A buyback to resolve Nigeria's debt problem

Debt relief and African poverty are firmly on this year’s global agenda, most recently from the Tony Blair-sponsored Africa Commission. But little attention is going to the big elephant in the room: Nigeria.Even with its oil wealth, Nigeria’s debt burden is enormous given its huge population of 130 million and its extreme poverty—average income is just $330 per year. Increasingly vital to Western energy security, Nigeria is also a worrying source of transnational security threats, including Islamic radicalism, disease, drug trafficking, and international crime.President Olusegun Obasanjo inherited huge debts when he came to power in democratic elections in 1999 ending fifteen years of military kleptocracy. Two-thirds of this debt, now estimated at $33 billion, is owed to the governments of Britain, France, Germany, and Japan. In the last year, Nigeria’s newly reform-minded leadership has used the recent high oil price to build reserves, “saving” more than $5 billion of its oil income.What now makes sense is a new kind of debt deal between Nigeria and a handful of creditors, who also all happen to be G-8 members that have pledged to make African debt a top priority this year: Nigeria ought to offer to buy back its debt at a heavy discount. Its official creditors ought to swallow hard and agree.Most of Africa has already received favorable debt treatment from the Paris Club of creditors, typically a two-thirds stock reduction on ‘Naples terms.’ Twenty-three African countries have also benefited from the multilateral heavily indebted poor countries (HIPC) initiative. But Nigeria has been denied traditional Naples terms on a technicality related to its classification within the World Bank— no doubt due in part to the size of its debt, its oil wealth, and its reputation for corruption. Now there is an opportunity for Nigeria and its creditors to exploit the new Paris Club option of case-by-case ‘Evian terms’ introduced last year to reduce Iraqi debt.What kind of discount on Nigeria’s debt makes sense? A reasonable opening offer from creditors would be 33 cents on the dollar, or what Nigeria would already have gotten from had it been treated like any other low-income country. The Nigerians might plausibly argue for a rate of 13-15 cents. This is our best estimate of the value of Nigeria’s debt after stripping out all interest, penalties, arrears, and export credit defaults accumulated by military dictatorships between 1984 and 1999. Perhaps both sides can agree on something within this range, similar to the 20 cent deal Iraq received or the 25 cent offer for commercial creditors currently on the table from Argentina.For Nigeria, the discounted buyback would be a backdoor way of getting irrevocable debt relief on Naples terms or better. It would also lock-in the fiscal boost of its recent oil windfall, eliminating the political pressure to spend the money unwisely.For the creditors, a deal implies some return on debt that is largely uncollectible at a rate near or even above its actual value (internal treasury valuations are likely in the 15-20cent range). The creditors would earn plaudits for helping a country with more than 100 million people living below the poverty line. They would also be supporting a fragile democracy and finally recognizing Obasanjo’s leadership on peacekeeping, conflict resolution, and his personal intervention to help end the political crises in Liberia and Togo.Most significantly, resolving the debt problem would be a big boost to reformers within the Nigerian government. Obasanjo and his new economic team have recently put in place an ambitious campaign to promote non-oil growth, fight corruption, and reduce poverty. But they face stiff resistance from entrenched powers and the debt itself has become one of the major complicating points with parliament, threatening to derail the entire reform effort. (Indeed, earlier this month Nigeria’s lower house voted to repudiate the country’s debt obligations.) A favorable debt deal soon could help to tip the balance in the reformists favor, while failure could undermine them and waste a crucial opportunity to get Nigeria back on track.Just as reducing Iraq’s debt was in the West’s own interest and a critical step in helping that country recover, so too for Nigeria. A discounted debt buyback may be the easiest, most affordable, and most practical approach to resolving the debt problem in Africa’s most pivotal country.