The Nigerian Village Square - Re: Is This What They Call Debt Relief? By Simon Kolawole

Re: Is This What They Call Debt Relief? By Simon Kolawole

Thursday, 14 July 2005

Re: Is This What They Call Debt Relief? By Simon Kolawole (This Day (Lagos) 11th july 2005) Let me start by acknowledging the fact that the article is an excellent piece. I was very happy when I read it because it provided a perfect answer to the question of national pride etc being peddled by some critics. The theory of national pride and ego was based on the imagination that Nigeria begged for the debt relief.

To say that Nigeria begged for debt relief is not only comical but shows a lack of understanding of banking practice. Your article has shown quite clearly that the debt cancellation was indeed in the interest of the creditor nations. I hope a popular economist cum critic read your piece.

I have always believed too that Nigeria deserves a better deal from the creditors, based on the following facts The loans were obtained for fraudulent purposes and there are no projects to show for them.A substantial part of the loans have translated to private investments in the creditors nations’ banks.There is ample evidence to suggest that the creditor nations did not monitor the uses to which the loans were applied yet Nigeria continued to service these “loans” and operated under stiff covenants such as IMF conditionalities which have contributed to the worsening of our economy.
However, as the Yorubas’ will say, “Adehun ni Adehun”- agreement is agreement.

Therefore, the whole debt issue should be viewed from the fact that whether rightly or wrongly, Nigeria at a time entered into these contracts which have no provision for one-sided repudiation.

Having said this, I want to comment on some of your submissions.

Firstly, you wrote, “ This means essentially that Nigeria would part with $12billion to get a relief of $18billion. Dear Nigerians, this is rip off of the century”.

It is not a rip-off. And just as you wrote later in your piece, financial transactions transcend arithmetic. Any relief is better than no relief.
With this payment, Nigeria will not only have these excruciating debt burden removed, the ever present dictation by the creditors about how we run our economy will also be wiped off; we will not be bound by the loan covenants after discharge. If we have to pay $12billion to get our financial independence so be it.

Secondly, the rate of interest applicable to a loan facility is determined by three factors- risk free rate (e.g. treasury bill rate), allowance for risk and allowance for time.

In financial management theory and practice, there is time value of money (N100 in 2005 is not the same N100 in 2006) just as you will expect a bank to pay interest on your savings account, and there are competing investments for any available amount. The income (to you) on your savings account can only be recouped from interest charged on loans and other investments to which your savings and other deposits have been applied.

It is based on these that interests are charged on loans.

Even if we chose to continue to pay the $1billion dollars annually, (and interest will continue to accrue on the reducing balance) the present value can never equate $18billion saving or the $12billion that we have to pay! It will be higher.

Why is that so? Financial management theory postulates that irrespective of the number or amount of each repayment of a loan, the present value will equal the amount borrowed if discounted to present value.

To put it in a more simplistic form, if we decide to invest the $12billion today, at say 4.33% and we continue to pay interest of 5.33% on the outstanding balance of the loan, the total repayment discounted at 4.33% will be higher than the $18billion that we are saving. And because interest accrual on our savings (4.33% ) is lower than the interest payable on the loan (5.33%) coupled with the fact that the loan amount is almost twice the amount of our savings it will take a long time for us to reach equilibrium or break even.

In present value terms, $18billion saving or payment of $12billion is preferred to $30billion outflow.

Apart from this, to continue with the annual repayment is to continue to abide with the loan covenants and the IMF conditional ties. The press in the past had criticized the continued presence of IMF conditional ties in our economy.
Also in a contractual agreement of this nature, the creditor has a upper hand in negotiations. So when you wrote “ I think we should plead for cancellation of all interests and penalities” one should quickly add that that is not our exclusive right, there is no guarantee that it will be granted and it does not follow the logic behind interest rate determination as specified above.

On the issue of Tsunami, book keeping and international financial order. This is not the same as the case of Nigeria and a creditor is at liberty to discharge a debtor at any time or to vary contractual provisions, especially if such variation will favour the borrower.

Tsunami was a world acclaimed disaster and Nigerians even contributed to a relief fund for the victims, so if their creditors decide to forgive their debts so be it.

In law too a contract may be discharged or frustrated by natural disasters of the Tsunami magnitude

“What do we stand to gain” PLENTY. The most important being economic freedom; not even credit rating as stated in your piece.
“What do we stand to lose if we don’t pay” . Once again PLENTY. The most important is national pride, so when Cameroun harasses you on board of CAF or Rwanda stops you from clinching UN seat then you will pause and think.

In fact credit worthiness is the least of the losses that an import dependent nation like Nigeria will lose if she refuses to honour her debt obligations especially if such a country occupies the place that Nigeria occupies in Africa and the World. Or the position she is aspiring to be.

Despite these observations, it is an excellent piece laced with innocence. This innocence is reflected in the avoidance of the technical cul-de-sac called FINANCIAL MANAGEMENT but which unfortunately is the appropriate tool to apply in a situation such as this.

Thank you
Taslim Anibaba (FCA) 12TH JULY, 2005

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	# 1 Re: Is This What They Call Debt Relief? By Simon Kola...Read the full article. Posted by Robot\| 06.05.2008 06:39

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