The forty eight countries of Sub-Sahara Africa spend approximately $13.5billion (Adam, 2004) every year repaying debts to enrich foreign creditors for past loans of questionable legitimacy. These debt repayments divert money directly from basic human needs such as healthcare, education, and fundamentally undermine African governments’ fight against the AIDs pandemic and their efforts to promote sustainable development.
Since their independent, most countries in West Africa became indebted to international countries through loans collected for political and economic stabilities. The massive revenue surpluses of oil money in Western Banks in the 1970s, made them to give loans with little thought to their purpose or to their recipients capacity to repay such loan. Many were made to retain the loyalty of corrupt regimes and much of the money went into the hands of visionless and wasteful government.
In the 1980s when the shocks of the 1970s oil crises rising interest rates and falling global price for primary commodities began to take a toll, the debt crisis in the developing world began to unfold. (Sam, 2005)
During the period of the economic boom in the early years of 1970s, West African government generated revenues which gave room for infrastructural and developmental projects which they could not complete due to embezzlement and misappropriation of funds meant for such projects. It was of no surprise that the Nigerian Economy dropped in the early 1980s when the price of oil collapse in the International market. This led to recession and economic deterioration.
In Ghana for example, an average price of $1,600 per metric tons of cocoa was used to project export revenues over the 1989/1991 period. (Adam, 2004) However, in 1991, the average world cocoa prices were below the expected price. Due to plummeting world price of coca, Ghana lost some $200 million in 1990. This loss in export
earning has made it difficult for Ghana to pay back the large loans it has contracted, while at the same time making new loans that is much more indispensable. Although Ghana did not enter the Economic Recovery Programme with serious debt problem, she is currently in one. The country’s total external debt has doubled in the course of the ERP, from $1.5billion in 1983 to $3.3 billion in 1990. (Ayadi, 2003) Some two third of the annual exports are required to keep up repayment of principal interest. The greatest beneficiaries of the ERP has been Ghana’s external creditors and foreign companies with Ghanaian operations whose affiliates are subordinates and has been able to repatriate profits and dividends, for many years. Pressure of debt payment is a major obstacle to an improvement in the living standards of the
masses of Ghana. </p><p>In Ivory Coast, a boom in cocoa and coffee price in 1976 led to dramatic increase in the country’s terms of trade from 77.9 in 1975 to 100.5 in 1976 and 140.2 in 1977. The agriculture price stabilization fund kept producer’s price stable during this period and thus accumulated large surpluses for government revenue (amounting to 16 percent of GDP in 1977). The government used these resources to embark on an ambitious investment program, which was to have a significant adverse effect on macro-economic balances in the decade that follow. (Sam, 2005) Although not quite matching the earlier period, GDP grew by 6.5 percent annually between 1975 and 1979 with strong growth in Agriculture at 4.2 percent and industry at 13.4 percent.
The price boom was short-lived, between 1977 and 1980, export price fell by 30 percent, and the country’s terms of trade declined from a peak of 140.2 to only 98.1 percent. Furthermore, the term of trade also declined by 38 percent in 1980. This single shock dominated all macro-economic accounting in Cote d’Ivoire during the 1980s. A major destabilizing event toward the end of the 1970 was a dramatic fall in national savings from 25 percent of GDP in 1977 to only 10 percent in 1980 and 6.8 percent in 1981. (Adam, 2004)
This low level of savings, combined with the poor export performances meant that; a large proportion of the investment program had to be financed through foreign borrowing, particularly by the public sector. While external borrowing scheduled under the program amounted to CFA franc 327 billion, public sector external borrowing also amounted to CFA franc 436billion. (IMF/World, 2004) This accumulation of debt was to dominate macroeconomic policy for the foreseeable future.
In addition, back in the 1960s when shortage of foreign exchange became one of the bottlenecks to national economic development, external borrowing became crucial to the Nigeria economy. Perhaps, the country attempted to rely too heavily on foreign resources in the 1960s up to the early 1970s in the construction and development of infrastructural facilities. This explains why the first National development plan anticipated that 50% of the funds for the total public capital programme of 307.8million naira would come from foreign financing. But the outcome was very disappointing because at the end of the plan period, external assistance actually amounted to only 25% of realized capital programme. (Izedonmi, 2012)
Hence, with these trends bedeviling West African economies, the fear that their governments would not be able to payoff their debts became something to be worried about by the western banks, who were desperate to recover their capital from African leaders. To prevent African leaders from defaulting, they used the IMF and World Bank to intervene. It should be noted that the IMF and World Bank were exploitative in nature.
