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