Nigeria's Debt Cancelled in Paris Club Deal
Outcomes and Reactions
The representatives of the Paris Club creditor countries met on 18, 19 and 20 October 2005 and agreed with the representatives of the Federal Republic of Nigeria on a comprehensive treatment of its debt.
This agreement implements the debt treatment framework for Nigeria announced by the Paris Club on 29 June 2005. The representatives of the Paris Club creditor countries welcomed the ambitious economic program implemented by the Nigerian authorities since 2003 and their desire to secure an exit treatment from the Paris Club.
This agreement takes place after the approval by the Executive Board of the International Monetary Fund of the Policy Support Instrument (PSI) on 17 October 2005 and includes a debt reduction under Naples terms on eligible debts and a buy back at a market-related discount on the remaining eligible debts after reduction.
This agreement will be implemented in two phases in consonance with the implementation of the PSI: - in the first phase, Nigeria undertakes to pay arrears due on all categories of debts and Paris Club creditors grant a 33% cancellation of eligible debts; - in the second phase, after the approval of the first review of the PSI by the Executive Board of the IMF, planned for March 2006, the Nigerian Government will pay amounts due under post-cut off date debt, Paris Club creditors will grant a further tranche of cancellation of 34% on eligible debts, and Nigeria will buy back the remaining eligible debts.
In total, this agreement allows Nigeria to obtain a debt cancellation estimated at US$ 18 billion (including moratorium interest) representing an overall cancellation of about 60% of its debt to the Paris Club of around US$ 30 billion. Paris Club creditors will be paid an amount of US$ 12.4 billion, representing regularization of arrears of US$ 6.3 billion, plus a balance of US$ 6.1 billion to complete the exit strategy. This exceptional treatment of Nigeria’s debt offers a fair, sustainable, and definitive solution to Nigeria and Paris Club creditors. With the large debt relief included in this agreement, Paris Club creditors extend their strong support to Nigeria’s economic development policy and its fight against poverty.
Background notes
The Paris Club was formed in 1956. It is an informal group of creditor governments from major industrialized countries. It meets on a monthly basis in Paris with debtor countries in order to agree with them on restructuring their debts.
The members of the Paris Club which participated in the reorganization of Nigeria’s debt were representatives of the governments of Austria, Belgium, Brazil, Denmark, Finland, France, Germany, Italy, Japan, the Netherlands, the Russian Federation, Spain, Switzerland, the United Kingdom and the United States of America.
Observers at the meeting were representatives of the governments of Australia, Canada and Norway as well as the International Monetary Fund, the World Bank, the African Development Bank, the European Commission, the Organization for Economic Cooperation and Development and the Secretariat of the U.N.C.T.A.D. The delegation of the Federal Republic of Nigeria was headed by Dr (Mrs) Ngozi OKONJO-IWEALA, Minister of Finance. The meeting was chaired by Mr. Xavier MUSCA, Director General of the Treasury and Economic Policy Department of the Ministry of Economy, Finance and Industry, Chairman of the Paris Club.
Technical notes
The Policy Support Instrument (PSI) concluded by Nigeria with the International Monetary Fund was approved by the Fund’s Executive Board on 17 October 2005. 2. The total stock of Nigeria’s public sector has been estimated as at end 2005 at US$ 36.2 billion, out of which around US$ 30 billion due to the Paris Club (source: IMF staff report and Paris Club creditors).
Nigeria, Paris Club Sign Debt Deal By Eziuche Ubani for This Day, Lagos on October 21, 2005
Nigeria and the Paris Club yesterday signed an agreement which guarantees a write-off of 60 per cent of the country's external debt stock, paving the way for Nigeria to exit the Club.
The deal signed in Paris at 4.30am Nigerian time is hailed as a precedent which may point the way for other countries indebted to the Club.
Beyond the agreement, the Paris Club endorsed to Nige-ria's economic reform programme, on which the country's exit strategy from the Club is built.
