Debt Relief and Nigeria

After much hoopla and many cerebral and not-so-cerebral altercations in the media between government officials (notably President Obasanjo, Finance Minister Dr. Okonjo Iweala, presidential spokesperson Mrs. Remi Oyo, DMO Director Dr. Mansur Mukhtar, etc.) and non-governmental citizens (journalist Simon Kolawole, economist Dr. Chu Okongwu, lawyer Dr. Mudiaga Odje, etc.), the implications of the recent announcement (on June 29, 2005; see announcement below In Appendix I) inviting Nigeria to begin new debt relief terms negotiations with Paris Club members “up to Naples terms” (for terms see below in Appendix II) has gradually began to sink in. It is now reduced to whether Nigeria will indeed take the most loud offer on the table: that is an immediate payment of $6 billion arrears, a more spread-out payment of another $6 billion within a year (which amounts to a discounted buy-back), following which the rest of the $18 billion out of a $30 billion Paris Club debt would be considered forgiven, and Nigeria would then “exit” from the club of Paris Club debtors.

While conceding that this is the first time that outright partial debt cancellation with possibilities of rescheduling the remainder with an early exit option is part of the terms being discussed with Nigeria (see Appendix III of history of debt treatments for Nigeria; earlier Classic and Houston terms had only debt rescheduling, no debt reduction), this is currently what is being described, prematurely in many respects, as having “received” a 60% debt relief – paying off $12 billion instead of $30 billion.

All of this is within the context that Nigeria currently has a hefty foreign reserve of $24 billion, and the promise of continuing international sky-high crude oil prices for an oil-and-gas-rich country like Nigeria for some time to come – “exceptional revenues” all around, without an equal concern for “exceptional needs.”

The above, in a nutshell, is where we are, and if anyone knows differently, let ‘em say so.

The euphoria with which the invitation to negotiate was received by the Nigerian government and many Nigerian citizens, including some in the media, was understandable, bearing in mind much skepticism leading up to the sudden announcement, despite the enormous globe-trotting on its quest that the President had embarked upon for the last six years. Anthropomorphically, one can equate the development to a childless couple being told after fifteen years of seeking a child and going to every reproductive health expert imaginable (both modern and traditional), that the woman has finally taken in and that all things being equal, in nine months a healthy baby should be forthcoming.

If the couple has chosen to let this inchoate gynecological development to be known to the public, then it is good form and charitable for those around to congratulate them for the development, and to pray not only that the child be delivered in nine months, but that it be unimpaired for natural development afterwards. It would be most unwise though for the couple to announce that they already have a son (or daughter), proceed to name that child, and then push an empty pram around the neighborhood to further demonstrate their confidence and ‘faith.”

But in this particular instance, there is a catch to this couple’s story: the mother has a blood condition that would kill the child, and the two options available are either to take without replacement immediately an enormous amount of blood, or else to take it more slowly over the gestation period and even beyond. The only uncertainties in the latter option are those of the machine (newly invented, untested in long service) and its human operator (aging), so the options are to either take all the blood now when the machine and its operator are known to be available, or to take it more slowly with the risk of complete breakdown of machine and/or operator before the gestation period is over.

Going back to our debt figures, at one level of street and intuitive analysis, the answer is rather simple: With the ability to pay $12 from our foreign reserves and promise of $18 billion forgiveness and a debt-free situation thereafter, emitting $12 billion so soon is quite “tempting.” But like in all things, there are alternatives if you look hard enough, and often those alternatives are quite better than the first thing that comes to mind.

In her article entitled “Understanding Nigeria’s Debt Situation” of February 27, 2005, Nigeria’s Finance Minister, Dr. Ngozi Okonjo-Iweala, had the following to say:

Nigeria's external debt stands presently at US$34 billion. About $28 billion or 85% of the debt is owed to the Paris Club of 15 creditor nations. Only 8% of the debt is owed to multilateral institutions such as the African Development Bank and the World Bank whilst the balance of 7% is owed to the London Club of commercial creditors and holders of Promissory Notes. Nigeria does not owe the IMF any money. The first fact therefore is that Nigeria's debt problem is really "a Paris Club debt problem" If Nigeria were to fully service its external debt every year, annual debt service would amount to approximately US$3 billion - $2.3 billion to the Paris club, and $0.7 billion to the multilateral and commercial creditors. The ownership structure of the debt is such that the federal government pays 75% of the debt service whilst 25% approximately is serviced by the states. Therefore, fully servicing the $3 billion every year would mean that the federal government would have very little left for the capital budget over the next 5 to 7 years as the federal government's portion of such debt service would virtually eat up all of the capital budget, especially when it is considered that we also have domestic debt service amounting to about $1.4 billion a year.

