Testimony of Emira Woods

Co-Director

Foreign Policy In Focus

Institute for Policy Studies

May 22, 2007

House Committee on Foreign Affairs, Subcommittee on Africa and Global Health

U.S. Congress

"In a world of plenty, poverty can and must be eliminated by changing the structural imbalances that create and maintain impoverishment in Africa and around the world." African economist, Samir Amin

Chairman Payne, Ranking Member Smith, distinguished members of the House Committee on Foreign Affairs, Subcommittee on Africa and Global Health, I would like to thank you for your invitation to participate in this hearing on “Vulture Funds and the Threat to Debt Relief in Africa: A Call to Action at the G-8 and Beyond.”

The Congress of the United States and the president of the United States took a huge step forward about 10 years ago when they stated that yes, it was a moral imperative to give poor people in poor nations debt relief.  Political leaders, including those in Congress, stated emphatically that it was simply wrong that poor people be burdened with repaying debts incurred by rich leaders.  Yet, today, in Zambia and several other countries, a new set of rich actors is undermining that moral promise.  These "vulture funds" are violating that promise of debt relief as they enrich themselves.  This is an outrage.

In this testimony, I will present my deep concerns with the expansion of vulture funds and offer some solutions to this growing problem.

I. Impact of Vulture Funds on Africa

The story of debt in Africa begins in the 1960s and it is not a pretty story. In many countries, undemocratic governments (in many cases, outright dictatorships) began borrowing large amounts of money from both official sources (governments and multilateral institutions and from banks and other private sources. Much of this money went into boondoggles that massaged the egos of the dictators, some of it went into private bank accounts and small amounts of it went into real projects that benefited Africans.

The debt crisis emerged in the 1980s when interest rates rose to epic proportions, and commodity prices were low, and country after country experienced difficulties in repaying the debts. At this stage, the creditors invariably sent in the International Monetary Fund to press for countries to shift policies towards exports, toward privatization, all with the goal of getting the loans repaid. The poor and the environment paid a heavy price.

Happily, by the late 1990s, Under pressure from groups in the South and North, governments agreed that much of this debt should be cancelled. And, governments at the G-8 meetings and elsewhere devised a HIPC that would carry out the debt relief. However, there were two big problems with HIPC:

- onerous conditions;

- no one foresaw the vulture fund problem.

So, today, there is very little meaningful debt cancellation and every African nation is vulnerable to vulture funds.

[Here put in table on 27 or so countries that have vulture suits]

II. Impact of Vulture Funds on Zambia and Liberia

My testimony will focus on two countries. One, Zambia, has already faced the ravishes of vulture funds in legal proceedings. The other, Liberia, may be one of the forthcoming cases in the not too distant future.

Zambia

Zambia is a poor land-locked country in Southern Africa whose main source of external income is copper. In the mid-1970s, the price of copper suffered a severe decline worldwide. Zambia turned to foreign and international lenders for relief, but, as copper prices remained depressed, it became increasingly difficult to service its growing debt. By the mid-1990s, despite limited debt relief, Zambia's per capita foreign debt remained among the highest in the world.

Today, the United Nations Human Development Index ranks Zambia 166 out of 175 of the poorest countries. Sixty-eight percent of Zambia’s 11 million people live on less than a dollar a day. Zambians throughout the country are plagued by inadequate schools, housing, healthcare. In 2000, Zambia was one of the countries spotlighted by an international campaign for debt relief.

According to Charity Musamba of Jubilee Zambia:

Even after the year 2000, with debt relief, we still have the obligation to continue servicing debt. And every year, from the little resources that we have, from the little revenue that we earn from [exports] we still have to service our debts. And the cost per year ranges from about £80 to £135 million per year. "This figure looks very small as I’m standing in England. But I can assure you, from the point of view of Zambia, we can provide better water facilities for certain communities using the money. We can also help the vulnerable children using this amount of money... We could use this amount of money to support those elderly parents who are looking after orphans. There’s a lot that we could use this money for. But because we are obliged to pay back, our government has no choice.

Charity went on to explain how conditions imposed in return for debt relief have included a freeze on the wages of government employees, including teachers and nurses, all of whom are denied a living wage. But she also spoke of the benefits that limited debt cancellation has had so far, thanking debt campaigners, and asking them to keep up the work. Zambia has courageously committed funds from debt relief to building and sustaining schools and hospitals.

In late April, a UK court ruled that Zambia must pay Donegal International, a vulture fund officially located in the British Virgin Islands but mostly owned by Debt Advisory International, $15 million for debt acquired for just over $3 million from the Romanian government. Donegal is a secretive firm based in Washington DC and led by American investor Michael Sheehan. This year, Zambia expects to save $40 million from debt relief. Paying Donegal $15 million would severely limit the relief’s impact.

As a result of the egregious behavior of debt vulture funds, Zambian children will continue to stay out of school and infants will continue to die from curable diseases. The $15.5 million award is approximately three quarters of the funds allocated for recruitment of new teachers in Zambia’s 2007 national budget for Zambia. Payment of this unjust claim will certainly derail Zambia’s achievement of the Millennium Development Goals (MDGs).

