Saturday, 23rd September 2023

Reviewing sovereign debt restructuring

By Femi D. Ojumu
31 May 2023   |   3:44 am
Today’s generic hypothesis is simple: effective financial stewardship implicates due diligence, productivity, prudence, regulatory and statutory compliance. It includes sharp prioritisation and resource allocation, positive cash flow, sensible investments, and assets (reserves) consistently outperforming liabilities (gearing) on the balance sheet.


Today’s generic hypothesis is simple: effective financial stewardship implicates due diligence, productivity, prudence, regulatory and statutory compliance. It includes sharp prioritisation and resource allocation, positive cash flow, sensible investments, and assets (reserves) consistently outperforming liabilities (gearing) on the balance sheet. This is a wide interpretation of the concept of “financial stewardship”, which applies at the tryptic of individual, corporate and sovereign levels. This is entirely responsible and could be regarded as the “risk free” approach to financial management.

Some analysts term it “unambitious”. That is because fundamental economics postulates that a corporeal or natural person’s wants, and or necessities, are unlimited; however, the means of satisfying them, are limited by their financial capacity. Inferentially, tough(er) choices have to be made regarding the allocation of limited resources to those very wants and or necessities, which offer optimal value to those persons.

Nevertheless, that generic hypothesis is circumscribed by several pertinent variables within the context of sovereign States’ debt financing and restructuring, the kernel of this piece. For brevity, I will examine six of those constraining variables. First, today’s global economic orthodoxy is capitalism, and debt finance is inextricably linked to that ideology. That, in of itself, is not inherently deficient, the issue is about effective stewardship, fulsome and repayment.

Second, as alluded to at the start, every sovereign State has unlimited wants and necessities; in political speak, those are manifesto commitments promised to electorate. These include the mechanics of defence procurement, environmental sustainability and cleaner energy initiatives, publicly- funded education, health and social care, social infrastructure, social security. Plus, the funding of States’ bureaucracy at federal, state, local government level; ditto within the executive, judiciary and legislative contexts.

They cannot always and concurrently be delivered to time, budget and quality specifications, invoking necessary trade-offs. The practical, policy and philosophical question, is who pays? How much? What are the opportunity costs of such? The answers to those posers are neither “in the winds”, nor in any crystal balls! Majority of sovereign states are, owing to competing demands on fiscal revenues, national budgets, sub-optimal productivity and balance of payments, quite simply, unable to independently fund key strategic investments in programmes and projects required to transform economic development of their countries. Therefore, they resort to borrowing from development finance institutions like the African Development Bank, Commonwealth Development Corporation, International Monetary Fund, World Bank; syndicated domestic and multilateral loans, ditto capital markets.

Third, is the withering disparity of balance of trade between richer and poorer countries, which benefits the richer countries. Even worse, some richer countries impose overt and covert trade barriers with poorer countries by restricting the latter’s access to their markets. That phenomenon has the presumably unintended consequence of dislocating the economy of poorer countries. And here’s how. If country A, in the global north, exports goods, totalling USD 250 million in the period 2019, 2020 and 2021, and country B, in the global south, exports, in the same tenor, goods totalling USD 5 million, that, evidently constitutes disproportionate and unfair trade terms applying that sole criterion.

It gets worse when country A, further restricts products from B on the grounds that B’s goods are “risk prone”, “unfit for purpose”, and “sub-standard” without clear and sound scientific evidence to back up those patently subjective assessments. And the point needs to be made in no uncertain terms, that an aspiration to engage in bilateral and multilateral trade, should not, in any way, subvert, necessary rigorous quality assessments for determining the fitness-for-purpose of products entering a particular market. The material issue here is the absolute necessity for transparency in the process not opacity.

Beyond that, in this scenario, there is, a compelling moral imperative upon country A, to help country B, to improve and sharpen B’s operational processes, quality control and supply chain mechanisms to ensure that the bilateral trade is less disproportionate. And, less disproportionate because it is hardly possible to achieve total equilibrium in genuine free market economies. Because, operational effectiveness, value chain efficiency, economies of scale and scope, informational asymmetry will vary from company to company, and country to country. These interdependent variables invoke each party’s competitive advantage, and by extension, market share and profitability.

Fourth, is the effect of the vicious cycle of weak institutional governance, profligacy, the absence of strategic vision and the delivery capacity; which, in turn, imperil effective leadership. Afterall, to resolve a problem, the correct diagnosis is essential to understand its complexity, scale and typology. Some States and or powerful persons therein, borrow imprudently, consequently mismanaging their national resources; engage in corruptive practices, and turn a blind eye to the duplication of functions by agencies of government. Why, for example, should two agencies of the same national government, theoretically, with two different names, engage in the very same functions, when these can be done more efficiently and rationally by a single entity say? And, at the same time, optimising data analytics and artificial intelligence?

