Forty percent buy back option; President Obasanjo blames debt on criminal corruption.
The Paris Club of creditors has agreed to reduce Nigeria’s external debt stock by 60 per cent. In effect, about $18 billion of the $30.848 billion external debt owed 14 members of the club by Nigeria has been cancelled.
The cheering news was announced yesterday by the Minister of Finance, Dr. Ngozi Okonjo-Iweala, at a press conference in Abuja. President Olusegun Obasanjo expressed delight at the long-sought agreement, which he said would help Africa’s most populous country press on with economic reform without the burden of massive interest payments.
The remaining 40 per cent of the nation’s debt owed to the Paris Club is to be bought back by Nigeria through a discount window using the oil windfall. This will free Nigeria from its indebtedness to the club of 19.
Dr. Okonjo-Iweala’s words: “Nigeria would clear arrears of about $6 billion on its $30 billion Paris Club debt, following which there would be a stock reduction on the Naples Terms and a buyback of the remainder to provide an exit from the Paris Club.”
A break down of the debt owed the Paris Club showed that as at 31st December 2004, Nigeria owed the United Kingdom $8 billion; France, $6.25 billion; Germany, $5.29 billion; Japan, $4.45 billion; Italy, $1.98 billion; Netherlands, $1.71 billion; the United States, $984.5 million. Others are Austria, $521.4 million; Belgium, $608.2 million; Denmark, $571.75 million; Finland, $3.99 million; Spain, $249.5 million; Switzerland, $201 million; and the Russian Federation, $36.97 million.
Nigeria has been in the clutches of a huge debt overhang that has constrained its development. Figures released by Manser Muhtar, Director-General, Debt Management Office showed that as of 1985 while Nigeria debt stock stood at $18.9 billion, cumulative debt service was $1.5 billion. In 1990, the nation’s external debt stock rose to $33.099 billion and cumulative debt service had a record of $10.841 billion. Within the period of five years in 1995, the debt stock declined to $32.564 billion and $21.905 billion.
According to Muhtar’s figure, the debt stock further declined to $28.495 billion but cumulative debt service increased to $29.992 billion. In 2002, while the debt stock stood at $30.991 billion, cumulative debt service rose to $33.288 billion and as of 2003 the debt stock stood at $32.91 billion while cumulative debt service rose to $35.097 billion.
This implies that as of 2003, Nigeria’s debt stock/export ratio was 177. The unsustainable nature of the debt led to the campaign for debt relief. Mr Tony Blair, Prime Minister of the UK, even set up the Africa Commission. Dr. Okonjo-Iweala, speaking yesterday, said: “The whole package is such that we can expect debt relief of about 60 per cent on our current Paris Club debt. We expect to pay off the balance of about 40 per cent through a buy back operation.
“This effort would represent a write-off of close to $20 billion for Nigeria which compares favourably with the $40 billion write-off for 18 low income heavily indebted countries out of which 14 are Africans.”
She said an agreement to this effect had been reached between the Federal Government and an International Monetary Fund (IMF) negotiating team led by the Nigerian Team Leader at the fund, Mr Menachem Ratz.
Details of the debt relief and how much would be left to be paid off would be discussed with individual member countries of the Paris Club in September after which the agreement would be implemented.
According to the minister, the funds to be freed from the debt servicing obligations, representing about $1.7 billion in the annual budget in the last three years would now be invested in the sectors that have been considered critical to the achievement of the Millennium Development Goals.
The sectors include: education, health, HIV/AIDS, agriculture, water, power supply, poverty reduction and wealth creation. A Senior Special Assistant, Mrs. Amina Ibrahim, is expected to monitor the utilisation of the funds to be so freed.
“If the money is to be used for immunisation, she and her team would make sure that children are actually being immunised. If it is for the purchase of books for school children, it would be tracked to be sure that the pupils actually receive the books. If it is for building of classrooms, it would be so identified,” she said.
In addition, Nigeria has been re-classified as an International Development Association (IDA)-only status which would allow the country to be eligible for consideration for Naples Terms, a more generous debt relief package reserved only for low income countries that show good performance in reforms.
Dr. Okonjo-Iweala said the federal government would discuss with state governors and reach a mutual agreement on how to finance the implementation of the agreement, which she hinted would be done from the nation’s accumulated excess crude oil revenue.
She said the Federal Executive Council had taken a firm position on borrowing from external bodies and that every necessary step would be taken by the Federal Government to ensure that the nation did not fall back into the debt quagmire over which it had been reeling for more than three decades.
“We are willing to channel some of our oil windfall resources into this. It is a strong issue in Nigeria that we want to exit (from the creditor cartel). We are saying ‘never again’. This road of debt relief has been long and hard. It was agreed in the cabinet that we will not allow ourselves to get back there again,” she said.
Besides the excess oil revenue, the nation has an unprecedented foreign reserve – stock has been put at about $23 billion and is thus far more that necessary for the nation’s importers to remain in business.
The minister said the IMF would continue to monitor the home-grown economic reforms being implemented by the federal government to ensure that the reform which has been approved as a Policy Support Instrument (PSI) remained on track.
According to Dr. Okonjo-Iweala, “the debt relief represents a historic achievement.” She expressed gratitude to Nigerians and friends of Nigeria within and in foreign lands who supported the struggle for debt reduction for the country.
A Paris Club statement distributed at the press conference corroborated the minister’s claims. It reads: “The representatives of the Paris Club creditor countries met in Paris on 29 June 2005 and expressed their readiness, consistent with their national laws and regulations, to enter into negotiations with the Nigerian authorities in the months to come on a comprehensive debt treatment.
“They took note of the economic reform programme implemented by the Nigerian authorities since 2003 and of their willingness to take advantage of exceptional revenues in order to finance an exit treatment from the Paris Club.
“This announcement takes place after Nigeria has recently been declared eligible to IDA – only borrowing status and at a time when Nigeria has decided to renew closer relations with the International Financial Institutions. Creditors welcomed Nigeria’s willingness to conclude a policy support instrument (PSI) as soon as this new instrument is approved by the board of the IMF, to pay all its arrears towards Paris Club creditors and to treat them equitably. On this basis, this debt treatment would include debt reduction up to Naples terms on eligible debts and a buy back at a market related discount on the remaining eligible debts after reduction. This Agreement would be phased in relation with appropriate IMF review under the PSI.
“This exceptional treatment of Nigeria’s debt would offer a fair, sustainable and definitive solution to Paris Club creditors and Nigeria. The significant debt relief would ensure long term debt sustainability and would represent an important contribution by Nigeria’s Paris Club creditors to its economic development. It would also help Nigeria in its fight against poverty.
“Paris Club creditors are ready to invite Nigeria to negotiate in Paris as soon as it has concluded a policy support instrument with the IMF.”
“It is with great joy that I address you today on one of the pillars of success of this administration… The total write-off is close to 20 billion dollars,” Obasanjo said in a televised address to the nation.
The president blamed the “criminal corruption, mismanagement and waste” of previous regimes for building up the debt, and vowed to plough an extra billion dollars into education, health, agriculture, water and power next year.
Omoh Gabriel and Emma Ujah, Vanguard, July 4, 2005