Debt repudiation has its costs – Muhtar

Tunde Rahman
This Day (Lagos)
March 13, 2005

Lagos: Dr. Mansur Muhtar is the man in charge of managing Nigeria’s debt portfolio. In this interview with Tunde Rahman, he says the option of foreign debt repudiation as canvassed by the House of Representatives has its implications for the country. He also gives insights into the debt over-hang bedeviling the country. Excepts:

What is the debt portfolio of Nigeria like?

The situation in terms of the debts Nigeria owes to creditors is very very precarious, we have a debt stock that now exceeds $35 billion and about 85 per cent of it is owed to a club of creditors called the Paris Club of creditors and we have about 7-8% owed to multilateral institutions which includes the World Bank and the Africa Development Bank. We do not owe the IMF any amount. A residual amount is owed to a private, commercial group of creditors of the London Club as well as commercial debts. 

How did we incur these debts and what were they for?

Well, there is a long history behind these debts and I think its important to separate them into various categories. The bulk of the debt which is owed to Paris Club, a lot of it was contracted prior to 1995 in the rescheduling arrangement that we had with them but I must say in the 1980s period and up to 1984, we had to sit down and reschedule with the Paris Club. But the bulk of it constitutes of short- and medium-term loans that were taken by various governments at both federal and state levels.

And essentially what happened at that period is that with the oil boom in the ’70s, Nigeria had gone on a spending spree. At various levels of governments all sorts of projects were being executed. Then we witnessed oil prices collapse progressively but unfortunately the leadership was not able to take corrective measures in terms of reducing expenditure accordingly. Instead what happened at the time was [Nigeria would] go to the international financial market to borrow monies [to] finance projects. So there is that category of debts. But I have to add also that there is a shared responsibility with the creditors themselves. They have to share the blame because they were lending out money without due consideration to the absorptive capacity of the country because many of these loans were taken without consideration to the economic viability of these projects, the ability of these projects to generate foreign exchange to pay back the loans, and there was no consideration of our ability to execute these projects, and there was no consideration of the appropriateness of these loans. For example, in many instances, monies were borrowed at non-concessional rates to finance social sector projects and repayment was over a short period of time. Those creditors were more interested in giving out money, recircling the petro-dollars that they had in order prevent interest rates from sliding. They kept encouraging these monies to be taken without due regard to the fact that these monies were not being judiciously used, that there could have been leakages in the system. There was no proper due diligence in essence, which should normally be the case. Any responsible leader should have made sure that the projects were viable and that the money was channeled to those projects and I think that was not appropriately done. And so that’s one category of loans that were incurred. There was another category and I can tell you roughly that we have been making some estimates in terms of the amount. From our records we would probably be talking about $10 billion to $11 billion roughly in that category. And then in addition to that, we have short-term trade arrears that are owed to [the] Paris Club and, here again, many of these were accumulated because at the time we were operating [an] import-licensing system and we had created a distorted economic structure that encouraged high propensity to import: [an] import dependent structure. We kept importing items that could not be matched with the availability of foreign exchange. There was no appreciation then, in the early ’80s, foreign exchange was diminishing and import licenses were issued recklessly to the extent that Nigeria was paid by people making the imports to the Central Bank and these were guaranteed by the export credit agencies, and automatically these had to be assumed by the government because the Nigeria equivalent had been paid and it was backed by letters of credit that were issued.

That also constituted a chunk at the time [of] about 4-5 billion dollars, and then some other loans. And so in total, what we have been able to put together for the Paris Club is in the range of 15 to 16 billion dollars.

But precisely how much did Nigeria actually take from the Paris Club?

This is based on our records. There are some that have not been captured because they were taken and paid for earlier. If we take into account the records that we have, the minimum should be about 16 billion dollars or so.

What’s in that category of the 10 billion-dollar-debt you mentioned?

These are different kinds of loans that went to finance all sorts of projects, from hotels to infrastructure and so on and so forth. Really all categories of loans were to supply and a lot of other things. But I say again there were instances where some of these loans were not used for the purpose for which they were taken.

You have said the bulk of the loans were actually taken from 1981 upwards, what were these loans taken for, and what are the state of these projects now, going by your records?

I can tell you that we are trying not to re-assess, we have done a lot of assessment earlier on. But an assessment by the Ministry of Finance in 1996 showed that a portfolio of projects, a sample of projects were financed from these loans. And what this revealed was that [. . .] projects amounting to about $2.6 billion in total were executed but it turned out that about 60 per cent or so of these projects were described as failed or unsuccessful projects. And another 10 per cent showed that no fraction of the amount had reached the project sites.

What are some of these projects all about. There should be records, what are their names?

