed in the London market in 1968, with syndications developing in the 1970s as a sovereign business.
Over time, the range of borrowers and type of lenders active in the loan market has expanded to include corporates and institutional investors. Such in my view is dangerous.
Given the wording of this agreement, its governing law clauses and jurisdiction in case government needs to secure a moratorium on such debt is English law and English courts in London. These are the kind of non-concessional loans that government is acquiring.
The best way such private debt can be dealt with is to lobby the U.K and U.S legal systems, specifically New York for the U.S to pass some kind of law that bars private lenders to use their courts to enforce strict payment of debts in line with the original schedule, as set forth in these loan contracts.
Most of debts African countries get from private lenders like commercial banks are arbitrated through both English and New York courts. But for such to happen, lender nations must be lobbied to negotiate with each other, something I don’t see happening due to U.S-China trade wars.
However, it is not entirely impossible in international relations for countries to be foes in one area and partners in some areas. Securing a moratorium on private debt for African countries could be in both their interest to keep countries stable so that they keep their geo-political soft power.
Unlike previous debt crises, it won’t be so easy to renegotiate these loans. In the past, when Uganda and wider Africa borrowed money from Japan, Germany, U.S, if there was a debt crisis and an interruption happened like the current one of the coronavirus, and there was a danger of default, Uganda could sit down with these countries and be in position to re-negotiate these loans.
But in an instance, where Uganda has sold or even acquired debt in the public market, bought by different people with different needs such as hedge funds, pension funds, or even commercial banks and due to the coronavirus, it is hard to have a meeting with such a diverse group of creditors.
Any lawyer knows that when it comes to loans, size is not everything. It’s about the repayment terms. Debt cancellation or suspension isn’t the answer. African countries at a diplomatic level should push for access to the global reserve funds technically known as special drawing rights (SDRs) so that both developed and developing countries can get the financing they need.
These SDRs were only used to save developed countries when the 2008 crisis hit them due to their lack of regulation of their financial markets. The problem is that for this to happen there is supposed to be consensus among the G-20 leaders, and the IMF leadership.
Recently the Trump administration voted down this suggestion because of fear that China would get some of it. Yet access to these SDRs can inject a trillion dollars or more of new liquidity in the financial system globally. As of now, the IMF is thinking of redistributing existing unused SDRs of rich member countries to low income countries. SDRs is an international reserve asset comprising of a basket of currencies such the dollar, euro, yen, pound and yuan and allocated to members according to their quota.