[stop-imf] What does the Paris Club deal mean for Nigeria?

[Robert Weissman]

A relatively positive view of the Nigeria deal ...

<mailto:ai@advocacyinternational.co.uk>
www.advocacyinternational.co.uk <http://www.advocacyinternational.co.uk>
What does the Paris Club deal mean for Nigeria?

By Helen Kersley, Ann Pettifor, and Janet Bush
Advocacy International, July 2005.

Introduction
The Paris Club announced on Thursday, 30th June, that official
(government) creditors were ready to consider a comprehensive debt
relief deal for Nigeria. This decision represents a considerable
achievement for the government of President Olusegun Obasanjo, and in
particular for the Minister of Finance Mrs Okonjo-Iweala and the
Director General of the Debt Management Office, Dr. Mansur Muhtar.
Nigeria is expected to sign a memorandum of understanding after a
meeting with the Paris Club in September.
The deal agreed in principle in late June is ground-breaking for a
number of reasons.
The first is because the Paris Club offer to cancel 67 per cent of
eligible debt means that $15.5 billion will be cancelled =E2=80=93 the
largest-ever sum to be written off for any African country. It beats the
previous record set in September 2002 when the Democratic Republic of
the Congo (DRC) had $10 billion written off.

The second notable aspect of this agreement is that, until recently,
Nigeria was ineligible for Paris Club relief, as she has chosen not to
have a programme with the International Monetary Fund but to follow a
home-grown package of economic reforms called NEEDS =E2=80=93 the National
Economic Empowerment and Development Strategy. An externally-imposed
economic programme would simply not have been able to command any
popular political support in Nigeria (as is increasingly the case in
other countries) and there was no realistic prospect of Nigeria entering
an IMF programme.

Admission to the Paris Club for debt relief negotiations has, for a long
time, been contingent upon an IMF programme being in place and it has
often taken a number of years after entering an IMF programme, and a
track record of meeting certain conditions, before a country is deemed
eligible. An IMF programme has been regarded as a =E2=80=9Cseal of approval=
=E2=80=9D of
a country=E2=80=99s =E2=80=9Cbehaviour=E2=80=9D =E2=80=93 and creditors hav=
e tended to insist on the
comfort level of having the IMF there as gatekeeper to any debt
concessions. This, in fact, remains the case but an unprecedented
exception has been made for Nigeria. (Even Iraq, with enormous political
and strategic pressure for a debt write-off particularly from the United
States, has had to sign up to an IMF programme).

Nigeria=E2=80=99s Government has managed to get round the usual condition o=
f
having an IMF programme by requesting that the IMF monitor NEEDS under
what the IMF calls a =E2=80=9Csystem or an approach of intensified surveill=
ance=E2=80=9D
. The IMF has been regularly monitoring Nigeria=E2=80=99s economic manageme=
nt
for some time but this has now been formalised as part of the quid pro
quo for the Paris Club debt write-off. This form of surveillance is an
entirely new IMF =E2=80=9Cinstrument=E2=80=9D and is being called a =E2=80=
=9CPolicy Support
Instrument=E2=80=9D. According to IMF staff =E2=80=9Cthis would be the inst=
rument or the
mechanism by which the Fund would provide input to the =E2=80=93 or an
assessment =E2=80=93 that could be used by the Paris Club for their own jud=
gment".

At the time of writing (18th July, 2005), there is still considerable
uncertainty about the precise nature of this instrument which has yet to
be discussed and formalised by the IMF=E2=80=99s Executive Board.

The third reason why the Nigerian deal is remarkable is that, until very
recently, Nigeria did not enjoy =E2=80=9CIDA status=E2=80=9D (a status conf=
erred on
countries by the World Bank and which deems a country poor enough to be
entitled, for example, to concessional debt relief). IDA status was
quietly conferred on Nigeria by the Bank in the weeks before the recent
meeting of G8 Finance Ministers in London (11th June, 2005). Campaigners
had been calling on the Bank to recognise the high levels of poverty in
Nigeria since as far back as 1997 but there had been no movement. The
sudden granting of IDA status =E2=80=93 clearly a precursor to a deal withi=
n the
Paris Club which the UK, Nigeria=E2=80=99s largest creditor, had been pushi=
ng
for =E2=80=93 was a notable turnaround by a multilateral creditor.

