Ajayi debt challenge December 28, 2006 | posted by Nigerian Muse (Archives)

 

---

From nigeriafirst.org

http://www.nigeriafirst.org/printer_55.shtmlrec

DEBT: Challenge to Nigeria’s Sustainable Development

By Olufemi Ajayi

PRCU, State House, Abuja
 

14 January, 2003, 05:12

Introduction

Nigeria’s debts, like that of most other African countries, appear to be on a ceaseless and perpetual increase. The more we pay, the more we seem to owe.

Doubtful deals, dud projects (white elephants) and dubious debts; Nigeria is neck-deep in the debt trap. Debt has become a millstone (an albatross) on Nigeria’s neck, jeopardizing her economic growth and compromising her social development. We spend a lion’s share of our national income servicing debts leaving little money for social services and infrastructures development, and even still much less for investment. In the process, we have paid more than we originally borrowed, yet our debt – like a malignant virus – continues to multiply.

Nigerians, victims of many years of belt-tightening and austerity measures are worried stiff while President Olusegun Obasanjo has cried himself hoarse appealing to the Western creditors to loosen the debt noose through outright cancellation, interest forgiveness and debt-for-development-assistance-swap. Yet the debt burden is not abating.

With an external debt of over $US30 billion, servicing of debt is a major economic challenge and a critical development issue. Nigeria currently spends about one third of its budget, three times its sectoral budget for education and nine times its health budget on servicing outstanding debts.

In fact, since 1980, debt and education spending have been broadly reversed, with debt service rising from 1.9 per cent to 8 per cent of GNP, and education spending falling from 6.4 per cent to 1.3 per cent. Even so, Nigeria is only paying little over half its scheduled debt service. Grants from donor countries are now one-hundredth of the value of debt service. The reality is that there is a net transfer of funds from Nigeria to the developed countries.

History of Nigeria’s Debt Crisis

In the late 1970s and 1980s, countries of the South, particularly African countries experienced severe savings gap and shortage of funds for investment. In the face of low international interest rates, some countries succumbed to the temptation of resorting to external borrowing. Nigeria was one of those countries that went a-borrowing. In 1970, Nigeria’s external debt stock was less than one billion dollars. By the second half of the 1980s, the debt profile had deteriorated seriously due to persistent inability of the country to meet its external debt service obligations. This resulted in mounting arrears and unmanageable growth of the debt stock relative to available resources. The external debt stock, which was about US$9 billion in 1980, grew to nearly US$19 billion by 1985. Correspondingly, the debt stock as a percentage of total export earnings and GNP rose to uncomfortable levels of 151% and 24 %, respectively. In that year, the debt service payment due was a little above US$4 billion which was about 33% of the total export earnings; however, the actual debt service payment for the year was about US$1.5 billion. By 2001, the debt stock as percentages of total export and the GNP was 149% and 83%, respectively.

How Nigeria got trapped

How did the country get into this exponential debt spiral? The bulk of Nigeria’s debt had been incurred at non-concessional terms during the late 1970s and the early 1980s, during a period of significantly low interest rate regime when the London Inter-Bank Offered Rate (LIBOR) hovered between 3 and 4 per cent. The debt grew rapidly through the eighties for two main reasons. The first was accumulation of debt service arrears due to worsening inability to meet maturing obligations. The second was the escalation of market interest rate. LIBOR peaked at 13 per cent in mid –1989. As a result, the pre–1984 debt of most developing countries, Nigeria inclusive, quadrupled by 1990. The collapse in oil prices and the ever-rising prices of imported (manufactured) goods, poor economic policies, bad management and unfavourable loan terms made it extremely difficult to service the mounting external debt obligations, particularly those due to the Paris Club. Hence, despite three rescheduling arrangements in 1986, 1989 and 1991, arrears continued to mount, which further aggravated the debt problem. Some progress was made however in restructuring the commercial debts and Nigeria has continued to service that category of debts as and when due.

The trend of the external debt highlights the fact that much of the country’s external debt is owed to fifteen creditor countries belonging to the Paris Club; as a percentage of the total external debt, Nigeria’s indebtedness to this group rose almost consistently from about 30% in 1983 to about 80% in 2001.


Debt Relief Initiatives

To address this unwholesome situation Nigeria has since 1986 been having negotiations with the Paris Club and other groups of creditors. In December, 2000, following a second round of negotiations, Nigeria reached agreement with the Paris Club. The rescheduling Agreed Minute was structured in Houston Terms, which applies to lower middle-income countries with per capita income of between US$785 and US$3125. (Nigeria has a per capita income of US$260 in 2000). The Agreed Minute provides for the rescheduling of Nigeria’s Paris Club debt of about US$21.4billion over an 18 – 20 year period. ODA credits are to be rescheduled over 20 years at interest rates that are no less unconcessional than the debts’ original interest rates and enjoy 10 years grace period. Commercial credits are to be rescheduled over 18 years at market-based interest rates, including a three-year grace period.

Impact of debt management

Ordinarily one would have expected that Nigeria be on the path of progressively declining debt burden. However, this is not so because while the Houston Terms allow for a deferral of payments, they do not have provisions for any debt reduction. They are insufficient to address Nigeria’s debt problem and have led to an endless cycle of restructuring. Thus, Nigeria’s debt overhang remains un-assuaged.

