Resolving the Debt Crises: Remedial Initiatives
By Akin Arikawe Vanguard (Lagos), posted to the web January 27, 2003

Recognising the crucial linkages between debt growth, development and poverty reduction, the Debt Management Office (DMO) has attached priority to obtaining rapid and substantial external reduction, as a crucial component of the government's debt management 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 favourable 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 the 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 Stand-by Arrangement paved the way for discussions with the Paris Club creditors on the restructuring of the country's debts in December 2000, the outcome of which is discussed below.

Paris Club debt rescheduling
The DM0 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 "Agree Minute"' for rescheduling Nigeria's debts, under the Houston Terms.
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 with 10 years grace period; while 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 out of the fifteen Paris Club creditor countries to which Nigeria is indebted. 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 $668. 186 million as at September, 2002. 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 11-12%. This will further reduce the future growth of the debt stock as well as the stream of debt service payments to our creditors, thereby expanding the ambit for economic recovery and growth.

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. The main reason for this is that the Agreed Minute was based on Houston Terms, which allow for a deferral of payments but do not have provisions for any debt reduction. They are, therefore, insufficient to address Nigeria's debt problem and may lead to an endless cycle of restructuring. Thus, Nigeria's debt overhang remains unassuaged.

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 IMFsupported 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 during the first quarter of 2002. 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 hope to build on the campaigns highlighted above to accelerate the quest for the granting of debt relief by our creditors and access more ODA assistance for development and growth.

Commercial debts
With regards to commercial debts, Advisers have been hired for the restructuring of our Par Bonds. The objective is to proactively reduce the commercial debt stock as well as their debt service payments over the short to medium term, by taking advantage of prevailing market opportunities. It is hoped that the stock of the Par Bonds which currently stands at US$2.043 billion would have been eliminated or significantly reduced by the end of 2002. The savings realized from the transaction will also provide some additional, even if symbolic, relief and confidence for the eventual turn-around of the economy. Thereafter, efforts will be made to restructure the Promissory Notes, currently with a stock of US$1.3 billion, with a view to reducing their annual debt service payment from about US$200 million to not more than US$100 million.