Debt Relief: How The Deal Was Sealed

culled from THISDAY, April 25, 2006

With last Friday’s final tranche payment of $4.5 billion to the Paris Club, Nigeria has become the first African nation to pay off its debts to the Club, a group of rich lending countries.
This came after a favourable appraisal of the nation’s economic reform programme by the Executive Board of the International Monetary Fund (IMF) which had paved the way for the final exit from the Club in a debt buy-back scheme negotiated under the Naples Terms.

Nigeria reached a deal last October with the Paris Club, which includes the United States, Germany, France and other wealthy nations, that allowed it to pay off about $30 billion in accumulated debt for about $12 billion, an overall discount of about 60 percent.
The country has been able to make the repayments so quickly mainly thanks to the current high price of oil which shot the nation’s reserves up as well as a fiscal stance that monies accumulated from excess crude price should be saved.

The repayment, according to some international financial experts who spoke to THISDAY in Washington, D.C., at the just concluded 2006 Spring Meetings of the International Monetary Fund (IMF) and the World Bank Group, is the latest sign that Nigeria's economy, long hobbled by corruption is on the rebound.
Earlier this year, two credit-rating agencies, Fitch and Standards and Poors, rated Nigeria's credit as BB-, which is below investment grade but puts it on a par with developing nations like Turkey, Ukraine and Brazil as well as well ahead of so many African countries.

Debt relief has become a central issue in the fight against poverty as the country which had owed about $36 billion in overall debt, is one of the most indebted nations in the world, and with a population of over 130 million, it has more impoverished citizens than any other African nation; per capita gross domestic product stands below $1,000 a year.
Yet, Nigeria had not been among the nations that have received write-offs or discounts on their debts, as several poor countries have.
However, debt relief could not be seen as the end to the means for a nation as Nigeria with so much infrastructural needs.

Mr. Abdoulaye Bio-Tchané, Director, African Department of the IMF told THISDAY weekend that “there is need for quality investments in the improvement of huge infrastructural needs of Nigeria.”
According to him, “the Federal Government has declared its commitment to committing substantial funds in improving infrastructure and we believe they are willing to do it and we support them”.
“I think one important thing we should stress, and maybe if I were Nigerian I would celebrate is that for the first time in this country's history, we are seeing reserves increasing while oil prices are going up.
“If you are familiar with Nigeria's history as I am, I think, this is the first time it is happening. And this is happening because we have the policies in place. This is happening because not only at the Federal level but also at the state and local level, all the authorities have accepted to implement this route of saving the windfall of oil resources.
“Now, how do you use that? I think you need to use it efficiently. It's an asset... I think the decision of the authorities to buy back their Paris Club debt is a welcome one; at least we support that. I think also the authorities are investing—and you can see it in the budget numbers—are investing a lot in infrastructure, not only at the Federal level but at the state level.
“But there is a limit to what you can do in the short run, and I guess that's what the authorities are struggling with, that we need time to build roads; we need time to restore electricity in a very efficient manner, and I know it is an important issue in Nigeria. You need time to build health centers and schools, and these are all things that I know the authorities are trying to attend to, and I think the first step to use part of the resources to buy back the Paris Club debt was a good move, and we support it”, Bio-Tchané said.

Analysts said the successful completion of the deal and its endorsement by the IMF through a new kind of agreement called a Policy Support Instrument would help redeem Nigeria's reputation in international financial circles.

This means Nigerian banks will be able to get loans from abroad and it will be easier and safer for foreign investors to put money into Nigerian equities.
Combined with a reform of the banking and insurance sectors, the improved rating has already attracted new portfolio investors and credit lines to the Nigerian economy, it is also hoped that the government would not waste this golden opportunity to improve the living standards of Nigerians.

Meanwhile, the International Monetary Fund (IMF) yesterday said it approved a two-year Policy Support Instrument (PSI) for Nigeria, as a pre-condition to finally exit from the Paris Club debt quagmire because of the strength of the country's economic programme.

Speaking to newsmen yesterday in Abuja, Senior Resident Representative, Dr. Idrissa Thiam said "Nigeria's economic performance has been very impressive during the years 2004, 2005 and the beginning of 2006. No doubt about it, the PSI was approved on the strength of this programme."

