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Nigeria The Debt Overhang
Among less developed countries (LDCs), Nigeria had the
eleventh largest external public debt in 1989 (and the
largest
among sub-Saharan countries.) Its debt had increased from
US$9
billion in 1980 to US$33 billion by 1989. The country
faced
persistent difficulties servicing its debt; in the 1980s,
debt
rescheduling was almost continuous. The secondary market
price of
Nigeria's bank debt in mid-1989 was only 24 cents on the
dollar,
indicating the markets were heavily discounting the
probability
that Nigeria would pay its external debt.
Official reluctance to devalue the naira between 1981
and
1983, when inflation was more than 20 percent per year,
discouraged foreign direct investment, spurred substantial
capital flight, and encouraged firms to build up large
inventories of imports (often with overinvoicing and
concomitant
foreign deposits) or underpricing exports (with the
difference
placed on deposit abroad). Having exhausted its official
reserves
and borrowing limits, Nigeria built up its arrears on
trade
credit to US$6 billion by the end of 1983.
From 1985 to 1986, President Ibrahim Babangida
skillfully
played the World Bank against the IMF for public relations
gains,
conducting a year-long dialogue with the Nigerian public
that
resulted in a rejection of IMF terms for borrowing.
Subsequently,
the military government's agreement to impose similar
terms "on
its own" was approved by the World Bank, which in October
1986
made available (with Western commercial and central banks)
a
package of US$1,020 million in quickly disbursed loans and
$4,280
million in three-year project loans.
Nigeria's contractionary fiscal policy in 1986 and 1987
reduced the budget deficit substantially. During early
1988, when
the poor 1987 harvest put pressure on food prices and
opposition
to austerity mounted, authorities eased financial policy,
more
than doubling the budget deficit. Nigeria also eased
monetary and
fiscal policy in late 1989. Still, the country had managed
to
reduce real public spending since the early 1980s.
Despite several debt reschedulings in the 1980s and
early
l990s, Nigeria's debt overhang continued to dampen
investment and
adjustment in the late 1980s and early l990s. Facing years
of
austerity and stagnation, Nigeria could not afford to
reduce
consumption to effect an external transfer; thus a major
contributor to adjustment was reduced investment. A
lengthy
schedule of large loan repayments acted as a tax on
investment,
since a share of returns had to go to creditors.
Substantial debt
servicing often meant slowing economic growth to avoid an
import
surplus. Without concessional funds, rescheduling only
postponed
an external crisis. Moreover, Nigeria's highly
oligopolistic
money markets, financial repression of interest rates and
exchange rates, and sluggish expansion in response to
improved
prices in export and import-substitution industries
prevented
timely adjustments to financial and exchange rate changes.
Data as of June 1991
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