The jigsaw would never have been completed if Nigeria had not been able
to offer to pay its arrears =E2=80=93 another sine qua non for the Paris Cl=
ub =E2=80=93
as a result of the recent sustained period of high oil prices which has
given it a revenue windfall, allowing Nigeria not only to pay arrears
but also to announce a market buy-back of the debt stock remaining after
the Paris Club write-off.

So the announcement by the Paris Club on 30th June represented a major
breakthrough for Nigeria. This briefing analyses =E2=80=93 as much as is
possible given the current level of detail available in the public
domain =E2=80=93 the debt deal that is currently on the table at the Paris =
Club.

The Paris Club deal

The Paris Club announced an =E2=80=9Cin principle=E2=80=9D agreement on the=
 30th June.
The precise meaning of =E2=80=9Cin principle=E2=80=9D is that members of th=
e Club are
willing to consider debt relief for Nigeria but only subject to detailed
negotiations with each creditor between now and a meeting with Nigeria,
scheduled for September. The status of these negotiations is not known.
A considerable measure of agreement on the terms of the package appeared
to be in place at the meeting in June although only in September will it
become evident what detail has had to be negotiated. However, Finance
Minister, Dr. Okonjo-Iweala is reported to have said: =E2=80=9CThis debt re=
lief
is real and by September we will complete the negotiations and sign the
memorandum of understanding. But it is there and we would expect 60 per
cent of our $30 billion debt would be written off.=E2=80=9D

With 86 per cent of its total external debt owed to Paris Club
creditors, the importance to Nigeria of securing a deal on this portion
of its debt is clear. The intention of the deal as announced is to
reduce Nigeria=E2=80=99s Paris Club debt to zero. In principle, the propose=
d
approach is

=E2=88=91 for Nigeria to pay back the outstanding arrears on its Paris Club=
 debt
(arrears currently stand at just over $6 billion);
=E2=88=91 for creditors to write off 67 per cent of the principal amount of=
 the
debt (the principal amount is $23.2 billion, so $15.5 billion should be
written off); and
=E2=88=91 for Nigeria to buy back the remaining amount ( around $7.6 billio=
n at
face value) at what has been defined as a =E2=80=9Cmarket-related discount=
=E2=80=9D.
Statements from the Nigerian Finance Ministry imply an assumption that
this buy-back will cost around $6 billion.

Nigeria=E2=80=99s external reserves stood at $23 billion at the end of May =
2005.
This was a considerable increase from $17 billion at the end of 2004 and
$7.5 billion at the end of 2003. This sharp rise in reserves was due
largely to a sustained period of high crude oil prices. If oil prices
continue at current trends, Nigeria may be in a position to further
increase its reserves. It might be possible for the Government of
Nigeria to use these windfall revenues to clear the $6 billion it owes
in arrears. At the time of the Paris Club announcement at the end of
June, it was unclear how much the discount on Nigeria=E2=80=99s buy-back wo=
uld
be because it was difficult to pin down the extent of the
=E2=80=9Cmarket-related discount=E2=80=9D. However, statements by the Minis=
ter of
Finance indicate that Nigeria will pay a further $6 billion in the
buy-back operation, bringing the total payment to the Paris Club
creditors to $12 billion .

Clearing arrears and buying back part of the debt will mean large
negative transfers in the short term. However, it is expected that even
as early as 2006, Nigeria would be in a position to spend an additional
$1 billion per annum on MDG-related programmes in health, education and
infrastructure . In addition, eliminating the Paris Club debt will
reduce the debt burden on current and future generations of Nigerians.

Although the details are as yet unknown, we have taken the Paris Club
announcement and extrapolated from it to analyse what the deal could
mean for Nigeria.

