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