Nigeria to Deal Directly With Lenders : Debt-Ridden Nation Sidesteps the IMF as Oil Woes Mount

The Nigerian government, in deep financial trouble, is making a bold maneuver to settle its international debts in the face of rapidly declining prices for oil, the country’s principal source of income.

Characteristically adopting an audacious course, Nigeria has decided to attempt to reschedule its medium- and short-term debts without first coming to terms with the International Monetary Fund. The government says it will attempt to deal with its creditors directly.

Nigeria, with an international debt that some say is approaching $17 billion, is the first debt-ridden African country to seek to bypass the IMF in settling its accounts with overseas lenders.

In recent months, Colombia and Peru have announced plans with similar features. Peru has declared that it will limit payments on foreign debt to 10% of its annual export earnings. Colombia has managed to reschedule its loan payments without an IMF program in place.

The Nigerian government, headed by Maj. Gen. Ibrahim Babangida, who seized power in a coup last August, has declared that no more than 30% of its income, derived almost entirely from oil, will be used for debt service.

Mixed Reaction

The reaction of Nigeria’s principal lenders has been mixed. Official response from the governments of the United States, Britain and France has been cautious. The reaction of private bankers has been somewhat more positive, with some bank representatives in Lagos saying privately that they are willing to listen to reasonable Nigerian proposals on the repayment of its loans and trade arrears.

“I think it’s pretty safe to say,” an American bank representative in Lagos said, “that the banks are going to be willing to reschedule the short- and medium-term debt.”

This would not mean, the banker quickly added, that Nigeria’s severe economic problems would be solved.

Nigeria’s current budget plans, including its proposals for paying its debts, were based on the premise that prices for its high-quality light crude oil would remain at about $25 a barrel. However, oil price futures for March have already fallen to less than $20 a barrel, and oil industry specialists here fear that the decline could continue and that this would wreak havoc with the Nigerian budget. For a short time Thursday, British North Sea oil, similar in quality to Nigerian oil, fell to below $18 a barrel.

Devaluation of Currency

Nigeria’s decision to approach its creditors directly, without the usual IMF program in place, was not reached lightly. The Nigerian government had been negotiating with the IMF for more than two years before breaking off talks last year.

The IMF had been seeking its standard package of economic reforms in return for a $2.3-billion loan arrangement. The reforms included a major devaluation of the Nigerian currency, currently trading on the black market at a fifth of its official value.

In addition, the IMF sought to reduce government spending, liberalize import policies and end government subsidies, particularly for gasoline and other petroleum products.

After Babangida took power from Gen. Mohammed Buhari in August, he opened the IMF question to public debate, with the issue formulated in terms of whether Nigeria should sacrifice its “sovereignty” to international bankers.

The debate raged in the Nigerian press for weeks, to the point that even taxi drivers in Lagos were reasonably conversant with the issue. But given Nigeria’s typically powerful instincts for self-assertion, the debate was settled almost before it began, and the government decided that it could not accept the IMF dictates.

In taking the decision, the Babangida government announced a budget that recognized some of the primary concerns of the IMF and other international bankers.

- Petroleum product subsidies were removed. Gasoline prices rose by 100%, diesel fuel prices by 150%. The projected savings to the government of about $900 million are to be used to rehabilitate the country’s rural road system, a move aimed at stimulating the movement of agricultural produce to markets.

- “A realistic exchange rate policy” was cited as a primary feature of Nigeria’s economic recovery program. Babangida’s budget message referred to a “second-tier” foreign exchange market that was interpreted to mean that the government was contemplating a plan in which foreign exchange could be auctioned off, thus adding to the gradual devaluation of the Nigerian currency, the nira. No details of this system have yet emerged. (The official value of the nira, now virtually on a par with the dollar, has been sliding slowly downward for several months.)

