US embassy cable - 05ABUJA1186

UNCLAS SECTION 01 OF 02 ABUJA 001186 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, KGCN, PGOV, PREL, NI 
SUBJECT: PARIS CLUB REDUCES NIGERIA'S DEBT: JUBILATION NOW, 
CHALLENGES AHEAD 
 
 
1. Summary:  The Paris Club group of creditor nations has 
agreed to reduce Nigeria's debt by about 60 percent. This is 
seen as a reward for Nigeria's effort at reforming its 
economy with its home-grown economic reform program. 
Modalities for implementing the agreement will be negotiated 
between the Paris Club and the GON at a meeting scheduled 
for September in Paris. Nigerians on the street, however, 
are skeptical that the debt deal will confer any benefits on 
their country in light of rising food prices and Nigeria's 
inadequate infrastructure. End Summary. 
 
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The Deal 
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2. On June 30, the Paris Club agreed to a 60 percent 
reduction in Nigeria's Paris Club debt of about USD 30 
billion. The GON will first pay USD 6 billion in arrears and 
buy back the remaining debt at 40 cents on the dollar -- 
roughly USD 9.6 billion -- in two tranches paid six months 
apart.  A meeting between the GON and Paris Club is 
scheduled for September in Paris to work out the modalities 
for implementing the agreement. 
 
3.  Nigeria's total foreign debt is about USD 35 billion. 
Around 85 percent of the debt is owed to the Paris Club; 8 
percent is owed to multilateral financial institutions such 
as the African Development Bank and the World Bank; and the 
rest is owed to the London Club of private-sector creditors. 
Minister of Finance Dr. Ngozi Okonjo-Iweala confirmed that 
Nigeria will seek opportunities to reduce other debt when 
and where possible, but her focus had always been to obtain 
relief from the Paris Club. She also noted that debts owed 
to multilateral institutions carry lower interest rates and 
are of longer tenor than debts owed the Paris Club. 
 
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A Novel Approach 
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4. The debt treatment agreed on by the PARIS CLUB for 
Nigeria's debt is a relative novelty. PARIS CLUB debt 
treatments normally carry "IMF conditionality" as a 
prerequisite for debt treatment, i.e., the country must 
enter a IMF-imposed Structural Adjustment Program (SAP). 
Nigeria's debt deal involves the use of a Policy Support 
Instrument (PSI), i.e., a home-grown economic stabilization 
plan with IMF monitoring.  Nigeria has been operating under 
its own economic reform program, the National Economic 
Empowerment and Development Strategy (NEEDS), which operates 
without a formal IMF agreement but with quarterly assessment 
by the IMF. Minister Ngozi stated to the media that this 
precedent proves developing countries can do things right 
and earn the respect of developed countries. 
 
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A Plus for the Ongoing Economic Reform 
-------------------------------------- 
 
5. On the evening of June 30, an elated President Obasanjo, 
on a state broadcast aired by all Nigerian television 
stations, announced that that the debt deal is a reward for 
painstaking efforts spanning six years and, most especially, 
a reward for the GON's effors at reforming the economy via 
the NEEDS program. He also stated that the debt deal proves 
cynics wrong, and he invited cynics to join with his 
government to move the nation forward. 
 
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Where Will the Money Come From? 
------------------------------- 
 
6. Later, in a live television program that evening aired by 
the state-owned National Television Authority featuring 
Finance Minister Ngozi and Senator Faruk Bello of the 
opposition All-Nigeria People's Party as invited speakers, 
Minister Ngozi confirmed that the debt treatment would 
result in USD 1 billion (about 130 billion naira), which 
would have been used for debt service, instead being 
available for use in the domestic economy. Specifically, she 
mentioned health care, education, and infrastructure. She 
also stated that the debt reduction does not mean that the 
GON will relax and stop carrying out reforms; rather, it 
will continue the reforms and improve the economy. She 
confirmed that for the benefits to trickle down, the reforms 
must continue. 
 
