Legal Requirements For Granting And Acquiring Foreign Loan In Nigeria: Where Nigeria Missed It Before Signing The Loan Agreement With Chinese Exim Bank

By Godfree Matthew Esq.

ABSTRACT

Of recent, the Nigeria government was hit hard with series of criticism with respect to the loan it obtained from China. This ranged from the accusation of lack of transparency associated with the procedure involved and the controversial nature of the terms of the loan. The latter generated a lot of debate among Nigerians. Thus, there are Nigerians who believed that by the terms of the loans Nigeria surrendered its sovereignty should it failed to pay off the loan, while others viewed it as not. From the positions canvassed in the course of these arguments, it was clear that the need to discuss the legal framework for granting and acquiring foreign loans in Nigeria became necessary. It was this development that gave birth to this work. The aim of this work was to show that granting or acquiring of loan is not an exclusive act of the executive. Rather it is a collaborative effort of both the executive and the legislature. Thus, this work showed that it is the provision of the law that the executive must subject every loan agreement to the legislature for it to be valid. The work also explored the positions of Vienna Convention on Law of Treaties 1969, vis-a-vis Nigeria’s law on foreign loan. The work found out that, Nigerians need to be enlightened on the role of legislators in granting and acquiring foreign loans. The work concluded by recommending the need for more NGOs to engage in finance monitoring to ensure transparency in dealing with granting or acquiring of loans. The need for Nigeria to show that the loan obtained from China was grossly against its national interests. In the course of this work, the writer deployed the use of statutes, case laws, journals and internets sources.

INTRODUCTION

The Nigeria government was heavily criticized for obtaining loan from Chinese’s Export-Import Bank. Many Nigerians were not happy with it because of the corruption and mismanagement antecedents of their leaders as well as lack of transparency and accountability. Others view it as another avenue of incurring foreign debts on the future of the country. To others, it is an act that was done in flagrant disobedience of the rule of law which negates Nigeria’s institutional sovereignty. In order to address these issues through the lens of the law, this work is classified in four parts. In the first part of this work, the work deals with the concepts of foreign loans and its characteristics. In second part, the legal instruments regulating the granting and acquiring loans in Nigeria were examined. These include both international and municipal instruments. The third part of the work discussed how and where Nigeria government got it wrong in their loan agreement with China. The last part of this work concludes with the options that should be explored by Nigeria government in order to prevent future recurrence of acquiring bad loans. The ultimate aim of this work is to promote learning, inspired policy formulation and law reforms.

MEANING OF FOREIGN LOAN

Foreign loan refers to the loans obtained by a country from a foreign entity. That foreign entity could either be a political state or business entity. The Longman Business Dictionary defines foreign loan as a loan to a country or organization or financial institutions.^[1] In this type of loan the foreign state or organization could be a lender or a borrower. States can also grant foreign loan to non state actors such as international organizations.

CHARACTERISTICS OF FOREIGN LOANS

The major characteristics of foreign loans are as follows:

• It is an international agreement. This means that parties are bound by international law especially Vienna Convention on Laws of Treaties, 1969. It is also by other international instruments like UNCTDA Guidelines on Responsible Sovereign Lending and Borrowing and Vienna Conventions on the Laws of Treaties between States and International organizations or between International Organizations, 1986.
• Foreign Loans are sometimes Standard Terms Contract. This means that it is a contract that is set up by one party in which the terms and conditions are drafted by one party. In this contract it is the party lending the money that dictates the terms of the contract. It has little or no room for negotiation for the borrowing party. The other party has either to take it or leave it.^[2] That is the situation that Nigeria finds itself with China before signing loan agreement with the Chinese EXIM Bank.
• There are no equal bargaining powers. The party borrowing is usually at the disadvantage because of its inability to negotiate certain terms to their taste. As such, it is highly restrictive to the rights of one of the parties.^[3]
• The Lenders, at most time determined where the arbitration or jurisdiction of the court will be, in case of any legal disputes. Most of the times the lending entity or the states decides the jurisdiction for settlement of disputes.
• Collateralization of national assets in case of default. This means that in case of defaults in compliance with the terms of the contract, the assets of the borrowing party will be taken as collateral.
• The State parties are exempted from pleading their sovereign immunities in complying with contractual terms.

