External Debt Management in Nigeria
External Debt Management in Nigeria – The Evolution
External Debt Management in Nigeria – External debt management refers to the establishment of the conditions of issue and redemption of foreign loans. It follows that debt itself is not evil but lack of optimal utilization of externally derived fund should be associated with proper debt management and servicing problem (Mutallab, 1984). In other words, it is not wrong to be a debtor; after all there is no country in the world as a whole that is self-sufficient and so countries engage in trade with one another in order to acquire what is lacking in their country. This trade between countries renders a country indebted to one another.
Bhatia (1987) and Musgrave (1959) posited that “external debt management” refers to the establishment of the conditions of issue and redemption of public securities. It entails the process of administering the external public debt, that is providing for the payment of interest and arranging the refinancing of maturing bonds/debt. It involves a conscious and carefully planned schedule to the acquisition, deployment purpose or to support the balance of payments. It requires the estimates of foreign exchange earnings, sources of external finance and the repayment schedule. It also includes an assessment of the country’s capacity to servicing existing debts and a judgment on the desirability of contracting further loan (CBN , 1999).
A question, which every prospective borrower should ask, is this loan absolutely necessary? If the loan is not absolutely necessary, the idea of taking loan at all should be dropped.
As Obadan (1990) has noted “External loans are necessary to accelerate economic growth provided they are channeled to increase the productive capacity of the economy in order to enhance easy repayment and promote economic development. As long as external borrowings are invested in activities that will result in a net stream of income sufficient large to service the debt, the country can continue to borrow. Problem arises, however when various reasons the debtor countries is unable to generate sufficient income to allow it service its debtor or transform the income margin into foreign exchange. And when debt problem surface, they can sap the countries credit worthiness, lead to reduction or loss of access to international capital market and result in lower investment and growth.
Obandan, also observed in the case of Nigeria, that the reliance on external loan and grants for Nigeria’s development has only increased the grip of imperialists on the economy been caught in the debt trap international monopoly capital.
It is possible for external capital to flow into politically stable economy of the real interest rate or the rate of interest in the country exporting the capital. This would either being form of direct investment or some form of short term capital. The management of savings – investment gap is an important aspect of macro-economics policy and as such the management of external debt, to the extent that it has implications for balance of payment stability, has a bearing on the entire framework of macroeconomics policy analysis. When more external loans are acquired and depending on their disposition, they lead to increase current expenditure and future debt service profit of a country. Unless the higher expenditure and higher debt service cost for the balance of payment are sustainable, a country will face external payment and debt service difficulties and it may have adjust its policies reduce expenditure and accepts level of economic growth and welfare (Hassanali, 1985). Thus, external loan acquisition should only contemplate when the domestic economic and investment environment is conducive and would ensure a return on capital that is higher than future cost servicing loans.
According to Okereke J.M (2002), “External debt management is the combination of policies that will allow for repayment of the debts or bring about its sufficient reduction”. It also involves how is administered or handled to avoid adverse economic effect. It also involves loan negotiation, monitoring of both government direct debt and non-governmental debt; controlling the debt (including the measurement of the debt servicing capacity, risk management – exchange, interest rate and commodity price risk) debt institutions; and the use of computer – based debt management systems (R.U.K. EDEME AND I.O IMIDE).
Ajayi (1984) posited that “Nigeria’s debt is rooted partly in the collapse of international oil price in 1981 and the persistent softening of the international oil market policy lapses”.
Also, in 1970’s and early of part of 1980’s the Nigerian economy was exposed t external shock due to the kind of policies that were pursued. There was the migration of people from the rural areas to urban areas and this was intensified in the wake of oil boom followed closely by inappropriate pricing and exchange rate policy. This led to a fall in the agricultural sector’s contribution to Gross Domestic Product (GDP) from 53% in 1965 to about 40% in the mid 1990’s and not more than 20% in 1980. That notwithstanding, the economy became heavily dependent on crude oil. The crude oil account for over 22% of Gross Domestic Product , 81% Government revenue and about 96% of exporting earning at the beginning of 1980.
The collapse of the price in 1981 and it prolonged depression led to a number of problems for our economy. These problem were found in distortion in the price cost relations, import oriented national expenditure and production and a grossly over valued exchanged rate. The economy, coupled with this problem lost its flexible payment difficulties.
Debt crisis as Ojameruaye pointed out actually became a problem at about 1983 when debt servicing payment started imposing severe stream on Nigeria’s balance of payment and interest rate also became high that Nigeria was unable to pay.
