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CGD began working on Nigerian debt issues in early 2004 to provide analytical support to Nigeria's ongoing efforts to persuade its creditors to agree to an appropriate debt relief package. In October 2005 Nigeria and the Paris Club announced a final agreement that should lead to debt relief worth $18 billion and an overall reduction of Nigeria's debt stock by $30 billion. CGD Research Fellow Todd Moss, who leads Center's work on Nigeria's debt, explained how the deal will work in a Q&A just days before it was announced.
Q: What is the current status of Nigeria's debt? How much debt is there, and what are the prospects for debt relief?
A: Nigeria has about $36 billion in external debt, most of which is owed to the Paris Club creditors. More than half is owed to just Britain, France, and Germany. The Paris Club agreed in June to a 'framework' for reducing Nigeria's debt which involves two steps. First, Nigeria has to clear about $6 billion in arrears. Then Nigeria can negotiate a reduction with the Paris Club on so-called Naples terms for the remainder, which is likely to also include a discounted buyback. The signs are fairly good for a deal soon, perhaps the first step concluding later this month. The second step will depend on Nigeria keeping macroeconomic conditions under control for another six months or so. If that all happens, Nigeria's debt problem could effectively be over by early next year.
Q: Nigeria exports oil, and oil prices are at near record highs. Why should the rich countries be interested in providing Nigeria with debt relief?
A: It is exactly the high oil prices that enable this deal at this time. Nigeria will use a big chunk of its oil windfall to clear its arrears and buyback its debt. So the creditors are not giving anything away for free, nor is Nigeria avoiding its past obligations. At the same time, agreeing to a discount is in the interest of the creditors who not only want to collect this old debt, but also have other interests in the region, especially encouraging economic reform and helping to stabilize a fragile democracy in a volatile country which supplies a lot of western oil.
Q: What would the implications be of a Nigerian debt deal within Nigeria itself?
A: A successful debt deal would be a huge boost to President Obasanjo and his economic team which has been working to try to break the stranglehold of cronyism and corruption that stifles Nigeria. On a short-term cashflow basis, the impact isn't very large. But the deal will free up the government to focus on other pressing issues. One other bonus of a buyback is that it locks in a rate of return for the savings from oil. In the past Nigeria's oil savings have been stolen by crooked regimes. Using the extra money to buy back the debt means that the money can never be stolen, no matter who comes to power. And the debt will be gone forever.
Q: CGD has played a key role in the debate over Nigerian debt relief. What can you tell us about that?
A: If the deal goes ahead, the real credit goes to the finance minister Ngozi Okonjo-Iweala and her colleagues who have put in months of grueling work to get this done. The creditors also deserve credit for thinking creatively about how to get all sides out of this lose-lose situation.
CGD did help to move things along in two ways. First, Nigeria was not considered for debt relief in the past because of a technicality related to its classification within the World Bank. We did some analysis last year which showed that Nigeria was in the wrong category. In June 2005, partly as a result of our work, the World Bank reclassified Nigeria as IDA-only, opening the door to everything else. Second, in April this year we proposed a debt buyback and gave some benchmarks for a possible deal. This proposal was used to open the dialogue over the buyback and gave both sides an opportunity to openly consider what might otherwise have been a sensitive topic for either one to broach. As a neutral player with no financial interest in the outcome, CGD could make both of these proposals and be taken seriously by both sides. I think the key role for think-tanks like CGD is to undertake independent analysis and generate new ideas helping policymakers to solve problems of common interest. This is a great example of that in practice.