One main lesson from the Zambian case is that where debt negotiations are “confidential and not publicly available” (language from Justice Smith’s judgment) it opens up future generations to speculators and other corrupt corporate practices.

Probably the hardest lesson is that the Zambian people will have to suffer at the hands of past dishonest activities of irresponsible leaders and present vulture greed of private investors.

· It is immoral for Donegal to ask for a profit of several millions dollars (US$ 55 million) over and above the price (US$ 3.3 million) it paid for the Zambian debt.

· Debt repayments to Donegal International will upset Zambia’s fiscal stability and ability to deliver public services.

· Mr. Sheehan and his agents did not act very honestly in the acquisition of this debt as noted by Judge Smith of the London court.

· The purchase of the debt undermines and erodes the full intended benefits from debt relief arrangements initiated through the Highly Indebted Poor Country Initiative (HIPC) and the Multi-lateral Debt Relief Initiative (MDRI).

Liberia

Liberia’s 26-year descent into chaos started in the 1980s when the Reagan Administration funneled military hardware, training, and finances to the regime of the ruthless dictator Samuel Doe. Under Doe's watch, American military aid to Liberia, often in the form of loans, increased ten-fold. Doe also racked up enormous debts as his cronies stole elections and built their machinery of repression. This military “aid” built the machinery of repression that led to the deaths of an estimated 250,000 Liberians. Much of the “assistance” in the 1980’s came in the form of loans, which have now ballooned to push Liberia’s debt burden to over $4 billion The Liberian people and the government of Africa’s first woman president are now being asked to foot the bill.

Liberia pays $60,000 each month in debt service payment. This is the equivalent of six hospitals or clinics that could have been built in the first year of the Ellen Johnson Sirleaf Administration. As the political will mounted for Liberia’s debt cancellation, the vultures started their deadly hover. While an estimated 44 countries have debt owed to vulture funds, by virtue of its size and complexity, Liberia could be the most dramatic case of all when compared with per capita income. According to Liberia’s Ministry of Finance, Totaling one-third of outstanding debt, Liberia’s commercial debt, a full $1.5 billion is now owned by hedge funds. It may well be only a matter of time before the vultures pursue their “claims” in court, which would be a devastating blow for the new government.

III. Three ideas on reining in the negative impact of vulture funds

A. Fixing Flawed Debt “Relief”

The “vultures attack on African countries is due in part to the flawed mechanism established in 1996 to deal with developing country debt, the Heavily Indebted Poor Countries (HIPC) initiative of the international financial institutions. The HIPC initiative was poorly funded, ill conceived, and left a big loophole by not addressing commercial debt.

Not only has the HIPC initiative not lifted the debt burden, but it has also imposed onerous constraints that have held back the continent’s growth and progress. Under the guise of debt relief, the U.S. Treasury and the international institutions found a way to impose multinational corporations on Africa's water, electricity, education and health systems, bringing higher fees and even further impoverishment to the region.

In a 2004 report, the World Development Movement Report notes "The evidence suggests that the past twenty years of IMF and World Bank intervention have exacerbated rather than ameliorated Zambia's debt crisis. Ironically, in return for debt relief, Zambia is required to do more of the same. The country has been condemned to debt." Now is the time to examine critically the factors contributing to debt and the downward pressure on African economies.

Revamping HIPC is a critical step in address the root issues of Africa’s debt problems.

B) Establish internationally binding legal constraints on the operations of vulture funds that prey on impoverished countries like Zambia

Congress should take all possible legal measures to prevent such predatory litigation and to ensure that it does not undermine international debt relief initiatives or restructuring mechanisms. Congress should also work to apply legal constraints and if needed prosecute fully all aspects of corrupt practices linked to such cases.

I urge the committee to instruct Treasury to negotiate an international mechanism that will bring a fair and transparent process for creditors and debtors to responsibly reduce the debt burden on developing countries.

C) Cancel Odious Debt – Africa has already paid enough

The UN Conference on Trade and Development (UNCTAD), in a comprehensive report on debt sustainability, noted that between 1970 and 2002, sub-Saharan Africa received $294 billion in disbursements, paid out $268 billion in debt service and yet remained straddled with a debt stock of some $210 billion. The average African country spends three times more of its scarce resources on repaying debt than it does on providing basic services. This daily transfer siphons off scarce resources needed to address the HIV/AIDS pandemic and other key concerns of the continent. In fact, African nations are still paying more in debt service to the United States and other creditors than they receive in aid, new loans, or investment. In addressing Africa's struggle for relief from its onerous external debt, advocates of global justice have raised a critical question: Who owes whom?

What is needed is acknowledgement and cancellation of all odious Debt.

Under the legal principle of odious debt, debts are regarded as illegitimate when the creditor is aware that loans to governments are made without the consent of the people and not spent in their interests. The U.S. was the first to use this doctrine. After conquering Cuba in 1898, it repudiated Cuban debts to former colonial power Spain because the loans never had the consent of the people. More recently, the Bush Administration has used the same argument for Iraq. Africa’s odious debt, Liberia the debt incurred by Liberia’s dictator Samuel Doe needs comprehensive and complete cancellation, with no onerous conditions.

Thank you for convening this hearing and for your leadership on this critical issue. I look forward to your questions.