This apprehension comes out clearly in External Debt Service Projections, 2002-2011, based on the agreed December 13, 2000 Agreed Minute rescheduling. The figures show that Nigeria’s debt service remains unbearably high under the arrangement. They are, therefore, inadequate to provide an escape from the debt trap. The crux of the matter lies in the incongruent nature of the dynamic relationship between the debt burden and available resources. Particularly, from 2002 to 2006, the projected debt service, though declining progressively, still remains so high that even the lowest figure is as high as US$2.4 billion (2006) while the highest is over US$3.0 billion (2002).

Nigeria’s precarious economic position is even more glaring when one takes into consideration, the volatility of oil export revenue. Oil accounts for as much as 98% of Nigeria’s aggregate export of goods and about 78% of government revenue. These indices highlight the need to incorporate oil price volatility into any realistic decision on what Nigeria can reasonably afford to provide for debt servicing and why it is necessary, therefore, to grant Nigeria real concessional relief.

Sustainability Analyses of Nigeria’s Debt
 

The grim reality is that even with the fourth rescheduling, Nigeria’s external debt remains unbearable and would continue to hamper economic growth and poverty reduction through the distant future if urgent remedial action is not taken. To buttress this point, a preliminary Debt Sustainability Analysis (DSA) conducted by the IMF has indicated that without further rescheduling, Nigeria’s debt service to export ratio will remain above the Highly Indebted Poor Country (HIPC) threshold until 2006: it would increase from 13% in 2001 to 21% in 2002 and almost 30% over the medium term.
 

A separate recent study on debt sustainability carried out for the Debt Management Office by Crown Agents corroborates the IMF results as it concludes that “Nigeria’s debt, based on HIPC targets, is not sustainable after the current Paris Club negotiation.”
 

Unless the debt burden is significantly reduced, the goal of reducing poverty by half by the year 2015 may be difficult to achieve. The picture is so bad that the London-based Jubilee Plus, a member organisation of the New Economics Foundation declares that: “Even if Nigeria’s debt is entirely written off, it will still need additional aid to meet the internationally agreed poverty targets for 2015.” So the minimum that is required is substantial debt reduction. The Debt Management Office has accordingly been making enormous effort to achieve this objective.

Unfortunately, Nigeria does not qualify for debt relief granted to Highly Indebted Poor Countries (HIPCs) as it is classified as a lower middle-income country. But it has good economic, political and moral arguments to make a case for maximum debt relief.
 

Nigeria is currently among the poorest and least developed countries in the world, with socio-economic and debt profile closely paralleling that of the Highly Indebted Poor Countries (HIPCs). The country’s per capita income is only about US$853. Over 70 percent of the country’s population earns less than $1 dollar a day. About 91 % of the population lives on less than $2 dollars a day. An average GDP growth rate of about 2.7% over the second half of the 1990s left little room for per capita income growth. This has increased only unimpressively in the early 2000s to a little above 3%.
 

Nigeria’s extreme poverty level is also reflected in its Human Development Indicators (HDI), which are among the lowest in the world. She has been ranked 151st out of 174 countries in 2001 UNDP HDI ranking. The adult literacy rate of 52% for males, 49% for females and life expectancy of 52 years are among the lowest in the world, while infant mortality at 77 per 1000 and maternal mortality at 1000 per 100,000 live births are among the world’s highest.
 

From the political angle, it should be noted that Nigeria is a polity in transition having just emerged from fifteen years of military dictatorship. The new democratic government is facing a revolution of expectations from the people to, urgently and substantially enhance living standards. The measures, fiscal and monetary, implied by this demand, are in conflict, at least in the short run, with those implied by curtailment of deficit financing, control of inflation and even privatization and commercialization of state-owned enterprises, which are some of the conditions required by multilateral financial institutions, development partners and creditor countries as a basis for debt relief negotiations.
 

The new democratic government needs to pay adequate attention to the mood of the populace in order to safeguard the nascent democratic dispensation. There is surely a dilemma in this regard. It would be important for creditors and multilateral financial institutions to find ways of letting these circumstances moderate their requirements vis-à-vis Nigeria’s debt servicing and access to concessionary loans and development assistance.

Unending Cycle of Debt Rescheduling
 

For many decades, creditor countries have relied on a “traditional approach” towards addressing Sub-Saharan Africa’s debt crisis. This has taken the form of debt rescheduling and refinancing, complemented, in varying degrees, by minor cancellations, especially for ODA debts; debt buy-back; debt conversion and other restructuring mechanisms. In general, debt rescheduling was initially negotiated with debtor countries on a case-by-case basis. This was however replaced by a more systematic framework that applied standard terms to debtor countries and provided little concessions. African countries have been taken through several arrangements, which have evolved over time, for the resolution of official debts.

These are briefly reviewed below.

• The Venice Terms were introduced in 1987 for the poorest countries that were undertaking adjustment. Several African countries benefited from this rescheduling arrangement, which provided for lower interest rates, and longer payment and grace periods;

• The Toronto Terms succeeded the Venice Terms in June, 1988 and were made available for the low income, heavily indebted IDA-only countries. Some African countries benefited from this arrangement, which provided lower interest rates, further lengthening of maturities and partial debt service write-offs that together could provide about 33 percent debt service relief.
 

