DEBT RESTRUCTURING: NIGERIA

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DEBT RESTRUCTURING: NIGERIA

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Title: DEBT RESTRUCTURING: NIGERIA


1
DEBT RESTRUCTURING NIGERIAS EXPERIENCE
  • YAKUBU ALIYU
  • Portfolio Management Department
  • DMO, Abuja
  • A Presentation to Workshop on Debt, Finance, and
    Emerging issues
  • in Finance Integration, Commonwealth Secretariat,
    London,
  • March 6-7, 2006

2
Outline
  • Stylised Facts and Context
  • The Paris Club Debt Exit Strategy Prelude
  • The Paris Club Debt Exit Strategy Process
  • Uniqueness of the PC Debt Exit
  • London Club Debt Exit
  • Domestic Debt Restructuring
  • Current Policy Thrusts
  • Key Challenges
  • Conclusion

3
Stylised Facts and Context
  • 1973-1985 Boom and Bust
  • External debt negligible between 1970 and 1973
  • 1980-1982 oil slump leading to drop in oil
    revenues from US25 billion in 1980 to US12
    billion in 1982 to US6 billion in 1986
  • Wasteful consumption, white elephant projects,
    uneconomic projects, etc. E.g. of 63 projects
    undertaken in the 1980s for which US2.6 billion
    was borrowed only one project was viable.

4
Stylised Facts and Context
  • 1986-1992 Debt Rescheduling and Debt Reduction
  • Paris Club
  • 1986 first trip to Paris Club (rescheduled US7
    billion debt in arrears)
  • 1989 rescheduled another US6 billion of arrears
    and future payments
  • 1991 rescheduled US3 billion
  • London Club
  • 1987 and 1989 Brady Plan
  • 1992 Brady Bonds (exchanged US5.6 billion of
    commercial bank debt for US2.1 billion of Par
    Bonds at a discount of roughly 60)
  • 1992
  • Nigerias economic policies did not meet IMFs
    benchmarks
  • IDA status a requirement for debt reduction
    operation
  • Ballooning of Paris Club Debt new borrowing,
    high interest charges, penalties and arrears.

5
Stylised Facts and Context
  • 1993-1998 The Debt Overhang
  • Payments to the Paris Club dropped well below
    scheduled amount after substantial payment in
    1992.
  • Paris Club extended no new credit, only
    accumulation of arrears.
  • New disbursements came from the multi-lateral
    creditors

6
Stylised Facts and Context Table 1 Nigerias
External Debt (US billions)
1985 1991 1992 1998 2004
Paris Club Creditors 7.8 17.8 16.4 20.8 30.8
Non-Paris Club 1.9 1.4 1.2 0.1 0.0
Commercial creditors 7.8 10.5 5.4 3.6 2.2
Multi-lateral creditors 1.3 4.0 4.5 4.2 2.8
TOTAL 18.9 33.7 27.6 28.8 35.9
7
Stylised Facts and Context
  • From 1999 debt issues elevated to high political
    level, raising expectations for debt
    cancellation.
  • Push for the establishment of a Debt Management
    Office (DMO)
  • Widespread sentiments on debt-preference for debt
    repudiation.
  • Significant parliamentary opposition to
    appropriations on debt service budget.
  • Difficulties in debt service deduction in respect
    of state governments.
  • the notion of odious debts dominates public
    perception the media, civil society
    organisations, etc.

8
Stylised Facts and Context
  • Other factors that fuelled the debate on debt
    policy
  • Considerable delay in reconciliation with
    creditors application of repayment to penalties
    first before interest and principal.
  • The level of poverty in Nigeria GNP per-capita
    (2003) was US350 poverty incidence 57 Basic
    infrastructure in poor shape.
  • MDGs promoted by the international community.
  • Inability to get rescheduling of the debts on
    concessional terms (Naples terms) Nigeria
    declassified IDA-only-
  • Finally settled for the Houston Terms in December
    2000, linked to IMF programme.

9
Stylised Facts and Context
  • Rescheduled amount in 2000 comprised 24 late
    interest 21 interest 48 principal and only
    7 principal balance.
  • Position subsequently worsened since December
    2000, arrears accumulated to the tune of over
    US6 billion.
  • Cross-currency exchange risks have added over
    US5 billion to the debt stock in dollar terms
    since 2001, due to dollar appreciation.

