SPEECH BY HON. THABO CHAKAKA-NYIRENDA, ATTORNEY GENERAL OF THE REPUBLIC OF MALAWI, AT THE FINANCIAL SERVICES LAWYER’S FORUM/ THE RBM-MLS CONFERENCE ON SOVEREIGN DEBT, SUNBIRD NKOPOLA HOTEL, MANGOCHI
25TH AUUGST, 2023
Introduction
- Salutations and recognition of all dignitaries.
Understanding Economic Justice Delivery and the Law
2. Mr President, last year at a conference like this, through your Vice at the time, where I delivered closing remarks for the conference and where Dr. Austin Chiumia told us that we have been sitting on a ticking time bomb in as far as foreign currency situation and debt stress are concerned, you reminded us of the textbook definition of economic justice. That it revolves around the concept of distributing of capital and labour in such a way that everyone is better off. That economic justice is rooted in the idea that an economy will be more successful if all market participants are treated fairly. And that as such, the goal of economic justice is to create opportunities for everyone in a country to potentially thrive, prosper and have a dignified and successful life.
3. You are also aware Mr President and distinguished delegates that there is a positive connection between economic justice delivery and an effective legal system. Progress is usually measured by adherence to the rule of law and/or the level of its (dis)regard by the decision makers, controlling officers and all those entrusted with public responsibility meant to deliver economic justice so that everyone is better off. Failing states and failing economies are characterized by the failure of the state to coordinate the integrity of its institutions. And because states coordinate state affairs through the law, delivery of economic justice for all cannot be divorced from the law, let alone financial services laws.
4. It is in that spirit, Mr President and distinguished delegates, that if we read the Constitution of the Republic of Malawi, we see that in 1994, the people of Malawi adopted the Constitution on the basis of “seeking to guarantee the welfare and development of all the people of Malawi, ensuring national harmony and peaceful international relations and “desirous of creating a constitutional order in the Republic of Malawi based on the need for an open, democratic and accountable government”
5. You will see from the Constitution that there is constant reference to “development for all. That is emphasis on economic justice. Let me also say that in relation to development of all, the Constitution underscores this point by providing for the details of right to development in section 30 of the Constitution.
6. We also see from the Constitution emphasis on constitutional order, open, democratic and accountable government. That is emphasis on the rule of law and that is where the legal profession and other professions fit in to help the people of Malawi achieve economic justice. All this was done with the aim of delivering economic justice to the people of Malawi as a whole through an effective governance structure.
7. I am therefore delighted that the Reserve Bank of Malawi, the Malawi Law Society and the Malawi Institute of Legal Education has maintained the momentum and the conversation on economic justice for all. I read with keen interest the well-researched concept note you developed as prelude to this conference.
8. My speech today is a prelude to a great intellectual but practical feast in relation to sovereign debt. Because of that I would do injustice to the participants if I do not introduce the subject of sovereign debt. Sovereign debt is an important source of financing for infrastructure for public service and for investment by sovereign governments. Therefore, sovereign debt cannot be avoided. What matters is how that sovereign debt is managed. The sources of sovereign debt are:
(a) multilateral lending is financing provided by international institutions, such as the International Monetary Fund (for short, IMF) and World Bank, including regional development banks such as the Asian Development Bank, the African Development Bank, the World Bank International Development Association (IDA) and the Inter-American Development Bank).
(b) bilateral sovereign lending is financing provided by governments (or governmental agencies) to other governments (or governmental agencies).
(c) private-sector lending is financing mainly in the form of commercial bank loans or bonds issued in capital markets. There are two broad categories of private sector lending: commercial bank debt and capital market-issued bonds. These two sources of finance can be obtained domestically or internationally.
9. Unlike multilateral or bilateral official creditors, commercial creditors provide funds to the sovereign borrower on commercial terms determined by market forces. Commercial debt, usually in the form of loans and guarantees, is not concessional or policy-based financing but is instead provided for the purposes – and on the terms – agreed by negotiation between the sovereign debtor and commercial creditor.
10. Bilateral sovereign lenders are categorized into the Paris Club and the non-Paris Club. The Paris Club is an informal group of 22 permanent sovereign lenders, hosted by the French Treasury, which aims to coordinate solutions to the payment difficulties experienced by debtor countries. The non-Paris Club creditors include China, India and Saudi Arabia. There is a consensus by authors on sovereign debt that the loans from non-Paris Club and at times from commercial lending institutions lack transparency. This has the effect of creating a debt burden on sovereign borrowers and invariably may contribute towards stunted economic growth.