• The Houston Terms were proposed in July, 1990 for the middle-income countries and allowed for deferrals of payments, rather than debt reduction. Nigeria’s debts have been rescheduled four times under this arrangement.
 

• The Enhanced Toronto Terms was formulated in 1991 to provide 50 percent debt service reduction as well as other enhancements that could ensure more even spread of debt service payments.
 

• The Naples Terms was adopted in December 1994 for the poorest and most-indebted countries. They provided up to 67 percent relief on the net present value of the debt, which could apply to both stock and flows, depending on each country’s balance of payments situation.

The traditional debt relief efforts highlighted above have centred around a number of key elements, including:
 

• the requirement for adoption of macroeconomic stabilization and structural reform programmes endorsed by the Bretton-Woods institutions; and
 

• the requirement for establishing a track record of economic reform performance before qualifying for debt relief.

African countries have gone through numerous rescheduling arrangements involving a series of annual negotiations and renegotiations in the endless cycle of debt reschedulings into which many of them have been plunged. These initiatives have failed to alleviate the heavy debt service burden. Indeed, in some cases, they contributed towards increasing the debt stock. The amount of debt rescheduled, the total debt forgiven and the amount of debt stock reduced remain very insignificant, compared with the overall debt stock.

Traditional debt rescheduling has failed and Sub-Saharan Africa still remains in the debt trap. Indebtedness ratios continued to remain very high for Sub-Saharan African countries as a whole. Debt stock to export ratio and Debt stock to GNP ratio remained well above 200 percent and 70 percent respectively up to 1996. This resulted in the launching of the HIPC initiative by the World Bank and the IMF, which sought to place debt relief within an overall framework of poverty reduction.

The case of Nigeria is very illustrative of the inadequacies characterizing the current eligibility criteria for debt relief and merits further elaboration here. The eligibility criteria under the Enhanced HIPC Initiative focus on macroeconomic aggregates in assessing a country’s debt burden. Arbitrary thresholds are set for these parameters. Furthermore, little regard is given to human and socio-economic development indices. Based on these economic criteria, Nigeria has been adjudged ineligible for relief under the HIPC Initiative. However, in sharp contrast with the illusory-image of an “oil-rich” country, Nigeria is a heavily indebted poor country. A HIPC review, which embraces the so-called “medium-income” debtors, will create the critical mass and momentum of economic activities across the African continent. This will surely accelerate the recovery and growth process to the mutual advantage of all parties concerned.

Paris Club Debt Rescheduling Trap: The Nigerian Example

The Paris Club emerged as a cartel of official creditors for negotiations over debts owed by a number of developing countries including African countries. The importance of the Club to the African situation is highlighted by the fact that for example, about 80% of Nigeria’s debt totalling about US$28.35 at the end of 2001, was owed to this group. The experience of Nigeria with the Paris Club arrangement, which is predicated mainly on debt rescheduling, clearly demonstrates the jeopardy faced by Third World debtor countries – a trap of endless cycle of debt burden.

The total amount borrowed by Nigeria from members of the Paris Club from 1965 to 2001 was of the equivalent of US$13.5 billion. She had paid the equivalent of US$41.273 billion to service the debts by the December 2001. Yet, as at December 31, 2001, she owed the Paris Club member countries the equivalent of US$22.092 billion. Another illustration of the debt conundrum: In July 2000 when Nigeria reached a one-year debt consolidation period agreement with the Club, her debt stock stood at US $ 22.416 billion. Over the agreed period, Nigeria paid back about US $1.457 billion. Yet at the end of the period the country’s debt stock remained virtually unchanged at US $22.046 billion. This was due to moratorium interest arrears amounting to about US $1.086 billion resulting from the rescheduling. It is therefore imperative that for rescheduling to be meaningful, it has to be interest free.

Agreement with Paris Club provides rescheduling as a way of providing debt relief for debtors but as we have seen, the strategy is virtually a fiasco. After four reschedulings with the Paris Club since 1986, Nigeria’s external debt burden today has not gotten any lighter. The Club has, in fact, turned out to be a debt enhancing rather than debt reducing association.

Another strong defect is that the Paris Club arrangement emasculates bilateral approach to the resolution of the debt burden. A debtor country can only negotiate with a Paris Club creditor country within the general agreed guidelines defined by the club. This negates the peculiarities of each debtor- creditor relationship. Hence, there is loss of initiative and creativity for finding mutually acceptable solutions.

Moreover, the arrangement encourages procrastination in bilateral negotiations. In the attempt to exploit the equal treatment clause usually contained in the agreed minutes of the Paris Club, each creditor under a game-theoretic psychology delays concluding its own agreement so as to take a cue from other creditors agreement terms.

Another problem is that the Paris Club creditors often rely on projected export revenue in insisting on minimum debt service from the debtors. But they do not take into account the volatility of such earnings in the case of such countries like Nigeria, which depends on oil for over 98% of its aggregate export earnings and for about 78% of government revenue. The crux of the matter lies in the incongruent nature of the dynamic relationship between the debt burden and available resources. These indices highlight the need to incorporate oil price volatility into any realistic decision on what Nigeria can reasonably afford to provide for debt servicing. Provision ought to be made for paying lower in debt service if export revenues fall below projected levels.


