EFFECT OF DEBT MANAGEMENT IN NIGERIA (1960 – 2005)

ABSTRACT

This study is on Debt Management in Nigeria from (1960 – 2005)  challenges and prospects.  This study seeks to determine  how and what  contributed  to Nigeria public  debt,  both  internal  and  external.  The  study is a  survey research.  The  study randomly selected three organizations responsible for managing debt. A sample of 364 was selected from a finite population by yamene’s statistical technique. Questionnaire was developed  for soliciting  information  from the respondents.  A test-retest method was used  to make the  questionnaire  reliable,  percentages  were used  to analyze  the

biodata and question items while X2  Test of a contingency table were used to analyze

the hypotheses. This study found out that Nigeria is not heavily indebted,  corruption, inadequate  resources  are  not  the  challenges,  poverty reduction,  effective  fiscal  and monetary  policies,  plus  sustainable  economic  growth  are  not  prospects,  that  debt reschedule, debt buy back and debt conversion programme are not ways of managing Nigeria external debt. This work concludes that deficiencies in managing our debt by debt agencies, non centralization of the offices, and functions/activities, plus unpatriotic attitude  of  past  leaders,  including  the  rapid  rate  of  technological  innovation,  and overnight policy reversals by past dictatorships government. Recommendations are that debt management office, in collaboration with other agencies managing debt in Nigeria should work out guidelines and criteria for borrowing from both internal and external sources by all tiers of government, even as the viability of the projects for which loan may be obtained and determined through realistic feasibility studies. Proper funding of the agencies and award for performance, adequate framework, mainly targeted of price stability, and form a good habit that will say no to corruption and pave way for effective communication and interaction for more productivity.

CHAPTER ONE

1.1       HISTORICAL BACKGROUND OF THE STUDY

Debt operationally,  is defined  as the Obligations  owned  by one country to another country, denominated in either local and /or foreign currency only or in both, comprising both domestic and external obligations (DMO,2002).

Debt management in Nigeria refers to the technical as well as the institutional arrangements involved in organizing both domestic and the external liabilities so that the  debt  service   burden  is  maintained/contained   witching   a   sustainable   level (Omoruyi, 1997:358).

Debt portfolio of Nigerian government is usually the largest financial portfolio in a country. It often contains complex financial structures and can create substantial balance sheet risk for the government. Large and poorly structured debt portfolio also makes  governments  move  vulnerable  to  economic  and  financial  shocks  and  have often been a major factor in economic crisis (IMT, 2003:10).

Together with overall macroeconomic  policy debt management policy plays an important role in ensuring and maintaining long-term debt sustainability.

Appreciating  the significant  role that public  debt management  can play  in helping  countries   or  nations   cope   with  economic   and  financial   shocks.   The International  Monetary and Financial  Committee   (IMFC)  has requested  that staff from the international Monetary Fund (IMF) and the World Bank Work together in cooperation with national debt managements experts to develop a set of guidelines  on public  debt  management  to  assist  countries  in  their  efforts  to  reduce  financial vulnerability.  The IMFC’S request   which was  endorsed by the   financial stability forum in the year 2000, was  made as point of  a search for board principles that could

help governments improve the quality of their policy frame works for managing the effects of volatility in the international  monetary  and financial system,  meanwhile contrast to 15 to 20 years ago, countries  are now much more focused on managing the financial and operational risks inherent in their debt portfolio than was the case in the past. And the way in which the stock of debt is managed is becoming increasing sophisticated,   especially   in  those   countries   levels  or  have  experienced   shock associated with the removal of capital flows.

This Institutional responsibilities  for debt management vary from country to country. In some countries, the ministry of finance is in charge of debt management, while in others, debt management functions are shared by more than one agency (the Central Bank and Ministry of finance for the most part). And in others, all functions and activities of public debt management are charged to a sole agency.

