Debt Relief for Nigeria… Nigerian Business Forum advocates

“We thought somewhere between 20 and 33 cents on the dollar made sense…” – Todd Moss, Author , Resolving Nigeria’s Debt Through a Discounted Buyback and A buyback to resolve Nigeria’s debt problem

June, 2005

As the leaders of the G8 countries meet in Gleneagles, Scotland for the G8 summit, Todd Moss of Washington , D.C think tank Center for Global Development , in an exclusive interview with the NBF argues that “….the signs are very positive” for debt relief for Nigeria.

The debt relief issue has become a very emotional issue for citizens of Nigeria, and the country as a whole. As the G8 summit in Gleneagles approaches, Ade Famoti, President of the Nigerian Business Forum (NBF) and Ayo Adenuga, NBF Director of Operations spoke to Todd Moss, research fellow at the Center for Global Development (CDG). Todd wrote a paper highlighting a “Debt buy-back” option for Nigeria by the Paris club, and a case for the “IDA only” status reclassification of Nigeria at the World Bank.

Todd Moss, Research Fellow, Center for Global Development

Expertise
Africa, politics of economic reform, capital markets development

Education:
PhD and MSc University of London, BA Tufts University

Background:
Todd Moss is a Research Fellow at the Center for Global Development. He joined the Center in July 2003 from his latest position at the World Bank as a consultant and adviser to the Chief Economist in the Africa Region. Prior to joining the Bank, Todd was a Lecturer at the London School of Economics in the postgraduate Development Studies Institute. Previously, he has worked as an Analyst for the Economist Intelligence Unit and was Assistant Director of US Policy Programs at the Overseas Development Council. Todd is also a consultant working on economic and political risk analysis, economic development, financial markets and policy reform in Africa.

L-R: Ayo Adenuga, NBF Director of Operations, Todd Moss, Research Fellow Center for Global Development, Ade Famoti, President NBF

Read transcripts of the interview below:

Q: Ade Famoti: Why do you think Nigeria’s case for IDA reclassification took so long…what inspired that change by the World Bank? Nigeria was a “blend” with access to IDA (International Development Association) and IBRD (International Bank for Reconstruction and Development) resources. Why did the reclassification effort succeed now?

A: Todd Moss: Nigeria used to be an IDA only country. There were 3 criteria. One was

Income level, lack of access to credit, and the policy variable. In the 80’s Nigeria’s income was above the income threshold and could borrow from the private market also. Nigeria has hence gone below the threshold from $850 to $320. The change in status at the World Bank never happened for different reasons.

So, the Nigerian government had to bring it up. The only African countries that successfully changed their classifications were Congo, Cote de' voir, and Cameroon. The French backed them up and championed their causes at the Bank. Nigeria didn’t have a champion. Now Nigeria does kind of have Britain as that champion within the Paris club.

The change…why did it happen ? Nigeria wanted it, the Bank agreed, and the Center for Global Development wrote a paper on an IDA only reclassification case for Nigeria. We backed up this case by saying based on the Bank’s criteria… Nigeria meets the threshold.

Q: AF: Let’s talk about your papers about the Nigeria debt buyback option and the IDA reclassification. You didn’t specifically mention Naples terms for Nigeria but something along the lines of 30 – 33 cents on the dollar for Nigeria.

A: TM: We wrote the IDA reclassification whitepaper, we started a few years ago, and it went public in September or October. We’ve been going back and forth to the World Bank, and it kind of stalled, and we hit a bureaucratic roadblock at the bank. So we said if they don’t get an IDA reclassification, and if they can’t get a Paris club deal, what else can they get? That when we wrote the paper on the buy back. When the IDA reclassification did look like it would happen, I started looking at different precedents. If they were going to buy back their debt, what should they get? We thought somewhere between 20 and 33 cents on the dollar made sense. 33 cents on the dollar was more or less comparable to what you would get with Naples, and 20 cents was what Iraq got at the Paris club. Nigerians would probably say 20 cents, donors would say 33 cents. Somewhere in between those two will be fair. Now we want to wait and see what happens in the Paris club process, and see what is left, and we can negotiate that down.

Q: AF: Rumor has it…rumors out there, that your paper about the buyback option for Nigeria inspired the G8 finance ministers to pretty much cut Nigeria 33 cents on the dollar. The World Bank minister Paul Wolfowitz was at a dinner last week in Abuja implying a deal may have been reached in an ambiguous answer to a journalist. Something not really Naples, but more along the lines of “Evian” terms or on a case by case basis may have been reached? Essentially, everyone thinks that the buyback option that you proposed may have played a big role in shaping the final deal.

