How to Better (Not) Use Sovereign Debt, By Uddin Ifeanyi

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Not only do we now owe more. We owe it to the wrong group of people. Unlike the counterpart of the Obasanjo government, we will have to repay this set of creditors. Unfortunately, we cannot indicate what we used the money for. And what there is to point to cannot be self-financing, let alone help pay off some of this colossal debt.

Seventeen years ago, the Obasanjo administration reached an agreement with the Paris Club on a comprehensive treatment of Nigeria’s debt. Although it was a multi-step, multi-covenant deal, local newspaper headlines focused on when, in order “to secure an estimated US$18 billion debt cancellation (including default interest) representing an aggregate cancellation of approximately 60% of its Paris Club debt of approximately $30 billion”, the Obasanjo government agreed to pay its Paris Club creditors “12, $4 billion, representing an arrears clearance of $6.3 billion, plus a balance of $6.1 billion to complete the exit strategy”.

There was a lot of talk then about the possibility that the Obasanjo government could have used the $12.4 billion paid to the Paris Club more usefully: to build schools, hospitals, bridges, new roads, etc. more numerous and of better quality. Today, this argument underlies much of the Buhari government’s justification for its extensive borrowing. Given the severity of the country’s infrastructure deficit, isn’t there a trade-off between more debt and investment in trains, bridges and roads? Without a doubt, yes. Especially if these investments boost domestic productivity and, by extension, the country’s ability to meet its various obligations on an ongoing basis.

But there were other far more serious considerations in 2005. Few Nigerians commented on the Obasanjo government’s decision to enter into this deal with the Paris Club so long ago. Remember that it was not until 2006 that the country received its first sovereign credit rating. . According to FitchRatings, its decision (published Monday, January 30, 2006) to assign “the Federal Republic of Nigeria a long-term foreign and local currency issuer default rating of ‘BB-‘ (BB minus), both with stable outlook” was supported by a series of reforms undertaken by the government, all of which “enabled the Nigerian government to reach an agreement on outstanding debt resolution with the Paris Club (“PC”) official creditors on October 20, 2005”.

… it is easy to assume that the burden the economy faced in the early years of this century was a sovereign burden. Nothing could be further from the truth, however. Large corporations have found access to credit lines obstructed due to the country’s poor debt position. Banks have had difficulty setting up lines of credit with correspondent banks for the same reason.

In other words, prior to the deal struck by the Obasanjo administration with its official creditors, Nigeria was in poor fiscal shape. Fitch then estimated that because of the debt agreement, “the government’s public debt burden will amount to only 17% of GDP at the end of 2006 compared to 66% in 2004”. He also estimated that with “a public external debt of only $5.1 billion (including $2.9 billion of mostly concessional debt owed to multilateral institutions), compared to $42 billion in international reserves projected to end 2006, Nigeria will be a net public country”. external creditor while the public external debt service ratio will fall to only 1% of exports of goods and services in 2007”.

In this context, it is easy to assume that the burden the economy faced in the early years of this century was a sovereign burden. Nothing could be further from the truth, however. Large corporations have found access to credit lines obstructed due to the country’s poor debt position. Banks have had difficulty setting up lines of credit with correspondent banks for the same reason. And the agreement with the Paris Club simply lifted the stranglehold on the country’s finances and economy. Essentially, the agreement was reached in two phases, in accordance with the provisions of a Policy Support Instrument (PSI) that the Executive Board of the International Monetary Fund agreed for the country in October 2005. In Under the first phase of the agreement with the Paris Club, Nigeria was to obtain the cancellation of 33% of eligible debts after payment of all arrears due on all categories of debts. The second phase involved Nigeria paying “amounts owed on post-cutoff date debt” and the Paris Club granting an additional 34% cancellation of all eligible debt, after which Nigeria repurchased the debt. remaining eligible.

Recall that in terms of naira, the country’s public debt fell from 12.6 trillion naira in 2015 to 39.56 trillion naira last year. Worse still, ready to take advantage of the looser external financing conditions that prevailed until this year, we had reduced our external debt to domestic debt ratio from 17:83 in 2015 to 40:60 last year.

If a $46.2 billion public debt threatened to strangle the economy so many years ago, what about the $95.78 billion the country owed at the end of last year? Recall that in terms of naira, the country’s public debt fell from 12.6 trillion naira in 2015 to 39.56 trillion naira last year. Worse still, ready to take advantage of the looser external financing conditions that prevailed until this year, we had reduced our external debt to domestic debt ratio from 17:83 in 2015 to 40:60 last year. It’s getting worse. Even as the external component of public debt fell from $11.41 billion in 2016 to $38.39 billion last year, the commercial part of it (eurobonds and diaspora bonds) increased from $1.5 billion to $14.69 billion.

Not only do we now owe more. We owe it to the wrong group of people. Unlike the counterpart of the Obasanjo government, we will have to repay this set of creditors. Unfortunately, we cannot indicate what we used the money for. And what there is to point to cannot be self-financing, let alone help pay off some of this colossal debt.

Uddin Ifeanyimissed journalist and retired civil servant, can be reached @IfeanyiUddin.


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