A related issue worth considering is that Debt Sustainability Analysis calculations on which rescheduling relies are based on narrow definitions and arbitrarily fixed targets, which are increasingly being questioned. The definition of debt sustainability should be broadened to encompass the full range of development needs of the country, with current poverty levels and human development considerations incorporated. In addition, a case could be made for some degree of flexibility in setting lower target ranges for certain countries in transition, such as those emerging from a conflict or unusual governance (as Nigeria did recently), natural disaster or other exceptionally difficult circumstances.

Paris Club Agreements are also contingent on a country having a Standby Arrangement with the IMF. This arrangement requires progress in meeting benchmarks relating to Macro-economic reforms. The requirement for the speedy attainment of certain macro-economic performance benchmarks relating to balance of payment, deficit finance, and inflation, although desirable are not flexible to take cognizance of the trade-off with Government pursuit of social development objectives and the difficulty it faces if it abruptly cuts down on existing levels of public expenditure needed to sustain social services. The measures, fiscal and monetary, implied by this demand, are in conflict, at least in the short run, with those implied by rigid requirements for sharp curtailment of deficit financing, control of inflation and other measures which are called for under the medium-term option.


The inescapable conclusion from the foregoing is that Paris- Club-style debt rescheduling as a means of lessening the debt burden of Third World sovereign creditors is a huge failure. This induces one to re-echo the recommendations of the International Conference On Sustainable Debt Strategy held in Abuja in May 2001 thus:

• Cancellation of the entire debt to free up resources for development.
• Increasing of ODA to debtors especially by way of grants.
• Increasing Nigeria’s unconditional access to Western markets for non-oil exports.
• Reforming of the global financial architecture to ensure that looted funds are not safe anywhere;
• Setting up of an international arbitration court to adjudicate disputes between donors and creditors.


But how do these advocacies fit into the interest and expectations of creditors and multilateral financial institutions? It is necessary for proposed measures to be convincing enough and seen to be for the long-term benefit to both parties. It is on this basis that Nigeria advocated the following scheme.


Special Debt Relief Measures

Because almost all of Africa is ravaged by poverty and disease, official creditors should provide Africa with additional and special debt relief aimed at encouraging good governance that targets rapid growth and development as well as poverty reduction. This could be done under two canopies:

(i) As part of the ongoing efforts at debt relief; and

(ii) As part of the delivery of measures under the NePAD initiative.

The additional and special assistance should be encapsulated as measurable governance benchmarks that should include but not limited to some or all of the following:

• Credible performance in the design and implementation of fiscal measures as reflected in low fiscal deficit, reduced inflation and stimulation of growth should be rewarded with special amount of debt reduction.

• Expenditure on poverty reduction - In addition to benefits under other schemes, African countries that spend on poverty reduction should be encouraged in such a way that for every dollar spent on poverty reduction, there would be a corresponding amount of debt relief. The proceeds of such debt reduction should, in turn, be re-flowed into further poverty reduction. A clear advantage of this type of scheme is that it would generate a self-reinforcing momentum in poverty reduction.

• Expenditure on credible HIV/AIDS and Malaria prevention measures should also be encouraged and rewarded such that for every dollar spent, there would be a matching reduction of debt on an ex poste basis.

• For countries in transition or emerging from conflicts, additional debt reduction should be conceded to encourage reconciliation and rehabilitation of infrastructures with a view to diminishing the potential for further conflict;

• There is also the need for the reduction of the HIPC thresholds by half for eligible African countries to accelerate their exit from the debt trap and the restoration of their economies to the path of robust growth.

The solution to the numerous social and economic problems facing Africa should not be confined to the ambit of debt relief initiatives. Other measures of support, which developed countries would need to provide, are addressed below.


Categories (Types) of Nigeria’s Debts

Nigeria’s external debt could be grouped into two main categories: official and private debts. Official debts consist of Paris Club debts, multilateral debts and non-Paris Club Bilateral debts. The private debts components on the other hand, are made up of uninsured short-term trade arrears contracted through the medium of bills for collection, open account, etc. Commercial bank debts acquired through loans/letters of credit are referred to as London Club debts. Chart 1 below presents a breakdown of Nigeria’s debt by categories of creditors.


Much of the country’s external debt is owed to fifteen creditor countries belonging to the Paris Club. Paris Club Debts are government-to-government credits or market-based term loans which are guaranteed by various Export Credit Agencies of the creditor countries. The Paris Club is a cartel of creditor countries that provides an informal forum where countries experiencing difficulties in paying their official debt meet with the creditors to reschedule the debts. It is an informal group with no permanent members, which works under the principle of consensus. Paris Club member countries, to which Nigeria is indebted, are: Austria, U.S.A., Switzerland, Germany, Denmark, Italy, the Netherlands, Japan, the U.K., Spain, Israel, France, Belgium, Russia and Finland. The total amount owed to members of the Paris Club as at December 31, 2001 amounted to US$22.092 billion.

