May 17, 2001

As part of a broad framework for debt reduction and sustainability, the report calls on the international community to cancel Nigeria’s odious debts and reform the global financial structures that allow such debts to proliferate.

May 17- 18, 2001
NICON Hilton Hotel, Abuja.

Summary of Proceedings

I: Introduction

The conference was organized by the Debt Management Office (DMO), Abuja, in collaboration with the African Institute for Applied Economics (AIAE), Enugu with the following two broad objectives: to sensitize the Nigerian public and the donor community about the magnitude and severity of the debt problem and the implications for policy choices; and, to initiate debate and synthesize ideas about strategies for sustainable debt strategy.

The conference, which was declared open by His Excellency, President Olusegun Obasanjo, was attended by Vice-President Atiku Abubakar, Senate President, Anyim Pius Anyim, Ministers, Special Advisers, Senators, members of the House of Representatives, Vice-President of the World Bank (Africa Region)- Mr. Callisto Madavo, Director of Africa Region (IMF)- Mr. G. E. Gondwe, Vice-President of the African Development Bank—Mr. Cyril Enweze, His Excellency, the British High Commissioner to Nigeria and other members of the Diplomatic Community, members of the public and private organizations, NGOs, civil society, academia, the Press, and members of international organizations. Initially the conference was planned for 150 participants but the attendance was well over 300—underscoring the importance attached to the theme of the conference by the participants.

In his speech to declare the conference open, the President (Chief Olusegun Obasanjo) charged the participants to:

· Diagnose the debt problem and identify an effective framework for debt reduction and sustainability

· Proffer solution to the compounding of interests and penalties that multiply the quantum of original borrowings

· Design debt framework that ensures a functional and early warning signal on debt crisis

· Identify the right domestic economic conditions that will in the short run make the debt of debtor nations sustainable

· Design debt management strategy for economic development, sustainable growth and poverty reduction, and,

· Germinate ideas for developing realistic country social actions.

Altogether, about 22 papers were presented and discussed at the two-day conference, which also featured an art exhibition, a drama sketch, dinner, and traditional dances. Participants generally praised the initiative of the conference—which is the first attempt by an African country to convene an international conference to debate its future in the context of debt overhang.

II: Major Issues

The presentations and discussions at the conference centered on the objectives of the conference as well as on the key issues raised in President Obasanjo’s speech. The following key issues emerged:

1) Debt overhang is huge and its consequences severe: Several papers and speeches analyzed the size and impacts of the debt stock. In the last decade, the Nigerian debt burden has been increasing at an unsustainable rate. The total debt stock as at end of March 2001 (reconciled data by the DMO) stood at $28 billion. This constitutes about 65% of Nigeria’s GDP, and the average annual debt service amounts to about $1.5 billion (1998- 2000). This amount is about 20-30 percent of total exports, three times the national education budget and nine times the public health budget. Indeed, the projected debt service (after rescheduling and without any new commitment) averages more than $2 billion per annum (2001- 2020) or a total of about $43 billion for the period. For the Paris Club of creditors, Nigeria borrowed a total of about $13 billion, but has so far paid about $17 billion in service payments, and yet still owes about $22 billion— due largely to compounding of interests, accumulation of arrears and penalties on late payments.

Nigeria’s debt overhang is considered severe in the context of its development challenges. Currently, about 70% of Nigerians live in absolute poverty (about 84 million people). It requires an annual GDP growth rate of 7-8% in order to halve the number of people in poverty by 2015, and this translates to an investment rate of more than 30% per annum. Currently, the country grows at about 3 percent and the national savings rate is about 15 percent. In addition, the country faces daunting challenges of re-building a country badly damaged by decades of military misrule and a fragile democracy. There is tremendous pressure on the government to deliver some ‘democracy dividends’. Furthermore, there are the threats of diseases—malaria, HIV/AIDS, tuberculosis, etc.

With annual per capita income of barely $300, Nigeria is one of the 20 poorest countries in the world. It should therefore be an HIPC-eligible country—deserving of deep debt reduction.

