DEBT RESTRUCTURING:
NIGERIA’S 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
Outline
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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
2
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
US$25 billion in 1980 to US$12 billion in 1982 to US$6
billion in 1986
 Wasteful consumption, ‘white elephant projects,
uneconomic projects, etc. E.g. of 63 projects undertaken in
the 1980s for which US$2.6 billion was borrowed only one
project was viable.
3
Stylised Facts and Context

1986-1992: Debt Rescheduling and Debt Reduction
 Paris Club
 1986 first trip to Paris Club (rescheduled US$7 billion debt in
arrears)
 1989 rescheduled another US$6 billion of arrears and future
payments
 1991 rescheduled US$3 billion
London Club
 1987 and 1989: Brady Plan
 1992 Brady Bonds (exchanged US$5.6 billion of commercial bank
debt for US$2.1 billion of Par Bonds at a discount of roughly 60%)
1992
 Nigeria’s economic policies did not meet IMF’s benchmarks
 IDA status a requirement for debt reduction operation
 Ballooning of Paris Club Debt: new borrowing, high interest charges,
penalties and arrears.
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4
Stylised Facts and Context
 1993-1998: The Debt Overhang
 Payments to the Paris Club dropped well below scheduled
amount after substantial payment in 1992.
 Paris Club extended no new credit, only accumulation of
arrears.
 New disbursements came from the multi-lateral creditors
5
Stylised Facts and Context
Table 1: Nigeria’s External Debt (US$ 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 7.8
creditors
10.5
5.4
3.6
2.2
Multi-lateral 1.3
creditors
4.0
4.5
4.2
2.8
TOTAL
33.7
27.6
28.8
35.9
18.9
6
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.
7
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
US$350; poverty incidence 57%; Basic infrastructure in
poor shape.
 MDG’s 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.
8
Stylised Facts and Context

Nigeria - Structure of Paris Club Debt Decem ber 2000

Late
Interest
24%
Principal
Balance
7%

Interest
Arrears
21%
Principal
Arrears
48%
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 US$6
billion.
Cross-currency exchange
risks have added over US$5
billion to the debt stock in
dollar terms since 2001,
due to dollar appreciation.
9
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 US$36 billion with US$30.8 billion or
85.82% owed to the Paris Club.
 The dominance of the Paris Club debt in Nigeria’s 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
10
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 Nigeria’s 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 “Nigeria’s Opportunity of a Generation: Meeting the MDGs, Reducing
Indebtedness, 5th April 2005.
11
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 Minister’s 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.
12
The Paris Club Debt Exit Strategy:
Process
Phase 1
Around
September
Write-off of 67% of
debt stock after
payment of arrears.
Estimated to cost
about $6 billion.
Reduces outstanding
debt stock to about
$8 billion
Phase 2
Around
May 2006
“Buy-Back” or
prepayment of
outstanding debt
stock at marketrelated discount.
Government-toGovernment, fixed,
disclosed rate.
Estimated to cost
about $6 billion.
Phase 3
After
May 2006
Elimination of Paris
Club Debts
Total and permanent
exit from debt trap.
Escape from endless
spiral of
indebtedness
13
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.
14
Uniqueness of the PC Debt Exit
 Historic deal-write off of $18 billion
 Biggest debt write-off in Africa.
 Previous record: Congo’s $10bill write-off.
 Egypt and Poland - $10-$15 bill write-off.
 G-8 write off for 18 HIPC countries - $40 bill.
 Major obstacles had to be overcome. Odds heavily stacked
against Nigeria:
 Reputational overhang; images of corruption and
mismanagement;
 Oil-rich country – 6th largest exporter.
 High Oil prices – Calls for windfall to be shared.
 Rising External Reserves
15
Uniqueness of the Exit
 Unprecedented deal-massive debt cancellation.
 Offers a “permanent exit” option from Paris Club.
 Debt relief sequenced over 6 months, as opposed to
the usual 2-3 years.
 First ever Paris Club debt buy-back at discount.
 First ever debt deal not premised on a formal IMF
Programme. Home-grown development strategy as
basis for engagement.
16
Post-Paris Club External Debt Profile
June 30, 2006 (in US$ million)
Nigeria's External Debtstock
London Club,
2022.28, 42%
Non-Paris Club,
121.04, 2%
Multilateral,
2704.16, 56%
 Debt stock down
from $35 billion to
less than $5 billion
 Debt service
payment declined to
$700 million from
$1.7 billion before
the landmark debt
deal
17
Post-Paris Club Public Debt Profile
Total Public Debt in US$(2001-2006)
40,000
35,000
30,000
25,000
External Debt
20,000
Domestic Debt
15,000
10,000
5,000
0
2001
2002
2003
2004
2005
2006
18
London Club Debt Exit:


Following the Paris Club Debt Exit attention was shifted to the London
Club Debts:
Par Bonds:

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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
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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
19
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
outstanding=$649.8million
 quarterly payments totaling $170.85 million a year; to be
fully amortized/paid off in 2010
20
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 US$1.5 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.
21
London Club Debt Exit:
Repurchase vs. Restructure
RESTRUCTURE:
REPURCHASE:
 Reduces debt stock and leads  Reduces debt stock and
leads to savings in terms
to savings in terms of interest
of interest burden
burden..
 Restores Nigeria’s standing in
 Provides permanent exit
the international financial
strategy for Nigeria’s
markets and assist in
London Club debt
securing S&P ratings upgrade.
 Enables corporate Nigeria to
have access to international
 Allows clearing of balance
capital markets
sheet
 Creates a complete reshuffle
of investor base.
 Begins process of establishing
a benchmark yield curve
22
London Club Debt Exit
 The Repurchase option was eventually implemented:
 Outstanding Par bonds (US$1.5 billion) were prepaid
in November 2006 [Exercise call option].
 Promissory Notes amounting to US$500 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
23
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
24
Domestic Debt Restructuring
Domestic Debt Profile
Local contractors
debt, $4,200, 19%
Other arrears,
$200, 1%
Securitized public
debt, $10,000, 44%
Pensions arrears,
$8,000, 36%
25
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
26
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
27
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 20072009
 Reduces fiscal impact of debt service costs
28
Domestic Debt Restructuring
Domestic Debt Stock by Instrument, 2004
FRN Development
Stocks
0.09%
1st FGN Bonds
5.30%
Domestic Debt Stock by Instrument, 2005
1st FGN Bonds
4.76%
2nd FGN Bonds
11.68%
91-day T-Bills
14.73%
FRN Development
Stocks
0.06%
Treasury Bonds
31.01%
182-day T-Bills
31.46%
Treasury Bonds
27.48%
91-day T-Bills
63.60%
360-day T-Bills
9.83%
29
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
30
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.
31
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.
32
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
34
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.
35
THANK YOU
FOR YOUR ATTENTION
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