Multilateral Debts constitute the second category of debts owed by Nigeria. These are project loans owed to multilateral financial institutions (e.g. the World Bank group, the African Development Bank Group, the European Investment Bank Group, IFAD, and ECOWAS Fund) by Federal and State Governments and their agencies. The total amount owed to multilateral institutions as at December 31, 2001 was US$2,797.87 million. Debt service payment to them in 2001 amounted to US$491.48.

Another category of debts is the Non-Paris Club Bilateral Debts. These are debts owed to countries, which are not members of the Paris Club and creditors resident in Paris Club countries but whose debts are not insured by the Export Credit Agencies. The amount owed to this category of creditors was US$121.21 million as at December 31, 2001. Debt service payment in 2001 to them was US$33.81 million. Debt Service projection in 2002 is US$34.9 million.

The final category of debts are the commercial debts, properly so called. They have been packaged into two groups. The first group are owed to the London Club. The London Club is a group of commercial banks that join together to negotiate the restructuring of their claims against debtor countries. London Club debts are arrears of commercial bank term loans but they also include some arrears of letters of credit, bills for collection, open accounts, dividends, airline remittances etc. After two earlier unsuccessful attempts, that were consolidated in 1991 and amounted to US$5.4376billion. Out of the stock, the term loans contracted by FGN and the arrears of the non-term loan components were bought-back in January, 1992. The portion bought back accounted for 62 per cent of the stock which was bought at 40 cents to the dollar. The remaining US$2.043billion (made-up of State Government’s term loans) were collateralised with US Treasury zero coupon bonds maturity on November 15, 2020. The holders are currently being paid interest at 6.25 per cent per annum that is, about US$128million.

The second group of commercial debts are what we now call Central Bank of Nigeria (CBN) Promissory Notes. These were trade arrears contracted by ordinary Nigerians, between 1981 and 1986 but who deposited the local currency equivalents of the cost of their imports, through their local banks with the CBN, which in turn had no foreign currencies with which to make the remittances. This is why the Promissory Notes are now regarded as FGN’s debt. The arrears were finally covered with Promissory Notes (PN’s) in January, 1988, the stock amounted to US$4.8billion to be authorized quarterly ending on January 5, 2010. The outstanding balance of the Promissory Notes as at December 31, 2001 was US$1,291.78 million. Annual debt service on the Promissory Notes is about US$200 million.

Who actually owes what?

At this juncture, it is useful to further disaggregate the incidence of external debt liability among the Federal and the thirty-six State Governments. As at December 31, 2001, out of the total external debt stock of US$28.347 billion, the Federal Government owed about US$21.08 billion or 76.14% while the states owed about US$7.265 billion or 23.86%.

Nigeria’s total external debt stock of US$28.347 billion as at December 31, 2001, consisted significantly of arrears of principal, interest, as well as late interest, which have been consolidated to form the current principal balance. So one could observe the exacerbating effect not only of principal and interest arrears, but also of late interest which is interest charged on defaulted debt service payments. The spectre that emerges from the dynamics is that of a conundrum of ever-increasing debt burden which if not arrested, would continue to nullify not only debt service efforts but also efforts made to restore the economy to the path of recovery and growth.

Consequences of the debt burden

Nigeria’s huge debt burden has grave consequences for the economy and welfare of the people. The servicing of the external debt has severely encroached on resources available for socio-economic development and poverty alleviation. Although from 1986, Nigeria had taken a decision to limit debt service to no more than 30% of oil receipts, this has not brought much relief.

Between 1985 and 2001, Nigeria spent over US$ 32 billion in servicing external debt. Prior to the recent rescheduling arrangement with the Paris Club creditors, annual debt service payments due was in the range of US$3.0 billion to US$3.5 billion. Debt service due in 2000 was over US$3.1 (or 14.5% of export earnings) excluding arrears of US$19.6 billion owed essentially to members of the Paris Club.

Actual servicing outlays in year 2000 was US$1.9 billion, translating to about 4 times Federal Government’s budgetary allocation to education and about 12 times the allocation to health. In year 2001,actual debt service payment was US$2.13 billion, which amounted to 6 times of the FGN’s budgetary allocation to education and 17 times the allocation to health for that year. Yet these two sectors need substantial public expenditure to upgrade the level of facilities and services for any meaningful alleviation of poverty.

Another area in which the external debt overhang is adversely impacting on the Nigeria’s economy is in the inflow of foreign investments. Following Nigeria’s problem with servicing her debts, Export Credit Guarantee Agencies (ECGAs) suspended insurance cover for exports, not only of goods and services, but also of investment capital to the country. Consequently, the much-needed inflow of foreign resources for the stimulation of investment, growth and employment has been hampered.

Without export credit cover and other facilities, Nigerian importers are required to provide 100% cash cover for all their orders and are, therefore, placed at competitive disadvantage compared to their counterparts else where who have access to ECGA covers and import credit facilities. This situation exacerbates the pains of the external debt burden as it blocks off the relief that would have been received via speedy economic recovery and growth.



Renewed Quest For Debt Relief
 

Recognizing the crucial linkages between debt, poverty, development and the survival of Nigeria’s nascent democracy, the current administration has attached priority to obtaining rapid and substantial external debt reduction, as a crucial component of its development strategy.