Debt stock will fall by $31 billion=E2=80=A6

At the end of 2004, Nigeria=E2=80=99s total debt owed to western government=
s,
businesses and multilateral institutions (such as the World Bank) stood
at $36 billion. Debt owed to the Paris Club creditors at that time
totalled $31 billion, a high percentage of its total debt. At the time
of the Paris Club announcement, this portion of Nigeria=E2=80=99s debt stoo=
d at
$29.5 billion. As the announcement from the Paris Club states,
negotiations over the next few months will be to clear all Nigeria=E2=80=99=
s
Paris Club debt. British negotiators said that a combination of
write-off, the payment of arrears, and a market buy-back would mean that
=E2=80=9C100 per cent of Nigeria=E2=80=99s debt would be eliminated=E2=80=
=9D by the end of 2005.

The following graph illustrates Nigeria=E2=80=99s debt profile with and wit=
hout
its Paris Club debt.







Nigeria=E2=80=99s Stock of Debt (end 2004) with and without Paris Club
Source: Debt Management Office of Nigeria


Annual savings of $1 billion=E2=80=A6.

Every year, Nigeria has to pay large sums of money in interest payments
and principal repayments on this stock of debt. The bill for this is
around $3 billion annually. Nigeria has been unable to meet this cost in
full and has paid about $1.8 billion annually over the past five years
(approximately $1 billion to Paris Club creditors and $0.8 billion to
multilateral and commercial creditors). Arrears have been built up on
the amount unpaid. Almost all of the arrears have been built up on the
portion of its debt owed to the Paris Club. The accumulation of arrears
and associated penalty charges has created the paradox whereby Nigeria=E2=
=80=99s
total stock of debt has been increasing year on year, despite the fact
that it has been repaying debts, and has not borrowed any more money
from Paris Club creditors.

By eliminating 100 per cent of its Paris Club debt, Nigeria=E2=80=99s annua=
l
debt service due should fall from around $3 billion to under $1 billion.
The amount of annual debt service paid should fall from $1.8 billion to
$0.8 billion, more than halving the amount it has been paying to the
west. This means that $1 billion can be diverted to spending on poverty
reduction. In addition, Nigeria will escape from the debt spiral caused
by rising penalties and interest on its unpaid debts =E2=80=93 a spiral tha=
t
each year adds about $1 billion to its debt burden.




Annual Debt Service (2004) with and without Paris Club debt

Source: Debt Management Office of Nigeria

Savings equivalent to doubling national health spending=E2=80=A6

The scale of annual savings for Nigeria is illustrated by their impact
on its national expenditure on health and education. The $1 billion paid
on debt service to the Paris Club represents 70 per cent of the total
education budget and 110 per cent of the combined federal and state
health budget . The following table shows this expenditure per head of
the population.

Annual per capita expenditure:

Education $11.04
Health $ 6.59
Total debt service payment $13.16
Paris Club debt service payment $ 7.35
Projected debt service payments (to multilateral and commercial
creditors) after Paris Club debt cancellation
$ 5.81

Note: Figures calculated from data published by Central Bank of Nigeria:
2004 Annual Report and Statement of Accounts, 30th June 2005; conversion
of naira per capita amounts to USD at CBN DAS exchange rate of =3DN=3D/USD
133.5/1. Population figure of 136 million, sourced from the World Bank,
Nigeria at a Glance.

As an illustration, if all the savings in debt service costs following
Paris Club debt cancellation were diverted to health, spending could be
doubled from $6.59 per head to $14 per head.

Moreover, Nigeria receives annual aid flows from the west of about $2
per head , but has been spending more than three times this on servicing
its Paris Club debt alone and almost seven times more than this
servicing the whole of its external debt every year. This translates to
a net negative flow from Nigeria to the west of almost $12 per head2.
With the Paris Club deal as proposed, this total net outflow could be
halved to $6 per head.