One of the major causes of debt burden in West African countries was the collapse of price in the international oil market as well as the decline in the volume of crude oil export. In Nigeria for instance, price and production of oil export fell from 2.2 million barrel per day in 1978 to around 1.0 million per day in 1981-1982. (Obademi, 2013) This effect was as a result of over-dependent in crude oil export. It was a period when agricultural production was neglected.
Another notable cause of debt burden in West Africa is the poor economic management coupled with the misuse of resources and colossal wastage of public funds. (Sam, 2005) Africa countries debt servicing problem have by and large been the result of low levels of economic growth, particularly in national income and exports, and high interest rate in the face of low export revenues. The increase in the interest rates also added to the debt crisis. During the first oil price hike, the real interest rates were low and even created negative effect in the developed countries due to inflation. This reduced the real burden of the debts of the LDCs.
The fiscal and monetary policy of a country has a tremendous impact on indebtedness. For instance, as the domestic economic situation deteriorates and the balance of payment begins to worsen, confidence in a country’s economic management may weaken, leading to a capital flight and a decline in net lending. With output and exports decline, reserves almost exhausted and debt servicing obligations increasing, a country’s low foreign exchange resources are insufficient even to maintain existing level of growth. Therefore, a country gets to a situation where the default on his debt servicing obligations reflects on principal repayment. (Ayadi, 2003)
It must be noted here that the adoption of the structural Adjustment Programme was also instrumental to debt crisis especially in Nigeria. The adoption did not differ from the standard prescription of IMF and World Bank in practice, judging from the type of policy instruments, monetary, incomes, exchange rate, commercial policy instruments and the making of choices that are capable of achieving desired results under disciplined implementation framework. Given the limitation of the adopted policy instrument in some circumstance, the adjustment programme should also have been mindful of the capability intensity and timing of the instrument. The type of adjustment required, therefore is one that recognizes the continuous nature of adjustment process not just a one shot affair. It should be one that recognizes the strengths and weaknesses of policy instrument in relation to the objective of restructuring, as well as the one that offsets the harsh effects of adjustment with compensating social policies and programs. (Jegede, 2014)
Nigeria did not experience any debt servicing difficulties until 1983. (Adam, 2004) Before then, both the absolute size of debt service payment and its proportion of export of goods and services were relatively small. For example, total debt service payment increase from the paltry $192million in 1974 to the phenomena $450.30million in 1985, representing 245.3% increase. The growth in the relative importance of private lending to Nigeria is also reflected in the structure of debt service repayment. (Obademi, 2013) For example, in 1978, 17.5% of total debt service payment went to private creditors and 82.5% to official creditors. In 1983, the reserve was the case, 90,2% of debt service payment went to private creditors while 9.8% to official creditors. Between 1974 and 1983, total debt service payment to private creditors grew at an average annual rate of 154.7%. Then dominance of private sector debt is further depicted by the fact that in 1983, private creditors accounted for 92.8% of principal repayment and 88.1% of interest payment. (Amakom, 2003)
The servicing of the huge debt stock has continued to be very burdensome on the economy. Given this difficulty in servicing existing loans and meeting current obligation, the external debt problem certainly looms large. Obviously, the burdens of interest payment has tended to the nation’s resources and reduce the possible expenditure of resources and reduce the possible disproportion high percentage of export earning to meet debt service obligation means increasing inability of the countries to pay for import of goods and services vital for economic growth.
In addition, International Monetary Fund encourages the Nigerian government to downsize government department. This often means a rise in unemployment and a cut in wages among the work force in Nigeria. The wages fell by 50 to 60 percent which also led to over 20 percent increase in unemployment rate among the working force. Also, despite the HIPC initiative, the economic debts to GDP ratio rose from 27.4% in 2008 to 34% in 2009 and also, the debt service to export ratio also increase to 16.2% from 15.9% in the same period. (Mbanwusi, 2011)
The financial debt problems in which Nigeria faced also jeopardize its efforts to meet the Millennium Development Goals (MDGs) targeted for 2015. (CBN, Statistical Bulletin, 2015) This however affected the level of development as well as the pace of development over the years. The interest rates on the various debts are outrageous and it became a habit to use loan in refinancing maturing debts obligations.