A statement by the Club said the deal "include a debt reduction under Naples terms on eligible debts and a buy back at a market - related discount on the remaining eligible debts after reduction."
The agreement reached after the International Monetary Fund (IMF) approved a Policy Support Instrument (PSI), will be implemented in two phases.
"In the first phase, Nigeria undertakes to pay arrears on all categories of debts and Paris Club creditors grant a 33% cancellation of eligible debt.
"In the second phase, after the approval of the first review of the PSI by the Executive Board of the IMF, planned for March 2006, the Nigerian government will pay amounts due under post-cut off date debt," the statement added. Thereafter, "Paris Club will grant a further tranche of cancellation of 34% on eligible debts, and Nigeria will buy back the remaining eligible debts."
In real terms, the Paris Club will cancel $18 billion of Nigeria's debt, or about 60% per cent of the about $30 billion owed to the Club. But the Club will be paid "an amount of $12.4 billion." Of this, $6.3 billion will be paid to regularise arrears owed and another $6.1 billion "to complete the exit strategy."
But Finance Minister Ngozi Okonjo-Iweala, who led the Nigerian delegation, said payment will be in three tranches. In the first tranche, Nigeria will clear the arrears by paying about $6.4 billion. About $1.3 billion will be paid in the second tranche. The balance of about $4.4 billion will be paid in the last tranche.
The Club considers its deal to Nigeria 'exceptional treatment' and unprecedented in its history, which it hopes offers a 'new start' for Nigeria to pursue its poverty reduction programmes. "With the large debt relief included in this agreement, Paris Club creditors extend their strong support to Nigeria's economic development policy and its fight against poverty."
In his remarks after signing the agreement, Mr Ambroise Fayolle, who stood in for Club President Mr Xavier Musca said the Club was impressed by Nigeria's doggedness in pursuing the debt relief programme.
He said the club members were encouraged by the opportunities the deal offers Nigeria. "This is a new start for Nigeria and the creditors," he said.
From the doggedness of the Nigerian team, the creditors were not in doubt of the country's determination to resolve the debt problem. But anxieties remained among members about whether Nigeria will respect the terms of the deal, due to its past history of repudiation of agreements. Members were also anxious to receive assurances of the continuation of the economic reform programme on the strength of which the IMF issued the PSI. Beyond the capital issue, these formed the political undercurrents that prolonged the negotiations.
When the Club received the assurances, the members were demonstrably willing to let Nigeria off the look, to the relief of the Nigerian delegation.
The Nigerian delegation, Paris Club members and delegates from the multilateral institutions considered the deal a fair one and the best possible any country could get under the circumstance. "This is an exit strategy and we are proud to be part of the fight against poverty in your country," said Fayolle.
Okonjo-Iweala made the point in her remark after signing the agreement. "We recognise that this is a singularly important gesture on all your parts and we want you to know the deal was reached after a marathon negotiation which began at 3.30pm on Monday," she said.
A breakthrough was achieved late Wednesday night, after the Club's delegates were satisfied by assurances Okonjo-Iweala offered. The arrival of the National Assemby delegation helped to cushion anxieties among Club members about the possibility of early payment.
Apparently referring to the anxieties of the creditors, the Minister assured that Nigeria will sustain the reforms that earned the debt relief.
"We understand the significance of this. The people of Nigeria understand it. We want to say that we will not fail to implement what is after all our own reform programme.
"We intend to utilize all the opportunities that have opened to us. We also hope that you will continue to support us in your various ways and that we will continue to be partners together in not only debt but on development, poverty reduction, and wealth creation."
Calling the occasion "momentous," Okonko-Iweala said the debt relief poses a challenge of expectation for Nigeria. While she acknowledged that it will enable Nigeria increase investment in social infrastructure, she said Nigeria had a duty to prove it has reformed. "We have exited the Paris Club, but we have to manage what we have judiciously, watch domestic debt so they don't go overboard," she added.