STATUS OF PARTIES IN FOREIGN LOANS

The status of parties in foreign loans is that of legal personalities involving in international contract. Therefore both of them could be termed as subject of international agreement. In case where a sovereign state engaged a foreign company as in this case between Nigeria and China, international law will apply.^[4] Thus, all of them are subjects of international law. This is more apposite considering the provisions of Article 2 (1) (a) of the 1986 Convention on Treaties between States and International Organizations or International Organizations, which defines agreements between states and international organizations to be bound by international law. At such a state or transnational entity cannot deploy its sovereign immunity in its commercial engagement. This is captured in the case of Trendtex Trading Corporation V Central Bank of Nigeria^[5] where the legal regime that restricts deployment of sovereign immunity was upheld to mean that where a state engaged in commercial transaction, it cannot be immune from legal responsibility.

LEGAL INSTRUMENTS REGULATING FOREIGN LOANS IN NIGERIA

The legal instruments regulating foreign loans in Nigeria include both international and municipal laws. The international laws which Nigerians are signatories to   include:

• Vienna Convention on Laws of Treaty,
• the United Nations Conference on Trade and Development,
• Rules of International Chamber of Commerce (ICC)

VIENNA CONVENTION ON LAWS OF TREATY, 1969

This law governs international treaties between states and other transnational corporations. It provides for the need of parties to respect the terms of treaties (including contracts) and perform it in good faith. This is known as pacta sunct servanda. ^[6]It also prohibits parties not to invoke their national laws to avoid performing their contractual obligations, except in certain circumstances.^[7] Nigeria is a signatory to the VCLT, 1969. Thus, Nigeria is under a legal obligation by international law to comply with the terms of its loans agreements with any country or multinational company it entered into contracts with.

THE UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT (UNCTDA)

This is another soft law signed by both China and Nigeria.^[8] The law governs all aspects of international trade. The specific aspect that governs borrowing and lending is UNCTDA Guidelines on Responsible Sovereign Lending and Borrowing (hereafter refers to as Guidelines).  Principle 1 provides for the need of the public officials involved in borrowing and lending to act in public interest. In other to ensure public interest and transparency are promoted, Principle 10 of the Guidelines makes provision for openness in the procedures for lending and borrowing of loans. This is meant to promote fiscal transparency in policy making involving the legislatures and the executives. The guidelines also provides for rights of the parties to access information.

RULES OF INTERNATIONAL CHAMBER OF COMMERCE (ICC)

This is a global instrument that regulates peaceful resolution of disputes in international commerce. It provides for the arbitration in case of disputes arising from contracting parties. The award reached by the arbitration is enforceable in about 145 countries.^[9] Incidentally both China and Nigeria are signatories to the Rules of ICC. ^[10]

Also, the ICC has a Rule for Documentary Instruments Dispute Resolution Expertise (DOCDEX). It helps in fast and effective settlement of dispute arising from disputes relating to letters of credits. It is also responsible for settling disputes relating to bank –to-bank reimbursement and collections.  Once the parties submitted themselves to DOCDEX’s Rule, they are meant to abide by the decision as a binding contract.

MUNICIPAL LAWS

The municipal laws that regulate foreign loan include:

• The Constitution of The Federal Republic of Nigeria 1999 (2010 as amended)
• Debt Management (Establishment) Bureau, 2011,and
• Fiscal Responsibility Act, 2007

THE CONSTITUTION OF THE FEDERAL REPUBLIC OF NIGERIA 1999 (2010 AS AMENDED)

The control of public funds is one of the constitutional functions of the Nigerian legislature. This is meant to ensure transparency and accountability in the management of public funds. The constitution provides for the power of Nigeria government to grant aid to a foreign state. This is seen in the provision of section 164 (2) of the Constitution which provides that:

The federation may make external grants to a foreign State or any international body in furtherance of the foreign policy objectives of Nigeria in such sums and subject to the terms and conditions as may be prescribed by the National Assembly.