The major planks of Nigeria’s strategy include regularization of relations with the international financial community to pave the way for constructive engagement; negotiation of favorable terms for debt rescheduling and restructuring under “traditional” debt relief mechanisms in the short term; and, building on that in the medium term, to secure deeper and more substantive debt reduction.

A precondition for meeting with Paris Club is the need to have an Economic Programme supported by the Bretton Woods Institutions. Accordingly, in order to actualize its debt relief strategy, this administration embarked upon bold macroeconomic stabilization and structural reform policies, supported by a Stand-By Arrangement that was approved by the IMF on August 4, 2000. The good track record of implementing these policies, amidst difficult socio-political circumstances, paved the way for discussions with the Paris Club creditors on the restructuring of the country’s debts, the outcome of which is discussed below.

Paris Club Debt Rescheduling:

The DMO has been actively involved in negotiations for the rescheduling of Nigeria’s Paris Club Debts, led by the Chief Economic Adviser to the President. Nigeria held a first round of talks with the Paris Club on the rescheduling of her debts in October, 2000. The second round of formal negotiations, held in December, 2000 resulted in an agreement for the rescheduling Nigeria’s debts, under Houston Terms, details of which are contained in the Agreed Minute.

The Agreed Minute provides for the rescheduling of Nigeria’s Paris Club debts totalling $20.5 billion over an 18-20 year period. ODA credits are to be rescheduled over 20 years at concessional interest rates and enjoy 10 years grace period. Commercial credits are to be rescheduled over 18 years at market-based interest rates, including a three-year moratorium. As part of the rescheduling agreement, the moratorium interest of about US$1.063 billion was capitalised and it was agreed that debt service payment to the Paris Club creditors in 2001 should be kept at $1 billion, to provide some breathing space for the country.

The Paris Club Agreed Minute sets out the general terms of debt restructuring with respective creditor countries. In accordance with Paris Club rules, Nigeria has been negotiating on a bilateral basis with about fourteen creditor countries on the specific details of each agreement. Bilateral negotiations have focused on the final reconciliation of eligible debt as well as the specific terms of the rescheduling agreements, including the applicable interest rates, application of debt service payment etc.

The reconciliation process with our creditors has now been virtually completed. A comprehensive inventory of all external loans was carried out by the Debt Management Office, based on which, reconciliation meetings were held with fourteen Paris Club creditor countries. As an outcome of the reconciliation exercise, I am happy to report to you that Nigeria’s external indebtedness with the Paris Club creditors has been adjusted downwards by about $537.1 million. Concomitantly, the Debt Management Office has, through lengthy, painstaking bilateral negotiations with our creditors, succeeded in renegotiating applicable interest rates for rescheduling the consolidated Paris Club debts down to an average 5.5%, compared with the historic levels averaging 12%. This will further reduce the future growth of the debt stock as well as the stream of debt service payments to our creditors.

Notwithstanding the modest gains as recorded above, the Debt Management Office considers that the Paris Club rescheduling arrangement still does not sufficiently address Nigeria’s debt problem and may likely lead to endless cycle of restructuring. During the course of negotiations with the Paris Club when this concern was raised, the members conceded their readiness, in principle, to consider further negotiations in future which could result in deeper and more substantive debt restructuring of Nigeria’s debt. Thus the Agreed Minute signed with them in December, 2000 contains a goodwill clause allowing for a further negotiation after July 31, 2001. This was however subject to: (i) a good track record in implementing the IMF-supported Stand-By Agreement; (ii) negotiation of a follow-up medium-term programme supported by the IMF; and (iii) satisfactory implementation of the 2002 Paris Club Agreed Minute, including primarily, effecting timely debt servicing.

Unfortunately, largely as a result of the socio-political challenges encountered, the Federal Government has had to suspend the Stand-By Agreement with the IMF. While that action was inevitable due to the exigencies of the moment, it has diminished the prospects for further dialogue with the Paris Club on debt reduction, within their established rules and framework. Nevertheless, efforts have been continued to canvass support for granting debt relief to Nigeria (and indeed other African countries) through various fora, including the African Union, the NEPAD Initiative and the United Nations by marshalling very strong economic, political and moral arguments. At a more propitious time, when Nigeria is able to resume its economic reform programme with the Bretton Woods Institutions, we would be able build on the campaigns highlighted above to accelerate the quest for the granting of debt relief by our creditors.

Commercial Debts
 

With regards to commercial debts, our efforts have focused on taking advantage of market opportunities to reduce the debt stock. These efforts commenced in July 1999, when the Federal Government of Nigeria engaged the services of Schroder Salomon Smith Barney as financial advisers and Lovells Solicitors as legal advisers, to explore the possibility of restructuring the country’s commercial debts, based on an assessment of current financial market situation. The advisers proposed the exchange or swap of Nigeria’s Par Bonds and Promissory Notes with new global bonds. However, in deference to advice from the IMF on the likely impact of the commercial debt restructuring on Nigeria’s negotiations with the Paris Club, the launching of the debt restructuring transaction was suspended by Nigeria. Recently, we have resumed discussions with international capital market experts and have received several proposals from them towards restructuring the commercial papers to take advantage of unfolding market developments, which now appear favourable. Possibilities are now being explored for a combination of debt exchange and buy-back. As I indicated earlier, the Par Bonds are owed by the State while the Promissory Notes are owed by the Federal Government.