To manage external debt effectively authorities must project the time profile of debt service obligations, they must accurately forecast export earnings, domestic revenue and future access to finance. They must also monitor the potential for prepaying or refinancing their debt borrowings on better terms, to adopt loan maturities to project revenue or to cope with shortfalls in earnings from exports or unanticipated expenditures on imports. Thus, debt management requires statistics on debt service obligations and on the balance of payment outlook.
Debt management policy is also inter-twined with overall macroeconomic and financial policies. In fact, beyond good macroeconomic policy, the effective management of external debt comprises three specific interrelated process – selecting the appropriate financing, deciding how much to borrow and keeping complete up-to-date records on debt. The major objective of external debt management policy is to achieve the benefits of external finance without creating difficult problems of macroeconomic and balance of payments stability, Klein (1994).
External Debt Management in Nigeria – The Objective and Guidelines
Nigeria’s external debt management strategies have varied from time to time since the early 1980’s when the debt crisis became pronounced. However, comprehensive guidelines were introduced in February 1988 with the following policy objectives:
(a) To evolve strategies for increasing foreign exchange earnings thereby reducing the need fro external borrowing.
(b) To stipulate the criteria for borrowing from external sources and determine the type of projects for which external loans may be obtained.
(c) To outline the mechanism for servicing external debts of the public and private sectors.
(d) To define the roles and responsibilities of the various organs of the federal and state government as well as the private sectors in the management of external debt.
The following guidelines were issued as regards to government borrowing:
(i) Economic sector projects should have positive internal rate of return as high as the cost of borrowing.
(ii) Social services or infrastructure would be ranked on the basis of their cost/benefit ratio.
(iii) Projects to be financed with external loans should be supported with feasibility studies, which include loans acquisition, deployment and retirement schedule.
(iv) External loans for private and public sector with quick returns should be sourced from international capital markets while loans for social services could be sourced from confessional financial institutions.
(v) Borrowing by state government, parastatals with private agencies should receive approval of the federal government to ensure that the borrowing conforms to national objectives. Approvals granted to the private sectors do not constitute federal government guarantee of foreign currency undertaking.
(vi) The state government’s borrowing proposals should be submitted to the federal Ministry of Finance and Central Bank of Nigeria for consideration before they are incorporated in the final public sector borrowing for the annual budgets.
(vii) State government and their agencies as well as, as federal parastatals should device their debts through the Foreign Exchange Market (FEM) and inform the Federal Ministry of Finance for record purposes. For failure to service their debts the naira equivalents would be deducted at source before the balance of their statutory allocations are released.
(viii) For loans on-lent by the federal government to state government, the federal Ministry of Finance would make due payments and deduct the full amounts at source from their statutory allocations.
(ix) For the private sector, individuals that are export-oriented should service their debts from their export earnings while others should utilize the FEM facilities to service their debt.
External Debt Management in Nigeria – Structures and Magnitude of Nigeria’s External Debt
Prior to 1978, when Nigeria took the jambo loan from the international capital market, the structure of Nigeria’s external debt comprised mainly of short-term medium and long-term loans Sanusi (1988). The loans were soft and confessional types mainly from the World Bank and other multilateral and bilateral institutions. The trend changed from 1988 owing to the oil glut, which brought about balance of payment support and project financing. Thus, borrowing from bilateral and multilateral sources decline, while borrowing from private sources at stiffer rates increased considerably. In 1978 alone, a total of $1.75b was raised from the Euro currency market, but between the period of 1979 an d1980, an additional $2.28b was raised. Nigeria’s external debt stock witnessed some changes in both quantum and structure between 1983 to 1997. As a result, the total external debt rose from $17.765m in 1983 to $33,364m in 1991 resulting to an increase in debt burden of about $15,599m within this period, thus representing an annual growth rate of 3 percent. The debt outstanding escalation during this period was because of the very short repayment periods, to it increased to $27,087.80m in 1997, As at then, the highest share of 70.07% of the total outstanding debt was owed to the Paris club, then the remaining was owed to the multilateral Paris bilateral and collaterised per bonds.
The Landmark success achieved external debt was sustained in 1997. For the first time since 1992, the rising trend of our external debt profile was reversed with the reduction of the stock from U.S $32.58b in December, 1995 to $28.06b. Therefore, government will continue with the implementation of the strategies already put in place to achieve external debt service of the coming.
Reconciliation of debt figures with Paris club members began in 1996. As at now, at least eleven of fourteen creditor countries have been visited representing 94% Nigerian debt to this group of creditors as at middle of 1997. The reconciliation also revealed that Nigeria had fully paid up her indebtedness to Ireland, Sweden and Norway. Nigeria’s total indebtedness to the Paris club members updated to U.S $18,980.39m as against US $19,09.73 m in 1996. However, Nigeria external debt reduces from $32,584 million in 1995 to $19,09.73 million in 1996. Consequently, it can be seen that Nigeria external debt increased year after year that is from 1980 to 1985 until us miraculously reduced in 1996.