The import of the above provision is that the power of Nigeria government to grant foreign aid is subject to the directives and prescription of the parliament. It also means that the grants to that foreign body must be in the interest of Nigeria’s foreign policy. Also the amount of the money granted as well as the terms and conditions associated with the grant must be prescribed by the Nigeria’s parliament.

With respect to external borrowing, the constitution is not that specific on the powers of National Assembly, as in the case of external grant. Rather, it is through the oversight functions of Nigeria parliament that they can regulate external borrowing. Moreover, since the National Assembly exercised control over Consolidated Revenue Fund it is the firm position of this writer that it still has the constitutional authority to exercise power over external loans obtained by Nigeria.^[11] However, there are other statutory bodies that empowers parliament to authorize external borrowings. These laws include Debt Management (Establishment) Bureau, 2011 and Fiscal Responsibility Act, 2007.  These laws are discussed in the subsequent parts of this work.

DEBT MANAGEMENT BUREAU (ESTABLISHMENT) ACT 2011

This law provides for the legal procedures for obtaining and granting foreign loan. These procedures are examined below.

• Legal Procedures On Obtaining Foreign Loan

The Debt Management Bureau (Establishment) Act, 2011 (hereinafter known as DMB Act) empowered the National Assembly to exercise authority over the role of the executive with regards to obtaining foreign loans. It is for this reason that section 4(d) provides that the Debt Management Bureau shall issue from time to time guidelines on external borrowings among others functions. Nevertheless, this exercise of power is subject to the approval of the National Assembly. This means that the Bureau shall update the parliament and the public about the current status of Nigerian foreign debt as to whether it is satisfied or pending. It is also the duty of the Bureau to issue guidelines and procedures on how to obtained, use and manage those funds.

Furthermore, section 16 (22) of DMB Act, 2011 provides that the Bureau alongside the Ministry of Finance shall lead the negotiations and acquisition of foreign loans. This became necessary because negotiation of foreign loans is an art diplomatic engagement which is the function of the executive. However, for such loan to be accepted it has to be fully scrutinized and accepted by Nigeria’s parliament.

Therefore, it is obvious from the provision of this law; that the National Assembly shall be a party in the confirmation of the terms and conditions of any foreign loan. However, during the negotiations of Nigeria’s loan with Chinese EXIMBANK, there was a disagreement on whether or not the national assembly was carried along. While others maintain that the parliament was carried along but they were not meticulous in the appraisal of the loan terms. ^[12] The statutory power of the National Assembly to approve the standard terms and conditions is captured in section 21 (1) which provides that the standard terms and conditions approved by the National Assembly shall form the basis for the negotiation and acceptance of external loans and issuance of guarantees.

From the expositions in the preceding paragraphs, it is evidence that there was no compliance with due processes by state agencies that represented Nigeria in obtaining the loan. What is the effect of such non-compliance under Nigeria law? The position of Nigerian law on this is captured under section 19 of DMB Act, 2011 which provides that “any loan obtained in contravention of the provision of this Act shall not be binding on the Nigeria government”.  In the same vein with respect to the non approval of terms and conditions for loans, section 21(4) provides that “no agreement in respect of which the approval of the national assembly is required shall come into operation without such approval.”

• Legal Procedures for Granting External Loan

The procedures for granting foreign loans are specified under the DMB. Section 24 of the act empowers the Bureau to grant loans to a foreign state or international body or any other agency.  However, the applications for such grant must be submitted to the President of National Assembly for it to be scrutinized and approved by the parliament.^[13]

The content of application for grants of loans to foreign states must specify the foreign policy objectives justifying the request. This is because promotion of foreign policy objectives is one of the acceptable grounds upon which foreign loans can be granted. This stem from the provision of section 164 of the constitution of Nigeria which provides that:

The federation may make external grants to a foreign State or any international body in furtherance of the foreign policy objectives of Nigeria in such sums and subject to the terms and conditions as may be prescribed by the National Assembly.

