While We Prepare to Indeed Emit $12.4 Billion in Nigeria for Debt Relief......


Mobolaji E. Aluko, PhD
Burtonsville, MD, USA

Saturday, October 29, 2005



I have been following with avid interest all the various essays and other contributions concerning Nigeria's latest debt forgiveness moves. I have also contributed my own thoughts before now.
Now that some actual deals have been signed by the Nigerian government with IMF (Policy Support Instrument (PSI) agreement) and the Paris Club ("Naples Terms" debt relief agreement), and since money emission will start soon, I have now reconciled myself with that eventuality, but I have still been trying to figure out the logic of the $12.4 billion "emission" advocates.

I believe that I now have some limited success.
Like in all complex issues, each of the propositions so far outlined by proponents and detractors has its merits and demerits, and each has to make assumptions about the future, which are some of the most difficult things to do in life. Nevertheless, my main conclusion is that there is some "voodoo economics" going on, and that there is merely hope all around that the voodoo might just work later on.
Yes, African voodoo does work sometimes - let us admit.
But before we delve into a few figures, please let me assure all readers that like ALL NIGERIANS, I want Nigeria to get out of debt, and we should not WALK AWAY from this debt agreement that will give us such SUBSTANTIAL debt relief. But we have a NATIONAL OBLIGATION to the Nigerian people to get the BEST DEAL within those parameters, and not be too eager to agree to THE WORST DEAL within those parameters, which many of us believe this $12 billion emission within one or two years is. In fact, on a very basic level of logic, to say that we pay $2 billion annually with pain, and then suddenly say that we can pay $12 billion all at one go is quite unusual.
Underlying some of the idea behind it of course are possibly the fear that money not paid on the debt now from our swollen reserves would be frittered away by some future leadership in Nigeria, as well as the glory that would accrue to the present political leadership that it was while in office that Nigeria "got out of substantial debt yoke". However, those rather pedestrian reasons should be stated upfront rather than using voodoo economics to justify the move.
Now to the figures.

Virtually all our Nigerian money is earned from oil, some of which is spent on INTERNAL BUDGET and the other is stored up in FOREST RESERVES.
So the first equation we need to write down is (approximately):


Now our current reserve is about $24 billion (and rising), and OUR current budget is about N1 trillion (and rising), which is about $9 billion (at roughly N130 to $1). [2003 - N976.3 billion ($7.6 billion) ; 2004 - N1.19 trillion; 2005 - 1.8 trillion; Projected for 2006: N1.7 trillion]
On average, up until now, we have paid $2 billion as debt payment annually - leaving us, according to the emission advocates, a "miserable" $7 billion budget annually. The argument is that if we did not have to pay that $2 billion annually, we could use it for additional targeted health, education, roads, water and so on. However this $2 billion does not even fully cover all of our interest payments - our annual interest + payment due is $3.8 billion - meaning that our debt burden rises by about $1 billion annually.
Now if we emit FROM OUR RESERVES $12 billion to get a $18 billion debt relief in order to wipe out our debt stock (well, much of it), then we are paying in effect our $2 billion annual debt payment six years ahead of time lump sum. It is true that we will now not have to pay FROM OUR BUDGET $2 billion annually for debt payment - which is now available for other uses - but we could have achieved the same result by paying our $2 billion annual debt payment AND drawing down the replacement from the reserve annually, except of course in that case our debt stock would be increasing by $1 billion annually as stated previously, but our reserves will only be depleted by $2 billion annually.

Thus the fact of the matter is that to the long-suffering ordinary citizen, the $12 billion ssudden emission is smokes-and-mirrors, at least for the next 6 years, although beyond 6 years, we would not be paying any substantial debt and theoretically we would not have to be drawing down from reserves.
When it comes to the issue of how fast to pay up, according to the traditional Naples Terms, we have one of the options (the DR option) with a six-year grace period followed by 23-year repayment as as follows:


3/ Description
3.1. Non-ODA credits are cancelled to a 67% level (after possible topping-up). Creditors may chose to implement the 67% debt reduction by one of the two following options:
- "debt reduction option" ("DR"): 67% of the claims treated are cancelled (after possible topping-up), the outstanding part being rescheduled at the appropriate market rate according to standard table "A1" (23 years repayment period with a 6-year grace and progressive payments).

- "debt service reduction option" ("DSR"): the claims treated are rescheduled at a reduced interest rate according to standard table "A3" (33 years repayment period with progressive payments). In case of stock treatment, table A3 is replaced by standard table "A5".
Two other options were also designed, but have been very seldom used:
- the "Capitalisation of moratorium interest" ("CMI") option, similar to the "DSR" option (with a reduction of 67% in net present value) but with slightly different repayment profiles;
- the "commercial option", with longer repayment profiles but no reduction of the claims in net present value. It was agreed that creditors would refrain from using this option to very exceptional circumstances.
So why did we not take the 6-year grace period, and then PAY UP on ALL of the $12 billion (from an escrow + foreign reserves after 6 years) at that time ? Thus what would have been a better deal was to have negotiated:
(i) to get relief on all principal + interest payments held off for the next six years - after all, Paris Club DR option allows that;
(ii) then agree to emit $12 billion to Paris Club in six years time - promising to pay the money (ie $12 billion) from the reserves
NOW into a money-making venture, with a guaranteed payment of a minimum of $12 billion no matter what, and splitting of
whatever "profit" is made from that invested money with Paris Club. If there is a loss from the $12 billion, we would draw i
down from the reserve at that time.


What I maintain is that if the emission of $12 billion is the pre-condition to get an $18 billion debt relief under Naples terms, then we should negotiate a condition under which we should delay THAT PAYMENT for AS LONG AS POSSIBLE, not pay it up AS QUICKLY AS POSSIBLE. We also have the duty to ask from those negotiating on our behalf what their measure of PREFERENCE is between the various options being offered PROVIDED all of them get us the 67% debt relief. I do not believe that just one option is the ONLY OPTION - and that is it. We have not been told what different options THAT STILL GET US THE 67% relief in a short time have been considered.
The point is that if our principal + interest payment should be about $3.8 billion (let us say $4 billion) annually, and we have been paying (with pain) $2 billion annually, and if we are insisting that we have to pay $12 billion, then we should be allowed to pay that over 3 - 6 years and STILL get the debt reduction ! The longer, the better...
All in all, if we don't deploy the annual "extra" $2 billion well, we will be in worse shape than before, and we would just have paid up to Paris Club for nothing.

(i) The key FIRST TEST is whether, with all internal and external factors considered, our HUMAN DEVELOPMENT
INDICES (access to energy, education, water, health, security, etc.) have improved over those six years.

(ii) The key SECOND test is to see whether, with all internal and external factors considered, WE CAN REPLENISH
OUR EXTERNAL RESERVES to the present $24 billion in those six years given that proper deployment.
Otherwise all of this quick and sudden "emission" would have been a bad idea.
So we have a six-year window - till 2011 - for the voodoo economics to work. That is hopefully no justification for the elongation of the term of this Obasanjo administration beyond 2007.
Best wishes all.


MONDAY QUARTER-BACKING: Debt Relief and Nigeria - To Emit or not to Emit $12 billion
Mobolaji E. Aluko [August 22, 2005]

On Debt Relief - Rejoinding the Rejoinders
Mobolaji E. Aluko [August 28, 2005]