GOOD DEBT MANAGEMENT PAYS
(Article Reference: Document No.3, January 1993)

LEGAL ASPECTS OF EXTERNAL DEBT MANAGEMENT
by Rolf Knieper[1]

In developing countries, lawyers play only a marginal role in development financing and debt management. Appraisal and implementation of projects and programmes have been firmly in the hands of financial analysts, economists and political actors. Developing countries have rarely taken legal expertise seriously, allowing contractors and other non-lawyers to prepare and negotiate legal documents such as loan agreements.

During the seventies there was widespread optimism as to the possibility that the "Third World" would catch up after a massive transfer of funds and technology. At the time, little attention was paid to the fact that loan agreements and contracts stipulated that technology was not just transferred, but sold and that development capital was available not so much as grants, but in the form of loans. The concept of developmental aid to sovereign nations seemed to work successfully during the first so-called development decade (1960 to 1970). Much of this aid took the form of loans which contained concessional terms such as grace periods and long reimbursement periods of capital, extending up to fifty years.

Today the period of grace is over and many developing countries have found themselves in default on their loans. These defaults engendered the debt crisis, which is still very real even though most transnational banks have recovered from its initial impact. In many countries the debt service has drained national budgets to such an extent that insufficient means remain for domestic programmes relating to education, health and infrastructure. Often, such programmes exist only because of complementary funding provided by foreign aid agencies.

In addition to the lending conducted by private commercial entities, lending by non-commercial international agencies has also contributed to the debt crisis. At the same time, it has been mostly sovereign borrowers who have borne the cost of unsuccessful projects, even though lenders may have contributed to the failure. This means that the former have had to reimburse loans contracted in connection with such projects irrespective of their viability. Furthermore, the sovereign borrowers are not granted compensation for any damage and loss.

In 1989 the World Bank published a report entitled: "Sub-Saharan Africa: From Crisis to Sustainable Growth". It stated that a 1987 evaluation had revealed that half the rural development projects in Africa financed by the World Bank had been failures[2]. The report further stated that "African governments and foreign financiers (commercial banks and export credit agencies as well as donor agencies) must share responsibility. Foreign financiers and suppliers promoted capital exports with attractive credits, and poor coordination among donors caused duplication and waste"[3]. It added that "foreign aid has greatly expanded the opportunities for malfeasance exacerbated by the venality of many foreign contractors and suppliers"[4]. Until now, these findings have not led the parties concerned to rectify this state of affairs through legal means. At present however, legal remedies exist and can be applied.

---

Professor Rolf Knieper - Prior to and after being a Legal Adviser to the Government of the Central African Republic from 1981 to 1988, and to the Government of Chad from 1978 to 1979, Professor Knieper has taught Civil and Economic Law at the University of Bremen since 1972. Professor Knieper also was a visiting scholar at Harvard Law School in 1971 to 1972. Born in 1941, Professor Knieper obtained a doctorate from the University of Frankfurt in 1966. Besides writing a book on the Limits of National Sovereignty and Development, Professor Knieper has contributed extensively to literature in his field and has made a major contribution to the adoption of a new Investment and a new Forestry Code by the National Assembly of the Central African Republic in 1988 and 1989.

---

[1] Professor of Civil and Economic Law at the University of Bremen.
[2] See p. 27.
[3] See p. 27.
[4] See p. 61.

>> Next: Legal aspects of external debt management (continued) | back to Table of Contents