Given Nigeria’s pivotal place on the continent – the most populated, the second largest economy south of the Sahara and the crucial development node for all of West Africa – Dr Okonjo-Iweala campaign’s for debt relief will be watched keenly to see whether the rhetoric of a better dispensation for Africa is translated into actions.
In April 2003, incumbent Nigerian president Olusegun Obasanjo won a second term in office. It was the mandate needed to step up economic reform, which he set about with determination. In addition to a home grown economic reform plan – The National Economic Empowerment and Development Strategy (NEEDS) – Mr Obasanjo appointed a number of influential reformers to key positions. Crucially, these reformers were largely independent and untarnished by the country’s long and messy history of corruption.
Economic change
Dr Okonjo-Iweala, at the forefront, strode determinedly into the thick of it, slashing deficit spending, reforming the budget process, tackling the chaotic and wasteful public service payroll, and driving through a raft of legislation governing expenditure rules, accountability and transparency. She has imposed oil price-based budgeting rules, meaning that surplus revenue above a given oil price is saved rather than spent, thus avoiding the country’s historic habit of squandering windfall oil revenues. Significantly, while conceding some ground to persistent demands from politicians for a greater share of revenue in the prevailing climate of high oil prices, she has managed largely to protect the surplus, part of which will be allocated to desperately needed infrastructure spending.
Charles Soludo, governor of the Central Bank of Nigeria and former special economic adviser to the president, is transforming the banking sector radically. He is demanding a huge increase in minimum capital requirements that is designed to consolidate the sector of 89 mostly weak and fragmented deposit-taking banks.
Policing corruption
There are signs, too, that progress, albeit small, is being made in the fight against corruption. Nigeria is ranked the second most corrupt country in the world by sleaze watchdog Transparency International; its international reputation is perhaps even worse than the ranking implies. Oby Ezekwesili, who heads the Budget Monitoring and Price Intelligence Unit, is saving the government billions of naira – more than $1bn so far – by monitoring and policing against inflated and fraudulent government contracts.
Elsewhere, reforms in the fuel industry have included some deregulation of pricing. Subsidised pricing distorted the market to such an extent that domestic refining facilities became unviable and Nigeria, the ninth largest oil producing country by reserves, was importing refined product. Also notable is the renewed impetus in privatisation and deregulation plans, in particular in the country’s electricity and telecommunications sectors and ports.
So it would be churlish to suggest that there is not some reform momentum – a fact that strains the preconceptions of many hardened sceptics who have seen Nigeria’s immense potential derailed by military coups, mismanagement and above all, corruption.
The pertinent issue is whether reform is sustainable and will be extended to other parts of the economy. For their part, creditors appear unconvinced that Nigeria has turned the corner, given the tone and language of official and unofficial responses to debt relief requests. Even before a discussion of affordability – 80% of Nigeria’s debt is owed to Paris Club members, meaning that relief is a cost to these governments – or the ramifications of any precedent set, there are fears that resources that are freed up by debt relief will either be frittered away or find their way into the offshore bank account of a corrupt official.
However, observers are starting to ask aloud whether Nigeria can ever do enough to convince creditors to cancel debts. They wonder about the fairness of the Paris Club offer of a debt moratorium to tsunami-affected countries, including Indonesia, which has a similar stock of debt to Nigeria’s but which is classified a lower-middle income country. They also point to the historical precedent of Paris Club debt relief to countries such as Poland.
Reforms at risk
Creditors want deeper reforms but Dr Okonjo-Iweala contends that without debt relief Nigeria’s reforms could be doomed. She highlights the vulnerable state of the country’s finances, out of which the $1.7bn in annual debt servicing costs is three times the education budget and nine times the health budget. Seventy four million Nigerians live on a $1 a day or less, about 60% of the population. Not only is Mr Obasanjo’s administration under pressure to show the dividends of reform or risk losing support, but also there is an even more stark threat: without a sustained improvement in the lives of ordinary Nigerians and a strengthening of public institutions, the fractious country faces further strains to its already uneasy stability, auguring not just a reversal of reform progress but a slide into chaos.
