DEBT RESTRUCTURING: NIGERIA’S EXPERIENCE

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)
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.

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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

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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.

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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.

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The Paris Club Debt Exit Strategy Process
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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.

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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

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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.

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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

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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.

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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

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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

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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

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Domestic Debt Restructuring Domestic Debt Profile
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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

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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

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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

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Domestic Debt Restructuring Domestic Debt Stock
by Instrument, 2004 Domestic Debt
Stock by Instrument, 2005
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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

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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.

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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.

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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

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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

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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.

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• THANK YOU
• FOR YOUR ATTENTION