Why Buhari’s call for debt forgiveness would be a tough sell  

President Muhammadu Buhari’s plea to international financial institutions for an outright cancellation of Nigeria’s debt obligation to them to help better withstand the coronavirus pandemic would be a tough sell, according to senior people with knowledge of the matter.

“Nigeria doesn’t have any justification to request for a debt relief when the evidence is there that the last time it happened, it made no difference in terms of how we progressed since then”.

The request which was made in a meeting with other heads of state from the Non-Aligned Movement seemed to be directed at multilateral lenders, including the World Bank and Africa Development Bank, as well as bilateral lenders led by the Export-Import Bank of China and include the French Development Agency (AFD), the Japan International Corporation Agency (JICA), the Exim Bank of India and Germany’s KFW.

These groups of lenders, especially led by the World Bank and China EXIM Bank, make up 60 percent of the country’s $27 billion external debt, according to official data, while commercial lenders, led by Eurobond holders, account for 40 percent.

Getting a debt cancellation from these groups of lenders would be a tough sell for multiple reasons.

For the multilaterals like the World Bank and AfDB, they operate as commercial entities with shareholders and would most likely balk at a deal to take a hit to lose part of their capital in a debt forgiveness spree.

“The World Bank already held internal discussions on ways to ease the pain of debtors at these trying times and decided a debt relief for a couple of months was appropriate,” a senior banker with multilateral lending experience said.

“If they thought a debt cancellation was feasible, they would have done that, but it’s not. What would they have left if they decided to cancel the debt of every debtor country? They’ll go bankrupt,” the person added.

The commercial lenders are also unlikely to accept a debt cancellation of Nigeria’s debt as it would mean giving away a diverse set of investors’ capital.

“That’s never going to happen. Fund managers could go to jail over that,” one money manager said.

“To avoid jail term, fund managers who invested in the Eurobonds will have to find a way for the diverse investors in their fund to reach a consensus to write off the money and that’s practically impossible, you are talking about some people’s pension money and life savings. Moreover, it could set off a chain link of defaults,” the money manager said.

Nigeria’s external debt has gradually crawled back up since the Paris Club wrote off some $18 billion debt owed by Nigeria in 2005. The problem is the substantial rise in external debt is not well reflected in the economy as it hasn’t translated to improved infrastructure.

What’s more is that while most developing countries take advantage of concessionary financing from the World Bank or other international institutions, Nigeria’s is increasingly made up of commercial debt, with Eurobond investors the single largest holders of Nigerian external debt at $10.86 billion.

Economists had warned that such a mix makes its economy especially vulnerable to external shocks, such as a sustained drop in oil prices. That’s the case today with oil prices reeling from the coronavirus-induced demand shock.

Ike Brannon, a former senior economist for the United States Treasury and US Congress, said Nigeria squandered its debt reduction of 2005.

“To have squandered the debt reduction in just fourteen years and have no tangible economic progress to show for it is beyond disappointing. If Nigeria does not get its financial house in order it will undoubtedly face some sort of fiscal crisis in the next few years,” Brannon said in an article published in Forbes magazine last year.

“In the long run the Buhari government must make a concerted effort to diversify the country’s economy away from oil as well as take steps to widen and increase the revenue base, and it should look to settle its major contingent liabilities sooner rather than later,” he said.

Another person familiar with the matter said “Nigeria doesn’t have any justification to request for a debt relief when the evidence is there that the last time it happened, it made no difference in terms of how we progressed since then”.

In April, Finance Minister Zainab Ahmed said the government is seeking a temporary suspension from multilateral and bilateral creditors to unlock funds to battle the illness that is spreading fast in Africa’s most populous country.

An outright debt cancellation might not come easily at the moment but multilateral and bilateral institutions will continue to support African and emerging economies through moratorium for repayment of obligations, interest suspension, credit interventions and new lending, said Omotola Abimbola, macro and fixed income analyst at Lagos-based Chapel Hill Denham.

African economies on the heels of the coronavirus outbreak have sought to tap into concessionary loans and support for their economies, but recently there have been appeals for debt forgiveness due to dollar crunch in their economies and the need to channel resources to supporting healthcare systems, local businesses and households.

Tanzania last Wednesday asked international lenders to write off debts of African nations to enable them manage the damages to their economies.

Nigeria received $3.4 billion in emergency financing from the International Monetary Fund last week, but currently holds no outstanding debt with the global lender.