Nigeria in the 1980s and 1990s was required to adopt restrictive monetary policies in response to economic turmoil with severe economic and social cost due to her participation in the Enhanced Structural Adjustment Facility (ESAF) of the IMF. (Mbanwusi, 2011) This Structural Adjustment Programme idea was that, Countries like West Africa are to open their sea ports to the importation of commodities and export of their local manufactured products. This was not favourable to the countries involved due to their minimal level of manufacturing capital goods. The few manufactured goods in Nigeria for instance, couldn’t compete in the international market due to the unequal exchange factor. The little revenue generated from export was used to pay for the imported goods. This led to the country’s inability to generate or increase domestic savings and adversely affected the local industries bringing about an increase in unemployment. This also brought about a rise in consumer goods hereby decreasing domestic production.
Nigerian government adopted and participated in a number of strategies and measure to deal with debt problems. Under the Structural Adjustment Programme (SAP) for example, Nigeria adopted some strategies to ameliorate debt burden which includes; acquisition of domestic debt, restructuring of domestic debts, and servicing of the debt.
There are some other measure used in managing debts in Nigeria, these include:
The debt conversion programme was established in January 1988 and debt conversion committee was set up to follow key objectives like:
Other measures include, the Banker Plan of 1985, Paris Club Plan of 1987, African Development Bank plan and Brady plan of 1989, IMF facilities like; SAP, External fund facility, Enlarge Access policy, Enhanced SAP and compensatory and Contingence financial facility.
World Bank facilities which includes; Structural Adjustment lending, Reduction facility, Special programme of Assistance and the Trade investment and policy loan. Toronto and Trinidad Terms, Enhanced Toronto terms, Houston Terms and the Naples Terms etc. (Izedonmi, 2012)
It is important to note that despite all these measures and policies put in place to reduce the debt rate of countries in West Africa, especially Nigeria, public debts has continue to grow distressingly. (Chinaenewem, 2013) </p><p><h2>Why the Strategies and Policies Failed </h2>The embargo placed on new loans and directions to state governments to restrict their borrowing to a minima level have not been particularly effective as indiscriminate quest for external loans have not reduced. (Chinaenewem, 2013) Although the rescheduling have conferred short term relieves from debt services obligations, the debt overhang has however hardly reduce. The relief conferred by the debt rescheduling strategy though enables the country to avoid outright difficulties, it is important to note that it has not only been temporal but inadequate even in cost efficiency. These costs includes continued payment of interest on the amount of debt outstanding, hindering of development and in the long run, building up of obligations for the future and creating problems for future governments. The rescheduling involves the compounding of principal and interest in the consolidation period.
There is no provision for interest cancellation in the strategies put in place. (Adam, 2004) For example, multilateral loans such as World Bank’s loans must be serviced as at when due to avoid suspension of disbursement as well as granting of new loans. Also, defaulting on the par bonds and promissory notes carry serious penalties like seizure of the assets of Central Bank of Nigeria and the Nigeria National Petroleum Corporation abroad. (CBN, Statistical Bulletin, 2015)
In the case of Non-Paris Club bilateral debts, defaulting attract a penalty of between one and three percent increase above the normal rate charges. Such defaults would also affect the credit rating of the country. According to the debt management office, failure to honour the country’s debt obligations will not only undermine Nigeria’s effort to secure substantial debt relief in the medium term, or secure restoration of the much needed western countries export credit guarantee covers for imports of goods and direct investment into the country. Nigeria’s Paris Club eligibility was suspended by the club in reaction to the Federal Government’s suspension of the IMF supervised standby arrangement in April 2002. (CBN, 2000) These among others made it clear that the debt management policies could not save the problems of debt in Nigeria but could only provide a temporal relief.
Financing of development through external borrowing is not a new phenomenon to Nigeria or other developing nations. Some of the developed countries also depend on external borrowing for major investment projects. External indebtedness is not harmful, what is detrimental to many West African countries is their inabilities to pay back their debts as at when due, resulting in a great burden on their economy as well as their national development. The solution to the problem of West Africa’s external indebtedness lies in acknowledging the fact that most nations in West Africa need to restructure their monetary and financial policies, both to meet current exigencies and generate further growth. The international economic system need to provide the right climate for developing countries of West Africa to make the right structural adjustments.
Nigeria government need to adopt drastic measures at the national level to curb public spending, wastage, misuse and mismanagement of resources, corruption, excessive dependence on foreign technical and managerial skills and competence; local production should be encouraged. Nigeria policy makers need to make serious and deep rooted structural adjustment in their industrial, agricultural, and trade policies in order to address external debts as an integral component of their developmental plans and priorities.
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