7. Senator Faruk Bello, on the other hand, said the deal was 
not a cause for jubilation, because the GON will have to 
make huge payments to the Paris Club instead of using the 
money to improve the economy and infrastructure. 
Specifically, he mentioned that the USD 6 billion (about 780 
billion naira) to settle the arrears would require a 
supplementary appropriation.  Bello said he doubted whether 
this measure will enjoy smooth sailing through the National 
Assembly, because President Obasanjo had earlier agreed that 
"excess revenues" (i.e., oil revenues above a benchmark oil 
price of USD 25 or USD 27 saved in a special account) would 
be used to cushion oil price volatility whenever 
international crude oil prices dip below a certain level, 
and they would also be used to improve infrastructure. 
 
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Reaction among GON Officials:  Break Out the Champagne! 
--------------------------------------------- ---------- 
 
8.  At the Finance Ministry, the reaction to the debt deal 
was unmitigated jubilation.  Embassy Economic Specialist, 
while at the Finance Ministry at 11 a.m. on June 30 working 
on a commercial advocacy matter, heard a general commotion 
when the debt buy-back was announced.  He encountered 
Minister Ngozi in the hallway and congratulated her on her 
accomplishment.  She beamed as she shook his hand and told 
him the GON had secured a 60 percent write-off.  The 
minister then entered a conference room where her minister 
of state, Esther Nnenadi Usman, was holding a meeting with 
the IMF quarterly assessment team, and announced the debt 
deal to all present.  The room erupted in cheers and 
applause.  Someone suggested that they bring in champagne 
and throw a party.  The Minister's secretary, Mrs. Fawzia 
Ahmed, known to Econ Section as a very proper and demure 
Muslim lady, was so elated that she exclaimed, "I am 
prepared to take off my veil and drink champagne!" 
 
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Public Reaction: What About Food and Electricity? 
--------------------------------------------- ---- 
 
9.  Because the debt deal was publicly announced at 8 p.m. 
local time June 30, there was little time for the Nigerian 
print media to gather "man in the street" reactions.  The 
BBC's Hausa language service broadcast interviews with 
individual citizens on July 1, and their general reaction 
was skeptical, focusing on whether the GON would exercise 
prudence in spending the money that otherwise would have 
gone for debt service and what effect, if any, the debt deal 
would have on rising prices of staple foods.  Even at the 
Finance Ministry, Economic Specialist encountered a 
businessman who did not join in the general jubilation but 
instead noted that the deal would make no difference unless 
the GON quickly moved to improve the country's 
infrastructure. 
 
 
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Comment 
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10. This debt deal is a plus for Nigeria's economic reform 
and opens a new chapter in the history of the relationship 
between the Paris Club and debtor nations. Despite Senator 
Bello's statement, it is unlikely that President Obasanjo 
will experience much difficulty in getting appropriations 
from the National Assembly for the debt payments. State 
governors, however, who are supposed to receive 53 percent 
of Nigeria's oil revenues, will undoubtedly object to the 
USD 22 billion in "excess revenues" from petroleum sales 
being used for debt payments.  Meanwhile, President 
Obasanjo's opponents are liable to interpret the debt deal 
as donor countries' endorsement of his policies and even as 
tacit approval of his alleged attempt to extend his 
presidency beyond his second and final term, which ends in 
2007. 
 
11.  Comment cont'd.:  Now that the President's "economic 
dream team" has obtained this valuable prize for him, it 
remains to be seen whether he will continue the economic 
reforms and retain the reformers.  His public pronouncement 
that the debt deal vindicates his reforms indicates that he 
may decide to stay the course.  If Obasanjo's economic team 
members stay in their current positions, the debt deal means 
that the "dream team" will have less reason to travel 
incessantly to the capitals of creditor countries and have 
more time to spend at home working on Nigeria's domestic 
economy and infrastructure problems. 
 
CAMPBELL