10
Stylised Facts and Context
  • Combined external and domestic debt service
    exceeded Federal Capital Budget in 2004.
  • 1 billion paid to Paris Club in 2004,
    represented 70 of total (recurrent and capital)
    education budget and 110 of health budget (both
    States and Federal).Total debt stock by December
    2005 was US36 billion with US30.8 billion or
    85.82 owed to the Paris Club.
  • The dominance of the Paris Club debt in Nigerias
    total external debt, the failure of rescheduling
    arrangements to engender debt reduction, the
    prospects of arrears accumulation if debt relief
    is not secured all combined to push for a
    comprehensive treatment of the Paris Club debt

11
The Paris Club Debt Exit Strategy Prelude
  • Making the Case for Debt Relief for Nigeria
  • Strong moral, religious, economic, geo-strategic
    and political arguments underpinned the quest for
    debt relief.
  • Analytical work to strengthen the case for debt
    relief
  • DSA 1 conducted by IMF indicates that Nigerias
    debt is unsustainable
  • A World Bank study has also indicated that even
    with strong economic performance and high oil
    prices, Nigeria cannot simultaneously meet MDGs
    and lower its indebtedness to manageable levels
    without debt relief. 2
  • Oil Volatility Argument
  • IDA Reclassification
  • 1 IMF Debt Sustainability Analysis for Nigeria,
    31 March, 2005
  • 2 World Bank Staff Report Nigerias
    Opportunity of a Generation Meeting the MDGs,
    Reducing
  • Indebtedness, 5th April 2005.

12
The Paris Club Debt Exit Strategy Prelude
  • Domestic front
  • 2003 A decisive shift towards economic reform
    Formulation of a Home-Grown Economic
    Strategy-NEEDS. Improved political climate and
    disciplined economic management
  • March 8, 2005 The House of Representatives
    passed a motion asking the Federal Government to
    stop repayments to foreign creditors.
  • International front
  • International developments conducive for debt
    reduction for middle-income countries (Argentina,
    Iraq, etc.)
  • 2003 G-8 meeting in France (endorsement of
    Evian Approach which provides for a
    case-by-case treatments, with attention to
    national specifics, namely financial capacities,
    economic situation and political dynamics).
  • UK chairmanship of G8 provided window of
    opportunity
  • G8 meeting of Ministers in June
  • Paris Club endorsed G8 deal for Nigeria at
    extraordinary meeting (June 29, 2005)
  • Formalised a policy Support Instrument (PSI) with
    IMF as basis for engaging with the Paris Club,
    October, 2005.

13
The Paris Club Debt Exit Strategy Process
14
The Paris Club Debt Exit Strategy Process
  • Financing the exit option. Why use of oil
    windfall?
  • Trade-off between spending on growth and poverty
    reduction or paying creditors and remaining in
    perpetual debt trap.
  • Judgment call-inter-generational issues risk of
    oil price collapse risk of misgovernance risk
    of interest rates and penalties risk of
    subjugation/political control by creditors
    national pride etc.

15
Uniqueness of the PC Debt Exit
  • Historic deal-write off of 18 billion
  • Biggest debt write-off in Africa.
  • Previous record Congos 10bill write-off.
  • Egypt and Poland - 10-15 bill write-off.
  • G-8 write off for 18 HIPC countries - 40 bill.
  • Major obstacles had to be overcome. Odds heavily
    stacked against Nigeria
  • Reputational overhang images of corruption and
    mismanagement
  • Oil-rich country 6th largest exporter.
  • High Oil prices Calls for windfall to be
    shared.
  • Rising External Reserves

16
Uniqueness of the Exit
  • Unprecedented deal-massive debt cancellation.
  • Offers a permanent exit option from Paris Club.
  • Debt relief sequenced over 6 months, as opposed
    to the usual 2-3 years.
  • First ever Paris Club debt buy-back at discount.
  • First ever debt deal not premised on a formal IMF
    Programme. Home-grown development strategy as
    basis for engagement.

