The financial powerhouses of some of the world’s richest countries have been slow to offer much needed support to lower-income countries during the pandemic. As of September 2021, just over three per cent of people in low-income countries had received at least one dose of vaccine compared to over 60 per cent in high-income countries.
Debt relief to low-income countries from private creditors has also been woeful, with some entities even funding legal cases against governments and exploiting their debts, likely exacerbating Covid-driven financial distress across the developing world.
Just as the health crisis was escalating in early 2020, and amid concerns many of the most fragile developing countries had been spending more on servicing external debt than on healthcare, the G20 launched the Debt Service Suspension Initiative (DSSI) in an effort to alleviate mounting economic pressure on developing nations.
The scheme, which ended in December 2021, saw participation from 46 low-income countries yet had limited success. The UK charity, the Jubilee Debt Campaign, assessed that between May 2020 and June 2021, creditors suspended 23 per cent of borrowing nations’ external debt payments, totalling $10.9 billion. Of this, $0.6 billion were cancelled payments.
However, according to the Jubilee Debt Campaign, private creditors who were urged to take part in the initiative but not compelled deferred only 0.2 per cent of sums they were owed, receiving $14.9 billion in payments. The campaign group commented that “public money intended to help lower income countries has instead gone to banks, hedge funds and oil traders”.
Indeed, last year World Bank David Malpass warned that “there is a risk of free riding, where private investors get paid in full, in part from the savings countries are getting from their official creditors.”
While private creditors’ inaction on debt relief is being called out by campaigners, there also needs to be more scrutiny and regulation of some of the controversial commercial methods these companies employ in the developing world, as these could worsen the Covid-related financial crises afflicting poor countries.
A cause for concern before the pandemic was private creditor financing of legal actions brought by entities against developing nations. In third-party litigation funding (TPF), a multi-billion dollar industry, creditors in return for their financial backing receive a share of the proceeds of litigants’ claims, should they win.
Advocates of TPF say it provides access to justice for those who would otherwise struggle to pursue legal actions. But critics point out that in investor-state disputes, developing countries win only half as often as their developed counterparts, according to a paper by Boston College Law School professor Frank J. Garcia. He said TPF “shifts power and resources towards private investors, which can in turn negatively impact the political affairs and social welfare of developing nations by sapping their resources”.
Nigeria is set to go to trial in the High Court in London in 2023 over an arbitration award of $6.6 billion, now with interest worth $10 billion – a sum ten times the size of its health budget. The size of this award would be extreme in even the richest nation but in Nigeria, a country where over 40 per cent of the population subsists on less than a dollar a day, the amount is egregious.
The award was won in 2017 by British Virgin Islands-based Process & Industrial Developments (P&ID) which had pursued Nigeria in the courts after a contract to develop a gas project in the country collapsed.
Subsequently, P&ID appears to have partnered with a hedge fund, which acquired a stake in the company, to finance enforcement. Nigeria later claimed the gas project deal had been obtained fraudulently. Last year, a London court considering the country’s bid to overturn the arbitration ruling, said there was a “strong prima facie case” that the contract was procured by bribes. P&ID has denied Nigeria’s allegations.
Whatever the right and wrongs of the long-running case, it appears against a background of unease about both the merit of litigation funder-backed cases brought against states and their economic consequences. Relatedly, there are claims that TPF is “enabling and driving marginal, speculative, and high stakes claims that, even when unsuccessful, are still costly” to the states subject to the legal actions, according to a report published by the International Institute for Sustainable Development. Such concerns, it seems, are being addressed in possible new reforms of investor-state dispute settlement, which include proposals banning claimants from receiving any third-party funding.
Just as troubling are the developing world activities of so-called “vulture funds”, which buy up discounted distressed sovereign debt, such as bonds that are not being repaid, then refuse restructuring and pursue the debtor countries through western courts for full repayment.
According to the African Development Bank Group, vulture funds grind down poor countries in cycles of litigation – with many law suits taking up to ten years to settle – and have averaged recovery rates of about 3 to 20 times their investment. By precluding debt relief and costing millions in legal expenses, the bank says vulture fund cases undermine the development of the most vulnerable African countries. Concerns over these legal practices have been raised by G7 leaders and the World Bank, with former UK Chancellor Gordon Brown, condemning them as a “morally outrageous outcome”.
A decade ago, the UN’s independent foreign debt expert called for legislation to control the activity of vulture funds. In recent years, Britain, Belgium and France have introduced laws to limit the use of their respective courts for litigation-funded cases against poor countries. Moreover, the European Union parliament has urged member states to pass similar laws.
With vaccine distribution to the Global South still poor, Covid will continue to subject many fragile developing countries to economic stress, slowing their recovery. Western governments and financial institutions must, therefore, step up their debt relief, persuade private creditors to do the same, and deter predators amongst the latter from exploiting vulnerable economies. Failure to do so risks widening global inequality.