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Debt relief...nothing to celebrate?

Posted by MANSUR MUHTAR on 2005/08/07 | Views: 353 |

Debt relief...nothing to celebrate?


On the so-called debt relief…I hope there will be something to celebrate in the future; right now, however, there is nothing to celebrate...the current celebration by the administration is both myopic and a strategic negotiating blunder -Dr. Chu Okongwu.

On the so-called debt relief…I hope there will be something to celebrate in the future; right now, however, there is nothing to celebrate...the current celebration by the administration is both myopic and a strategic negotiating blunder -Dr. Chu Okongwu.

THESE quotes from a recent newspaper article by Dr. ChuOkongwu, which received wide publicity, aptly sum up the verdict of critics of the debt deal struck with Nigeria’s Paris Club creditors. As the debate triggered by this article has not died down, I felt inclined to write this piece, not as a rejoinder, but as a contribution that would restate the contours of the debt deal as well as put things in proper perspective, to better inform the Nigerian public. I respect their inviolable rights to ask questions and to be kept informed regarding such matters of national importance.

It is true that when the Paris Club issued its historic statement on June 30, it said that it "would enter into negotiations with the Nigerian authorities in the months to come on a comprehensive debt treatment". But this is official language and I can cut through the semantics. As the director general of the Debt Management Office and the person who, together with our finance minister, Dr Ngozi Okonjo-Iweala, has been closer to these negotiations than anyone, I can reaffirm that the debt cancellation deal for Nigeria agreed in principle at the end of June by our Paris Club creditors is real. A package has been substantively agreed. We are very clear in our minds as to the details and sequencing of the deal. It only remains to address some procedural and process issues.

In September, when Nigerian officials go to the Paris Club for final discussions, 67 per cent of the debt outstanding will be written off simultaneously with the payment of outstanding arrears due to the creditors, amounting to about $6 billion. This would reduce the debts owed to Paris Club to about $8 billion. Then, over a period of time- about six months - Nigeria will buy back the rest of that debt at a market-related discount.

Debt to be bought back

The terms of the buy-back are very clear and the deal will be transparently executed on a direct, government-to-government basis, without going through a third-party. The debt will be bought back at an estimated cost of some $6 billion. So, it is clear: by the end of March 2006 - subject of course to the democratic will of the people represented by the National Assembly, the State governors and State Assemblies, Nigeria will, by the grace of God, have no more Paris Club debt on its books. And we will have emerged, independent, from the debt trap arising from past mismanagement.

The debt relief being granted to Nigeria through the process outlined above is not an illusion. Nor can we understate its significance. We are talking real money - a historic deal which will result in the write off of $18 billion of debt, the biggest ever debt write-off for sub-Saharan Africa. This deal beats the previous record set in September 2002 when the Democratic Republic of the Congo had $10 billion written off. Egypt and Poland were both granted only $10-15 billion of debt relief. Nigeria’s deal tops them all. It also compares favourably with the recent $40 billion write-off of debts announced by the G-8 countries for the 18 Highly Indebted Poor Countries. Criticisms of the debt deal miss the point when they scream at the amount of arrears that have to be repaid. Their position reflects a preoccupation with "form" rather than "substance".

I have to elaborate on how remarkable this deal is. First, major obstacles had to be overcome to secure the deal. Even as recently as February - and despite support for debt cancellation for Nigeria from the British government, Nigeria’s largest creditor - the Group of Seven industrialised countries (the United States, the United Kingdom, Germany, Japan, France, Italy, and Canada) had strong reservations about giving Nigeria any debt relief at all. They were still talking about Nigeria’s history of corruption and questioning whether any debt relief would be spent properly; one official just said that Nigeria would have to join the back of the queue of countries pleading for debt cancellation. Late last year, Paris Club members were pushing for an increase in the amount earmarked for servicing their debts, to share in our "windfall". Indeed, a representative of one of the major creditor countries declared at a public meeting that it was "immoral" for Nigeria to be asking for debt relief from its creditors, given the high oil prices prevailing at the time as well as the concomitant build up of reserves. A lot of "blood, sweat and tears" went into reshaping these perceptions and securing a turn-around.

The Paris Club deal is unprecedented in many respects. Before this agreement between Nigeria and the Paris Club, no country has been able to secure at once both a massive debt cancellation, and the opportunity to buy back the balance, to clear the books. Paris Club debt restructuring is usually sequenced over an extended period of time and is not designed to permit an exit strategy, should the creditor so choose. For example, Iraq, despite its geopolitical importance, its uniquely high and unsustainable debts, has nevertheless to comply with a debt reduction phased over three years. This deal would also include the first ever Paris Club debt buy-back at a discount. Both Russia and Peru were unable to negotiate a buy back of their outstanding debts at a discount. Recently, Russia had to buy-back its debts, amounting to $15 billion, at full face value.

Another notable element of this deal is that this is the first time Paris Club is agreeing to a deal without a formal IMF programme. Even at the beginning of this year, this was an absolutely sticking point. Our creditors were still arguing that Nigerian debt relief was simply a non-starter, because the Paris Club never writes debt off unless a country is subject to an International Monetary Fund economic programme. As a matter of fact, they can’t even invite you to the negotiation table without a formal IMF programme.

