Debt Relief - Benefits and Achievements of Millenium Development Goals

The Benefits of Debt Relief

There is no better way of answering the question “will Nigeria be better off with the debt relief” than by looking at the debt sustainability ratios in the table below. Without debt relief, total debt stock constitutes almost 52% of the country's gross domestic product. Debt to total government revenue amounts to 412%, and debt/export ratio stands at 152%. In the crudest of explanations, the Nigerian worker would give up more than half of his gross output annually to service external indebtedness, government annual gross revenue would have to quadruple to afford timely offsetting of the nation's indebtedness to the outside world. The Nigerian worker would have to export the equivalent of one and half times his current annual levels in order to liquidate the external charge on his foreign exchange revenues. The situation is graver when the net variables of domestic product and revenues are considered.

External Debt sustainability ratios before and after debt relief (Using end of 2004 nominal figures)

Debt ratio	Benchmark	Before debt relief	After debt relief
Debt stock/GDP	30%	51.4%	7.3%
Debt stock/revenue	250%	412.0%	58.4%
Debt stock/export	150%	151.9%	21.5%
Actual debt service/GDP	n.a	2.5%	1.1%
Actual debt service/ Revenue	13%	20.1%	2.6%
Actual debt service/export	n.a	7.4%	3.2%

With debt relief however, the burden would be drastically reduced. Post-relief debt charge on GDP stands at a little over 7%, down by almost 45 percentage points. Debt to revenue ratio falls by more than 354 percentage points to a mere 58%. At US$1 billion per annum, actual debt service to the Paris Club prior to relief, which itself represents only about a third of debt service falling due, amounts to 70% of national (federal plus states) education budget, and 110% of national health budget. In contrast, debt service payments due, as a ratio of GDP, revenue and export would be more than halved following relief.

The debt write-off of about USD18 billion, when eventually actualised, would constitute a direct saving on debt service payments. Nigeria has in the last five years been spending an average of USD 1billion out of about $2.1 billion falling due annually in Paris club debt service. This huge amount would immediately be made available to fund critical priority sectors such as health, basic education, water, power, road networks and other infrastructure to stimulate the economy.

Debt Relief and Employment

One of the criticisms of the debt relief from the Paris Club creditors is that the cost of the package may come in the form of massive job losses. As in most emerging countries, the public sector in Nigeria is the major employer of organized labour. Over the years however, the public sector has shown its inherent lack of capacity to function efficiently. Saddled with huge budgets with very soft constraints, the sector has been bedevilled by resource mismanagement, misallocation, and corruption. The resultant colossal waste, low productivity and poor service delivery have provided a genuine case for government to divest from not only direct economic activities but also from other strictly non-public services in which it has proven inefficiency.

The privatization of public enterprises is in fact, the consequence of public sector failures in Nigeria . Yet, it is true that the potential gains of privatization will not be achieved without the support of sound public infrastructure such as good road networks for goods and services delivery, basic mass education, not only to guarantee a qualitative labour force but also to increase capacity for active participation in the economy, and adequate health as well as services to empower the poor and protect the very weak in society from the capitalist tendencies associated with privatization.

Huge debt service obligations represent the largest handicap to government's effort to provide social infrastructure that will allow a private sector-driven economy to thrive. A debt relief package that will effectively reduce both the debt stock and debt service payments is the surest way to free resources that would be channelled to social infrastructure.

It is in this regard that debt relief would help not only to cushion the short term effects of public sector job losses due to public sector reform as well as the on-going privatization of the public enterprises, but also guarantee sustainable economy-wide wealth creation in the medium to long term. This is even more the case when one takes into account that unemployment-based arguments against privatization often loose sight of the labour force in the informal sector, which by every calculation quadruples the organized labour force in Nigeria . Savings from debt relief that will be channelled to social services has the potential to expand employment in both the organized private sector and the informal sector, which by far outweighs the immediate job losses in the public sector.

It is also noteworthy that with or without debt relief public sector job losses are inevitable. The more than six decade dominant view of economic policymakers that a competitive marketplace will fail to generate adequate employment opportunities, which informed the widespread advocacy of government programmes to ‘create' jobs is fast fading. In the 21st century, fostering an enabling environment for wealth creation, not creating jobs, is viewed as a primary objective of government policy.

Debt Relief, Non-oil Export and Wealth Creation

With the benefit of hindsight of the 1970s oil boom, no one is in doubt that selling only extractive crude oil will lead Nigeria to a dead end of continued poverty. The solution to a simultaneous reduction of import bills and the expansion of the nation's export base is to process non-oil exportable including agricultural products to satisfy national markets first, then African regional markets, and finally overseas markets. The immediate imperative of this is the industrialization of the non-oil sector in Nigeria . Expanding the manufacturing sector – and its link with agriculture - and providing special training and support to local businesses in meeting the standards and challenges of the global market are sure recipes to boost non-oil economic activity in Nigeria .

Wealth is created primarily by increasing investment. However, new investment will only be viable in an enabling environment. The provision of social infrastructure with savings from debt relief not only improves efficiency in production but also ensures a sustainable demand for the output of new investments. Governments also promote wealth creation by assigning and protecting property rights and by providing for an enabling environment for the enforcement of private contracts. The special manner of the Paris Club debt relief offer testifies to an improving socio-political environment, which effectively de-classifies Nigeria as a ‘bad and doubtful debt' country, meaning that the investment community's perception of Nigerian economy will improve dramatically, thus allowing for inflow of badly needed investment. In particular, the private sector will gain a new lease of life: foreign export credit guarantee agencies (ECGAs) which had withdrawn covers for exports of goods and services as well as of investment capital to Nigeria because of the debt overhang, can now confidently resume provision of their guarantees based on the credibility of the private sector clients. The restoration of the ECGA facility will enhance the competitiveness of the Nigerian private sector as they need not provide 100% cash cover for their imports.

This debt-relief-based industrialization process will in addition create a larger consumer base with higher purchasing power. Therefore, the dependence on uncertain and operationally cumbersome overseas markets via such American initiatives as the African Growth and Opportunity Act (AGOA) would be less important in the first stage.