Nigeria external debt increased tremendously in 2001 which stood at $28,347million, in 2003 it was $601.2billion, and in 2004 it stood at $693.9billion and in 2005 it was reduced to $152.4billion.
Nigeria’s External Debt Management Measures/Approaches
The Central Bank of Nigeria (CBN) has the responsibility to manage Nigeria’s external debt. This led to the establishment of a Department in the CBN to undertake the functions in collaboration with the Federal Ministry of finance and other agencies. In 2000, the Debt Management Office (DMO) was established.
Since Independence, Nigeria had attempted to manage her external debt through several measures which include:
(i) Embargo on New Loans
This was introduced in order to prevent unmanageable hike in the debt stock and to subsequently arrest additional debt burden. In 1978, the Federal Government fixed N5billion for itself as the maximum limit of external loan contraction. Also, a lid of N200million was put on state government’s borrowing from external sources in 1982. And this stipulation has remained in force since then, although some state government borrowed arbitrary, especially during the military.
(ii) Limited on Debt Service Payments:
This is a policy measure, which places a limit on the proportion of the nation’s external earnings that can be used to service her external debt. It was devised in order to leave enough resources for internal development. In 1980, the state government was required to spend not more than 10 percent of their total revenue debt service payments, while the Federal Governments debt services ratio to external earnings has subsited at 30 percent since the 1980’s
(iii) Debt restructuring
Debt restructuring simply means that outstanding debts are converted into other types of debts. Refinancing, re-scheduling buy-back, issuance of collectarised bond, and provision of new money are different categories of debt restructuring.
(a) Refinancing of Trade areas
The procurement of a new loan by a debtor to pay off an existing debt, especially when it involves short-term trade debt is known as refinancing of trade arrears. The new loan may be contracted from the same creditors or a different set of creditors. Nigeria’s first refinancing agreement was made in July, 1983 and the second came on September that same year.
(b) Debt Rescheduling
Debt rescheduling involves the postponement of the effective maturing dates of debt owed to a future date. In 1986/87 and 1989 Nigeria had some rounds of rescheduling with external creditors of the London and Paris Club Debt Rescheduling may bring temporary relief to a country but it is not an effective means of solving the debt problem since it amount to “postponing the evil day”
President Olusegun Obasanjo while presenting the budget for 2002 fiscal year, said that as a result of rescheduling agreement, a total of about $19.5billion was rescheduled for 2001, but “even after the rescheduling, the debt service due by Nigeria to the Paris Club of creditor for 2001, was about $3billion, but following negotiations this was pegged at $1billion.
We can rightly say that with debt rescheduling, Nigeria has enjoyed some relief, with regard to the reduction of debt service ratio. However, the rescheduling and restructuring have not provided the much desired debt relief to the country as Olu Falae correctly stated and cited in Obadan (1991), ‘it has become clear that the strategy (rescheduling) does not hold promise for solving the debt issue, it has become meaningless in the long run because with the decreasing terms of trade and unstable oil price, it will be an uphill task for Nigeria to honour it obligation under the rescheduling agreement”.
From the above, it is quite obvious that the policy of debt rescheduling only assists in postponing the “evil day” when external debt will become unmanageable and our economy will be declared bankrupt by the international community. Perhaps, it is only then that the international community will take the issue of debt forgiveness much seriously; this is what happened in Nigeria in 2005.
(c) Debt Buy-back, collateralization and new money options.
Whenever a substantial discount is offered by the creditors to the debtor for the payment of outstanding debt we have a debt buyback. Under the collateralization arrangement, the yield of a collateralization bond within a specific period is expected to offset or pay off the collateralized amount. This is referred to as the zero coupon option. The new money option essentially involves the granting of new loans by creditors or a group of creditors to assist a heavily burdened debtor nation.
(d) Debt conversion
Debt conversion simply means the exchange of monetary instrument (e.g. promissory notes) for tangible assets or other financial instruments. It is designated for the reduction of a country’s external debt burden by changing the character of the debt. Debt conversion could take various shapes, including debt for equity and debt for cash. In Nigeria, the debt conversion exercise involves the sale of an external debt instrument for a domestic debt or equity participation in domestic enterprises. Debt conversion could assist in encouraging capital inflow and also help in the recapitalization of enterprises in the private sector. This debt conversion was interdicted to complement other strategies for debt management.
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