We knew from the on-set, however, even before engaging with the Paris Club, that as a country, we have had bitter experiences with the implementation of an IMF programme in the past and it was clear that a national consensus for the deep reforms needed to transform our economy could not be built around an IMF programme.

Comfort level

The government, therefore, crafted its own home-grown economic reform program - the National Economic Empowerment and Development Strategy (NEEDS) which it has been implementing as far back as 2003. So, in our negotiations with the Paris Club, NEEDS was non-negotiable; there was never any question of us having an IMF programme. But we found a way around the impasse of giving creditors the "comfort level" they wanted by asking the IMF, sometime last year, to scrutinise our home-grown economic programme. Despite its initial reservations, the IMF supported us and agreed to monitor our economic programme regularly under an enhanced surveillance arrangement. The Policy Support Instrument (PSI) which will provide the basis for this deal is simply a formalisation of what we have been doing for over a year - asking the IMF to cast an eye over our economic policies, over which we have 100 per cent control, as a way of reassuring our creditors. The monitoring process under PSI is just that: it is not a new set of economic conditionalities. It is to the credit of Nigeria that this instrument is being adopted by the International Monetary Fund and the Paris Club creditors as a basis for monitoring and surveillance of other countries.

This deal represents a once-in-a-lifetime opportunity to rid ourselves of the shackles of our accumulated debts and, as a country, start anew. The reason we have been able to persuade our creditors to agree to such a substantial write-off is because they are confident in the economic management of this government and believe us when we tell them that the money will be used wisely and well. It is also a recognition of the credible and creditable steps taken by the country’s leadership in the direction of better governance. And Nigeria will benefit enormously. The amount of annual debt service paid should fall from $1.8 billion to $0.8 billion (which represents debt service payment due to multilateral institutions and London Club) more than halving the amount we have been paying to our western creditors. Indeed, if we consider the total amount that is actually due to our external creditors, which is about $3 billion, the difference is even more glaring. That means that $1 billion can be diverted to spending on schools and hospitals and lifting our people out of poverty.

The Oversight of Public Expenditure on NEEDS (OPEN) initiative or "Virtual Poverty Fund" currently being put in place by the Federal Ministry of Finance is designed to ensure proper monitoring and tracking of debt relief savings. The scale of annual savings for Nigeria is illustrated by their impact on its national expenditure on health and education. The $1 billion paid on debt service to the Paris Club represents 70 per cent of the total education budget and 110 per cent of the combined federal and state health budget in 2004.

Many people question the justification of using part of our excess crude savings to secure a permanent exit from the debt trap. It is true that one could put the money to other uses now - to rebuild infrastructure and improve social services delivery. But given the trade-offs involved, this is a judgement call. Nigerians have to judge whether they want to seize this window opportunity to escape the debt trap, or continue to remain in perpetual grip of western creditor countries.

Given our experiences with the battle that had to be waged to secure this arrangement, we must not delude ourselves that the creditors will wake up one day, out of benevolence, or even based on strategic considerations, and give us 100 percent debt write-off, as Nigerians are being led to believe. This is wishful thinking that betrays a stupendous innocence of global geo-political realities. Indeed, it is more likely that creditors will look for an excuse to retrieve this offer of an exit strategy. Even right now, there is still a lot of acrimony among some of the creditor countries arising from the feeling that they have been pressured to endorse a generous deal for Nigeria. Many others see debt as an instrument of control in the post-imperial era and are not comfortable with the idea of a "permanent exit".

At different times in the past, Nigerians know only too well that windfall oil revenues at times of high crude prices have been wantonly frittered away. To me, it makes good sense to use these resources to secure a permanent exit from the debt trap. This deal will reduce the debt burden on current and future generations of Nigerians.

Even as we make a sacrifice this year, we would, beginning as

early as next year, be able to free up $1 billion that could have gone into debt servicing and channel this into investment in education, health and infrastructure. This deal will save us from making interest payments that would have totalled $8 billion on the $12 billion payment that we are expected to make now, if the amount were to be rescheduled over 23 years at current rescheduling interest rates, as is the creditor practice. This deal will also hedge against the risk that oil prices will collapse in the future, which will limit our ability to service the debts as well as bring back the spectre of spiralling interests and penalties. Just remember how Nigeria found itself straining under the weight of this debt, our growth stunted, our future darkened. Remember how many rescheduling agreements we have signed with Paris Club in the past...1986…1989…1991… 2000, without any relief in the horizon.

Why should Nigerians be denied the opportunity presented by this deal to break the endless cycle of rescheduling and escape the debt trap? Why should the Nigerian people be denied the resources liberated by this debt deal - a dividend of democracy which will make a concrete difference to their lives? Why should the current and future generation of Nigerians go on suffering for the mismanagement of former days? We have been in a dreadful debt spiral not of our making. This deal puts an end to that spiral. It draws a line under the past and gives Nigeria a fresh start. It is our second declaration of independence. It is worthy of celebration.



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Fay(Katy, Texas, US)says...

Actually translates to bravehearted.