He added that, "I would say that the least impressive achievement that I can quote is the sixth in fiscal policy making through the introduction of the oil price based fiscal policy rule, by which all tiers of government in Nigeria have decided to save oil revenue above the reference price at the time of budget approval. It has been implemented successfully.
"All tiers of government have complied with this rule and this has led to a significant improvement in fiscal management, which had helped to stabilise the macroeconomic situation. I would say that in our assessment criteria, Nigeria met all assessment criteria. One of them is fiscal policy of course, which has been impressive. Some others regarding monetary policy, the impressive accumulation of foreign reserves achieved its projection under the PSI, which was very good.

"Also, net credit to government was within the prescription of the PSI. As you have noticed, inflation, which was in the range of 17 to 21 per cent at the beginning the PSI was designed, ended up being 11.9 per cent, which was impressive. The Gross Domestic Growth has also been impressive. On the overall, Nigeria's economic performing had been expressive and that is why the PSI was endorsed by the IMF."

It is recalled that when the Paris Club granted the country $18 billion debt relief on June 29, 2005, it asked the IMF to approve a two-year PSI for her, as a pre-condition for offsetting the remaining portion of the debt. On October 17, 2005, three days before the Paris Club debt agreement was sealed with Nigeria, the Fund approved the PSI and competed a first review of instrument on April 17, which enabled her to exit the Club's debt stranglehold.

The IMF chief said implementation of the last phase of the Paris Club agreement and exiting its debt trap was "a good development because Nigeria will be moving from a highly indebted country to a country with a manageable debt."

On $5 billion non-Paris Club debt, that is debt owed by the country to multilateral institutions, like the Fund itself, the World Bank, ADB, London Club among others, Thiam said, "there will be no problem/harm for Nigeria to continue pay the debt. Of the $5billion, about $2billion is owed to commercial banks or London Club. You will recall that this was restructured long time ago. Nigeria's debt has become sustainable. What we need to do now as far as debt management is concerned is to be preventive and to follow the rules of borrowing. Also, we need to limit the borrowing to only concessionary debt."

Meanwhile, the IMF has approved the adjustment of its anti-money laundering and combating of financing of terrorism (AML/CFT) programme with a view to tackling, head-on, the challenges usually faced by countries in implementing the standards and regimes.

Speaking at the opening of Second West Africa Financial Crime Prevention Seminar organized by Financial Institution Training Centre (FITC) with the support of the National Drug Law Enforcement Agency (NDLEA),Thiam said the ratification, which was done sometimes in August 2005, became necessary on realizing that 'the bad guys' have exploited ways to counter the Fund's efforts in conjunction with other institutions, aimed at stopping the nefarious activities.

He noted that "although substantial progress has been made, let us be clear on one point: crime still pays."
 According to him, "the history of the fight against money laundering and the financing of terrorism has illustrated that the bad guys are quick to engage in criminal arbitrage. Money launderers will exploit any weakness in legislative and institutional frameworks, both domestic and international.
"They will take advantage of any failure of international cooperation, and particularly in informal, unregulated and unsupervised sectors. Loopholes will be found wherever they exist."
He recalled that IMF's adjustment followed an earlier revision of the Financial Action Task Force on Money Laundering (FATF) standard in June 2003. He said, "the revision was in spite of results achieved so far in strengthening AML/CFT regimes in member countries, which significantly raised the bar for countries' legal, regulatory, and institutional frameworks."
Thiam lamented that that IMF and World Bank resources are limited asking the donor community to "commit additional resources, given the clear and urgent need to support countries in the implementation of the revised standard."

He explained that the Fund, along with the World Bank, has been delivering an intensive work program that has been yielding results in strengthening AML/CFT regimes in their 184 member countries.
"The IMF contribution to the fight against money laundering and the financing of terrorism includes an assessment of national practices against the international standard, as recommended by the Financial Action Task Force, the provision of technical assistance to help bring countries closer to that standard, and policy development," he pointed out.
He however stated that the experience of the assessment program identified a number of deficiencies. These, he added, included inadequate systems for obtaining information on customer identity, reporting suspicious transactions, and confiscating terrorist assets.

He said the Fund and the World Bank, in collaboration with other donors, have "greatly intensified the delivery of their technical assistance to respond to member countries' needs. Since January 2002, the IMF and the World Bank have delivered over 300 technical assistance projects, almost two-thirds of them in the last eighteen months.
"Nearly 1,000 officials from 111 countries have been trained on AML/CFT, including legal, regulatory and financial supervisory frameworks for AML-CFT, as well as their financial intelligence units (FIUs), and 37 countries have adopted or are in the process of enacting AML/CFT legislation while a number of others are at various earlier stages in the process."