The total structure of our outstanding domestic and external debts, as well as external debt service payments since 2000 are outlined in Tables 1 and 2.

Working with the numbers quoted above in Okonjo-Iweala’s write-up required to “fully service” our debts of $28 billion for Paris Club and $6 billion for non-Paris Club, it means that we are working with an average payback annual interest rate of 8.21% for Paris Club Debt and 11.7% for multilateral and commercial creditors.

Confining ourselves Paris Club and the easy figure of $30 billion, paying $1 billion per year will never get us out of debt (not enough to cover interest + penalties), while paying $2.3 billion, $2.37 billion, $2.42 billion, $2.62 billion, $2.86 billion, $3.2 billion and $4 billion annually(eg on January 1 of each year) would let us cut those years into 57, 40, 35, 25, 20, 15 and 10 years respectively. The cumulative amount of monies paid would be $133.16 billion, $96.99 billion, $86.59 billion, $67.45 billion, $57.61 billion, $50.51 billion and $42.71 billion respectively. These figures have been summarized in Table 3.

The true 60% debt relief TO NIGERIA should therefore be a combination of the amount THAT WE CAN AFFORD to pay over an acceptable period of time. If for example, we could afford to pay $30 billion over a 1 year period, but we are asked instead to emit $12 billion over that same rather short period and forget the rest for ever, then that is a GENUINE 60% debt relief, and I would advise that we pay off accordingly. If, as another example taken from above, we are somehow able to pay $4 billion annually over a 10 year period comfortably, and we are asked instead to pay either $4 billion just for 4 years (skipping the other six years entirely), then that is genuine 60% debt relief.

As an alternative approach in the latter example, even though we are “comfortable” to pay $4 billion per year, we could even ask to pay $0.16 billion annually (which is 40% of $4 billion) for 10 year period, pledging to dedicate the rest of the $3.84 billion each year within the context of an escrow management for infrastructure, education, health and agriculture. The latter approach is of course less favorable to the creditor than to the debtor, but whose “relief” is this anyway ?

Paramount in a genuine debt relief to us, therefore, is our own ability to pay at a rate COMFORTABLE to us, not at the rate that the creditors want. Any other “debt relief” is a mirage, and becomes MORE “mirage-ous” as the amount we are asked to pay increases over a shorter and shorter period.

Affording It Without Emitting Billions to Creditors At Once – Some Proposed Plans

I have asked a number of investment advisers around: given $12 billion or $14 billion CASH, how would you invest it and what kind of rate of returns would you expect with that kind of money ? With eyes popping and some salivation, the answer invariably has been that from a portfolio of conservative to aggressive financial vehicles, a rate of return of about 20-25%, possibly higher, is almost certainly guaranteed.

With that fact in mind, therefore, here are some plans: looking at Table 3, suppose, after making the first down-payment of $2.42 billion (Plan A) or $2.62 billion (Plan B), from our reserves we INVEST at one go $14 billion (not even $12 billion) in international financial vehicles, and get at least a rate of return of 20% (the lower end of expectations). This means that we can earn $2.8 billion interest annually, enough to make our annual payments either through:

There might even be Plan C and Plan D still based on this $14 billion investment and certain payments amounting to $2.42 billion and $2.62 billion:

Plan C – paying $0.97 billion annually to the creditors over a 35 year period, with $1.45 billion being set aside SPECIFICALLY for infrastructure, health, education and agriculture.

Plan D – ditto, except that we would be paying $1.05 billion to creditors over a 25-year period, and $1.57 billion set aside annually for special projects.

My preference is for Plan D, with possible reduction in interest rate, and additional monies being paid to accelerate the debt retirement in years of unusual excess crude profit.

The above plans are offered, based on my deep opposition to paying up so much money to our creditors all at once, particularly when we know that we have paid what we owe several times over, over all these years. For example, according to reliable information, 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. By December 31, 2001, Nigeria had paid the equivalent of US$41.273 billion to service the debt but still owed the Paris Club member countries the equivalent of US$22.092 billion.

To pay up that way is really to appear as if we did not need debt relief in the first instance.

Although it is the “politically expedient” thing to do to get rid of the debt right away by paying $12 billion – “so that it does not get stolen again”, some whisper - and though president Obasanjo may go down in history as having ridden Nigeria of its debt during his rule, I strongly believe that it would be an economically unwise thing to do, bearing in mind what we ourselves could do with so much money, both in bold financial investment and in productive infrastructural development. Otherwise, the child born after so much blood has been taken all at once from the mother may be permanently impaired, and money spent to keep it alive thereafter may exceed what would have been spent if the mother was less violently treated.