This puts developed countries’ commitment to address Africa’s plight to the test. Failure of the Nigerian state, with its 130 million-strong population, would have a severe impact on the region.
Nigeria’s public debt burden is high. It amounted to N5600bn ($42bn), equivalent to 74.5% of gross domestic product (GDP) and 138% of non-oil GDP at the end of 2003. External debt of $34bn accounts for the bulk of it. Of that, only 6% is principal and the rest is interest and arrears.
The case for debt relief
The case to the Paris Club is two-pronged. First, Nigeria’s reform programme has momentum and the government is committed to it. In 2004, the budget deficit was 2.1% of GDP, less than that of the UK, France, Germany and the US. Such discipline has had a positive affect on inflation, which averaged 17.2% in 2004 but by October had slowed to 10.9% on a year-on-year basis. Growth is also expected to meet the target rate of 5.5% in 2004 and is set to grow by 6% this year.
While Paris Club debt restructuring is typically contingent on an International Monetary Fund (IMF) loan programme (which stipulates and monitors reform) and Nigeria has no such programme, Dr Okonjo-Iweala stresses that the country is better off than that: it has an economic plan with every appearance of an IMF structural adjustment plan but not called that, meaning it is more palatable to Nigerians. Yet the IMF is actively involved in monitoring the plan’s implementation, providing objective certification that reform is under way. More than that, Dr Okonjo-Iweala is adamant that the government can lock in reforms with a range of legislation that would be difficult to unwind.
The second angle of argument is that Nigeria deserves relief. Dr Okonjo-Iweala points out that the country receives the smallest amount of aid on a per capita basis of any sub-Saharan African country – about $2 compared with the $28 average. Factor in debt servicing costs, she says, and the net movement is an actual outflow of $12 per capita.
In a similar vein, the minister is at pains to dispel the myth that Nigeria is awash with petrodollars. In 2004, oil revenues were $28.5bn. The net amount, after reinvestment in the industry, was equivalent to $0.50 per capita per day – which, she points out, is roughly equivalent to Cameroon, which is defined as heavily indebted and deserving debt cancellation. She also argues that Nigeria’s external debt is odious debt, incurred by illegitimate previous governments and, as such, should be cancelled.
Development goals
The last line of this argument is that weighed under this burden of debt, Nigeria faces little prospect of meeting the Millennium Development Goals. Estimates indicate that it needs to spend roughly $7.7bn over the next five years, up from the $4bn first estimated in 2003.
Dr Okonjo-Iweala says that Nigeria will honour its debt servicing obligations but believes that the debt is unsustainable. She is also deeply affronted by press reports that Nigeria failed to meet a $30m payment in January, arguing that there was a clause in the terms of the deal that was disputed by lawyers acting for the government of Nigeria.
Progress toward debt relief at the Group of Seven meeting in London in February, where finance ministers achieved measured consensus on the need for relief, signals a climate of willingness but action will only become clear at a later meeting. Even then, it has little bearing on Nigeria because the proposal centres on debt owed to multilateral institutions by highly-indebted poor countries (HIPCs), a classification that Nigeria does not have.
Nigeria has received a sympathetic ear from the UK, but UK foreign office minister for Africa Chris Mullin warned that convincing other Paris Club members would not be easy. Nigeria, he said, still had to convince creditors that debt relief would not be wasted.
The door has not yet been firmly closed on Nigeria’s request but nor are there signs that sympathy will translate into anything more meaningful than that. At worst, the climate of willingness to help Africa is nothing more than rhetoric. Even with the best intentions of the developed world, Nigeria’s debt burden, and its bearing on the country’s welfare, illustrates how unsatisfactory the debt relief plans are.