Since  1999, President  Olusegun Obasanjo  has visited  the world’s  financial capital  many times,  seeking  debt  forgiveness  and  out the least,  some  meaningful relief. To ensure our creditors that Nigeria is a responsible country,  he has ensured that we service our huge debts regularly. But all his effects in this regard so far until recently have been futile. The creditors would not bulge. They insisted we must pay up even though much of the debt is dubious because it is based on very dodgy figures and accounts.  This is why the president  become  increasingly exasperated  by their intransigence and sheer bloody mindedness, and public opinion was hardening around the popular but dangerous proposition that Nigeria unilaterally repudiates the debt.

According to the Debt management office (D.M.O, 2004), Nigerian’s foreign debt increased to US $36 billion in the first quarter of the year  2005, in spite of the country paying close to US $40 billion in the past two decades. As reported by “THE punch”  of  march  14,  2005,  the  D.M.O    Director-General,  Dr    Mansur  Muhtar, attributed the increase to the continuing freefall of the dollar in which most of the debt is denominated. Dr Muhtar disclosed to the punch, that “an illustration is that (as at) December  2000 when we were going to  reschedule our debts with Paris club, we found out that out of      that was being rescheduled, about 24% was penalty and 22% was interest. Another 48% constituted arrears, which are payments that should have been made. Only 7% was really the outstanding (debt).” This means that the penalty and interest equal US $ 10 billion. At this rate, by the time the debt is finally retired, Nigeria would have bettered of closed to US $ 100 billion.

Such  brazenly  organized   robbery  perpetrated   on  mostly  poor   helpless countries by the international financial system controlled by the developed nations is worse than waging a war on a country, sucking it and pillaging its resources. Yet the original debt, most of which was accumulated during the second Republic to this debt burden,  the  Nigeria  economy continues  to  experience  strains  and  stresses  arising largely from debt burden and debt over hang. Despite the debt management’s efforts put in place by debt management authorities since 1983 to deal with the debt problem and challenges.

The scenario is, indeed, frightening. It is within this context that the resolution of the  house of representatives  early March  2005,asking  the  government  to  suspend further debt payments becomes understandable,  even if it was not in the  long term best  interest  of  the  country.  If  nothing  else  the  resolution  served  notice  on  the creditors that the country could not continue to supinely beg for some relief without some concession from them. As Austin Opara,  deputy speaker of Nigeria house of Representative  was  reported  to  have  posited,  “THE  debt  is  not  sustainable,  so something must be done, otherwise we cannot pay.

However the creditor were unmoved by the country’s plan that the debt has

become   an   unbearable   burden   that   is   draining   badly   needed   resources   for development. In their estimation, Nigeria does not qualify for even debt relief because it is not a poor country. To this end and even as Nigeria wriggles under the clutches of an overwhelming debt over hang.

Nigeria  is rich  but the reality is that  a huge proportion  of its populate  is desperately poor. While the intransigence  of the creditors is hard to take.  There is however, some merit in their argument that Nigeria can conveniently service its debts and still have a lot of funds left for development,  if only it  could put its financial management regime in shape and reduce corruption to the barest minimum.

This is heavily the crux of the issue. Corruption is the demon that has  the country  in  a  suffocating  embrace  and  before  whom  Nigerians  bow.  The  highly phenomenon has locked up the country in a crushing state of arrested development. Estimates of public funds stolen in the last 35 years and stashed  away in numbered bank accounts abroad range from US $100 billion to US $ 200 billion. During the same period, the country earned approximately    US$500  billion with very little to show for it in development terms” (Noso, 2005).

Thus while  Obasanjo  is boringly making  his plea  for our debts to be  out rightly  cancelled  on written  off,  many of  our elected  public  officers  continue  to globetrot in the most lavish style of Arabian princes. At any given time, half of the governors in Nigeria are out of the country for all kinds of nonsense reasons. And in the last six years. (1999-2005) Nigerian “big men and women” have poured hundreds of millions of dollars into prime real estate in Europe, North America, middle  east and, lately, south Africa. Hence the contention that Nigeria should the accorded the same consideration over external debt payment has been laughable and unpersuasive. As intolerable as the situation is, a unilateral repudiation of the debt is not practicable doing so would get the  country frozen out of the global financial system, and that would be irreparably damaging to an economy that is dangerously fragile.