11. Professor Rodrigo Olivares-Caminal and Professor Paola Subacchi contend that the new forms of bilateral credit arrangements that are often performed via alternative financing methods, such as offbalance lending, execution of swap agreements, repurchase agreements or via the participation of SOEs are the problematic when it comes to transparency. Most often the facilities’ terms and conditions, given the nature of confidentiality clauses that are usually included are opaque. The absence ‘of clear disaggregated and truthful public data and information regarding public debt has been a problem for lenders to assess the actual status of public accounts and repayment schedules.’
The legal Framework for Sovereign Debt in Malawi
12. The Malawi Constitution provides the overall legal framework for loan contraction process in Malawi. According to Section 180 of the Constitution, Government can only raise a loan under the authority of an Act of Parliament. Parliament may, in the Act authorizing the raising of a loan or by any other Act, appropriate the proceeds of the loan for specific purposes and authorize the payment of such proceeds out of the Consolidated Fund for such purposes. The Malawi Constitution therefore gives.
13. As of July 2016 Malawi had 216 loan agreements that were being serviced . Most if not all the loans were written off under the Heavily Indebted Poor Countries (HIPC) initiative championed by the International Monetary Fund and the World Bank. Despite receiving debt relief under the HIPC Initiative, Malawi quickly accumulated new debt and has now reportedly reached debt distress thereby causing economic downturn. The question this workshop ought to address is why after receiving the debt relief in order to start a new life we have accumulated such unsustainable debt level? Should lawyers take responsibility for this? I would say because loan agreements are legal instruments and because sovereign borrowing gets its source from the constitutional and statutory instruments, lawyers play a very crucial role in responsible sovereign borrowing. If you doubt let me draw your attention to section 180(1) of the Republic of Malawi Constitution requires that a sovereign loan to be acquired only under the authority of an Act of Parliament and not otherwise. Section 180(2) of the Constitution empowers Parliament to specify the purposes of the loan provides for accountability and authorize the payment of such proceeds out of the Consolidated Fund for such purposes. The loan authorization Acts that you have seen have provisions on the purpose of the loan and the terms of the loan. The Public Finance Management Act (No. 4 of 2022) outlines the authority and procedures to be followed in loan contraction. Section 70(1) of the Public Finance Management Act (No. 4 of 2022) requires that Government may only borrow money in accordance with this Act and under an Act authorizing such borrowing. Parliament authorizes such borrowing through an Act of Parliament which is then assented to by the President. In terms of section 71(1) of the Public Finance Management Act the secretary to the treasury is required to prepare and submit to the Minister, a medium-term debt management strategy for the management of public debt. This requirement is about debt management and not project or programme management.
14. With regard to borrowing by any person, company or body corporate, organization or statutory body, Section 82 (1) of the Public Finance Management Act gives powers to the Minister of Finance to give, in writing, a guarantee or indemnity, but with prior approval of Cabinet and consistent with Section 25 of the Act. A sovereign guarantee involving financial liability that does not conform with the provisions of section 82 of the Public Finance Management Act is not binding on Government. However, the Act stipulates that the money the State pays under a guarantee or indemnity constitutes a debt due to the State from the person, company or body corporate, organization or statutory body and may be recoverable in any court. The guarantee is issues only in the public interest. Public interest has been defined as . including its future economic development, and of the financial welfare of the statutory body concerned.
15. As Head of the Bar and given my experience in the office of the Attorney General in the last 2 years I agree that it is imperative:
(i) that we clearly identify what role the legal profession has to play within the broader economic architecture of the country in order to facilitate the effective and sustainable public debt management for the development of our country, and
(ii) that we equip lawyers with basic knowledge of the key concepts and fundamentals in public debt management and excite interest for the profession to contribute to sustainable public debt management. Key to sovereign debt are transparency, accountability and prudence
16. According to Shakira Mustapha and Rodrigo Olivares-Caminal, transparency, in the context of sovereign debt entails “making information publicly available, so that it is accessible to interested stakeholders and the wider public”. The learned authors observe that transparency of debt terms and conditions is a prerequisite to responsible borrowing and lending, and crucial to effective policy decision-making and risk management. The obligation to be transparent is placed on both the borrower and the lender. Rodrigo Olivares-Caminal, Professor of Banking and Finance Law at Queen Mary University, and Paola Subacchi, Professor of International Economics at Queen Mary University, in their paper titled ‘the Debt Burden: How to Create a Better Debt Management Framework’ with regard to the topic of transparency maintain that ‘it is not only a question of how much information is disclosed, but also of the quality of the reported data.’ They proceed to warn that ‘reporting lump figures without including details on maturity dates, material contractual clauses, composition of creditors and any contingent liabilities in place, means that the information is not of much use for market players, civil society, and other stakeholders.’ The Public Finance Management Act No. 4 of 2022 has attempted to provide transparency and accountability mechanisms in terms of sovereign debt and sovereign debt management. The successor Act also had transparency provisions embedded in it. Despite this transparency provisions, there are reported breaches of the statutory safeguards.
