Let’s Celebrate Debt Relief

08.08.2005

NOIThe ongoing debate on the comprehensive debt treatment for Nigeria recently announced by the Paris Club of creditor countries has generated diverse viewpoints on the substance of the matter. In a recent tendentious commentary by former Finance Minister, Dr. Chu S. P. Okongwu, he (in tandem with some other recent articles) raised a number of issues indicating that contrary to the initial widespread excitement on the prospects of debt relief, there is actually nothing to celebrate.

Quoting copiously from the June 29th press statement of the Paris Club, the premise of his detour from the path of the triumphal rests on two major planks. One, that Nigeria could get a better deal from the Club or else, we would have been short-changed, and two, that the emission of US$12 billion to the Club is not good for our economy whereas such funds should be applied to more productive economic ends.

According to the statement by the Paris Club, they decided to agree on a debt treatment for Nigeria after noting “the economic reform programme implemented by the Nigerian authorities since 2003” and “our willingness to take advantage of exceptional revenues in order to finance an exit treatment from the Paris Club.” This is instructive because Nigeria was not even classified as eligible for debt relief by international financial institutions because our resource-rich portfolio creates an impression that the country’s debt profile is sustainable. Therefore, their change of tack may be partly based on the rigour and robustness of the arguments put forward by the Nigerian officials (for which we were even declared eligible to IDA-only borrowing status in the first place) and also of timing. (I will address the issue of timing much later).

The Club further hinged this package on the payment of all our arrears to the Club (US$6 billion) and the IMF board’s approval of a policy support instrument for Nigeria, which in this instance is assumed to be the NEEDS document. In the words of the Club, on this basis (emphasis mine) the country will be eligible for debt reduction up to Naples terms. This is the point of divergence by some commentators because it is from here that the “exaction” actually begins. However, I interpret the position of the creditors as: now that we agree with your arguments for debt relief, pay us the arrears owed to us and we will give you a reduction up to Naples terms i.e. up to 67% of the debt stock.

We must not lose sight of the fact that these arrears are monies that should have been paid in previous years and anyone who has ever lent money to another person with interest (and default penalties) would very well agree that any serious discussion on debt forgiveness usually begins with the payment of arrears, especially repudiated arrears. To get a reduction of up to 67% after that for a supposed resource-rich country is truly exceptional. Could we have got a better deal?
In an interview granted to Tell magazine, Finance Minister, Dr. Mrs. Ngozi Okonjo-Iweala pointed out that after convincing the Paris Club to put Nigeria on the Evian track for debt relief, the Club offered the country a 30% debt reduction and then the negotiations began. Therefore, if we are getting 60%, it is definitely very significant. In that same interview, the Finance Minister said that the last country to get relief from the Paris Club had a 50% debt reduction. Understandably, an outright cancellation of all debts is most desirable but we should not misdirect the euphoria and expect the impossible.

The creditors further gave us an exit window through a buy back at a market related discount on the remaining eligible debts after reduction (about US$6 billion). Given that a buy back will be at a discount, we may not have to emit all of the US$6 billion as is widely touted. But, even if we do, nations of the world always commit their resources in furtherance of defined national interest. That is why, against all odds, the United States of America put down US$120 billion to invade Iraq.
Every Nigerian would agree that the issue of Nigeria’s debts have appeared in various colourations in the past two decades and more. Most of these debts were simply a collusion between corrupt Nigerian officials and like-minded Western creditors to ‘cream off’ funds meant for development. However, over the years, they have also become honey pots for officials who would rather relish in debt rescheduling junketing and in the words of Dr. Okongwu keep waiting for the debts to “die by semantics”. But semantics never kill anything; they only postpone the evil day and seek to elongate the days of creditor strangulation.

It has been argued that rather than paying the Paris Club (even if it is phased), we should invest the money in development infrastructures and services like education, health, power, transport, etc. I quite agree that these derelict areas are begging for meaningful injection of funds and I have written two articles on this in the past. However, from the wording of the Paris Club’s statement, this option looks open to us if we reject the Club’s offer and return to the pre-June 29th situation i.e. rescheduling our debts along with its interests and penalties and keep servicing it at more than US$1 billion per annum (probably without consideration of the accumulative effects of interests and penalties) until such a millenarian time that we will be buoyant enough to just pay off the Club. May be by then we would be talking about US$50 billion.