Also, it is within the contemplation of the law that, the terms and the conditions for the grant of a foreign loan must be specified. This is in other to ensure transparency and accountability in the art of negotiation. The application is also obliged to state the benefits Nigeria will derived from the said grant. This is meant to ensure that Nigeria benefits from its national assets it is sending abroad.  Equally, the law further states the need to establish the nexus between Nigeria and the said foreign state or international organization at the time of the request. This position is reflected in the provision of section 24(3) of DMB Act, 2011, which state as follows:

(3) An application specified in Subsection (2) of this section shall indicate the-

            (a)  foreign policy objectives underlining the request or proposal;

            (b) terms and conditions of the grant or loan;

            (c) benefits which Nigeria stands to derive from the grant or loan; and

 (d) State of the relations existing between the foreign state or international body and Nigeria at the time of the request or proposal.  

It is after complying with the above procedures, the National Assembly will then approve or disapprove the proposed request.^[14] The President then forwards a request to the National Assembly for approval for the foreign country or the intending international body. ^[15]

From the expositions of the law above, it is clear that Nigeria’s laws provide the necessity for obtaining the approval of the National Assembly, before executing any foreign loan; either in  lending or borrowing. Failure to obtain parliamentary consent will render such contract or loan invalid. This position is stated in section 19 of the DMA Act, 2011, which provides that any loan that is obtained not in accordance with the provision of the Act, shall not be binding on Nigeria.

FISCAL RESPONSIBILITY ACT, 2007

This law provides for needs for transparency and accountability in financial management.  Section 44 (1) and (2) provides that:

Any Government in the Federation or its agencies and corporations desirous of borrowing

Shall specify the purpose for which the borrowing is intended and present a cost-benefit analysis, detailing the economic and social benefits of the purpose for which the intending borrowing must be applied:

Without prejudice to subsection 1 of this section, each borrowing shall comply with the following conditions as the existence of prior authorization in the appropriation or other Act or Law for which the purpose for which the borrowing is to be utilized; and the proceeds of such borrowing shall be applied towards long-term capital expenditures.

The above provision is the pointer to the facts that external borrowing is not an act that is exercisable by mere ministerial authority. It is an act that requires compliance with certain terms and conditions specified in the above provisions. These terms are not complied with when Nigeria signed Loan agreement with China.^[16]

HOW NIGERIA GOVERNMENT GOT IT WRONG WITH CHINA

Having examined the legal frameworks related to borrowing and granting of loans under Nigeria’s law, it is pertinent at this juncture to point out how Nigeria’s government went wrong in their loan with China.

One of the areas is due to lack of proper consultation on divergent views. It was noted and reported that the loan was mostly negotiated by the Ministry of finance and Transportation. It was mostly an act of ministerial engagement.

Also, stakeholders like seasoned academics and international lawyers with expertise in law of contract like Professor Itse Sagay, SAN, were not consulted. There are many Nigerian international lawyers whose ought to be consulted be consulted but were not. Thus, lack of adequate consultation led to the quagmire associated with the terms and conditions of the said loans. Nigeria needs to be apolitical in dealing with foreign matters. They should engage their best brains on matters like this.  Sensitive international documents like this should seek for more independent opinions aside from government officials.

The other mistake was poor parliamentary engagements. The Nigerian parliaments did not sit well to study and make a critique of the loan term with China. Rather, it was hastily greeted in the usual manner of partisan politics and intrigues.^[17] This further affected the national interest of Nigeria. The Federal government ought to have applied due diligence before signing. It was clear that there was no synergy between the legislature and the executive in deals concerning Chinese loans ^[18]

OPTIONS OPENED TO NIGERIA

The first option opened to Nigeria is to abide by the terms of the loan it signed. It is obliged under international law to observe this treaty with utmost faith. Doing so will earn Nigeria the respect in the comity of nations. Thus, this is the utmost responsibility of any state that is involved in international treaty.