2) Debt is only a symptom of larger economic problems: A broad consensus among the participants was that although debt overhang now constitutes a major problem, it is only a part of the legacies of past mismanagement of the economy. As a part and a symptom of the larger economic problems of Nigeria, participants agreed that these broader issues must be fundamentally tackled as part of a sustainable debt strategy. Some of the issues include:

· Fragile economic base and inadequate economic policy reforms: The lack of diversification and competitiveness of the economy was identified as a major constraint to both sustainable poverty reduction and debt strategy. Without addressing the risk and uncertainty inherent in the investment climate, it is difficult to stem capital flight, and prevent future indebtedness. It was observed that the stock of capital flight from the country is now more than twice the size of GDP and efforts should be made to attract it back.

· Weak legal and institutional framework for public resource management: Participants identified the problem of weak institutional/legal and administrative capacity to design and manage public resources as central to both the debt overhang problem and general economic management.

· Huge waste of public resources: Many participants identified gross inefficiency and waste of public resources as major issues, which also compound the debt problem. Corruption was frequently pointed out as a key issue. For example, it was noted that a survey by the Ministry of Finance showed that about 40% of the projects for which loans were contracted were never started (even though the loans were fully drawn), and of the remaining, hardly any of them was economically viable to generate returns to service the debt.

· Absorptive capacity of the economy is low: Given the weak institutional capacity and waste in public resource management, participants frequently pointed to the weak absorptive capacity of the economy.

· Inefficient and ineffective system for debt management. A lot of discussion centered on how to make the DMO effective in debt management so as to prevent a repeat of the past.

3) The global financial architecture is also a major problem: Many participants blamed the asymmetric power relations, as well as the rules governing international finance for the debt crisis. It was observed that the rules of international finance encouraged odious debt to accumulate, capital flight and brain drain to persist, and stolen wealth to be stored in the western countries and off-shore financial centres. There was a broad consensus that the debt crisis is a shared responsibility between Nigeria and the creditors, and that creditors are as guilty as Nigerians in the accumulation of the debt.

III: Over view and Conclusions of the Conference: The Way Forward

In the light of the issues identified above, the following conclusions were reached on the way forward.

1) Nigeria should pursue vigorously all the options for debt relief, including outright cancellation. Although some participants would opt for unilateral repudiation of the debt, the dominant view was that Nigeria should go for negotiated resolution of the crisis. Given Nigeria’s low income status, Nigeria is, at the minimum, entitled under the international rules to HIPC treatment (67% cancellation of its debt service over three years followed by 67% cancellation of its stock) regardless of its debt ratios, and should receive this as soon as it has established a minimal track record—probably late in 2001 or early 2002. Discussion of any lower reduction (e.g. 33% or 50%) would be penalizing Nigeria because it owes so much. Also, the fact that about 75% of Nigeria’s debt is owed to the rich industrial countries (Paris Club), was seen by the participants as a positive factor in the quest for debt cancellation. Usually, the argument against debt cancellation is that the multilateral agencies cannot afford it. But the same argument cannot hold for the rich industrial countries, which are savouring Post Cold War peace dividend and prosperity. Also, the argument that Nigeria is an oil rich country is simply untenable. At the best of times, the oil revenue is only $91 per Nigerian per annum.

2) Government should vigorously pursue economic policy reforms, not just as an attempt to meet the requirements of donors for debt reduction, but as fundamental national imperative. Nigerians understand that regardless of what happens to the debt issue, they need to keep their house in order by deepening reforms. Such reforms should address issues such as the prohibitive cost of doing business, transparency and accountability, macroeconomic stability, efficiency and competition. The reforms should also address the poor state of infrastructure, enforce the rule of law and minimize the risks and uncertainties associated with the business environment. There was broad consensus that only reforms that ensure sustainable growth and competitiveness of the economy constitute a sustainable exit strategy from debt and poverty.