The choice of Nigeria is actually limited. We have to continue to engage with our creditors to get a significant reduction of debts, while at the same time meeting our payment obligations. Nigeria’s pain from a killing debt overload is self-inflicted. Again considering the pains being inflicted on the citizenry by the debt overhang, it becomes absolutely necessary for Nigerian government to strengthen its action against the  continuous  rise  of  the  nation’s  debt.  Thus  according  to  the  Economic  and intelligent  unit  EIU (2005),  the combined  impact  of a weak dollar,  the  expected invade in world bank lending to Nigeria and the build up of interest arrears may push the country’s external debt stock to  a new high of US$39.5 billion in year 2006 if urgent, pragmatic and concerted  effort is not made to remedy the situation. On the whole the IMF and World  Bank (2001) specified that the basic objective of public debt management is to ensure that the government’s financing needs and its payment obligations  owe  met  at  the  lowest  possible  cost  over  the  medium  to  long  run consistent with a prudent degree of risk.

1.2       STATEMENT OF THE PROBLEM

Though there were some inherent problems in the management of the nation’s debt between  the attainment  of independence  in 1960  and 1970  when  Nigerian’s external debt stock was less than one billion dollars, the seriousness and severity of the situation deteriorated  significantly  by the second  half of  the  1980s.  This was largely due to persistent  inability of the country to meet  its external  debt service obligations. This situation resulted in mounting arrears and unmanageable growth of the debt stock relative to available resources.

The external debt stock which was about US $9 billion in 1980, grew to neary US$19 billion by 1985. Correspondingly,  the debt stock as a percentage   of total export  earnings  and  GNP     rose  to  uncomfortable   levels  of  151%   and  24% respectively. In that year, the debt service payment due has a little above US$4 billion which was about 33% of the total export earnings, However, the actual debt service payment for the year was about US$1 billion as at December 31, 2004, the country’s external  debt  stand  at  US$35,944.66   while  the  domestic  credit  obligation  was N1,370.32  respectively.  The  servicing  of  Nigerian’s  external  debt  has  severely encroached  on  resources  available  for  socio-economic  development  and  poverty alleviation. Thus between 1995 and 2001 alone, Nigeria spent over US$32 billion in servicing external debt.

Meanwhile, in spite of the enormity of the hardship caused by the debt burden, it  has  not  been  given  the  serious  attention  it  deserves  early  enough,  as  the management  strategies  employed  by the  various debt  management  units  have  not yielded the desired results in practical reality. Thus the study focuses on the effect of debt management in Nigeria. It is for this reason(s) that this researcher is out to know the true nature of the effect.

1.3       OBJECTIVES OF THE STUDY

The major objective of this study is to know the effect of debt management in

Nigeria (1960 – 2005). The specific objectives of the study is stated as follows:

1.        To identify the extent of Nigeria indebtedness.

2.        To identify the challenges encountered in the management of debt in Nigeria.

3.       To identify the prospects from debt management in Nigeria.

4.       To identify ways of managing Nigeria external debt.

1.4       RESEARCH QUESTIONS

This study seeks answer to the following questions.

1.        What is the extent of Nigeria’s indebtedness?

2.        What are the challenges encountered from debt management in Nigeria?

3.        What are the prospects from debt management in Nigeria?

4.       What are the ways to manage Nigeria external debt?

1.5       RESEARCH HYPOTHESES

To guide this study in realizing its objectives, the following null and alternate hypotheses were formulated.

1. Ho:  Nigeria is not heavily indebted.

Hi:   Nigeria is heavily indebted.

2. Ho: Corruption as regards embezzlement of funds, inadequate human resources and inadequate   debt   data   statistics   are   not   challenges   encountered   in   the management of debt in Nigeria.

Hi:  Corruption as regards embezzlement  of funds, inadequate human  resources, and   inadequate   debt  data  statistics   are   challenges   encountered   in  the management of debt in Nigeria.

3.Ho:  Poverty  reduction,  effective  fiscal  and  monetary  policies,  and  sustainable economic growth are not the prospects from debt management in Nigeria.

Hi:  Poverty  reduction,  effective  fiscal  and  monetary  policies,  and  sustainable economic growth are the prospects from debt management in Nigeria.

