Amalgamation Day in Lagos, 1914

Amalgamation Day in Lagos, 1914

28 December, 2011

Debt Mismanagement

In 2000, perhaps as a sign of "international community" support for the year-old Fourth Republic, the Federal Republic of Nigeria and the International Monetary Fund reached a debt-rescheduling agreement. Our annual payments to bilateral (Paris Club) creditors were reduced from $2.3billion to $1billion, while annual payments to multilateral agencies (IMF, World Bank) and foreign private (London Club) lenders were cut from $1billion to $700million.

Combined payments to all foreign creditors was in effect reduced to $1.7billion-a-year. Payments to domestic (i.e. Nigerian corporate and institutional) creditors averaged $1.2billion a year, so total annual spending on debt servicing was about $2.9billion. The $1.6billion balance cut from our annual payments may have been subject to annual capitalization. I am not sure of this, but were it to have been the case, it would not substantively change the conclusions of this post.

Read this Vanguard article on Finance Minister Ngozi Okojo-Iweala and our burgeoning federal debts. Pay attention to these paragraphs:

Looking back at Nigeria debt’s profile and services in the last five years for which data are available, $2.335billion was spent by the Federal Government to service both internal and external debt in 2009. This amounted to about 50 per cent drop in the amount used for debt service in year 2008 which stood at $4.055billion. Before the debt relief of 2006, Nigeria spent $8.0429billion to service debt in 2006 and $10.1072billion in 2005.

Figures released by the Debt Management showed that in 2005 Nigeria used $8.940 billion to service its external debt paying only $1.1662billion to residents in Nigeria as domestic debt service. Nigeria’s obligation to foreign creditors in terms of debt service dropped slightly in 2006 to $6.729billion while what it used to settle due domestic debt and interest on outstanding loans inched up to $1.3137billion. With debt relief in 2006 its obligations to foreign creditors in terms of debt service nose dived southward with the payment of only $1.022billion as external debt service and $2.1629billion as domestic debt service.

I do not know if the interpretation of the numbers as expressed in those paragraph belongs to the writer of the article or to the DMO. The language conveys the impression that Nigeria lowered its annual debt service payments from a whopping $10 billion in 2005 to just $2.3 billion in 2009.

But there are crucial explanatory facts that have been omitted from the paragraphs.

Under the terms of Mrs. Okonjo-Iweala's debt cancellation deal, Nigeria had to pay $12billion to the Paris Club in order to receive the $18billion write-off. That $12billion payment was made in two (or three) tranches in 2005 and 2006; the DMO numbers for debt service payments in 2005 ($10billion) and 2006 ($8billion) in the quoted paragraphs above are comprised of that $12billion, as well as the regular debt service payments that would have been made for those two years. Breaking down the $18billion in total debt service paid in 2005 and 2006 combined gives:
(a) $12billion, the fee for the debt cancellation; and
(b) $5.8billion (at $2.9 billion-per-year) in regular payments to the Paris Club, multilateral agencies, London Club (private foreign creditors) and domestic creditors.

It would have been more appropriate for the DMO or the article's author to have said that our annual debt service payments had gone down from $2.9 billion in 2005 to $2.3 billion in 2009. This is obviously much less impressive-sounding, particularly in light of the fact that we paid $12billion for the privilege.

The counter-argument would be that $600million/annum would add up to $12 billion over 20 years. Add to this any avoided capitalization of the reduced portion of our payments per the initial agreement in 2000 with the IMF and other creditors.

This isn't a good counter-argument. If you held $12billion in potential investment funds, you wouldn't give it all away in exchange for $600million-a-year in money that will be eaten up by recurrent expenditure.

At the time of the debt deal, we were told we would save $1 billion/annum or (as they frequently said) "$20billion over 20 years", and that these funds would be allocated to the Millennium Development Goals. At that time, I wrote an essay questioning this on the following bases:
(a) You could earn the same amount of money over 20 years from compounded interest by simply investing the $12billion, while maintaining your principal;
(b) $12 billion properly invested and leveraged could have a multiplier effect on the GDP in excess of $1billion-a-year;
(c) The savings were being over-estimated because Nigeria would definitely start borrowing again, which would mean debt service payments to foreign creditors would rise again from the alleged "$0" to a new number that would cut into the so-called $1billion/annum savings; and
(d) $1billion/annum would not make much of a difference in the Nigerian federal budget, or to the Millennium Development Goals, and as such was not worth the loss of $12 billion in potential investment funds.

These are the DMO's figures on the federal government's ballooning domestic debt:


2005 = $11.83billion
2006 = $13.81billion
2007 = $18.58billion
2008 = $17.69billion
2009 = $21.87billion
2010 = $32.5billion
2011 = $40billion

Somehow, the federal government has racked up at least $28 billion in new debt in just 6 years (2005-2011)!.

The upward spike in domestic debt between the end of 2009 and the end of 2011 may have been linked to the global financial and economic crises, but may also have been driven by the effect of the approaching 2011 Elections. The only clearly identified case of election-year largesse was revealed by the junior minister in the Finance Ministry to the Senate; he said the 2011 budget included funding for only two months of the "fuel subsidy" (i.e. up till February), but the government had decided to continue paying the subsidy past February for fear of losing the 2011 Elections (held in April).

There were likely other expenditures directly and/or indirectly driven by politics. On a related note, the $4.055billion in debt service paid in 2008 (as opposed to the normal $2.3 billion) may have been linked to late payments from 2007 delayed due to spending spikes associated with the 2007 Elections.

As our public debt-load continues to rise, annual debt service payments will have to rise too. Eventually, we will return to payment levels extant before the 2005 "cancellation" deal, and shortly thereafter to payment levels from before the 2000 IMF deal. And for this, we paid over $12billion in savings.

And what has happened to our savings anyway? In the last six years we have:

(a) Spent $12 billion in reserves on the debt cancellation deal;
(b) Spent $20-$30 billion in reserves defending an artificial Naira/Dollar exchange rate;
(c) Spent $10 billion of our reserves to bail out banks caught in a "toxic asset" problem of their own creation.
(d) Spent an unknown (by me) total amount on other industrial interventions.

This adds up to $42 billion at least, but is definitely more than that. The first three were not what you might call "productive" investments; I hope someone studies the impacts of the fourth. This is where our external reserves went.

For the record, I advocated a firm and direct intervention in the banking and financial sector to fix the "toxic asset" problem. From the start I have said I do not like it, but it was (and is) economically necessary. But it is still an avoidable waste. The USA and Canada are deeply integrated economies, but Canada's banking industry fared better than its southern neighbour's when the global crises hit because they were better-regulated.

Nigeria would always have been affected in some way by the global financial crises, but our "toxic asset" problem was self-created, driven by the action of our banking industry and the inaction of our regulators. And our all-too-obvious stock market bubble was bound to "pop" even if there had never been a global crisis. Our banking/financial industry, regulatory agencies, government, and political parties (especially the PDP) bear the blame for our problems.

Personally, I think the banks should be made to repay the Nigerian public the full cost of the bailout. They don't have to do it this year, or even next year. We can wait until they are back to full health. But we should make them repay our money , though that is a different argument for another day.

With little debate or discourse, public debt is becoming a serious problem, and not just at the federal level. The states are wallowing ever deeper in debt; incoming governors always blame their predecessors for leaving behind a fiscal mess, but then work very hard during their terms to expand the mess, before finally leaving office to be accused by their successors of leaving behind a fiscal mess.

We are told that it isn't a problem, because our economy is bigger and the ratio of debt to GDP is smaller. But this isn't an excuse for racking up unproductive debts.

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