In 1964, the Nigerian government awarded the contract for the construction of Kanji Dam to a Consortium of Italian Civil Engineers. The cost of the dam is put at $209million. To build the dam, the government obtained a $13.1million loan from a European nation, Italy. This became Nigeria’s first Paris Club loan. From that initial loan in 1964, the total external debt of Nigeria grew to $36.99billion in December 2004.
The external loans have ballooned because Nigeria executed ambitious development plans to become industrialized. In the early 80s, the market price of Crude oil crashed, and Nigeria no longer had foreign currency earnings to service her external loans. To compound the issue literally, the Nigerian Military regimes from 1985-1998 simply stopped making any payments whatsoever.
In 2006, the Paris Club reached an unprecedented arrangement with Nigeria to restructure and write off the entire external debt owed by Nigeria. In essence, Nigeria paid $18billion to write off a total of $36.99billion in external debt, with an initial $6billion to qualify for debt relief. The relief offered was a write-off of $16billion. Nigeria then bought back $8.2billion of the debt at discount and paid off the final $6billion, translating to a 60% discount. This was a novel agreement secured by Nigeria because the Paris Club does not do debt write-offs at a discount.
Did Nigeria make a good deal in paying cash to write off a debt that was made up primarily of interest and late payments? I conclude yes.
It is important to understand what makes up the loans Nigeria was carrying as external debt, these were mostly export credit loans, commercial credits, and trade arrears guaranteed by the Federal Government of Nigeria. These were not bilateral loans at concessionary rates but commercially based loans, which the inability to repay led to the suspension of Lines of Credit to Nigeria. This forced the country to pay for imports with dollar cash, further depleting the reserves. Nigeria was in a classic debt trap, where she could not make enough payment to offset the principal of the loan, but only service them.
To put this in proper perspective; in a presentation by the then Minister of Finance, Dr. Okonjo Iweala, to the US Council of Foreign Relations, she said
“The rescheduled amount in December 2000 comprised 24% late interest; 21% interest; 48% principal arrears, and only 7% principal balance.
“The external debt as rescheduled was made up only of 7% of the principal sum, the rest were penalties, and these penalties had accumulated since December 2000 to the tune of about $5 Billion.”
This is the definition of a debt trap. If Nigeria was only rescheduling 7% of the principal, a full 93% was simply unpayable.
As of 2003, Nigeria’s Debt to GDP was at 57%. This meant the entire output of Nigeria was more than half of the total external debt. Even worse, Nigeria’s external debt to revenues in 2003 was nearly 100%. In essence, Nigerians were simply working to pay debt externally first and when those debts were not paid, it created a charge on future revenues.
Another factor was that the external debt of Nigeria is mainly with European nations. This meant that as Nigeria sold crude oil in USD and the dollar depreciated, the debt stock grew. In fact, Dr. Iweala said, “Cross-currency exchange risks have added over $5 billion to the debt stock in dollar terms since 2001, due to dollar depreciation. Dollar accounts for less than 25% of debt stock.”
What you should know
- Nigeria had borrowed commercial loans on terms that charge interest for late payment, which compounded the loans.
- Nigeria’s output was 57% of external debt.
- Nigeria’s revenues were 100% of revenues.
No entity can survive with such metrics. Thus, Nigeria’s debt buyback was a wise move to pay off the principal sum, eliminate future penalties and exchange risk, and start over in proper management of the nation’s debt. Recall that Nigeria remains the only nation to have bought back its debts at a discount from the Paris Club.