Yes there are records and I will give you the details of some of these projects and we are quite happy to share with you and, in fact, some of these projects have been published in a paper presented at an international seminar. I will give you a copy of that. Then a few of those were successful, maybe 2 per cent. 15 per cent or so could be regarded as functional, though not really very effective, but a bit functional. What we plan to do is to go back, we have now compiled a list of all these projects and in collaboration with the states, we have already indicated to the governors that we will be sharing the information with them. We know that as important stakeholders they are very interested to know about these things so we would be happy to share the information we have about these loans and work collaboratively to assess the state of these projects.

You placed part of the blame of this debt overhang on the doorsteps of the creditor nations. Does that make debt repudiation an attractive option?

Well, I think it’s really for them (creditor nations) to acknowledge responsibility. I know there are legal issues involved. There is a concept referred to as ‘odious debt,’ that relates to many types of debts. For example, debts that are illegitimate and if you look at the antecedents, there have been some legal and historical precedents, though it is narrow and has specific definition. And so it’s not something that can easily be clarified but really I think even if we don’t have a legal case here, at the end of the day, there is a political and moral issue.

And it’s not just the absorptive and implementation capacity but also the structure and composition of these loans. The fact is that many of them [loans] were contracted in periods when the interest rates [were] very low and later interest rates soared from 3 per cent to about 13 or 14, 15 per cent. So that really added to the stock of debts considerably. And to illustrate the point I am making the fact that we have not been able to service those debts as at when due compounded the situation. To illustrate the magnitude of the problem in that regard, when in December 2000, we went to reschedule these loans with the Paris Club, we had a total of about 20-21 billion dollars that were being rescheduled and out of that about 23 per cent represented late interest penalty and 21 per cent was interest. And about 50 – 53 per cent were arrears of the amount that we should have paid but didn’t and was still part of the loan. So the outstanding principal represented only about 7 per cent. So you can see really that nearly 50 per cent of the debt was interest and penalties that accumulated and is still accumulating. Currently, in the last few years, we have been faced with another challenge which is that of the depreciating dollar which has really caused havoc to the debt stock. It’s coming to a point that we are having difficulty grappling with the figure we are generating and I am having to ask my staff to go and cross-check and cross-check again. Even then I still can’t believe it. You look at a situation where the debt stock has been going from $28.87 billion to about 29 billion or 30 billion and then to 32.9 billion and now we are talking about 35 billion.

Every year we are paying amounts to service these debts largely because the dollar has been depreciating in relation to other currency. And because our debt stock is in these other currencies (only twenty something per cent is in dollars while the others are in Euro, Pounds and Yen), we can’t get out of this trap easily. We try to negotiate to get the debts in a single currency and reschedule using the dollar because about 80 per cent of our revenue comes in dollars, and if the dollar goes up that provides a natural shield but they have refused. So we have basically added over $5 billion to the debt stock in the last few years.

From the figures you have given and the one your director gave sometime last week saying that in the last 38 years we have paid about $43 billion as interest and we still have about $35 billion remaining. Is that not a frustrating situation?

It is absolutely frustrating. It’s a kind of situation that really makes you feel hopeless and deeply frustrated especially when you contrast it especially against the effort that the President has been making to canvass support for debt relief. The painful thing is not really about the figure, it is behind those numbers. One looks at the opportunity cost forgone. Its not that we have so much money. The illusion they have of Nigeria being an oil-rich country is really a false one because if you look at the amount this oil revenue translates to [it] is barely 50-53 cents to the dollar. Even last year when things were going well for us it was the same scenario. So contrast that against the huge and unmet needs of the Nigerian population in terms of educational service, health services delivery, and infrastructure deficit that we have. If you look at the financing gap, the amount of resources that are needed to rebuild those institutions, to restore normal services, its quite huge especially considering the 15 years of decay that we have experienced. So these are the kinds of things really that make one feel frustrated. Again, you hear the creditors talking about especially in the last few years, helping everyone in the world achieve some decent living standard, its Millennium Development Goals (MDGs), the targets they have set in 2015 and all this talk about Africa Commission to make poverty history and so on. Against this backdrop really you cannot ignore the need to look at the debt issue. And the real frustration Nigerians are facing reflected in recent developments, is that we do not seem to be making much headway with our dialogue with the creditors and it’s like we are going round in circles talking about the same issue for several years and the creditors have not been responsive.

Against this backdrop, how do you view the resolution of the House of Representatives that Nigeria should stop paying the debts?