17. Allow me, Mr President and distinguished delegates to give a few examples on why the Bar must seriously undertake this kind of conversation and pursue these two purposes:
(a) The lack of transparency as exhibited in the famous IMF misreporting: sovereign debts were reported as inward investments.
(b) The Deloitte and Touche Forensic Audit on the Reserve Bank of Malawi also shows lack of transparency and accountability in the management of sovereign debt in the form, i.e. the financial derivatives that the Reserve Bank of Malawi contracted with the AFRIXIM Bank and the manner in which the Trade Development Bank revolving financing facility was managed.
(c) The Ombudsman Report dated 2016 titled ‘The Present toiling, the future overburdened’ points to not only lack of transparency in the management of sovereign debt but also lack of accountability: the line of credit worth US$50 million was not used for the purpose outlined in the Loan Authorisation Act. Government flagrantly flouted its own procurement laws when it acquired the tractors for the Greenbelt Initiative as authorized by the Loan Authorization Act. The scam was allegedly disguised as a routine public auction of government equipment.
18. Lack of accountability and lack of prudence in debt management was observed by the Malawi Supreme Court of Appeal in the case of The State v. Ombudsman Ex Parte Principal Secretary for Finance, Principal Secretary for Agriculture and the National Assembly, MSCA Civil Appeal No. 24 of 2017 (Unreported:
‘Going through the Ombudsman’s report it is clear that the Respondents conducted themselves in a fashion that fell below that standard expected of reasonably competent public servant/officers…. Of course we appreciate that the project concept that gave rise to the credit line would have greatly benefited the Malawian citizenry. It is however clear that procurement in relation thereto was poorly managed/implemented. So was, in our view, the scheme devised to mitigate wastage and costs when officialdom realised that the equipment was not fit for the purpose of the project.’
19. This decision of the Malawi Supreme Court of Appeal demonstrates that transparency and accountability depends on good governance and the rule of the law. Governance and rule of law is largely for the lawyers to implement. There are many cases of reckless sovereign debt and mediocre sovereign debt management strategy. The Tractorgate case is a typical example of loans that have gone to failed projects and programmes. These loans are still being repaid at a huge cost to poor women, men and children in Malawi because their governments are using public resources to service debts for programmes and projects that brought little benefit to them. Because of reckless and insensible borrowing communities are denied their right to basic necessities of life such as food, shelter and basic health and education guaranteed by UN Convention on Social and Economic Rights.
20. What happened in the Tractorgate case was replicated in Mozambique notoriously called the Mozambique ‘tuna’ scandal. In the Mozambique ‘tuna’ scandal, three state-owned enterprises (SOEs) in Mozambique borrowed 2 billion dollars in 2013 and 2014. The three loans were arranged by Russia’s state-owned VTB and Credit Suisse, and were fully guaranteed by Mozambique’s state. However, information about two of the loans was initially hidden from the public. The loans were used to acquire military equipment instead of the official purpose which were, coastal surveillance, building a tuna-fishing fleet and a shipyard. Only one loan was made public (Ematum loan) and when the other two were disclosed in 2016, the IMF and bilateral donors suspended their budgetary support, causing severe financial difficulties for the country which ultimately defaulted on external commercial debt as subsequent corrupt findings were made. The country’s administrative auditing court also declared the state guarantees illegal for violating the constitution and previous budgetary laws. In December 2018, a US prosecutor indicted multiple individuals, including high-level Mozambique officials (e.g., the then Minister of Finance), for allegedly conspiring to defraud investors through numerous material misrepresentations and omissions. Mozambique also filed a claim in London against Credit Suisse, among others, for its involvement in the financing (domestic indictments were also issued). In October 2020, Mozambique’s Attorney General’s Office – with the country’s Supreme Court approval – pursued the extradition of three former Credit Suisse bankers implicated in the scandal who acted as arrangers. In parallel, Privinvest, the contractor for the projects in which the monies from the loans should have been invested, launched an arbitration against the three state-owned companies for breach of contract. Mozambique – to remove liability – sued Privinvest and Credit Suisse in London’s High Court arguing the debt was not a valid obligation. According to case authorities hiding of a loan does not mean that the loan is invalid.
