?A Dent on Progress.
Lately Nigeria's external debt situation has been in the ">

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EXTERNAL DEBT CONUNDRUM: …And It's Wealth Effect On The Progress Of A Nation

Posted by By Chamberlain S. Peterside, Ph.D on 2005/03/29 | Views: 871 |

EXTERNAL DEBT CONUNDRUM: …And It's Wealth Effect On The Progress Of A Nation

Lately Nigeria's external debt situation has been in the news a lot, not merely because of its enormity, but also due to statistics that recently revealed the calamitous nature of the debt.

…A Dent on Progress.
Lately Nigeria's external debt situation has been in the news a lot, not merely because of its enormity, but also due to statistics that recently revealed the calamitous nature of the debt. According to the Debt Management Office (DMO), despite making a huge re-payment of over $42 billion since the late 1960s, Nigeria's external debt-stock still tops $32 billion. As a percentage of foreign earnings, Nigeria spends over 30% or $1,3 billion annually servicing this debt. Hence Obasanjo's administration has made the issue of debt repudiation a major plank of its reform agenda.

The accrued interest on the debt over the years is simply alarming and if the growth trend continues, it is unlikely that any future generation can ever eradicate the bondage. This makes you wonder at what interest rates the loans were granted and for what amortization period. The business of money lending is no child's play. Its an arena where the Latin phrase "Caveat Emptor" couldn't be more appropriate. Unless a borrower understands the fine prints and uses the money wisely, he better beware.

Borrowing in a normal economic process is often inevitable, especially when the funds are earmarked for a judicious purpose. In the absence of internal resources, business organizations and countries utilize loans to fund capital projects or bridge temporary shortfalls in revenue stream. Ironically, the largest debtor nation in the world - United States happens to be the most advanced too. But, if you look around Nigeria, it is clear that the bulk of external loans weren't prudently managed.

High indebtedness and disproportionate debt service burden exerts a crippling effect on national development of poor countries. Brazil and more recently Argentina and majority of African countries are in such dire circumstances. Not even the Baker or Brady Plan (Treasury Secretaries during Reagan and Bush Presidency) introduced by the US in the 1980 could successfully ameliorate the debt chokehold on highly indebted countries.

This situation is virtually depriving Nigeria of vital resources to tackle pressing social needs for its teeming population. At over 130 million people, per capita income is one of the lowest anywhere in the world. With a decaying infrastructure and health care/education system in disarray, economic activity runs at a snail speed and life expectancy has continued to dwindle in the past 20 years. Majority of inhabitants can't afford decent housing, lack access to clean water, basic healthcare is scarce, and electricity is a rarity in most parts of the country. High infant mortality and the scourge of HIV/AID pandemic poses considerable threat to the very existence of the population.

…Genesis of Dependence.
To better understand the reality of Nigeria's debt situation, one must analyze the genesis of the modern global financial system in relation to developing countries. After the Second World War, as the world became unstable there was emergent need for a coherent international financial mechanism that will ensure economic prosperity. This led to the formation of the World Bank and International Monetary Fund (IMF) as development finance institutions and instruments for pursuing uniform global financial policy amongst nations, excluding the socialist countries.

The Gold standard took root in the post-war era, just as so-called Special Drawing Rights (SDR) was introduced as an instrument for international financial settlement that is accessible to every country in proportion to their reserve (stake) in the system. This was designed to somehow assuage the concerns of less-privileged countries, but was never to be. Thanks to the obvious economic hegemony of victorious United States and Western Europe, these two Bretton Wood's Institutions fell squarely under their tutelage. The gold standard was unilaterally abandoned by the US in the early 1970s, which resulted in the dominance of American dollar as a means of settlement in international commerce.

In the 1960s poor countries as peripheries of post-war global capitalism, emerged from colonialism and prolonged political struggle for independence, with little or no modern infrastructure, but an urgent need to develop their national economies. This urge created an insatiable appetite for cash - foreign investments and loans at all cost (in the face of meager domestic financial resources) to underwrite lofty socio-economic initiatives.

…The Nigerian Case.
Nigeria delved into the borrowing game, with the mobilization of its first jumbo loan in mid 1970s to execute ambitious infrastuctural and industrial projects. In my opinion, the current debt overhang was caused by the following factors:

a) Before embarking on a borrowing binge, bureaucrats in the developing world, including Nigeria hardly understood the enormity of what they were venturing into or the dynamics of a complex international financial framework.

b) Flush with cash from OPEC countries, western lending institutions applied very liberal underwriting standards in approving loans on the assumption that these countries would utilize the resources well in building their economies and ultimately repay the loans.

c) Unfortunately, majority of loan proceeds were utilized to fund unviable economic projects or social programs that did not yield sound financial returns on investment.

d) 70% of the debt accrued from private sector "Eurodollar" bank loans (owed to the London and Paris Clubs) with high fixed interest rates. In the 1980s both the US Federal Reserve Rate and LIBOR Rate (London Inter Bank Offered Rate) were at an unprecedented double digit high of 12% - 18%, compared to current historically lows of 2% -.4%. That being the case, you would expect that restructuring some of the debt would be a viable option.

e) Due to dismal sovereign credit rating developing countries could not float debt instruments such as bonds in the international marketplace at favorable terms/rates to fund their development projects. Nigeria still cannot issue debt securities internationally for the same reason.

f) Quite often large-scale contracts/invoices were inflated and falsified. Government expenditure was not properly accounted for. Through transfer pricing multinational corporations siphoned off some of the loan proceeds.