The hard truth is that there are three political economic approaches to the management of an embarrassing and scandalous debt overhang: reduction, rescheduling and repudiation. For the past two decades, we have been rescheduling our debts and this overhang keeps suffocating our economy and national pride by permanently tying us to the apron strings of Western creditors while perpetually keeping us in a debt trap. We definitely want to get out of it. On the issue of repudiation, the experiences of countries that have repudiated their debts to multilateral financial institutions are not worth relishing because such countries usually come around to return to the table with a bruised and battered ego.

Take Peru as an example, according to their former Finance and Economy Minister Carlos Boloña, when the Fujimori administration (seeing that the international community had tightened the noose and the Peruvian economy was on the brink of a precipice) decided to reverse the decision of his predecessor, Alan Garcia, to repudiate their IMF debts, Peru could not be trusted with credit to even make a collect call to the international financial institutions to express their readiness to renegotiate the terms of debt rescheduling and repayment. In the case of Cuba, I would not join in romanticising that country’s economy as we did of the Soviet Union until it is opened to the outside world and is sufficiently democratic. So it seems to me that we should rather pursue best approaches to debt reduction and ultimately an exit.

Why the hurry? Why now? This brings me to the question of timing, which I would approach from three fronts. The times are fortuitous for us because the West is currently engaged in (what Samuel Huntington had predicted would be) a “clash of civilisations” – international terrorism – laid bare by the flames of 9/11 and whose roots are traceable to underdevelopment in the countries of the South. For this reason, they have become more willing to partner with the so-called Third World in eradicating poverty, hunger and disease. Has it occurred to us that a deceleration of the war on terror that could result from an expiration of the bin Laden threat at any time (through death or capture) might slow down their enthusiastic momentum in solving the malaise of the developing world.

Fortunately though, the Nigerian authorities have moved fast in a way we did not do in 1989 at the start of Francis Fukuyama’s “end of history” with communism attenuating, which led to the fall of the Berlin Wall and ultimately the demise of the Soviet Union and the communist regimes of her poster children. That was yet another opportunity for the countries of Africa to move in on the West and make strong arguments in furtherance of development and beneficial mutual cooperation by showing tendencies towards good governance and not just issuing a flatulent resolution at an annual gathering of African despots and kleptocrats of the same year.

Also, rather than postulate that the creditors have seen the funds to target, I would argue that it is auspicious that we have the resources to fund an exit from this debt nightmare and if it is the price we have to pay for past mistakes, then so be it and avoid this bad habit of blaming everyone else but ourselves. In any case, the Governor of the Central Bank of Nigeria was recently quoted as saying that on the issue of US$12 billion, “we are solid on the ground”. As an aside, what did we do with the funds we generated the last time we had excess crude revenues (after the first Gulf War)?
It is also propitious that Nigeria has a good economic team in place with the acclaimed capacity to ensure that the benefits of debt relief get down to the people to whom it belongs. The fears (albeit justified) arising from the effects of emitting about US$12 billion from Nigeria as expressed by Dr. Okongwu as well as Prof. Jeffrey Sachs (who added a proviso: “without putting in something”) should be considered alongside the solid macroeconomic and fiscal framework put in place by Dr. Mrs. Okonjo-Iweala and her team since 2003. After all, the NEEDS document unprecedentedly stipulates that more than 60% of our appropriations go to those critical development areas and she is also said to be putting in place a tracking mechanism towards monitoring our achievements in meeting the United Nations Millennium Development Goals, especially arising from this debt relief.

In conclusion, even though I am not a Roman Catholic, I am tempted to align myself with the words of that former Peruvian Minister of Finance and Economy, Carlos Boloña: we were “in hell, and now we’re in purgatory. When you graduate from hell to purgatory, you feel fine”. This evisceration of the debt cancer and immiseration of prospects for future Nigerian government officials to reap bounties from our sorrows give us a lot to celebrate and “embark on a triumphal”.

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