A: TM: Well, that’s fine either way is fine. The thing we’ve been doing is saying…it’s not just this technical issue. One of the reasons, Nigeria hasn’t gotten a deal, is that there is an issue why you give debt relief to poor countries. The reason the “hipics” or HIPC (Highly Poor and Indebted Countries) get relief, is that people think that they are poor, they will never be rich, they’ll never be able to payback, and instead of paying back, spend it on your healthcare or schools or something like that. Nigeria is not exactly that case. That’s the reason we’ve been making a case, a strategic case for Nigeria for debt relief. Not like Nigeria doesn’t have access to resources to spend on social services. Two things. Nigeria is not like Ghana, Mali or Malawi that are poor countries, without the critical mass of human capital or resources to generate lots of things. But it’s taking two issues, one is that it’s a critical country for western countries on issues like international crime, money laundering, terrorism, polio all these things. It is also a critical partner is west Africa given what the country has done in Togo, Liberia, and the role it is playing in NEPAD. So Nigeria is an important country that shouldn’t be left behind.

The second reason is debt relief might be for a poverty reason, which is why those other countries are getting it. It could also be a transition tool okay. In Iraq, they didn’t get it because they were poor, but because they were coming from a horrible government to hopefully something better. In the DRC ( Congo), nobody thinks the debt money will be well spent, but they didn’t want the debt to be an issue holding the country back from moving forward. So for countries coming out of transition or out of conflict, in Nigeria’s case, making an important transition from one kind government to hopefully a better kind of system. If the debt itself is a problem, the creditors should move to get the debt out of the way, so that should solve that other problem. What the Finance Minister (Dr. Ngozi Okonjo-Iweala) and the Central Bank Governor (Prof Charles Soludo) right now are trying to do right now is a similar case, that the debt itself is a problem, and is holding back Nigeria from pushing forward on reform.

Q: AF: Some people argue that a lot of the debt was incurred when we had the military government, and that it was not overspending or over-borrowing, like other countries. It was more defaulting, and not servicing the debts. A lot of people consider the debts “odious”, and that Nigeria should get 100% debt relief.

A: TM: I’ll tell you a couple of things. An odious debt as a term is a very specific thing. We have a longer technical working paper; in the back are three pages on odious debts. We’ve explained what the odious debt doctrine is, and why Nigeria doesn’t fit. It is very specific. It hasn’t been successfully invoked since 1922, only being used twice, and there is no way that Nigeria is going to get it because of the specific criteria. It is a bad option but the case that this debt accrued over the 15 years of military government, to us is background that the creditors should be more favorable towards a deal. The principles of debts are that governments inherit previous debt and obligations that they owe. If Nigeria wants to borrow in the future, which they do, they need to adhere to that. But it doesn’t mean that you cannot cut them a deal due to the problems they’ve had. So I think that’s the background regarding Nigeria. The country is not like other poor countries and we explain to people, it’s not like Nigeria over-borrowed. Basically, the military government didn’t service the debt, and this is some background to why the creditors should be more favorable.

The other thing is repudiation…terrible idea. If you repudiate your debt, saying we’re not paying. The problem is that debt doesn’t go away; it just delays because eventually it’ll have to be cleared. Nigeria will not go “ North Korea” and close its borders and not going to deal with the outside world. Nigeria will want to borrow again, and all that’s doing is making it harder. I realize that may have been a tactic, to pressure the creditors and say this is serious…you guys are going to have to cut us a deal or this is going to get uglier, but for practical purposes, terrible option for Nigeria.

Q: AF: There is no international law regulating debt issues between creditors and debtors…bilateral, multilateral and private creditors have these clauses where sovereignty is sometimes compromised. For example any assets NNPC or CBN of Nigeria can be claimed if Nigeria defaults based on the “cross default” clause of the Paris club. If the country doesn’t pay, the creditors can lay claim to Nigeria’s asset, if for example we refuse to pay and use the “odious debt argument. Like what Argentina tried to do.