3) A major goal of the reforms is to target the return of flight capital and prevent the transfer of domestic savings abroad. If the government can convince Nigerians to invest at home through the provision of appropriate investment climate, it is estimated that the annual inflow of private investment might more than make up for any future financing gaps. As a consequence of Uganda’s reforms, the return of flight capital has exceeded the total exports in the last few years. Nigeria should explore such source of investible funds.

4) A key element of the reforms is the need to strengthen or reform the institutional/legal and administrative framework for public resource management. This is to ensure effective and efficient utilization of present and future public resources so as to prevent the waste and inefficiencies of the past. Among other things, this institutional re-engineering would ensure due process and due diligence, transparency, accountability and sanctions.

5) Domestic debt, if not well managed, can cause huge problems for the budget and for the entire domestic financial system. So far, the government has worried mostly about external debt but the domestic debt is also mounting. Participants cautioned that appropriate mechanisms be put in place to check the ballooning of domestic debt, especially with the seeming reckless borrowing and spending of states and local governments. Such domestic borrowing has implications for the ability of the Federal government to maintain macroeconomic stability and should be checked.

6) Participants observed that much of the debt is odious, and had enormous corruption built into it. Consequently, there was a broad consensus that the government undertakes an audit (review) of each of the projects/programmes for which the loans were incurred. Two reasons warrant such an audit. First, it would enable the government to truly verify the genuineness or otherwise of the debts that we are servicing. Second, the responsible officers who contracted the odious loans and/or those who expended them should be prosecuted. It was broadly agreed that those people be brought before the Justice Akanbi Independent Corrupt Practices and Other Related Offenses Commission. This action would help to signal the seriousness of the government about accountability.

7) Partly as a consequence of the weak institutional framework and corruption at high places as well as waste in public resource management, many participants were of the view that government places a moratorium on all borrowings until the following conditions are met:

* A National Debt Policy is developed

· A legislation is enacted by the National Assembly. Such a legislation should stipulate when to borrow, from where, for what purpose, evaluation and due process requirements, accountability and sanctions for failure, involvement of parliament and civil society in oversight functions, etc. Currently, there is no such law, except the constitutional provision defining who has the power to borrow.

· Mandate all future borrowings to be part of the budget and not by-pass the budget and National Assembly.

8) Many participants argued that Nigeria could do without external borrowing in the near future. Currently, the government policy is to borrow only from concessional sources– such as the IDA. But participants argued that there are many idle resources that could provide more resources than the maximum loan Nigeria is eligible under the IDA window. Such sources of extra funding include:

· Put the recovered corruption money as well as proceeds from privatization into a Trust Fund, and the annual interest returns could run into hundreds of millions of dollars per annum. This could be more than the IDA loan and also Nigeria would avoid the conditionality attached to such loans.

· It is estimated that the gas being flared cost Nigeria more than $2 billion per annum. A better utilization of such resources could yield significant resources for development.

· Indeed, many participants suggested a careful audit of the operations of the oil companies because they feared that Nigeria might not have the full information regarding the oil companies’ output and export of oil. Plugging areas of waste by the oil companies could free up significant resources.

9) It was recommended that government should take steps to domesticate technical assistance. Much of the debt and ODA came with technical assistance, but these merely funded expatriate consultants and with hardly any domestic capacity built. Participants urged government to dialogue with the donor agencies to evolve a strategy to rely mostly on Nigerian experts for technical assistance, and where such skills are unavailable, to devise mechanisms to ensure that any expatriate consultant effectively transfers the skills to Nigerians.

10) The government is advised to take issues of contingent liabilities more seriously. There are excellent systems for managing contingent liabilities— including those in Chile for private sector debt and those in India/South Africa for decentralised borrowing by public institutions whose experiences the Government could draw upon.

11) Debt Management: There is no recipe or blueprint for successful debt management and Nigeria needs to draw lessons from wherever there are best practices, which are relevant (OECD, middle-income and low-income economies). Some of the factors crucial to effective debt management include:

· Political commitment to sound debt management, especially adhering to legal and accountability frameworks, and commitment to building national capacity for debt management rather than relying on external consultants.