Well, I have to say that there have been tempers and feelings about this issue for the last couple of years. We have been in discussion with the legislature and I know that as representatives of the people, they are sharing the sentiments of the population about the need for something to give really in this situation. But I would hesitate to think, much as I understand the point they are coming from, from my own perspective as an economist and as someone who is involved in debt management and all the complexities of the international financial system and the global financial relationships that each country is embedded in, I would hesitate really to endorse that action which has grievous consequences. One could talk about Argentina but that country has been dealing with private creditors and we are talking about official creditors and we know that it’s possible that this could generate an adverse reaction in terms of our ability to fully integrate and benefit from the international system. The long-term effects in terms of financial reputation and even the ability to attract Foreign Direct Investment (FDI) and foreign capital and loans and also to really make Nigeria a good business climate all have to be considered. So one has to tread carefully. Personally and professionally, I think that we should allow a little more time for dialogue with our creditors and I believe that the renewed efforts by Mr. President and his team should be given a little more time to develop to fruition. And I still remain hopeful and if not optimistic, though sometimes one is discouraged when you hear different jibes from these people, I remain hopeful. We have a compelling argument really and I think that given the constellation of factors and what’s happening in the global environment, we can afford to really mobilise support from the international community. We have the Africa Commission, the bilateral effort of Mr. President with the UK, the United States and with other Western countries and I am hopeful that these would basically come to fruition. But really, at the same time, I do appreciate that we are running out of time, that if Mr. President doesn’t deliver substantive results in very good time, the political momentum that is gathering would basically overtake or subsume all of these efforts we are trying to make. I am hoping that we won’t come to that because the countries that have done it (debt repudiation) in the past have had to go back to negotiate. I would opt for bilateral and multilateral negotiations rather than unilateral decisions that Nigeria could take. At the end of the day, they are official creditors, they could just decide to shut us out and if we have to go back to them down the line, then there would be this issue of the interest rates and we cannot disagree, we have to start to negotiate again.

So precisely what you are saying is that debt repudiation as being canvassed by the House of Reps is not a feasible option?

Well, looking at things pragmatically it’s not a feasible option but as politicians perhaps, they are looking at things from a different angle. I wouldn’t go all the way to say its not a feasible option but it has enormous costs associated with it. Depending on the political climate, it may well be that at the end of the day a push comes to a shove and Nigerians and the House of Reps representing the voice of the people feel, that Nigeria is being pushed to the wall and that the political situation at home, but I mean, you have to weigh the cost benefit because, at the end of the day that’s what determines what is feasible or what is realistic. I am looking at it from a purely professional angle and I don’t think this call for debt repudiation is a feasible option. From the political angle, if you do all the calculations, it could turn out too early but I think that my own thinking the decision is such a major one and would have widespread and far-reaching effects for Nigeria’s economy and I think these are the kinds of things that with all due respect and while acknowledging that the National Assembly members are representatives of the people, I think this is an issue that should be subject to broader public debate and discussion before a decision is taken to really build a consensus. But that should be informed discussion taking into account and fully appreciating the pros and cons of both options, looking at the present situation and the challenges we face if we continue with it because really it’s a no-win situation in a sense. I have told you we are making these debt service [payments] yet the debt is growing so that has to be considered, and the trade-offs, the cost, the benefit of diverting these resources, this money could be used for our educational institutions, the Universities, the secondary and primary schools, to build more classrooms, to buy books and equipment, health services and to create jobs for the people. So that’s what we are talking about.

Creditor nations normally say Nigeria is a rich country that does not deserve debt relief, what do you think really entitles the country to debt relief?

As I said, it’s a fallacious statement to say Nigeria is a rich country that does not deserve debt relief. If you look at our socio-economic indicators, our per capita income, how much is it? It’s a little over $300 per capita compared to those countries that are currently benefiting from debt relief, some of which have theirs standing over 400 dollars and these are all low-income countries. That’s higher than our average per capital income and if you look at other socio-economic indicators also, life expectancy, our infant mortality rates are among the highest in the world. What they are using are these artificial criteria, what they call debt sustainability analysis, to look at the debt ratio in relation to debt service and debt stock in relation to export and its relation to GDP. Even that methodological approach is flawed because it does not take into account other liabilities. Domestic debts for example is huge in Nigeria, contractors debt, securitised debt, pension liabilities and other commitments that have to be met.