Asked if exiting the Club meant Nigeria will never take new loans, she said it was not necessarily so. She said that what Nigeria's trouble with the Paris Club and the debt burden advises is a change in the structure of loan Nigeria obtains in future. "When we borrow, it should be on concessional terms, and we must always watch the level of borrowing. Henceforth, loans should be tied to specific activities like education, health, water, sanitation and others," the minister said.
Dr. Mansur Muhtar, the Director-General of the Debt Management Office (DMO) spoke in the same vein. Describing the deal as "historic," and a cause for celebration, he said he was delighted that "we have got rid of "this debt burden. It is something that will help us to provide a firmer foundation for achieving economic growth in the country."
Members of the National Assembly who were part of the lobby and campaign for debt relief, praised the development as a new beginning. Senate Chief Whip, Senator Udoma Udo Udoma, said exiting the Paris Club was a major breakthrough. "When we started this campaign, people said 10 per cent debt relief was mission impossible," he said, adding, "That we achieved over 60 per cent is a major achievement."
He said the development requires that Nigeria begin to manage its resources prudently. He was sure that the government's withdrawal from commercial activities, its loss of control over foreign exchange, and the National Assembly's determination to curtail public sector borowing will ensure that Nigeria will not build up new loans. Senator Effiong Bob, Chairman of the Senate Committee on Finance, who was also on the Nigerian delegation, said debt relief will improve the welfare of the people. "The effect of this will be felt in the short and long term," he said but warned that "we have to begin to plan for the future."
Hon. Farouk Lawan, who chairs the House Committee on Appropriations, urged the government to continue on the implementation of the reform programme. "We must continue on the path of reform. We must continue on the path of transparency, accountability and prudent management of our resources," he said.
Hon Sadiq Sanusi agreed with his colleague saying it was a "great achievement for the country."
But Mr. Menachem Katz, who represented the IMF as observer at the negotiations, was more cautious. Apparently speaking from his awareness of anxieties about the stability of the polity beyond 2007, he said it was important for Nigeria to sustain the momentum of reform after the elections.
"It is important that the reform programme is not reversed after the elections in 2007," he said. "It is important that the government entrenches the reforms by passing laws establishing good practices in public affairs, reform the budgetary process, and the press has an important role to play as watch dogs," he added.
Members of the Paris Club which participated at the negotiation were representatives of the governments of Austria, Brazil, Belgium, France, Finland, Germany, Italy, Japan and the Netherlands. Others are Russian Federation, Spain, Switzerland and the United States.
Observers at the meeting were representatives of the governments of Australia, Canada and Norway as well as the IMF, the World Bank, the African Development Bank, the European Commission, the Organisation for Economic Cooperation and Development and the Secretariat of the U.N.C.T.A.D.
On the Nigerian side were Okonjo-Iweala, Muhtar, Senator Udoma, Senator Bob, Hon Lawan, Hon Sanusi and Ambassador P.B. Preware, Nigeria's ambassador to France.
Looking Forward
AFSC is committed to working towards the following:
- Expand debt cancellation to more countries
- Remove HIPC as the eligibility criteria
- Remove any form of conditionality
AFSC will do this in the following ways:
- Working with U.S. Congress to pass the Jubilee Act (H.R. 1130), now co-sponsored by 73 members, which calls for 50 countries to be included in debt cancellation deals without harmful conditions.
- Continue to put pressure on the U.S. Department of Treasury, the IMF and the World Bank to establish a new yardstick for debt cancellation eligibility.
- Work with Civil Society groups in the Global South and in G-8 countries to campaign to remove conditionalities.
What you can do:
- Send a message to your Congressional representatives and tell them that you stand with Bishop Tutu in his call for 100% debt cancellation without harmful conditions. Also ask them to co-sponsor the JUBILEE Act, a bill calling for debt cancellation for low-income countries.
- Subscribe to the National Africa Network E-Newsletter
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