The Pitfalls In Nigeria’s Debt Relief

I do not wish to be a spoilsport. But I hope that there will be something to celebrate in the future; right now, however, there is nothing to celebrate. I also advise that we should proceed carefully and cautiously.

I have read the minutes of the Paris Club. The minutes are merely the announced minutes of the Club following its internal meeting of June 29, not the usual Agreed Minutes of the Club following its negotiations with the creditor country, Nigeria. They make it clear that: they are ready to enter into negotiations with the Nigerian authorities in the months to come on a comprehensive debt treatment; they note the willingness of the Nigerian authorities to take advantage of exceptional revenues (my emphasis) to finance an exit treatment from the Club; they note furthermore Nigeria’s willingness to (i) conclude a Policy Support Instrument (PSI) with the IMF, subject to its approval by the IMF Board; and (ii) to pay all its arrears to the Club creditors, with comparability of treatment; on the foregoing basis, debt treatment would include debt reduction up to Naples terms (my emphasis) on eligible debts and a buy back at a market-related discount on the remaining eligible debts; the Agreement is to be phased in relation to the appropriate IMF review under the PSI;

they are ready to invite Nigeria to negotiate in Paris as soon as the country has concluded a PSI with the Fund.    

Clearly, nothing has been concluded, although the Paris Club, evidently, given certain understandings it has received from the Nigerian government, is ready to enter into negotiations with the Nigerian side towards a comprehensive debt treatment on certain terms. Much work remains ahead. The conditionality set is clear: (a) Nigeria is required to conclude a new policy support instrument with the IMF, upon the Fund Board approving the new instrument; (b) Nigeria is also to clear arrears with equitable treatment of all creditors; (c) then negotiations can begin upon invitation by the Club; (d) even on conclusion of the Agreement, the Agreement itself is to be phased in relation to IMF tracking of performance under the PSI.

I have gone to this trouble to show that we do not yet have debt relief in the bag. So, while the authorities may have reasons to conjure up self-congratulations, adulation, and justifications for the President’s numerous foreign trips, the minutes of the meeting of the Paris Club on Nigeria’s debt relief do not yet provide such bases.

On eligibility for Naples terms, although this is determined on a case-by-case basis, the criteria include importantly that the country have a low per caput GDP ($755 or less), have a high level of indebtedness and is only eligible for IDA financing from the World Bank, taking into account, of course, the track record of the country with the Paris Club and the IMF. Nigeria, with a per caput GNP of about $260, having been declared eligible for IDA financing by the World Bank, fitly meets the important criteria, save possibly for its track record with the Club and the IMF.

Perhaps, it needs to be noted that the staffs of the Treasury Departments of the Paris Club countries, who handle these officially insured debts, are hard-headed realists, just as, and perhaps even more so than, their Foreign Office counterparts. Together, they conduct external economic relations, not on the basis of sentiments, but on realities, especially self-interest. Similarly with the policy makers, who are not sentimental and capricious, as some may suppose.

It is therefore incorrect and misleading to suggest that Nigeria’s eligibility for Naples terms treatment is attributable in any way to any or all of the President’s numerous foreign trips.  

It may seem a minor matter that the Paris Club announcement states that debt relief would include debt reduction up to Naples terms, not on Naples terms, for eligible debts. The difference should be ascertained, as it may not be a matter of semantics. Since 1999 all Naples terms carry 67% debt reduction. And 67% is different from 60%.

Evidently, both sides, the Nigerian authorities and the Paris Club, are targeting the republic’s “exceptional revenues” and by extension the external reserves. This raises a wholly new set of important issues. It has been suggested that the debt service arrears, to be first paid, amount to $6 billion, and that a further $6 billion would be paid at a date to be agreed in September when hopefully negotiations would have started. I find this alarming and scandalous. I hope that no one is seriously planning any such emission.

As desirable as an exit from debt peonage is, it is scandalous for a poor debt distressed country, which cannot afford to pay $2 billion in annual debt service payments, to part with $6 billion up front or $12 billion in three months or even one year. The emission rate is simply too high. Not even the Americans (United States) can afford it or will do it. The international community – the Paris Club, the London Club, the IMF and the World Bank particularly – well know that they cannot get that kind of up-front money from even richer countries like Argentina, Brazil, India, and Mexico. Indeed, anybody getting that kind of money up front should be prepared to extinguish an aggregate debt stock of $36 billion without imposing additional conditionality on the country.

They must take Nigerians for fools who do not know how to use resources productively, and certainly have no use for “exceptional” or “windfall” revenues. Already, Nigeria, according to official sources, has repaid some $22 billion on the $17 billion originally borrowed by previous administrations, and yet is marked as owing $36 billion. The new debt relief proposal with the Paris Club will further accentuate the perverse resource transfer from the poor debtor to the rich creditor nations and also impoverish Nigeria and Nigerians. It amounts in effect to a summary levy of $80 per caput, an unaffordable exaction from every Nigerian – which should be rejected rather than celebrated.

Additionally, it will certainly set a dangerous precedent for other highly indebted third world countries like Brazil, Argentina and Mexico, which have enjoyed better debt relief deals in the past.

The wisdom of hoarding such essentially idle funds, whether in “excess oil revenues” or in external reserve build-up, while the economy is strangled and assets decay, is questionable. A fraction of the proposed sum, judiciously invested in national electricity supply, not to mention health and education, and the road system, would productively transform the lives of Nigerians. These would represent practical dividends of democracy to Nigerians. The economic justification – low interest yielding as against more productive deployment – and security implications are also worrisome. Clearly, if the Paris Club can target them so can others.

Besides, there are constitutional-legal implications of using the so-called excess oil revenues and the external reserves.

It is worth recalling that the OAU Heads of State at their 25th meeting in 1989 adopted a resolution for an enduring treatment of Africa’s debt problems, and deputed a delegation of three to sensitize the G-7 +1, as they were then. That resolution, which was sponsored by Nigeria, among other things, called for the cancellation of all official (Paris Club) debt on the basis of generalized poverty of all African countries. The African Union has again made basically the same call. I believe that the president was among the African heads of state deputed to sensitize the recent G-8 meeting on Africa’s position. It seems rather odd for Nigeria to accept the prospect of a deal inferior to what she is advocating and to be celebrating the prospect.

Why the hurry? Why indicate willingness to pay arrears separately? Why not continue negotiating, seeking consolidation of arrears and principal, and favourable treatment of new stock?

At a different level, it should be noted that no one in the international financial community really expects the class of officially insured debts (Nigeria’s included) to be paid off. Such debts are expected to “die by semantics,” as has been well said. On the other hand, they are most susceptible to the political decision of write-off. Undoubtedly, the Nigerian side is eager, for whatever reason, to pay the debt, the Paris Club now knows that Nigeria is eager to pay, and has seen the funds to target. Accordingly, the Paris Club is only too happy to collect and to insist on collection now, given uncertainties regarding future developments in Nigeria. From this viewpoint, the current celebration by the administration is both myopia and a strategic negotiating blunder. These defects should be promptly and firmly redressed.  

These are the sorts of issues that I think we need to resolve before embarking on a triumphal.