Previous experience shows that debt relief works=E2=80=A6

Some examples :

=E2=88=91 Uganda has used money from debt relief to double primary school
enrolment and invest in a successful HIV/AIDS plan;
=E2=88=91 Benin has been able to eliminate school fees in rural areas, allo=
wing
thousands of children to go to school;
=E2=88=91 Tanzania has put funds from debt relief into an education program=
me
which has resulted in a 50 per cent increase in the primary school
population between 2000 and 2004 =E2=80=93 an additional 2.7 million childr=
en in
school.

And Nigeria has strategies to use debt relief effectively=E2=80=A6

With its history of military dictatorship and economic mismanagement,
Nigeria has had difficulty persuading international creditors that it
deserves debt relief. The Government of President Obasanjo,
democratically elected in 1999, has been working hard to turn around
Nigeria=E2=80=99s performance and prospects and the Paris Club=E2=80=99s wi=
llingness to
negotiate on Nigeria=E2=80=99s debt is evidence of the progress the Governm=
ent
has made so far.

Economic reforms=E2=80=A6

The Government=E2=80=99s NEEDS programme has as its central focus a drive t=
o
reduce poverty, create wealth and generate employment. It also sets out
far-reaching public reforms to make clear that corruption will be punished.

The strategy is focused on improving management of public finance by
ensuring fiscal discipline through public revenue reforms and improved
public resource management and utilisation. This is supported by a new
culture of transparency and accountability enforced through the rule of
law, which includes, for example, a new due process mechanism for
awarding public sector procurement contracts and improved budget
monitoring through the Budget Monitoring and Price Intelligence Unit
with publication of mid- and end-year budget performance reviews. In
addition, a poverty spending tracking programme will ensure that those
resources directed to achieving the Millennium Development Goals are
delivered and spent in a transparent way. Alongside these management
reforms, there is a drive to restructure public service delivery to
enhance efficiency and responsiveness and rebuild Nigeria=E2=80=99s physica=
l and
social infrastructure. Pension reforms, civil service reforms,
accelerated privatisation and economic liberalisation, together with
financial sector reform, also form part of the strategy. Taken together,
these measures are aimed at fostering macroeconomic stability and growth.

A key part of the drive to enhance fiscal discipline is the Commodity
Price-Based Fiscal Rule, under which excess crude oil revenues, earned
as a result of higher oil prices, are held as part of Nigeria=E2=80=99s for=
eign
reserves. Under this rule, 50 per cent of these excess earnings will be
saved for volatility cushioning against oil price movements and 50 per
cent will be distributed between federal, state and local governments.
The federal government=E2=80=99s share of these revenues has been applied t=
o
education, power, infrastructure, pension and structural reforms.

Complementary to the national NEEDS programme, individual states have
started to prepare State Economic Empowerment and Development Strategies
(SEEDS) with an emphasis on creating an enabling environment for private
sector development. Each state will implement core measures to improve
their own expenditure management, for example by adopting due process in
procurement decisions.

Anti-corruption strategies=E2=80=A6

In addition, President Obasanjo=E2=80=99s government has implemented a forc=
eful
anti-corruption drive. As part of this an Economic and Financial Crimes
Commission (EFCC) has been set up (http://www.efccnigeria.org) which is
fighting corruption =E2=80=93 and has already achieved considerable success=
 in
identifying and tackling corrupt practices, such as advance fee fraud
and oil-bunkering, and arresting and imprisoning amongst others, those
behind the notorious Nigerian internet scams. Also within the EFCC=E2=80=99=
s
remit is the ability to investigate high level political crimes. Most
spectacular of all has been the sacking and arrest on corruption charges
of the Education Minister, the Housing Minister, the President of the
Senate and the Chief of Policy.

A new Independent Corrupt Practices and Other Related Crimes Commission
has already undertaken the prosecution of senior public officers and has
55 alleged fraudsters facing prosecution. Other measures envisaged under
the government=E2=80=99s anti-corruption strategy are reform of the police
service, with an increase in its size, equipment and training and legal
and judicial reform.

