Recent research by the Center for Global Development has concluded that Nigeria has not been treated fairly by international creditors and that more deliberate consideration of debt reduction would be appropriate. The Center has proposed two ways forward:
- Reclassifying Nigeria within the World Bank, which would allow Nigerian debt to be treated like that of any other low-income country.
- Negotiating a debt buyback with bilateral creditors, allowing Nigeria to use its recent oil windfall to settle its external debts at a steep discount.
This work has generated a few commonly-asked questions:
- Isn’t Nigeria too corrupt to deserve debt relief?
- Isn’t this giving Nigeria special treatment?
- Doesn’t Nigeria have enough resources from its oil?
- Won’t debt relief for Nigeria reward over-borrowing and fiscal recklessness?
- Won’t debt relief for Nigeria cost donors too much money?
- Isn’t this letting the commercial creditors off the hook?
- Why hasn’t Nigeria gotten debt relief already?
1. Isn’t Nigeria too corrupt to deserve debt relief?
Only if you view Nigeria as an unchanging monolith. The country certainly has a problem with corruption and the ubiquitous 419 e-mail scams are a constant irritating reminder. And no one would want to minimize such graft or its devastating effects on development. But those that suffer the most are ordinary Nigerians who deserve better government and better public services. Fortunately, the current democratically-elected administration appears to be trying hard to rein in the dominant patronage system and to attack criminal theft by public officials. This is no easy task, and many of the key reformers already face death threats and possible recriminations. If the reformers fail and the thugs win, things will get even worse in Africa’s biggest country. On the other hand, debt relief could help to strengthen the reformers in their fight against entrenched interests. In the least, shouldn’t donors give the reformers the best chance to succeed?
2. Isn’t this giving Nigeria special treatment?
No. Changing its IDA status would actually require creditors to treat Nigeria just like the rest of the world’s low-income countries. A debt buyback would merely give Nigeria the same benefits through other means. If anything, Nigeria has so far faced an unfair double-standard. Many of the countries which have already been granted substantial debt relief, such as Chad or the Democratic Republic of Congo, face similar levels of corruption as Nigeria. Indeed, Cameroon reached its HIPC decision point within weeks of being ranked by Transparency International as the world’s most corrupt country.
3. Doesn’t Nigeria have enough resources from its oil?
Nigeria is oil rich, but still deeply poor. The country earns billions each year from oil exports, but it also has at least 130 million people. In all, oil earns less than 50 US cents per day per Nigerian. This means that Nigeria has to get its non-oil economy going too, and resolving the debt problem would be a key step in the right direction.
4. Won’t debt relief for Nigeria reward over-borrowing and fiscal recklessness?
Not in this case. Unlike many indebted poor countries, Nigeria’s debts are not from massive over-borrowing and then wasteful spending. Its $33 billion in external debt is mostly from arrears, penalties, interest, and export credit defaults accrued by military regimes, such as the notorious General Sani Abacha. And since he came to power in 1999, President Obasanjo has not been particularly fiscally lax; the average budget deficit has been less than 2% of GDP. Indeed, the government ran a fiscal surplus in 2004, has projected another surplus 2005, and it has used the recent spike in oil prices to build reserves.
5. Won’t debt relief for Nigeria cost donors too much money?
Not really. The face value of Nigeria’s debt is a fiction. Most of the debt only exists on paper, since treasuries have likely already written off such debts internally. Even if there is a direct budget hit, the value is likely to be less than 20 cents on the dollar.
6. Isn’t this letting the commercial creditors off the hook?
Possibly, but it’s not relevant. About 9% of the debt is owed to commercial creditors. But if the bilaterals accept a steep discount of 67-80%, the Nigerians will be in a much stronger position to negotiate a commercial debt buyback. In any case, this is a small amount, and does not present the same political barrier to reform that the official debt does.
7. Why hasn’t Nigeria gotten debt relief already?
Nigeria should have already received a major debt stock reduction on 'Naples terms' from the Paris Club, but did not because of its World Bank status as 'blend' rather than an IDA-only. This technicality also excluded Nigeria from consideration for HIPC status (although its debt ratios probably were too low to qualify). The buyback proposal has also not yet happened, apparently because of a first mover problem. Creditors seem distracted with other matters and may not want to expend the political capital to seek a Nigerian debt deal. The Nigerian government could make an informal proposal, but is also treading a careful line with parliament, which seems willing to sabotage reform initiatives to score political points.