DMO and the Challenge of Debt Servicing

A major challenge faced by the Debt Management Office is ensuring that a reasonable level of resources are earmarked for debt servicing to avoid the risk of default and to maintain conducive relations for debt relief negotiations with our creditors. The DMO also faces the related challenge of ensuring that budget resources are release in time to effect debt service payments. As I pointed out in Part 2, much of Nigeria’s debt stock build-up was significantly accounted for by the capitalization of interest arrears and penalties for default. It is pertinent at this juncture to elaborate on the applicable penalties in case of default in debt service payments.

Credits and loans from multilateral institutions are to be serviced immediately they are due. Debt service payments to the World Bank in particular are due every 15 days while ADB debt service payments occur almost as frequently. Currently, these debts are not subject to debt relief or rescheduling and carry stiff consequences in case of default. Sanctions are invoked 30 days after due date. The implication of default on multilateral loan and credits from the World Bank and ADB, our major multilateral creditors include: (i) prohibition of the borrower/guarantor from signing any new loan or guarantee agreement with the Bank Group; (ii) suspension of disbursements in respect of all Bank Group loans granted to the borrower /guarantor; and (iii) suspension of the granting of any new loans by the Bank Group to the borrower/guarantor, among other things. The imposition of the above sanctions by the multilateral institutions, adversely affects a country’s credit-worthiness as well as its access to further foreign credits or loans, including direct foreign investment. From the 61st day of default, the cross-default clause in the agreement would be triggered thereby allowing our commercial creditors to attach FGN assets whenever found, including CBN and NNPC assets. Its membership rights to the multilateral agencies would also be suspended and all other member countries are notified about its insolvency. It is therefore to be avoided at all costs.

With respect to the Paris Club, failure to honour our payment obligations undermines Nigeria’s efforts to obtain substantive debt relief over the medium term. Another adverse consequence of defaulting on the Paris Club Agreement, particularly with regards to the payment of agreed debt service obligations, is the continued inability of Nigeria to benefit from normal credit facilities. Export credit agencies in Paris Club creditor countries do not provide cover and risk guarantees to countries in default of debt service payments to them. Businesses and government agencies from such debtor countries seeking to import goods and services are required to pay the full 100 percent cost upfront, even against deliveries that will take several months and at times, years. Also, the accretion of unpaid interests and penalties to the debt stock has created a situation whereby our debt stock continues to grow despite the fact that we have been paying between US$1.5 to US$2 billion as debt service annually in the past 15 years.

For Non–Paris Club Bilateral, default in this category of debts incur penalty charges in the form of late interest, which are, usually about 1 to 3 per cent above the normal interest charged.

Defaulting on London Club debts carries stiff consequences. The present instruments carry enormous legal obligations. For example, under existing terms, if Par Bonds on Promissory Notes payment is not received as and when due, creditors could attain the assets of the Central Bank and NNPC anywhere in the world, as Nigeria has expressly waived her sovereign immunity under the terms of the agreement.

Taking into account the undesirable consequences of tardy debt service payments, the best arrangements must be put in place from time to time in response to changes in the economy and the polity. In the past, external debt service was a first line charge on the Federation Account. The National Assembly annually, as part of the annual budget appropriation process and based on recommendations from the executive which take into account the revenue and expenditure profile, decides the amount of money that should be earmarked for external debt servicing. With the Supreme Court ruling of April 5, 2002 on the issue, which adjudges that external debt service should be charged upon and payable out of the revenue and assets of the government that incurred the indebtedness and not the Federation Account, a new arrangement became needed. The traditional practice of servicing external debt as a first line charge on the Federation Account has now been abolished.

To facilitate the implementation of a new debt service arrangement consistent with the constitution, the DMO has disaggregated the nation’s external debt stock and debt service obligation so that the levels of Government and their agencies that contracted the loans would know their respective stock of the debt, amount required for its service and the amount it should contribute to the annual debt service budget as approved by the National Assembly.

I would like to point out here that although these figures have been reconciled with representatives of the State Governments, there have been delays in reaching agreement on the amounts to be deducted from their Federation Account allocation for servicing the debts, even within the overall ceiling set by the 2002 Budget. As you are aware, prior to the Supreme Court ruling, the sum of $375 million was deducted for external debt servicing as a first-line charge on the Federation Account from January to March, 2002. Subsequently, the sum of $150.5 million was deducted from the States and Federal Government allocations from July to September, 2002, bringing the total deductions to date to $525.5 million. Between now and the end of the year, you have agreed to effect further monthly deductions totaling $300 million. If this is realized, the actual subscription for debt service for 2002 will amount to $825.5 million, compared to the $1.5 billion appropriated by the National Assembly for this year, leaving a shortfall of $674.5 million.