· A clear legal framework covering external and domestic debt, management of existing debt and new borrowing, and all issues surrounding contingent liabilities (of non-central government public institutions and the private sector), which is widely disseminated in order to provide protection for debt management officials against political pressures

· Coordination among many government agencies, to ensure coherence with overall policies for economic growth and poverty reduction, especially in the analysis of whether debt is affordable and what new loans or debt relief should be spent on. No country has achieved good debt management merely by improving debt management institutions.

· Participation of and accountability to civil society. This needs to extend beyond parliament to independent national audit offices and structures for consultation on new borrowing and public spending.

· Sound and effective management information systems. These should include recording systems and separate systems for analyzing debt sustainability and risk management. These can generally be obtained off the shelf (as Nigeria has done with the CS-DRMS Commonwealth system) but the essential aspect is making these systems sustainable by ensuring that all skills and technology are transferred to the national officials rather than retained by consultants or system designers.

· Sufficient numbers of well trained and motivated staff, with a clear vision of the importance of their position in national development, and their individual objectives and careers in debt management, supported by well-defined job descriptions and working procedures, adequate equipment and working conditions, and sufficient and transparent remuneration (this also applies to other core government policy agencies vital to debt management, such as the Finance Ministry and the Central Bank, and key spending ministries which are involved in poverty reduction).

· Overall institutional capacity-building plans which ensure systematic transfer of skills to national officials, drawing on all available international and national expertise for training, and run independently by the debt management organization (DMO in Nigeria’s case) without any intermediary organizing contracting or sub-contracting.

· Keeping up with developments in international best practices by talking directly to other countries, which have solved the problems you are facing. In other words, Nigeria must define its own priorities for debt management rather than trying to obtain any international models or guidelines, and then build its own capacity to manage debt within government and civil society, by exchanging expertise with other countries and drawing on the widest range of independent and low cost training and skills transfer.

12) There is need for a National Debt Strategy, based on a technical debt sustainability analysis, which is then validated through consultation with civil society and adopted by the Executive Council and National Assembly.

Addressing the International Financial architecture:

The resolution of the national debt crisis needs the effective cooperation of the international community. The Paris Club to which Nigeria owes about 75% of its debt should be more willing to assist Nigeria to exit the debt trap. As a gesture to underpin Nigeria’s unique situation in Africa and the urgent need for the government to provide the dividends of democracy to its 120 million people, the conference called upon the international community to show greater flexibility and understanding in handling Nigeria’s request. Among other things, the international community should do the following:

· Cancel the entire debt to free up resources for development

· Increase ODA to Nigeria, especially by way of grants, and other ODA to fight diseases– malaria, HIV/AIDS, tuberculosis— and security in the West African region.

· Increase Nigeria’s unconditional access to Western markets for non-oil exports. Currently, the new European trade initiative (everything but arms) excludes Nigeria. The conference called for a reversal of this, especially given that Nigeria is poorer than most of the LDCs included in the list of beneficiaries.

· Reform the global financial architecture to ensure that looted funds are not safe anywhere in the world and also ensure that such loots by Nigerians are speedily returned to the Nigerian people. Also, there is a need for an international law stipulating adequate penalties for looters and their foreign collaborators.

· Set up an international arbitration court to adjudicate disputes between donors and creditors.

In conclusion, the conference (which was declared closed by Vice-President Atiku Abubakar) was very productive, and largely accomplished the objectives set for it. The debates generated about economic reforms and the useful ideas for developing a sustainable debt strategy have provided the momentum for the DMO to take its work forward. The enlightened public is now sufficiently aware of the nature of the debt problem, and the choices open to the government. There is also a greater appreciation of the work of the DMO. Hopefully, the useful ideas that emerged out of this conference would soon translate into a debt strategy and probably also a legislation guiding public debt management.