Fifth, are the tectonic shocks of which, force majeure, was the most striking relative to the 2020 global COVID pandemic. This phenomenon upended the sovereign debt obligations of weaker economies, prompting requests, for restructuring and/or outright cancellations.

Finally, there is the subsisting challenge of rising demographics in the global south counterbalanced with white elephant projects, lacking robust business cases, tested financial models and strategic value. When brigaded, all those factors, and the complexities of adjusting to economic headwinds in poorer countries, post-COVID, inform the whys of sovereign debt finance and its integral restructuring dynamics.

For perspective, these six global south countries; Angola, Gabon, Iran, Iraq, Nigeria and Venezuela, averaged 229.65% in gross sovereign debts as a proportion of gross domestic product in 2020 (IMF 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.

Zambia, for example, already under enormous pressure and beholden to external creditors regarding a crippling USD 12 billion, defaulted on a USD 42.5 million debt due to international creditors in Q4 November 2020. Furthermore, in 2022, Nigeria’s debt obligations rose 16.9% from N39.56 trillion (USD 88.2 billion) to N46.25 trillion (USD 103.1 billion) to underpin deficit financing models; rising public expenditure, including circa USD 10 billion in petroleum subsidies (which, incidentally, President Bola Tinubu vowed to remove in his inaugural address on May 29, 2023); and a population of approximately 223 million people (World Population Review).

Evidently therefore, some of the world’s poorest countries are encumbered with massive sovereign debts, which impoverishes them more. And, these crippling debt service obligations oftentimes supplant investments in priority social education, health, housing and related public programmes. More widely, the latter springs a vibrant debate on whether these items should be provided by sovereign states, by private firms or, a hybrid. Notwithstanding, it does not detract from the huge debt burdens these states are under.

Of course, sovereign debt restructuring is not peculiar to poorer nations. In the United States, complex and lengthy negotiations between President Joe Biden’s Democratic Party and the Republican-controlled House of Representatives have, in recent days, yielded concessions and a tentatively positive outcome for all sides. The US operates a deficit financing model in that its expenditure outstrips its income given competing budgetary pressures, that’s now accentuated by US commitments to providing substantial military support – exceeding USD 37 billion, to Ukraine, in the ongoing Russo-Ukrainian war. The expectation is that it is a positive outcome for all sides; not least because the Republicans have been targeting efficiency cuts in education and related social programmes as a quid pro quo, for increasing the government’s USD 31.4 trillion debt ceiling.

From the foregoing, the synopsis is clear. Sovereign debts and restructuring are not inherently pernicious. The emphasis has to be on effective leadership, prudential borrowing, tested allocation of resources and democratic accountability.
Given the interwoven dynamics of sovereign debts, restructuring and multilateralism, the recommendations are, easily distilled:
i.) Debtor States should prioritise and allocate resources sharply whilst optimising fiscal revenues.
ii.) Visionary leadership is key to driving the agenda of effective and robust financial stewardship.
iii.) High level intergovernmental discussions with the, UN, World Trade Organisation, World Bank, IMF, the African Development Bank and other leading development finance institutions are essential to frame (and embed) more imaginative and robust policies to the modus operandi concerning sovereign borrowing and restructuring.

The flipside of prudential borrowing is prudential lending. Is State X able to repay a loan for project Y, at USD 800 billion in six years say? Is the project subject to a viable and costed business case? What is the funding model and exactly how will repayment be made? Are the right risk management protocols in place?

iv.) There is a case for a re-examination of debt relief and debt cancellation where, owing to extreme factors, objectively beyond the debtor State’s control, debts genuinely cannot be repaid without imposing extreme hardship on innocent citizens going about their daily lives. The premise here is not intended to be a carte blanche for irresponsible lending. No! Rather, humanitarian factors should conscionably influence the policies on debt relief.

vi.) The WTO should work with the global north in actualising policies for free(r) markets. What, after all, is the point of a subsistence farmer spending years harvesting cocoa in Owo, Nigeria, if the same cannot be freely sold, in Wieze, Belgium, say? Productivity demands freer markets and the latter helps to reduce poverty.

vii.) There needs to be more concerted global efforts to actualise the climate finance fund pursuant to the UN’s COP 27, 2022, to assist farmers mitigate the adverse effects of climate change and global warming.

viii.) States should tackle weak institutional governance, profligacy, waste, and bureaucratic inefficiency across the board.

Ojumu is the Principal Partner at Balliol Myers LP, a firm of legal practitioners and strategy consultants in Lagos, Nigeria.