21. Those who are involved in the loan contracting process (the duty bearers) are enjoined to assess whether and what size of a loan is necessary or desirable for a specific project or programme, to negotiate beneficial and sustainable terms of repayment, and to account for the project or programme success. To achieve this, the rule of law and governance has to be complied with throughout the loan contraction and debt management process.
22. Programme or project management is key to resolving the debt burden. I will give you an example, Malawi established the Northern Transport Corridor (NTC) which links Malawi to the port of Dares salaam in the United Republic of Tanzania using syndicated loan and grant financing from international lending institutions amounting to US$ 132,400,000 arranged by the International Development Association of World Bank. Government serviced the loan up to the year 2006 when it was written off under the Heavily Indebted Poor Countries (HIPC) initiative championed by the International Monetary Fund and the World Bank. The loan was aimed at boosting both exports and imports. There is little gain in terms of either imports or exports that is being realised from this investment.
23. In my public lecture titled interface between the law and development I mentioned that Malawi like South Korea initiated economic development policies centered on the active government promotion of industries and export activities, and the government used legislation and subordinate administrative rules as a primary regulatory means to promote development. Malawi sourced financing from international institutions mostly in the form of project financing. As observed by Prof. Ben Kalua, the projects were able generate enough revenue to repay the borrowed finances. This was also made possible because the country owned several profit oriented state owned entities. This is barely the case today such that over 90% of the borrowing is applied towards social development as opposed to economic development.
24. The state of our economy and the state of the developmental structure of our country show that there could be no better topic and timely subject to discuss among lawyers generally especially those practicing law in the financial services sector than a discussion of sovereign debt. Lawyers play a very important role in sovereign debts. They are the ones who advise on and draft the pari passu, negative pledge, maturity, currency, interest rate, the confidential clauses and cross-default clauses. They draft pledges and guarantees. The draft money bills that are presented in Parliament. They are the implementers of the law. We need to sincerely interrogate the role of lawyers in this country in ensuring sustainable public debt management for the development of our country.
25. From the Government side we shall remain supportive of these kind of initiatives in so far they help us find ways for delivering economic justice for all. Pillar No. 1 of the Malawi Vision 2063 clearly recognizes that the rule of law is important for shared prosperity in any society. It also recognizes that adherence to the law, efficient and effective enforcement of law remains a major challenge of our country. Yet the observance and enforcement of the rule of law empowers and cultivates confidence in the citizenry, especially where those feel excluded, marginalized or underprivileged.
26. The Vision records that Malawi shall embrace the rule of law and strictly adhere to its tenets in order to ensure the effectiveness, efficiency, accountability and transparency of Government in the implementation and realization of the Vision.
27. It is aimed to ensure that the rule of law denounces, punishes and eradicates impunity; facilitates economic development; recognizes and protects active citizenship; facilitates and enhances economic justice; strengthens openness, transparency and accountability in public and private institutions; reduces and eradicates corruption, enhances the fair and equitable allocation of services; and promotes and preserves our environment and natural resources for the benefit of our children and subsequent generation
28. In saying this I am actually using the words that are in the Vision 2063. This national vision cannot be realized if as lawyers our understanding of the core issues for economic growth are not aligned to the applicable standards. I, therefore, find this training timely, relevant and useful. As Government, we look forward to more trainings of this nature not only in the legal profession, but in other professions as well so that we build capacity and we demonstrate our commitment to realise the common goals and vision of the country.
29. I finally want to join you in thanking the distinguished speakers and panellists lined up for the session. Looking at the profiles that of the distinguished speakers line up, we have no reason to doubt that it is within us as a people to find solutions to our challenges and for mobilizing such calibre and for their availability I thank you.
30. I wish you a successful conference.
31. With these remarks and gratitude to the organising team, I declare the conference open.
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Thabo Chakaka-Nyirenda
ATTORNEY GENERAL