17
Post-Paris Club External Debt Profile June 30,
2006 (in US million)
  • Debt stock down from 35 billion to less than 5
    billion
  • Debt service payment declined to 700 million
    from 1.7 billion before the landmark debt deal

18
Post-Paris Club Public Debt Profile
19
London Club Debt Exit
  • Following the Paris Club Debt Exit attention was
    shifted to the London Club Debts
  • Par Bonds
  • These are mainly arrears of commercial bank term
    loans, also include some arrears of letters of
    credit, bills for collection, etc. accumulated
    during the 1980s.
  • Issued in 1992, collateralized with US Treasury
    zero coupon bonds maturing in 2020
  • Interest rate of 6.25 paid semi-annually
    amounting to 90 million a year
  • Par Bond holders were issued with additional debt
    instruments-oil warrants
  • Oil Warrants
  • Issued along with Par Bonds.
  • Approximately 2 million oil warrants issued along
    with Par Bonds in 1992 maturing in 2020.
  • Semi annual interest payment subject to rise in
    oil price above reference price of 28
    consistently for 6 consecutive months, but capped
    at 15.
  • Current payment liability amounts to 52.7
    million per year

20
London Club Debt Exit
  • Promissory Notes
  • Issued through the CBN, resulting from uninsured
    short-term trade debt, accumulated in the early
    1980s.
  • Verification exercise carried out by Chase
    Manhattan in the mid-1980s.
  • Original amount 4,891.3million. Amount
    currently outstanding649.8million
  • quarterly payments totaling 170.85 million a
    year to be fully amortized/paid off in 2010

21
London Club Debt Exit
  • Two options were considered
  • A) Repurchase
  • The government will make budgetary provisions for
    the repurchase of Par Bonds and Promissory Notes.
  • Use embedded Call Option to redeem Par Bonds and
    Promissory Notes
  • Raise additional resources to retire Oil Warrants
    after verification process
  • B) Restructure
  • Launch 2 benchmark bond issues of 5 and 10-year
    maturity respectively for a total amount of
    US1.5 billion.
  • Use the proceeds of these issues to redeem Par
    Bonds and Promissory Notes using their embedded
    call options.
  • Balance of proceeds contribute towards the
    retirement of Oil Warrants given completion of
    verification process.

22
London Club Debt Exit Repurchase vs. Restructure
  • REPURCHASE
  • Reduces debt stock and leads to savings in terms
    of interest burden
  • Provides permanent exit strategy for Nigerias
    London Club debt
  • Allows clearing of balance sheet
  • RESTRUCTURE
  • Reduces debt stock and leads to savings in terms
    of interest burden..
  • Restores Nigerias standing in the international
    financial markets and assist in securing SP
    ratings upgrade.
  • Enables corporate Nigeria to have access to
    international capital markets
  • Creates a complete reshuffle of investor base.
  • Begins process of establishing a benchmark yield
    curve

23
London Club Debt Exit
  • The Repurchase option was eventually implemented
  • Outstanding Par bonds (US1.5 billion) were
    prepaid in November 2006 Exercise call option.
  • Promissory Notes amounting to US500 million were
    discharged March 2, 2007.
  • Oil Warrants, the only remaining
    component-initiated the 3-phase process of
    redeeming these through cash tender offer
    launched late February, 2007.
  • Phase 1 reconciliation of positions in Oil
    Warrants
  • Phase 2 Tender offer through an Investment Bank
  • Phase 3 Inter-pleader action after the buy-back
    is complete

24
Domestic Debt Restructuring Domestic Debt Profile
  • Securitized public debt amounting to 10 billion
    equivalent. comprising of short term T-Bills
    (60), held predominantly by CBN (60) and
    financial institutions (34), while non- bank
    sector (6)
  • Local Contractors debt amounting to 4.2 billion
    equivalent, these are contractors and suppliers
    that have rendered various services but are being
    owed by the government.
  • Unpaid pension liabilities of over 8 billion
    equivalent due to retirees in the public sector,
    which have accumulated over the years.
  • Accumulated arrears on allowances due to
    teachers, doctors and health workers, and
    liabilities of Foreign Missions, amounting to
    over 200million.
  • Contingent liabilities notable from public
    enterprises and agencies still undergoing
    verification exercise

25
Domestic Debt Restructuring Domestic Debt Profile
26
Domestic Debt Restructuring Domestic Debt
Profile
  • Before 2003, major deficiencies
  • Domestic debt stock was disproportionately
    short-tenored (60 in 91-day Treasury Bills).
  • Monetary financing of fiscal deficits
  • Low holding of public debt by Non-Bank Public
  • High rollover and Refinancing risks
  • Long absence of government from the capital
    market