- Import restrictions were eased somewhat, a move aimed at boosting Nigeria’s manufacturing sector to 55% of capacity. It is now operating at a much lower rate because manufacturers are having difficulty importing raw materials and spare parts. Some import licenses will be granted to some individuals who have access to foreign exchange outside the country, but the regulations affecting imports are still stringent, though most economists say that Nigeria’s step in this direction would not have satisfied the usual IMF guidelines.

Voice of British Exporters

The reaction to the Nigerian plan acknowledged that its goals were responsible. The Financial Times of London, a voice representing British exporters who are awaiting payment for $5 billion to $7 billion in trade arrears, praised the Babangida government for providing “some evidence of willingness to tackle the country’s economic crisis at its heart.” The paper added, however, that “an agreement with the IMF remains essential to Nigeria’s economic recovery.”

It was Nigeria’s unilateral declaration of a 30% limit on debt service payments that caused the most controversy in the financial community. Dr. Kalu Kalu, the Nigerian finance minister, said that without such a limit, Nigeria would face payments amounting to 42% of its projected earnings. Most economists, however, put the figure much higher, suggesting that Nigeria would have been scheduled to make payments of somewhere between $5 billion and $6.5 billion in 1986, roughly half to two-thirds of its expected income.

The Nigerian move adds to the pressure building on the IMF to redesign its economic recovery programs in a way that allows debt-plagued Third World countries to spend some of their money on development and economic growth. The argument is getting more attention outside the developing countries. U.S. Treasury Secretary James A. Baker III has called for “growth-oriented adjustment” for debtor countries facing the firm demands of their creditors.

Paris and London ‘Clubs’

Under arrangements that have become traditional with the IMF, countries in trouble with their creditors receive emergency loans from the fund after agreeing to stringent economic programs aimed at getting their financial houses in order. With an IMF program in place, the debtor countries can then usually proceed to the so-called Paris Club and London Club, where loans with private banks and from governments, respectively, are renegotiated and payment schedules revised. The Paris and London clubs usually do not consider rescheduling without the seal of approval represented by an IMF program.

As the trend of defiance against the IMF continues, bankers say they are concerned that debtor countries may attempt to play one creditor off against another as finance ministers try to negotiate their loan repayments one by one. Bankers say they regard this as an unacceptable approach.

“That’s not going to work, negotiating loan by loan,” another American banker in Lagos said. “The banks simply won’t accept that. It may be that in the Nigerian case, one leading bank, perhaps a British bank, will come forward and put something together. The Nigerians have a 50-50 chance, I think, of making this work. But it represents a real departure, because the banks are going to be reluctant to do something without the IMF.”

Nigerian Foreign Minister Bolaji Akinyemi, who returned recently from travels to London, Washington and Paris, said in an interview that he was pleased and surprised at the reception given to the Nigerian proposals. “I went on the trip as a damage-controlling exercise,” Akinyemi said, “and I came back with a much more positive expression than I expected.”

Foreign creditors, he said, “do not like debtors dictating the terms, but it was an offer that could not be refused. Thirty per cent of a $10-billion income is a substantial payment. What we proposed was a responsible way out. We have confronted the issues. We believe you have got to take the political cost of what you are doing into account. So far, we have applied the medicine without having rashes break out.”

Activity Monitored

One reason that IMF programs have become essential to international creditors is that the fund closely monitors government economic activity. Although it has tried to avoid the impression that it serves a watchdog role over the budgets of sovereign nations, its reports are followed carefully by creditors, who usually regard the IMF analysis of a nation’s economic position as more realistic than that of the government itself.

One concern bankers here have is that it is not certain who might fill that role if the IMF is not a party to a Nigerian debt rescheduling plan.

Another major question facing Nigeria is the possibility of a severe reduction in its planned income should oil prices continue to decline.

An American oil company executive here said that the Nigerian National Petroleum Company has not had a history of reacting swiftly to fluctuations in the oil market and that its economic crisis could worsen sharply if oil revenue declines.

“Everything here is tied to oil,” he said. “Ninety-five per cent of everything you see here--all those ships out in the harbor--is tied to the price of oil.”