A: TM: Ade, It’s not going to come to that. First of all, Argentina’s default was to commercial creditors, they needed to negotiate with the bond holders. Nigeria has some commercial debt, and will have to get a deal at some point. The issue is going forward, what do you want to do going forward. What does Nigeria want to do if they want to borrow from the World Bank, commercial creditors and from the bond market? So, if you want to do that, you have to…its all based on your credit rating. E.g. if you get a mortgage, and you don’t pay for your bank, the bank will come take your house. Because it’s a mortgage, you can get a low interest rate like 6 %. If you’re going to borrow just a regular credit loan on a credit card with no collateral, the rate might be 18%. So if someone is going to borrow to Nigeria you have to put down a sovereign guaranty to get the interest down. In Nigeria’s case, to guarantee the rate and get the loan down. No one will give Nigeria a loan without a sovereign guarantee because the default risk is too high. Its like an individual with bad credit, you slowly start to build your credibility, pay old debt, restructure old debt, then your interests rates start to come down. That’s what Nigeria needs to do. But Nigeria is in a good position because of the oil revenues that can be used as collateral. . We know Nigeria will have cash flow or revenue stream in the future.

Q: AF: The Nigerian Business Forum is pushing for Nigeria’s debt relief as a non-governmental organization. We support the efforts of our Finance ministry, the Minister and President Obasanjo. We even feel strongly that we have a debt relief package deal that may be announced before Gleneagles However, going forward, what next after debt relief?

A: TM: The truth is, Nigeria’s debt isn’t that high even now. Sounds like a lot of money, given the amount of export earnings the country has, its not that high granted it’s centered around oil

When the debt deal’s done, Nigeria should take a deep breath, say how much debt do we have, how much reserve do we have, where do we want to spend our resources, do some calculation, and do some thinking about 2007. Do we want to lock some of these things down? Maybe take IDA loans, now that we have IDA only status, pay off some, maybe buy back the commercial credit at higher interest rates. IDA loans are 0.75% for 40 years and get 10 years grace. Why not borrow all you can from the World Bank, pay everything back, restructure the debt.

Q: AF: You’re the expert on Nigeria here at the Center…have you been to Nigeria?

A: TM: I haven’t been there…I’ve been to Ghana.

Q: AF: What else besides Nigeria research do you do here at the CDG?

A: TM: Well, I work on African financial issues, private capital flow, debt and AID issues, looking at debt relief arena here in Washington. I looked at Nigeria; Nigeria fell outside of HIPC, enhanced HIPC. Look at the package announced last week for the 18 countries, Nigeria was out again. A country with 95 million people below the poverty line. Almost as big as all the others Nancy Birdsall and I sat down, talked to Ngozi (Dr. Ngozi Okonjo-Iweala) and said what can we do here? We talked about some of these issues, sat with, the DMO office, World Bank country team, and finance ministries, debt people around town to get feedback and help shape the paper, and discuss what the exact issues were.

Q: AF: So you’ve entertained the Finance Minister

A: TM: Yeah, Ngozi has been here a couple of times

Q: AA: You mention going to the world bank to negotiate... you have been on the other side... and there are all these criteria. It seems that every time Nigeria meets these criteria there are a whole lot more. How do we know it wont happen this time around before any possible debt relief announcements?

A: TM: We don’t know. One of the criteria was a bit ambiguous. It was about good policy performance. It’s hard to argue that Nigeria is a good policy performer. What we were able to argue was that Nigeria wasn’t that bad elative to all the other countries in the same group, and in some cases in fact was pretty good. The issue is always going to be…that debt relief requires the transfer of resources. It means because Nigeria gets debt relief, for example the Germans will have less money available for debt relief for other countries, or health care funding in Ethiopia or whatever it is. The case always has to be made for good use of resources relative to other potential uses. If the corruption issue is a big deal, or oil is $60 a barrel, sympathy for Nigeria will plummet.

Ngozi been a genius has managed to build the reserve. That shows that even though the oil prices are high, the money is not being blown, but being saved. This suggests that something is different from before, which is what the creditors want to see.

Rodrigo de Rato the IMF Managing Director was in Abuja in May, he was very positive on the “NEEDS” initiative and the direction of the reform program. So I hope Nigeria gets a deal in Gleneagles or before the U.N summit in September.

http://www.cgdev.org/Research/index.cfm?Page=Nigeria:%20%20Africa's%20Forgotten%20Debtor

http://www.cgdev.org/docs/Nigeria%20debt%20buyback%20oped.pdf

http://www.cgdev.org/Publications/index.cfm?PubID=147

http://www.nbfonline.org/debtrelief.html

Download the transcript in adobe PDF format