Refocusing on the Objectives: A Critique of the U.K.'s Debt Relief (Developing Countries) Act, 2010

Abstract

Managing unsustainable debt and the crises that have ensued from the sovereign debt of developing countries have not only left the countries enmeshed in excruciating poverty but also threatened the stability of the international financial system. Concerted efforts have been progressively formulated and implemented by the international community to solve the unsustainable debt crisis faced by developing countries. Chief of these efforts are the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief embarked upon by the International Monetary Fund and the World Bank. The HIPC Initiative aim of reducing to sustainable levels the debt of countries classified as heavily indebted poor countries (HIPCs), while the MDRI was added as a supplement aimed at achieving 100% debt relief for countries completing the HIPC Initiative. One of the phenomena that has been variously and widely blamed as a set-back to the HIPC Initiative and the MDRI is the perceived activities of vulture creditors who are accused of profiteering on the external debt of poor countries by purchasing them at steep discount in the secondary market and suing for the full value of the debt plus all interests and associated fees. Studies by both the World Bank and the IMF, as well as various experts commissioned by major world bodies, indicate that a substantial portion of the monies saved poor countries by the HIPC Initiative and MDRI which should have been channeled to developmental activities – such as infrastructural development, education, food, health, and generally uplifting the living standards of the people – are lost to vulture creditors who trade on the debts of these countries. These studies also indicate that the activities of the vulture creditors also pose serious developmental challenges to developing countries falling outside the HIPC Initiative – particularly those eligible to borrow from the International Development Association’s concessional loan program – and a threat to the stability of the international financial system. In response to the perceived menace of the vulture creditors, major policy and legislative responses have been undertaken by various countries to check their activities. These include the “Stop Vulture Funds” bill (the Bill) pending before the United States’ Congress and the United Kingdom’s “Debt Relief (Developing Countries) Act” (the Act) in force in the U.K. since April 2010. This paper is a critique of the Act. It examines the provisions of the Act in the light of its avowed objectives and the objective of the international community – to curb what has now become known as the “vulture culture”, make debt relief work for the poor and preserve the stability of the international financial system. A brief introduction introduces the problem of debt, debt relief and the vulture culture in developing countries. Later parts of the paper delve into an examination of the salient provisions of the Act in the light of its objectives, necessary comparisons with the Bill, and recommendations for reforms.