Okoa Uchumi: Global South Constitutional Law and Public Debt

José Ignacio Hernández G. / 30-04-2024

Source: Okoa Uchumi

I

The Kenyan Institute for Social Accountability (TISA) launched an initiative called Okoa Uchumior Save the Economy, to raise awareness of Kenya´s debt and its pervasive effect on human development. The country is “drowning in debt and is at high risk of debt distress, with debt transparency proving to be a major concern”. 

recent New York State Court of Appeals ruling has created an opportunity to increase debt transparency. This is particularly important given the unique aspects of constitutional law in the Global South.

Insufficient governance can lead to imbalances that trigger a surge in public debt, igniting widespread economic and social turmoil. Without robust checks and balances, public debt spirals out of control, with funds often diverted towards corruption or mismanagement. Conversely, a well-structured system of checks and balances, underpinned by principles like accountability and transparency, is a bulwark against the buildup of unsustainable debt burdens. 

Economic causes trigger debt crises. In Kenya, for instance, TISA concluded that “persistent fiscal deficits driven by growth in foreign borrowing and expanding imports” led to a debt trap. However, those economic causes are consequences of a poor governance system that prevents effective control over the government´s indebtedness.

In the so-called Global South, checks and balances over the public debt are necessary to promote equal access to goods and services related to social and economic rights based on human rights centrality. While debt can improve fiscal conditions for these rights, it is crucial to prevent socially unsustainable debt that could compromise the enjoyment of these rights. 

To address this issue, the Global South Constitutional Law includes special provisions such as Art. 211 of the Kenya Constitution, which ensures parliamentary control over public debt and other obligations of transparency and accountability. The goal is to promote social and economic development and provide accessible services throughout Kenya.

If these controls are not effectively implemented, there is a risk of unsustainable indebtedness. Despite the growing recognition of the importance of accountability and transparency in public debt, there is still no precise mechanism in the public debt framework to enforce democratic controls.

II

Foreign law usually rules financial debt due to advantage frameworks such as the New York State Law. At the same time, foreign law protects creditors from any change in domestic law that may deter their rights. From an economic perspective, the choice-of-law provisions are efficient institutions

However, the choice-of-law provisions could be misused to evade constitutional controls that ensure transparent and accountable debt emission. This, in turn, can increase the risk of debt crises. The principles of transparency and accountability are particularly relevant under the constitutional law of the issuer, especially in the Global South. But they may be less relevant under New York Law.  

Among other objectives, the odious debt doctrine aims to enforce transparency and accountability in public debt. However, it has proven to be ineffective in the New York courts. In situations like the Argentina default crisis, sovereign governments are considered simple debtors who must fulfill their obligations in those courts. Using the violation of democratic standards to repudiate the debt is not a legal defense to avoid compliance with debt contracts.

III

The ruling adopted by the State of New York Court of Appeals on February 20, 2024, could change the enforceability of democratic standards, paving the way for introducing accountability and transparency in sovereign debt litigation. We should briefly explain this case to understand its practical relevance. 

The Venezuelan national oil company (PDVSA) issued bonds in 2016, with the collateral over 51,1% of Citgo Holding, a U.S.-based PDVSA affiliate, and its most valuable external assets. Before issuing the notes (known as the 2020 Notes), the National Assembly, based on checks and balances constitutional provisions, challenged the transaction, considering that PDVSA did not have the authority to pledge the shares. The National Assembly called for a transparent investigation to understand the reasons for the transaction as part of ongoing investigations over PDVSA´s massive corruption. 

However, PDVSA decided to ignore the parliamentary control and issue the Notes. Years later, in 2019, PDVSA and the parent company of Citgo Holding filed an invalidity claim before the Southern District Court of New York, arguing that the Notes were invalid because of the violation of Venezuela’s constitutional provisions. In 2020, the Court dismissed the case, considering that New York Law governed the Notes and that, as a result, the Venezuelan constitutional law provisions were irrelevant. 

In 2022, the United States Court of Appeals for the Second Circuit changed the perspective of the case, considering that the Venezuelan constitutional provisions are relevant to the validity of the Notes. Due to the implications of that conclusion in the public debt ruled by the New York Law, the Second Circuit decided to certify some questions regarding choice-of-law provisions. Precisely, the State of New York Court of Appeals concluded that “Venezuelan law governs the validity of the notes under Uniform Commercial Code § 8-110 (a) (1), which encompasses within its scope plaintiffs’ arguments concerning whether the Venezuelan National Assembly duly authorized the issuance of the notes under the Venezuelan Constitution”. 

In short, the State of New York Court of Appeals finds a way to bring accountability and transparency into debt litigation. Although the New York Law regulates the rights and obligations of public debt, the validity of the debt is subject to the issuers´ constitutional provisions, including those that established parliamentary controls, such as in Kenya or Venezuela.

IV

In a recent report, the National Democratic Institute and Transparency International highlighted that although public debt is a valuable policy to promote sustainable development, it could also deviate into malpractices when governments capture debt for private interests. The first condition to prevent that risk is to apply quality prior controls about how debt is contracted. Transparency “is a first key step in ensuring that lending does not fuel corruption and that decisions are made to benefit the larger public”. 

The Global South Constitutional Law includes a comprehensive framework that aims to prevent public debt mismanagement and protect social and economic rights. In Africa and Latin America, this framework is reinforced by international human rights law, which recognizes the importance of democratic institutions that uphold human dignity and the common good. Sometimes, the choice-of-law provisions can bypass those constitutional and international law provisions that promote sustainable development, particularly in weak and vulnerable governing institutions. 

The recent ruling by the State of New York Court of Appeals has provided a more equitable perspective because debt instruments governed by the New York Law are still subject to the issuer’s constitutional provisions to determine their validity. Rather than leaning on the odious debt doctrine, nations and civil society now have recourse to invalidity based on the violation of constitutional provisions that mandate controls over debt transactions, thereby ensuring transparency and accountability.

Instead of relying on the odious debt doctrine, countries, and civil society can now rely on invalidity based on the infringement of constitutional law provisions that provide controls over debt transactions to ensure transparency and accountability.