Mobolaji E. Aluko, PhD, is professor and past Chair of Chemical Engineering at Howard University, Washington, DC and President/CEO of Alondex Applied Technologies, Inc.

June 29, 2005

Nigeria

The representatives of the Paris Club creditor countries met in Paris on 29 June 2005 and expressed their readiness, consistent with their national laws and regulations, to enter into negotiations with the Nigerian authorities in the months to come on a comprehensive debt treatment. They took note of the economic reform program implemented by the Nigerian authorities since 2003 and of their willingness to take advantage of exceptional revenues in order to finance an exit treatment from the Paris Club. This announcement takes place after Nigeria has recently been declared eligible to IDA-only borrowing status and at a time when Nigeria has decided to renew closer relations with the International Financial Institutions. Creditors welcomed Nigeria's willingness to conclude a policy support instrument (PSI) as soon as this new instrument is approved by the board of the IMF, to pay all its arrears towards Paris Club creditors and to treat them equitably. On this basis, this debt treatment would include debt reduction up to Naples terms on eligible debts and a buy back at a market related discount on the remaining eligible debts after reduction. This Agreement would be phased in relation with appropriate IMF review under the PSI. This exceptional treatment of Nigeria's debt would offer a fair, sustainable and definitive solution to Paris Club creditors and Nigeria. The significant debt relief would ensure long term debt sustainability and would represent an important contribution by Nigeria's Paris Club creditors to its economic development. It would also help Nigeria in its fight against poverty. Paris Club creditors are ready to invite Nigeria to negotiate in Paris as soon as it has concluded a policy support instrument with the IMF.

In December, 1994, Paris Club creditors agreed to implement a new treatment on the debt of the poorest countries. These new terms, called "Naples terms", grant two substantial enhancements with respect to London terms, that can be implemented on a case by case basis, on the level of reduction and the conditions of treatment of the debt :

- for the poorest and most indebted countries, the level of cancellation is at least 50% and can be raised to 67% of eligible non-ODA credits. Creditors agreed in September 1999 that all Naples terms treatments would carry a 67% debt reduction;

- stock treatments may be implemented, on a case-by-case basis, for countries having established a satisfactory track record with both the Paris Club and IMF and for which there is sufficient confidence in their ability to respect the debt agreement.

Eligibility for the Naples terms is assessed on a case-by-case basis, taking into account the track record of the debtor country with the Paris Club and the IMF and of various criteria, including having a high level of indebtedness, being only eligible for IDA financing from the World Bank, and having a low GDP-per-capita (755 $ or less).

3.1. Non-ODA credits are cancelled to a 67% level (after possible topping-up). Creditors may chose to implement the 67% debt reduction by one of the two following options:

- "debt reduction option" ("DR"): 67% of the claims treated are cancelled (after possible topping-up), the outstanding part being rescheduled at the appropriate market rate according to standard table "A1" (23 years repayment period with a 6-year grace and progressive payments).

- "debt service reduction option" ("DSR"): the claims treated are rescheduled at a reduced interest rate according to standard table "A3" (33 years repayment period with progressive payments). In case of stock treatment, table A3 is replaced by standard table "A5".

- the "Capitalisation of moratorium interest" ("CMI") option, similar to the "DSR" option (with a reduction of 67% in net present value) but with slightly different repayment profiles;

- the "commercial option", with longer repayment profiles but no reduction of the claims in net present value. It was agreed that creditors would refrain from using this option to very exceptional circumstances.

3.2. Concerning ODA credits, they are rescheduled at an interest rate at least as favourable as the original concessional interest rate applying to these loans, according to standard table "D2" (40 years with 16-year grace and progressive repayment). This rescheduling results in a reduction of the net present value of the claims, as the original concessional rate is smaller than the appropriate market rate. The reduction in the net present value varies from one country to another, depending on the original interest rate of the claims. By contrast, the Paris Club rescheduling has a positive effect on the expected value of the ODA claims, as the creditors salvage value relative to the recovery of otherwise defaulted amounts.

3.3. Naples terms also include the possibility for creditor countries to conduct, on a bilateral and voluntary basis, debt swaps with the debtor country.

These swap operations may in principle be carried out without limit on official development assistance loans (ODA), and up to 20% of the outstanding amount or 15 up to 30 million SDR for non-ODA credits.

Paris Club creditors and debtors regularly conduct a reporting to the Paris Club Secretariat of the debt swaps conducted.

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Debt Relief and Nigeria - To Emit or not to Emit $12 billion