Diverting debt relief to the poor=E2=80=A6

Management of the funds made available through the Paris Club debt deal
will be monitored by a tracking mechanism called the Virtual Poverty
Fund, which in expectation of debt relief, was inaugurated in June,
20005. The Fund will take the form of an initiative named OPEN
(Oversight of Public Expenditure on NEEDS) to monitor and track all
MDG-related expenditure. This will come into effect in the 2006 Federal
Government budget, and will apply to baseline MDG expenditure as well as
any additional spending released by debt relief. This will be overseen
by a committee called the Millennium Development Goals Committee, to be
chaired by President Obasanjo, and a steering committee which will
include members of non-governmental organisations such as ActionAid who
will monitor what the funds released by the debt write-off are being
spent on.

The Finance Ministry is in the process of calculating the overall
financing needs for each MDG, which will then inform individual
budgetary allocations for each Ministry (within the Medium Term
Expenditure and NEEDS frameworks). The objective of this process is to
ensure that Government spending impacts on poverty reduction, halts
HIV/AIDS and Malaria, and addresses child and maternal mortality. The
Nigerian government will prioritise spending on health, education,
water, infrastructure, power and agriculture.

In the 2006 Federal Government Budget, the Finance Ministry will aim to
ensure that this MDG-spending is tagged and can be tracked to concrete
outcomes. This tracking will be both financial and activity based, and
Nigeria will be drawing on the best international analysis.

Nigeria=E2=80=99s Finance Minister, Mrs Okonjo-Iweala has already identifie=
d the
Education sector=E2=80=99s requirements for infrastructure, qualified teach=
ers
and teaching aids. In the next three years, Nigeria is aiming to reduce
class sizes to 40:1; enrol over 50% of the 7 million out-of-school
children (in particular the girl child) and increase the number of
qualified teachers by 120,000.

The road ahead
Nigeria=E2=80=99s Finance Ministry, its Debt Management Office, and the UK=
=E2=80=99s
Department for International Development all calculate that the Paris
Club deal, as it stands, cancels some 60 per cent of Nigeria=E2=80=99s debt=
,
leaving the country itself to pick up the bill for the remaining 40 per
cent. Given the fact that there was, as recently as February this year,
no appetite to give Nigeria any debt deal at all, a write-off of some 60
per cent write-off is considerable.
However, there will be some voices within Nigeria =E2=80=93 as well as
international non-governmental organisations =E2=80=93 that have expressed =
the
desire to negotiate for an even larger proportion of Nigeria=E2=80=99s debt=
 to
be written off.
President Obasanjo said on a live interview on Radio Nigeria on 7th
July, 2005: =E2=80=9CWe thank them (Paris Club creditors) for what they hav=
e
done We are still hoping and looking forward to more debt relief from
the Paris Club".
The President is mindful that, earlier this year, Nigeria=E2=80=99s House o=
f
Representatives passed a resolution calling on the President to
repudiate Nigeria=E2=80=99s debt. The Honourable Farouk Lawan, Chairman of =
the
House Finance Committee, said that Nigeria should get 100 per cent debt
cancellation. The Senate has not joined the House in calling for
repudiation and Senate Chief Whip Udo Udoma greeted news of the Paris
Club agreement in June as a =E2=80=9Csignificant development for which all
Nigerians must be deeply appreciative=E2=80=9D. His qualified welcome for t=
he
deal is important because it was Senator Udoma who led a National
Assembly team of parliamentarians on a tour of creditor capitals,
warning them that without action, the call for outright repudiation
would gather strength.
The National Assembly has only just returned from its recess and it is
evident that there is discontent in some quarters with the deal which
some argue is not enough to ensure that Nigeria meets the Millennium
Development Goals.
Indeed, Professor Jeffrey Sachs, Special Adviser to the UN
Secretary-General on Millennium Development Goals, on a visit to Abuja
described the creditor countries as =E2=80=9Ccallous=E2=80=9D and condemned=
 the debt
deal. He said: =E2=80=9CThe $18 billion debt cancellation for Nigeria is go=
od
but is less good than it should be. The creditors are nasty and stingy.
To extract $12 billion from a country with an annual budget of between
$3 and $4 billion is callous."
He added: =E2=80=9CWhy would they be demanding so much from a country where
children are dying, millions are not in school and hunger and diseases
pervades?" Professor Sachs said that he would mount pressure on the
creditors to give back a large chunk of the $12 billion Nigeria is
expecting to have to pay back. =E2=80=9CThey don=E2=80=99t need the money b=
ut Nigeria
needs it,=E2=80=9D he said.
Non-governmental organisations have cautiously welcomed the deal but it
appears highly that they will campaign for a higher percentage of
relief. The European Network on Debt and Development, for example, said:
=E2=80=9CWe will be frank: Nigeria finally going to the Paris Club to negot=
iate
a comprehensive debt cancellation can be interpreted as a success =E2=80=A6=
 With
solid bargaining by the Nigerian government, we=E2=80=99re confident that i=
t
will be impossible even for the Paris Club creditors cartel to grant
Nigeria a worse deal than the one Iraq received only 9 months ago =E2=80=93=
 an
80 percent cancellation - when all the comparisons play in favour of the
African country.=E2=80=9D