They don’t appreciate that. The methodology needed does not also take into account the financing gap needed to achieve MDG targets. So we have been questioning that, African leaders have been questioning that methodology and its been faulted and I don’t think really anybody can say Nigeria is not qualified for debt relief. Like I said about the oil revenue, how much is it worth? It’s nothing really, it’s peanuts. And then look at the other countries benefiting from debt relief who are in a much better position financially and economically than Nigeria and some are oil-producing countries. Look at Iraq, look at Egypt, look at Poland, Yugoslavia and you tell me Nigeria does not deserve debt relief? Yes, some of them have played a key role in terms of geo-political stability but so has Nigeria. Nigeria basically has been a stabilising force in the region. Look at her peace-keeping role in the region, if you look at the amount of resources that have been committed, if you look at the effort the government has been making, recently in Togo, the role Mr. President played in Cote’d’voire, in Darfur, these are very strategic. If Nigeria does not do these things in the region, there would be serious crisis. Even beyond that if you look at the size of Nigeria, it’s a major growth-driver in the region and if these countries appreciate that helping Nigeria rebuild its economy would help other neighbouring countries grow also and so they don’t need to put in their resources to continue to prop up those countries, we have an economy that is able to do that. Again, as I said if you want to be talking about Millennium Development Goals (MDGs) and making a difference, if Nigeria is not assisted, is not provided with relief, is not given a respite to be able to really improve the welfare and well-being of its people, you cannot make progress in Africa because one, if you look at the population of Nigeria, the size of the economy just like China and India, all these noise that have been made globally in tackling poverty in the last decade or so, that they have been clamouring about is largely associated with the progress recorded in China and India. So by the same analogy, if you want to see progress in Africa in terms of combating poverty, you must make progress in Nigeria.

How has the country benefited from the numerous trips abroad by the President and his team to canvass for debt relief?

That is a very pertinent question. If you look at it from the surface really, it would appear that no progress has been made but I think that we have recorded some progress.

One, basically, we did a rescheduling arrangement in December 2000 with Paris Club creditors which helped really, really extend the repayment period. Though it was a traditional arrangement which does not provide us any relief per se, but if you look at it concretely, it was more really to lengthen the repayment period to a longer period so that we don’t have to accumulate more debts. So we reduced the rate of accumulation of penalties and arrears. And that was seen as a prelude to further negotiations that would lead to something more substantive and obviously, there have been concerted efforts in that direction. And I think we have begun to lay the framework for that and I think that everybody now appreciates and acknowledges the progress Nigeria has made in implementing her economic reforms and the efforts Mr. President has made to reach out to the creditor countries. At least we have put in place a framework, a platform for dialogue and we have to appreciate that the Paris Club has a very rigid set-up and procedures and for us to get them to change those rules and listen to us. Because if we go by the traditional procedure, there is no way they would give us debt relief. So a lot of the efforts have gone into convincing them. All the efforts of Mr. President, his visits to the G8, discussions at NEPAD, at the UN, has at least given us some window because the creditors were able in 2003, largely as a result of some of these efforts, [to] concede that creditor countries should change their rules to take into account the specific situation, to do things on a case by case basis. Otherwise they just had a template that for this country, this is the kind of arrangement you can have with us, no more no less. But now basically, we have what is called the “Evian approach” which allows them to look at our own case and be as flexible as possible in terms of the kind of debt relief that could be granted to us. We have not been able to initiate concrete dialogue on this because there are other issues that we have to overcome. One of the key challenges Nigeria faces when we go to talk to creditors is the reputation overhang that we had, Nigeria being stereotyped because of the things that had happened in the past, a country that is very corrupt and doesn’t know how to manage its economy well and if you give them debt relief what guarantee do you have that this money will be judiciously utilised, etcetera, etcetera. So that’s the kind of argument we face every time. So because of that basically, we have not bothered to talk to them while we are just preparing the ground in bilateral rounds to soften the ground for future negotiations. The progress that has been made by the EFCC in terms of the 419 thing, getting all the kingpins and going aggressively in pursuit of people involved in economic and financial crimes. So there are a lot of things to show for it.

Finally and in a nutshell, as an expert what is the way out of this debt overhang?

Well, the way out ultimately I believe, is that the international community, the creditor countries have to sit with us around the table, put all the cards on the table, look at our situation, look at the precarious nature of the debt situation, appreciate the fact that this is unsustainable and appreciate that there are serious political pressures that really if we don’t have a good deal, that could basically make it impossible in the future to have any meaningful discussion. We need to sit down and really look at the figures and the numbers, agree on what would give us [a] sustainable exit, a kind of arrangement to ensure that we don’t come back again. Nigeria has great potential, if we manage to get rid of this debt overhang and with the efforts we are making to revamp the economy, this presents a very good opportunity for this country to benefit from some of the potential Nigeria offers in terms of investment. Nigeria is a very potentially rich country with lots of possibilities and also they (creditor nations) have to appreciate that having peace and stability in Nigeria would be very good for their own global security and so the fight against global terrorism. Really, there is [a] need to sit down and negotiate a win-win solution to Nigeria’s debt problem. And I hope that the international community would really begin to appreciate things from this perspective and work with us to come to a sustainable solution.

Categories: Africa, Odious Debts

Tagged as:

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s