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Nigeria, home to one in five Africans, has been the continent's most indebted nation. With $36 billion in external debt, 100 million people living on less than a dollar a day, and a fledgling democratic government attempting reforms, Nigeria should have been a strong candidate for debt relief. Yet, in part because of its oil revenues, Nigeria slipped through the cracks of debt relief programs. In 2004, CGD set out to provide analytical support to Nigeria's efforts to persuade creditors to agree to an appropriate debt relief package.
In October 2005, Nigeria and the Paris Club announced a final agreement for debt relief worth $18 billion and an overall reduction of Nigeria's debt stock by $30 billion. The deal was completed on April 21, 2006, when Nigeria made its final payment and its books were cleared of any Paris Club debt. CGD Fellow Todd Moss, who led CGD's work on Nigeria's debt, explains the outcome of the deal.
This watershed deal was the result of months of tireless work by both Nigerian officials and the creditors. CGD is proud that its work contributed to this historic outcome. A September 2004 CGD working paper, Double-Standards, Debt Treatment, and World Bank Country Classification: The Case of Nigeria, argued for Nigeria's reclassification as an 'IDA-only' country within the Bank—a prerequisite for debt relief. This overdue change in status, announced in June 2005, enabled Paris Club negotiations to begin in earnest. CGD's work also influenced the structure of the final agreement, which included the first-ever discounted buyback within the Paris Club, an innovation first proposed in an April 2005 CGD note, Resolving Nigeria’s Debt Through a Discounted Buyback.
The Center's contribution to the deal has been recognized by participants in the negotiations, by others close to the process, and by major media:
"Your catalytic work and analysis made a difference…especially the work of CGD in facilitating the reclassification of Nigeria as an IDA-only country as well as putting forward an innovative solution to the debt problem."—Ngozi Okonjo-Iweala, Minister of Finance
"CGD has played a critically important role… I have it first hand from negotiators in the Paris Club that it was the CGD concept of a buyback that was the tipping point that led creditors to agree debt relief for Nigeria…This is a great achievement for all concerned, and is in no small part due to the work of CGD."—Ann Pettifor, co-founder Jubilee 2000 and Director of Advocacy International
CGD was described by the New York Times as "a nonpartisan research institution in Washington that proposed elements of the [Nigerian debt] deal" (Oct 21, 2005) and by the Economist as "the Washington think-tank that first proposed the buy-back" (October 20, 2005).
Nigeria's debt relief deal is historic. Although the short-term financial windfall will be modest, the real potential impact is for the future. The long-term challenge for Nigeria will be to consolidate the gains from the debt deal by pushing forward with economic reform and ensuring that the benefits from debt relief are shared with the population. This is by no means assured, but the debt deal is an important step in the right direction.
CGD hosted a public talk last week by Nigerian Acting President Goodluck Jonathan. During the speech, the acting president discussed key issues facing his country before a standing-room-only crowd dominated by exuberant Nigerians. Before the speech, the acting president spoke at a private breakfast with development experts, diplomats, and senior U.S. and World Bank officials.
During the speech, Acting President Jonathan called upon the United States to support Nigeria’s efforts to strengthen its democratic institutions, to increase private investment in Nigeria, to diversify U.S. imports from Nigeria beyond oil, and share technology to help meet Nigeria’s electricity needs. “Without fixing [electrical] power, you cannot create jobs – you cannot create wealth,” he said.
The power sector is among Africa’s biggest hurdles to development according to a CGD book Africa's Private Sector: What's Wrong with the Business Environment and What to Do About It.
CGD president Nancy Birdsall expressed concern that despite Nigeria’s $300 billion in oil revenue since 1970, incomes have remained low and poverty is widespread. Nigeria demonstrated improvement between 2003-2007, but preoccupation with domestic political infighting since 2007 has hurt Nigeria’s progress, she said.
Acting President Jonathan said he was working to improve the electoral process by strengthening the accountability of electoral agents at polling stations. National elections are due in 12 months.
“At the polling units, election (results) should be declared by their polling agent,” he said. “What has happened in the past is that at the end of the vote, the results are not declared at the polling station.” The acting president also thanked CGD for its role in debt relief. “I would like to applaud the supportive role by the Center in facilitating Nigeria’s debt buy-back in 2005,” he said.
CGD vice president and senior fellow Todd Moss, who chaired the breakfast discussion and the audience Q&A following the public speech, led CGD's analytical work in support of Nigeria's efforts to persuade its creditors to agree to an appropriate debt relief package. As a result, Nigeria’s debt stock was reduced by some $30 billion dollars.