The African Network for Environment and Economic Justice (ANEEJ)
welcomed the Paris Club=E2=80=99s announcement and commended the Obasanjo
government =E2=80=9Cfor its steadfastness in seeking an exit from the Niger=
ian
debt overhang since assuming office in 2003, particularly through the
instrumentality of its economic team headed by Dr. Ngozi Okonjo-Iweala=E2=
=80=9D.
But it called for a transparent process of negotiation, involving civil
society and Nigeria=E2=80=99s National Assembly.

Conclusion

There is no doubt that the deal announced in broad terms in June is
ground-breaking and a genuine achievement by President Obasanjo=E2=80=99s t=
eam.
This is the largest African debt write-off in history. However, Nigeria
must still ensure =E2=80=93 and non-governmental organisations will pressur=
e it
to do so =E2=80=93 that, once the ink is dry on this deal, it has a genuine
chance of hitting the Millennium Development Goals.


See the transcript of a recent speech by Mr. Tom Dawson, Head of Media
relations at the IMF. http://www.imf.org/external/np/tr/2005/tr050707.htm
Mr. Dawson=E2=80=99s comments as above
For further information on the background to the conferment of IDA
status on Nigeria, see Center for Global Development, www.cgdev.org
See the work of Jubilee 2000 in support of Nigeria, in particular the
publication =E2=80=9CDrops of oil in a sea of poverty=E2=80=9D by Kwesi Owu=
su, published
by Jubilee Research at the new economics foundation in 2001.
(www.jubileeresearch.org)
http://allafrica.com/stories/200507140143.html
In other words, official creditors will assess what Nigeria=E2=80=99s
outstanding debts would have been worth, if they had been bought and
sold on the international commercial debt markets. The market value is
based on the probability of the debt being repaid in full but this
=E2=80=9Cprobability=E2=80=9D is a matter of market judgement. Clearly any
=E2=80=9Cmarket-related=E2=80=9D discount made on official or public debt i=
s going to be
a subjective judgement, a judgement made largely by official creditors,
after negotiations with Nigeria=E2=80=99s Debt Management Office.
Source: Central Bank of Nigeria Communiqu=C3=A9 No.43 of the Monetary Polic=
y
Committee, June 2005.
http://allafrica.com/stories/200507140143.html
Nigerian Finance Ministry
Nigerian Ministry of Finance

Nigerian Ministry of Finance
Source: =E2=80=9CIf not now, when? Debt Cancellation and the G8=E2=80=9D, J=
ubilee Debt
Campaign and the All Party Parliamentary Group for Heavily Indebted Poor
Countries, June 2005
http://www.news24.com/News24/Africa/News/0,,2-11-1447_1735261,00.html