4.Ho: Debt reschedule, debt buy back, and debt conversion programme are not ways of managing Nigeria external debt.

Hi:    Debt reschedule, debt buy back, and debt conversion programme are ways of managing Nigeria external debt.

1.6       SIGNIFICANCE OF THE STUDY

The  study will  be  of  help  to  the  government  and  policy  makers  in  debt management. It will also serve as a base point to researchers, financial managers and bankers in the aspect of debt management and it will add to existing literature for debt management in Nigeria.

1.7       LIMITATION OF THE STUDY

1.        Financial Constraints: the researcher was heavily constrained by finance as it concerns travelling and distribution of questionnaire.

2.        Attitude of the Respondents:   Reluctance on the part of the respondents to answer the questionnaire, because of no financial benefit from the study.

3.        Time constraint: The researcher does not have enough time to carry out this

study.  There  was  constraint  of  time  in  going  to  places  where  data  and information relevant to the study could be obtained.

1.8       SCOPE OF THE STUDY

The study focuses on   genesis and   trend   of Nigeria public debt, the  debt management office, prospects and  benefits of debt management office in Nigeria, the need for external  debt acquisition in Nigeria, ways and methods of contracting public debt,  structure and composition of Nigeria public debt, managing  paris club debt and debt  data reconciliation,  domestic  public debt in Nigeria, problems and challenges in achieving effective debt management in Nigeria and strategies adopted so far at managing Nigeria external debt.

1.9       DEFINITION OF TERMS.

Debt:  Operationally,  this  is defined  as  the  obligations  owned  by one  country  to another denominated  in either local and / or foreign currency only or in  both  and comprising both domestic and external obligations (DMO, 2002).

External Debt: External debt includes short-term public sector debt and/or  private sector non-guaranteed  debt (both short-term and long-term),  all medium  and long- term debt (for one year or more) guaranteed  by the public sector to  non-residents (Omoruyi, 1997:358).

Debt  Management:  Debt  management  refers  to  the  technical  as  well  as  the institutional  arrangements  involved  in  organizing  both  domestic  and  the  external liabilities so that the debt service burden is maintained/contained within a sustainable level (Omoruyi, 1997: 358).

Debt Servicing: This refers to combined interest payment and principal repayment

(D.M.O, 2004:6)

Debt/GDP ratio: This “The ration of debt stock to the annual GDP (or any other variant like, Sony GNI) which shows the number of years the total  income of the country has to be sacrificed in order to liquidate the debt” for example, a ratio of 50% shows that the country can liquidate her debt by  “starving”  and devoting  its total income for ½ a year to debt repayment (D.M.02004).

Debt/Export Ratio: This is described as “the ration of debt stock to the annual export earnings needed to report the debt. (CBN, 2003:39).

Domestic Debt: Domestic debt is defined as “debt denominated in local currency and being currently managed by the Debt management office (D.M.O) (D.M.O, 2001:44). Debt Service Ratio (or Debt service/ Export ration): this ration shows “fraction of a country’s export earnings used in servicing debt” (D.M.O, 2004).

Debt/Government  Revenue  Ratio: This is the ratio of debt stock to  government annual revenue which shows the number of years of government revenue needed to repay the debt.” (CBN, 2003).

Debt   Service/Government   Revenue   Ratio:   this   ratio   shows   the   fraction   of government revenue devoted to servicing of debt” (F.M.F. 2002)

Debt service/government  Expenditure  Ratio: this shows “ function of total  (i.e. Recurrent and capital) federal Government expenditure that is used indebt servicing (CBN 199).

Debt Service/ Health Expenditure Ratio: This is the ratio which shows the size of debt servicing  in relation to total (I.e.  Recurrent  and capital)  federal  Government expenditure  on  health  and  hence  the  extent  to  which  debt  serving  crowds  out government spending on health of the population (D.M.O 2004.

Debt service/Education  Expenditure Ratio: The interpretation of this is similar to that of debt service/health expenditure above.

Debt Relief: this is defined as a reduction, X Do-D1, in the contractual value of the stock of debt, D. Creditors benefit from debt relief if it increases the expected of their chains, E(V), Michael B. and James W.D. 1997:23).

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