External debts of countries

The origin of Nigeria’s external debt dates back to 1958 when a sum of US$28 million was contracted for railway construction. Between 1958 and 1977, the the resort to foreign debt was minimal, as debts contracted during the period were the concessional debts from bilateral and multilateral sources with longer repayment periods and lower interest rates constituting about 78.5 per cent of the total debt stock. From 1978, following the collapse of oil prices, which exerted considerable pressure on government finances, it became necessary to borrow for balance of payments support and project financing. This led to the promulgation of Decree No. 30 of 1978, limiting the external loans the Federal Government could raise to 5 billion Naira. The first major borrowing of US$1 billion, referred to as the "jumbo loan" was contracted from the International Capital Market (ICM) in 1978, increasing the total external debt stock to US$2.2 billion. Thereafter, the spate of borrowing increased with the entry of state governments into external loan contractual obligations. While the share of loans from bilateral and multilateral sources declined substantially, borrowing from private sources at stiffer rates increased considerably. Thus, by 1982, the total external debt stock was US$13.1 billion.

Nigeria’s inability to settle her import bills resulted in the accumulation of trade arrears amounting to US$9.8 billion between 1983 and 1988. The insured and uninsured components were US$2.4 and US$7.4 billion, respectively. The insured component was rescheduled at the Paris Club, while the uninsured component was reconciled with the London Club. The reconciliation exercise, which took place between 1984 and 1988 reduced the amount to US$3.8 billion. The accrued interest of US$1.0 billion was recapitalised bringing the total to US$4.8 billion in 198, and the debt was eventually refinanced.

Nigeria’s external debt rose further to US$33.1 billion in 1990, but declined to US$27.5 billion in 1991 and increased steadily to US$32.6 billion at end-December, 1995. According to the Federal Ministry of Finance, the total external debt outstanding at the end of 1999 was US$28.0 billion. Of the total outstanding debt, the Paris Club constitutes the highest source with a share of 73.2 per cent in 1999. The balance is owed to the London Club, the multilateral creditors, promissory note holders and others.

Since the beginning of civilian administration in 1999, Nigeria in concert with other debtor nations have canvassed for debt cancellation to no avail. However in the year 2000, arising from good performance on a preliminary programme with the International Monetary Fund (IMF), Nigeria’s debt service obligations was reduced from about US$4.0 billion to US$1.6 billion per annum.

Source of External Debt

Nigeria has contracted a number of debt obligations from external sources, some of which are 

(i)    the Paris Club of Creditors, 
(ii)   London Club of Creditors 
(iii)  Multilateral Creditors 
(iv)  Promissory Note Creditors, which are the refinanced uninsured trade arrears
(v)  Bilateral and Private Sector Creditors.

Causes of Nigeria’s External Debt Problem

Numerous factors contributed to the increased size of Nigeria’s external debt which by end-2000, stood at US$29 billion. The major factors include the rapid growth of public expenditure, particularly that on capital projects, borrowing from the international community at non-concessional interest rates, decline in oil earnings from the late 1970s and the dependence on imports, which contributed to the emergence of trade arrears. By 1986, short and medium-term loans constituted about 85.0 percent of the total debt stock. The above developments resulted in the bunching of debt service, thus compounding the debt situation. Furthermore, upward movements in interest rate affected the size of the external debt stock.

External Debt Management

External debt management became a major responsibility of the Central Bank of Nigeria (CBN") in the 1980s, necessitating the setting up of a Department in the Bank to undertake the functions in collaboration with the Federal Ministry of Finance. Nigeria’s external debt management strategies have changed from time to time since the early 1980s when the debt crisis became pronounced. The following guidelines were issued as regards government borrowing:

1. economic sector projects should have positive internal rate of return as high as the cost of borrowing;

2. social services or infrastructure would be ranked on the basis of their cost/benefit ratios;

3. projects to be financed with external loans should be supported with feasibility studies (which include loans acquisition, deployment and retirement schedule);

4. external loans for private and public sector projects with quick returns should be sourced from the international capital markets while loans for social services could be sourced from concessional financial institutions;

5. borrowing by state governments, parastatals and private agencies should receive approval of the Federal Government to ensure that the borrowing conforms to national objectives. Approvals granted to the private sector do not constitute Federal Government guarantee of foreign currency undertaking;

6. state governments’ borrowing proposals should be submitted to the Federal Ministry of Finance and the Central Bank of Nigeria for consideration before they are incorporated in the final public sector borrowing for the annual budget;

7. state governments and their agencies as well as Federal parastatals should service their debts through the Foreign Exchange Market (FEM) and inform the Federal Ministry of Finance for record purposes. In the event of failure to service their debts, the Naira equivalents would be deducted at source before the balance of their statutory allocations are released;

8. for loans lent by the Federal Government to state governments, the Federal Ministry of Finance would make due payments and deduct the full amounts at source from their statutory allocations; and

9. Private sector, industries that are export-oriented should service their debts from their export earnings, while others should utilize the FEM facilities to service their debts.

As part of the pragmatic approach to reduce the burden of the external debt, the following measures were taken:

1. Embargo on New Loans:  
   The embargo was to check the escalation of total debt stock and minimize the problem of additional debt burden.

2. Limit on Debt Service Payments: 
   This requires setting aside a proportion of export earnings to meet debt service obligations to allow for internal development.

3. Debt Restructuring:  
   Debt restructuring involves the reduction in the burden of an existing debt through refinancing, rescheduling, buy-back, issuance of collateralised bonds and the provision of new money.

In 2001, the Federal Government established a Debt Management Office under the Presidency for the purpose of managing and advising on the governments overall debt obligations, both domestic and foreign.