Birdsall expressed her interest in continuing to offer analytical support to Nigeria’s development efforts.
“We’re very interested in working with the Nigerians to deal with the management of their oil – perhaps in new ways – over the next few years,” she said.
Moss has proposed that Ghana consider direct distribution of at least part of the revenue from new oil discoveries directly to citizens on a flat per capita basis. In forthcoming work, he explores the possibility of applying the approach to other African countries with oil.
Q: What does this debt deal mean for Nigeria?
A: The completion of the deal, which will see Nigeria exit from $30 billion in Paris Club debt, is absolutely historic. In the short-term it will mean that the budget can focus more on promoting private sector growth and development. But the longer-term implications could be much more important. Debt has been hanging over President Obasanjo and is one of the major barriers to consolidating the aggressive reforms being undertaken by his economic team. This gives them momentum to push further, including the passage of the Fiscal Responsibility bill now before parliament.
Q: What is the background to the completion of Nigeria’s debt deal this weekend?
A: Nigeria had been trying to get debt relief since Obasanjo was elected in 1999. These efforts failed until last year when three things finally came together. First, the government started cracking down on corruption. Second, the country was reclassified by the World Bank as "IDA only," a technicality that kept them out of consideration for either HIPC or a favorable Paris Club deal. Lastly, the treasury was able to save oil revenues (reserves have risen from almost nothing in 1999 to about $34 billion today) which gave Nigeria the cash to put on the table to get the deal done.
Q: Will Nigeria still be a borrower and/or aid recipient?
A: Nigeria has lots of cash, but there are two relevant caveats to this. First, the country has perhaps 140 million people, so the social service needs of the country are substantial. Perhaps more importantly, the systems for spending money are still far from being fixed, which means using money wisely is not that easy. Because of this, Nigeria will still probably look for donor help with things like HIV/AIDS and community development, such as in the Niger Delta. It already has started some modest private borrowing, a good sign that the government is keen to get the country re-linked to international capital markets.
Q: Will debt reduction have an impact on corruption?
A: Hard to say. On the one hand, debt relief strengthens Obasanjo’s hand and could open space for some more aggressive steps. He has already removed from power several senior officials who were corrupt. In addition to continuing to go after big fish, Nigeria’s long-term development demands that the government get a handle on the pervasive petty corruption which stifles small businesses. This is, of course, much harder to do.
Q: What has been CGD’s role in this deal?
A: The real credit for getting the debt relief completed goes to the finance minister Ngozi Okonjo-Iweala and her colleagues who have put in months of grueling work. The creditors, especially the UK and US, also deserve credit for finding a creative way out of what had become a lose-lose situation.
CGD is proud to have played a supportive role in two ways. First, we did some analysis in 2004 which showed that Nigeria was wrongly categorized by the World Bank, a technicality that was holding everything up. In June 2005, partly as a result of our work, the World Bank reclassified Nigeria as IDA-only, opening the door to real negotiations.
Second, in April 2005 we proposed the outlines of a bargain: the creditors would give Nigeria debt relief and the government would buy back the rest of the debt. We also gave some benchmarks for a reasonable price window of 20-33 cents on the dollar. Our proposal was used to open the dialogue over the buyback and gave both sides an opportunity to openly consider what might otherwise have been a sensitive topic for either one to broach. In the end the non-arrears portion was settled at 24 cents. As a credible neutral player, CGD could make both of these proposals and be taken seriously by all sides. I think the key role for think-tanks like CGD is to undertake independent analysis and generate new ideas helping policymakers to solve problems of common interest. This is a great example of that in practice, and we’re pleased to have been able to make this modest contribution to a huge result.
Download the CGD press release on the debt deal announcement.
CGD began working on Nigerian debt issues in early 2004 to provide analytical support to Nigeria's ongoing efforts to persuade its creditors to agree to an appropriate debt relief package. In October 2005 Nigeria and the Paris Club announced a final agreement that should lead to debt relief worth $18 billion and an overall reduction of Nigeria's debt stock by $30 billion. CGD Research Fellow Todd Moss, who leads Center's work on Nigeria's debt, explained how the deal will work in a Q&A just days before it was announced.
Q: What is the current status of Nigeria's debt? How much debt is there, and what are the prospects for debt relief?