27
Domestic Debt Restructuring Restructuring of
T-Bills
  • Smoothen and lengthen maturity structure 91 day
    NTBs into longer tenored instruments
  • Reduces roll-over and refinancing risks
  • Reduces interest rate volatility in the money
    market
  • Ensures better asset/liability match

28
Domestic Debt Restructuring Securities
Issuance
  • Resuscitation of the bond market through issue of
    1st FGN Bonds(N150 billion) in October, 2003.
  • Regular monthly issuances of long-term FGN bonds
    started July 2005.
  • In 2005 2 and 3- year Bonds issued
  • In 2006 3, 5 and 7-year Bonds issued
  • In 2007 3, 5, 7 and 10-year Bonds to be issued
  • Issued in monthly tranches of between N20 N30
    billion.
  • Helps establish benchmark yield curve
  • develops alternatives to monetary financing of
    government deficits.
  • Pensions Arrears and Local Contractors
    Liabilities Quantify and securitise outstanding
    debts cash payments for liabilities less than
    N100 million
  • Domestic Debt Service Ceilings set on domestic
    debt service levels for 2007-2009
  • Reduces fiscal impact of debt service costs

29
Domestic Debt Restructuring Domestic Debt Stock
by Instrument, 2004 Domestic Debt
Stock by Instrument, 2005
30
Domestic Debt Restructuring Market Development
  • 15 financial institutions (10 banks and 5
    discount houses) pioneering the primary
    dealer/market maker (PDMM) system under general
    rules and regulations as specified by the DMO
  • engenders a liquid, vibrant and efficient
    secondary market through the institution of a
    two-way price quotes system
  • Strengthens market for government bonds

31
Current Policy Thrusts
  • The objective is to avoid a relapse into
    indebtedness
  • Borrowing from only concessional sources (IDA or
    near IDA terms)
  • Official Bilateral borrowing at up to 3 interest
    rate and not less than 10 years maturity.
  • Proposed Fiscal Responsibility Law (about to be
    passed by the National Assembly)
  • Conducting DSA on regular basis.
  • Focus on sub-national debt issues.

32
Current Policy Thrusts
  • Proposed Fiscal Responsibility Law provides among
    others
  • an oil-price based fiscal rule which imposes
    permanent constraint on fiscal policy
  • borrowing only for capital expenditure and human
    development
  • debt to GDP ratio is held at a sustainable level
  • Sets limits for amounts of consolidated debt for
    Federal, State and Local government
  • Transparency Reporting, disclosure of all
    transactions and decisions, public hearings in
    preparation of medium term economic framework,
    disclosure of all audited accounts by all tiers
    and arms of government.
  • Focus on effective domestic debt management and
    building the local debt market.

33
Key Challenges
  • Need to build on progress to date and
    institutionalise reform in order to safeguard
    economic stability Deepen NEEDS.
  • Enhancing resource flows.
  • Development financing gap estimated at 4- 5
    billion.
  • Need to increase ODA transfers.
  • Nigeria currently lowest aid recipient at 2 per
    capita compared with 29 for other African
    countries.
  • Need to design new financing strategy to ensure a
    coordinated approach to debt management such that
    the country borrows when
  • Borrowing is needed
  • Borrowing is sustainable
  • Borrowing provides good value for money

34
Key Challenges
  • Particular challenge include guarantees and
    contingent liabilities, sub-national debt, and
    asset-liability management
  • Need to underpin policy framework with effective
    operational coordination to ensure effective dent
    management still there are issues with multiple
    players, complex relationships and blurred
    responsibilities the risk of line ministries
    operating autonomously.
  • Need for effective coordination between fiscal,
    monetary policies dealing with portfolio inflows
    and liquidity management.
  • Stakeholder ownership of the strategy and
    consensus building.
  • Strengthening governance and accountability
    framework clearly define objectives,
    authorities, and accountabilities
  • Strengthening transparency media and the civil
    society

35
Conclusion
  • Even after the exit from Paris Club and London
    Club debts overhang, the challenges of public
    management remain-may be, even more demanding.
  • Need for proactive management of the remaining
    external debt.
  • Need for a well-articulated new borrowing
    programme within the context of an appropriate
    national debt strategy
  • Development of the domestic bond market still at
    relatively early stages.
  • Sub-national debt management needs to be
    developed too, and synchronized with, the status
    at the Federal level.

36
  • THANK YOU
  • FOR YOUR ATTENTION
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