Subsequently, with the attendant political infighting and squander mania that ensued Nigeria drifted from its laid down economic objectives, and spent haphazardly. Funds were swindled by corrupt officials and re-deposited abroad as progress stalled, while the loans continued to accrue interest. Things spiraled out of control when the oil glut hit in early 1980s.

To a large extent, Nigeria's lack of financial probity is to blame for the demise, but the argument that developing countries must bear all the brunt for this nuisance is spurious and unfair. The debt conundrum requires a political solution, because there is an underlined contractual understanding between creditors and debtors that is predicated on "all things being equal". According to recent estimates, Africa's private savings held abroad is about half the size of external debts. In the face of such colossal capital flight, statistics show that as much people die in Africa due to hunger diseases and poverty every week that died in the Asian tsunami, things are simply out of hand.

…Any Relief in Sight?
Few countries like Poland, Egypt, and even Iraq have received debt forgiveness that has helped jolt their economies. Other countries have been unlucky and taken unilateral stance on their debt situation. In 2001 Argentina decided to honor only 25% of its debt obligation and to cut debt service payment. Nigeria has been unable to receive any such relief despite repeated plea. Nigeria does not belong to the group of highly indebted poor countries (HIPC) that are being considered for serious relief. The reasons I could adduce for such ambivalence and lack luster attitude towards Nigeria can be summarized as follows:

a) Perception that Nigeria is an extremely wealthy country, endowed with natural resources, and belongs to the club of rich developing countries (OPEC) that is squeezing industrialized countries with high oil prices. Hence not favored by advanced countries; therefore if Nigeria can get its act together, it is capable of repaying its debt.

b) Massive corruption and lack of accountability is a deterrent to creditors to offer relief, because they believe that the benefit wouldn't trickle down to the common-man anyway.

c) Public sector procurement and budget implementation is a fiasco, replete with wastage and bogus spending. The bulk of government revenue is spent on sustaining a bloated public sector that consists of less than 2% of the population; therefore any benefits from debt forgiveness would accrue to the privileged class.

d) According to our creditors, Nigeria hasn't shown enough commitment to sustainable democracy, human rights, fight against corruption and financial crimes; therefore why be in a hurry to offer a relief.

e) Nigeria is a potential economic powerhouse south of the Sahara, there's no saying what it could transform into if it is offered a breather and capitalizes on debt relief to shine economically like India and China. Already there are so many hue and cries about offshoring, technology transfer and mounting trade surplus with the new economic powers in Asia. Better to leave Nigeria as a supplier of raw materials.

f) The international financial community has an inherent bias against Nigeria and is only interested in supporting multinational corporations involved in its extractive industries and could care less about its citizens, because they are black people.

g) There is an opinion that canceling huge amount of debts could rock the boat of global financial system. Revenue projections would be distorted and lending institutions might not achieve their long-range performance milestones. Most of all, new borrowers might see an impetus not to adhere to financial covenants.

Since Nigeria is the architect of this shoddy treatment by the international financial community, any chance of debt forgiveness will depend on her consistent effort towards reform, transparency, fight against corruption, and rationalization of the public sector, without which it might have no moral grounds to seek relief.

…Autarkic Approach.
Efforts of Obasanjo's government so far are creating some attention; as policy makers around the world take notice. The finance Minister Ngozi Okonjo-Iweala and her economic team are a group that speaks the language that the Paris and London club of creditors understand. She has not minced words in criticizing the "obnoxious" rules of the creditor institutions that disallows a debtor nation to fully amortize a debt no matter how small, but must reschedule for a prolonged period.

The recent call by the House of representative that the government should cease debt payment is a preamble to an autarkic resistance that poor countries could increasingly wield against the debt cabal.

To succeed, Nigeria must continue on the path of democratic reform. Efforts to energize its domestic capital markets, reduce government spending, diversify revenue base and mobilize savings through pension contributions and bank consolidation would definitely help strengthen the economy and improve credit quality, tapping external resources could then be reduced to the barest minimum or done on better terms. At least a logical argument could be made that any reduction in debt service payment would be directed towards social needs, education, health care, and environmental programs like in Uganda.

If Nigeria ultimately fails to appeal to the moral conscience of creditors, maybe one day it will stand up and call their bluff and bear the consequences.

Chamberlain is the Founder & President of New Era Capital Corp. and MyCompleteFinance.com, a New York based financial services group. He was previously a Financial Advisor in the Global Private Client Group, of Merrill Lynch.

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