A: Nigeria has about $36 billion in external debt, most of which is owed to the Paris Club creditors. More than half is owed to just Britain, France, and Germany. The Paris Club agreed in June to a 'framework' for reducing Nigeria's debt which involves two steps. First, Nigeria has to clear about $6 billion in arrears. Then Nigeria can negotiate a reduction with the Paris Club on so-called Naples terms for the remainder, which is likely to also include a discounted buyback. The signs are fairly good for a deal soon, perhaps the first step concluding later this month. The second step will depend on Nigeria keeping macroeconomic conditions under control for another six months or so. If that all happens, Nigeria's debt problem could effectively be over by early next year.
Q: Nigeria exports oil, and oil prices are at near record highs. Why should the rich countries be interested in providing Nigeria with debt relief?
A: It is exactly the high oil prices that enable this deal at this time. Nigeria will use a big chunk of its oil windfall to clear its arrears and buyback its debt. So the creditors are not giving anything away for free, nor is Nigeria avoiding its past obligations. At the same time, agreeing to a discount is in the interest of the creditors who not only want to collect this old debt, but also have other interests in the region, especially encouraging economic reform and helping to stabilize a fragile democracy in a volatile country which supplies a lot of western oil.
Q: What would the implications be of a Nigerian debt deal within Nigeria itself?
A: A successful debt deal would be a huge boost to President Obasanjo and his economic team which has been working to try to break the stranglehold of cronyism and corruption that stifles Nigeria. On a short-term cashflow basis, the impact isn't very large. But the deal will free up the government to focus on other pressing issues. One other bonus of a buyback is that it locks in a rate of return for the savings from oil. In the past Nigeria's oil savings have been stolen by crooked regimes. Using the extra money to buy back the debt means that the money can never be stolen, no matter who comes to power. And the debt will be gone forever.
Q: CGD has played a key role in the debate over Nigerian debt relief. What can you tell us about that?
A: If the deal goes ahead, the real credit goes to the finance minister Ngozi Okonjo-Iweala and her colleagues who have put in months of grueling work to get this done. The creditors also deserve credit for thinking creatively about how to get all sides out of this lose-lose situation.
CGD did help to move things along in two ways. First, Nigeria was not considered for debt relief in the past because of a technicality related to its classification within the World Bank. We did some analysis last year which showed that Nigeria was in the wrong category. In June 2005, partly as a result of our work, the World Bank reclassified Nigeria as IDA-only, opening the door to everything else. Second, in April this year we proposed a debt buyback and gave some benchmarks for a possible deal. This proposal was used to open the dialogue over the buyback and gave both sides an opportunity to openly consider what might otherwise have been a sensitive topic for either one to broach. As a neutral player with no financial interest in the outcome, CGD could make both of these proposals and be taken seriously by both sides. I think the key role for think-tanks like CGD is to undertake independent analysis and generate new ideas helping policymakers to solve problems of common interest. This is a great example of that in practice.
CGD President Nancy Birdsall testified before the U.S. Senate Foreign Relations Committee on Tuesday, May 17, 2005 on the Commission for Africa report initiated by Tony Blair. She suggested the U.S. should prepare a package of Africa-related initiatives for the UK-hosted G-8 Summit in July covering areas such as peace and security, advance market commitments for vaccines; debt relief, trade, and aid delivery. Sen. Lugar praised the proposal for an advance market commitment for vaccines. "This is an extraordinary idea and I thank you for bringing it to our attention," he said.
Benjamin Leo, formerly of the U.S. Treasury and National Security Council and a key behind-the-scenes player in the inception and implementation of Multilateral Debt Relief Initiatives, examines the potential risk of renewed debt re-accumulation by countries that have only recently completed the HIPC/MDRI process that was to prevent a repeat of excessive debt accumulation.
The Multilateral Debt Relief Initiative (MDRI), the latest phase of debt reduction for poor countries from the World Bank, the IMF, and the African Development Bank, will come close to full debt reduction for at least 19 and perhaps as many as 40 countries. Debt relief proponents see it as a momentous leap in the battle against global poverty. CGD research fellow Todd Moss argues that actual gains in poverty reduction will be modest and slow.
Nigeria has $33 billion in external debt. The government has been trying unsuccessfully for years to cut a deal with creditors to reduce its external obligations but to date has only managed to gain non-concessional restructuring. The major creditors also have good reasons for wanting to seek a resolution, yet agreement has been elusive. Fortunately, there is a brief window of opportunity in 2005 to find a compromise that can meet the needs of both sides. This note briefly outlines a proposal for striking such a deal through a discounted debt buyback.