The deductions made so far have been used to settle multilateral debts and a portion of the London Club debts, while deductions for Paris Club debts and other categories of debts are still being held in abeyance. While recognizing the financial difficulties faced by the States and the Federal Government in making resources available for debt service (given other compelling needs), the DMO continues to stress the importance of remaining current in servicing certain categories of debt (Multilateral Debts, Par Bonds and Promissory Notes) on a timely basis, to avoid the risk of default. The need to ensure a minimum level of debt service payment to Paris Club creditors that will satisfy conditions for the conclusion and implementation of on-going bilateral rescheduling agreements can also not be over-emphasized. It is necessary therefore to find an appropriate balance between the need to secure reasonable levels of funding for debt service and the financial pressures exerted on Government resources by the other needs of the economy.

Numerous discussions have been held with the State Governments and other government agencies regarding the procedure for determining the amount of resources that should be allocated for debt servicing every year as well as the modalities and mechanism for deducting the monies from the revenues respective debtors. The DMO considers that the National Assembly, should continue to fix the overall level of debt service payment for the country as part of the Annual Budget Appropriation process, based on recommendations from the executive, and taking into account foreign exchange inflows as well as revenue profiles during the year. This amount, which was previously being deducted as first-line charge, would then be disaggregated and shared on a pro-rata basis among the various tiers of the debtor governments, to conform to the Supreme Court ruling. Each party would be informed accordingly and it would be the responsibility of State Governments at that point to seek ratification from their respective State Assemblies during the budget process. The debt service due in 2003 is of the equivalent of US$2.93 billion but because we would be carrying arrears and penalties amounting to US$1.96 billion from 2002, the total requirement in 2003 amounts to US$4.89 billion.

The DMO considers that section 166 of the constitution sufficiently empowers the Federal Government to make appropriate set-offs from the allocation due to each State from the Federation Account, once the figures have been agreed upon. We are however not enthusiastic in advocating reliance on constitutional provision unless it becomes inevitable. We are therefore of the hope that out of the US$4.89 that we will need for the servicing of own external debt in 2003, the National Assembly would permit a debt service allocation of about US$3 billion, so that we would stem the growth of arrears and consequent penalties. Such a level of debt service would also enable us to reduce own arrears to the Paris Club member countries, thereby paving the way for own eventual approach to them for debt reduction, hopefully during the year.

Preventing new debt stock

Prudence is required in managing our external borrowing, including the issuance of guarantees, until such a time when the Government is able to reduce the country’s debt burden to a sustainable level. In deed it may be correct to assert that Nigeria’s current crisis stems from the in appropriate, uncoordinated and excessive levels of borrowing in the past. It is in this spirit that the Federal Ministry of Finance in 2001 formulated the Guidelines on External Borrowing, which were approved by the Federal Executive Council and the National Council of States.

The 2001 Guidelines on External Borrowing indicate broad parameters for the appropriate level, terms and purposes of borrowing that could be contracted. The document also outlines the general criteria for approval of these borrowings and the servicing arrangements for the loans, among other things. Currently, the Guidelines limit borrowing to the financing of projects in the area of poverty reduction and infrastructure development only, which will be assessed on the basis of cost-benefit analysis. Furthermore, the funding of these projects should be limited to concessional sources only, which carry low interest rates and long moratorium periods. It is envisaged however, that with the expected passage of the Debt Management Office Act by the National Assembly, all external borrowing or the guaranty of such borrowing may require National Assembly approval.


The primary rationale for the Guidelines is to avoid undue build-up of external debt, which could exacerbate Nigeria’s debt servicing problem and to ensure that maximum benefit is derived from external borrowing where considered necessary. The guidelines also aim at gearing external borrowing towards ensuring overall consistency with the economic management policy of the Federal Government. It is our ardent hope that the successor Guidelines for 2003 would encourage every government in the Federation to be efficient in revenue generation and expenditure control, both of borrowed and un-borrowed funds and will support the development of the fiscal discipline needed for a sustainable size of public expenditure.

It is imperative that states be made to fully appreciate and accept the logic and principles underlying the policies that apply to external borrowing. This is particularly important since the states would usually request the Federal Government to guarantee their borrowings.


Current Debt Status and Level of Servicing

The Federal Government has been making efforts and taking necessary initiatives to ensure that the country’s debt service obligations to the multilateral institutions, the country’s commercial creditors and the Paris Club are fulfilled as at when due.

However, Nigeria is in arrears to the member countries of the Paris Club. Out of over $2 billion that was due for payment as amount for debt servicing in year 2002, Nigeria did not make any payments to the Paris Club until December 24, 2002 and it only paid $70million, which did not make any dent on the level of indebtedness. However, Nigeria continues to hold bilateral discussions with Paris Club members.

Since the suspension of the stand-by arrangement with IMF in February 2002, Nigeria is yet to formally re-engage the IMF. Nigeria’s temporary withdrawal from the IMF-monitored programme was, according to official sources, to enable the government correct the problems that were making it difficult to achieve the 100 per cent performance demanded by IMF. Nigeria intends to assume formal relationships with the IMF after correcting the distortions in its monetary system.

As reported in the Global Development Finance (a publication of the World Bank), Nigeria’s debt servicing figures vis-à-vis country’s GDP is 162 %.

For now, as the Nigerian government makes bold attempts to maintain a delicate balance between its domestic responsibilities and its debt servicing/payment obligations, the uneasy friendship between Nigeria and the Bretton Wood institutions persists.

---