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On April 21 Nigeria made its final buyback payment to its bilateral creditors, completing the wipe-out of more than 80% of its debts. In the end, Nigeria paid $12 billion in cash -- out of the more than $34 billion saved so far from higher oil prices -- in order to buy back $30 billion in debt, an overall 60% discount. (The actual discount is even higher since about half of the repayment was to clear arrears at face value, leaving the true discount at about 24 cents on the dollar for the remaining $24 billion.)
This is truly historic for Nigeria, and for the global effort to help fragile countries get on the right track. But whether or not it makes a lasting difference to Nigerians will depend on what happens next. The actual fiscal effect was never very strenuous for the country since the debt level was not all that high and was mostly not being paid anyway, so the immediate windfall will be modest. The real benefit will be if the deal helps to lock in reforms, such as a fiscal responsibility bill currently before parliament. This can help to ensure that future spending is more efficient and make it more likely that the gains over the past few years will outlast the current economic team. Erasing the debt is a fine legacy for President Obasanjo and finance minister Okonjo-Iweala. But helping to make the broken Nigerian state more development-friendly would be an even bigger one.
NOTE: CGD is proud to have played an independent supporting role (see our work on Nigerian Debt Relief) in making debt relief for Nigeria a reality, including early analytical work arguing in favor of the country's reclassification within the World Bank (a prerequisite for debt relief) and proposing the discounted buyback framework.
When the world’s finance ministers and central bank governors assemble in Washington later this month. they would do well to focus on another looming debt crisis that could hit some of the poorest countries in the world, many of whom are also struggling with problems of conflict and fragility and none of which has the institutional capacity to cope with a major debt crisis without lasting damage to their already-challenged development prospects.
International actors have criticized decisions by the Trump administration to reject the Paris Climate Accord, abandon the Trans Pacific Partnership, and withdraw from a United Nations declaration intended to protect the rights of migrants. However, there is one international body, the Paris Club, whose members may be rooting for the United States to leave. That’s because, in the absence of congressional action, continued US membership in the Paris Club could impair the economic prospects of some of the poorest countries in the world.
Even for countries that are far away from graduating from foreign aid, the importance of domestic resource mobilization for maintaining macroeconomic stability and sustained economic growth is well documented. A look at the experience of countries that have received HIPC debt relief validates this point and underlines the need for attaching a high priority to tax policies and practices in international assistance programs for low income countries.