Another option for Nigerians is the need to set up an audit monitoring team. This audit shall be an independent auditors set –up by auditor general of the federation or association of private auditors of Nigeria. Also the government shall allow NGOS and INGOs to monitor the spending of these loans. These auditors should become a watchdog that monitors and give a periodic report on the projects implemented with the monies from this loan.^[19] This will served as anti-dote against the fear of corruption by most Nigerians. As one of the reasons why most Nigerians are averse to the Chinese Loans is because of corruption and lack of financial accountability associated with their leaders.

Another option opened to Nigeria is the principle of debt restructuring. This is an internationally recognized principle which states that public debt should be restructured where one of the parties is not convenient with the terms. This also means that Nigeria must show that it is unable to abide by the original terms of the loan agreement.^[20] As such parties (Nigeria and China) may agree to modify the terms of the loan.

Lastly, Nigeria government should be more inclined towards facilitating and lobbying for foreign loans to its private entrepreneurs. This private individual will invest the money and employ Nigerians. This will reduced the unemployment rate and boost the economy. Also, the assets of these private entrepreneurs will be used for collateralization. This will do away with the fear Nigerians are entertaining regarding takeover of national assets.

CONCLUSION

This work began with examination of the basic terms associated with the topic of discussion. In this regards definition and characteristic of foreign debt were examined. After that the work highlighted and examined the legal frameworks that prescribed procedures for grant and acquisition of foreign loans. Here both international laws that Nigeria is signatories to, as well as the municipal law are discussed. The work examined the flaws of Nigeria in the course of obtaining the foreign loan from China and how to preclude the recurrence of such instances.

[1]^{1.www.idoceonlim=ne.com>dictionary”foreign loan in Longman Business Dictionary of Contemporary”…<accessed on 5th September, 2020>}

[2]^{2. Business Law Form, Standard Form Contracts|-Law Explorer@lawesplores.com>standardfor…<accessed on5th September,2020>}

[3]^{3.Schroeder Music  Publishing CO. Ltd V Macaulay (1974)3 ALL ER 616 House of Lords.}

[4]^{4.This position is supported by the provision of Article 3 of the Vienna Convention on Law of Treaties, 1969. states that an agreement entered by a state  does not lose its validity because its involved international organization.}

[5]^{5.(1977) 2 WLR 356 : 64 ILR P. 111}

[6]^{6.Article 26 of VCLT, 1969}

[7]^{7.Some of these exceptions are include where there is a violation of its internal law of fundamental importance or it is manifestly evident by States that the violation is clear and against good faith.}

[8]^{8.Matthias Goldman, “Responsible Sovereign Lending and Borrowing: ”,  (Max Planck Institute of Comparative Public law and international law,Heildelberg,Germany2012) P.4}

[9]^{9.Pence Law Library Guide, ”International Commercial Arbitration: International Chamber of Commmerce”,@wcl.american.libguides.com>c.php<accessed on 7th September, 2020>}

[10]^10.Ibid

[11]^{12.Section 26(1)(a) provides that any money received from external loans shall be paid into the Consolidated Revenue Fund of  the states.}

[12] ^{Adamu Abuh, “Why House of Representatives Resolved to Probe Chinese Loans” Guardian25May,2020@Guardian.ng<access d on9thSeptember,2020>}

[13] ^{Newswire, “$500M Chinese Loan Already Approved, Probe Unnecessary-Reps’ ,@newswire.com<accessed on 9TH September, 2020>}

[14]^{15.Section 25(4) of DMB Act,2011}

[15] ^{Section 25(5) of DMB Act,2011}

[16]^{28.Adamu Abuh, Loc Cit.}

[17]^{29.Newswire, “$500M Chinese Loan Already Approved, Probe Unnecessary-Reps’ ,@newswire.com<accessed on 9TH September, 2020>}

[18]^{30.Unini Chioma, “  Chinese Loans: How FG Signed Empty Loan Repayment Documents-Reps.”,@thenigerianlawyer.com<accessed on 9th September,2020>}

[19]^{31. Principles 13 of Sovereign Responsible Lending and Borrowing .}

[20]^32.Ibid