Saturday, October 29, 2005

Africa's Biggest Debt Agreement

By David White
Financial Times
October 21, 2005

On October 20, 2005, Nigeria, Africa’s most populous nation, tied up Africa's biggest-ever debt deal and set terms for its main lenders to write off $18 billion of the money it owes them. But, to receive this deal, Nigeria had to commit to paying the Paris Club nations $12.4 billion, mainly to France, the UK, and Germany. Ngozi Okonjo-Iweala, finance minister, justified the outlay, saying Nigeria might not have had the opportunity again. "We think it's a good use of the money," she said.

The debt agreement would reduce Nigeria’s risk premium, improve the country’s financial reputation, and encourage skittish investors. The deal is separate from the debt cancellation plan agreed by leaders of the Group of Eight richest countries at their July summit in Scotland, under which some African countries are due to see their debts to the World Bank, International Monetary Fund and African Development Bank wiped clean.

Earlier this week, the IMF endorsed Nigeria’s economic policy framework. Debt service savings will appropriately be channeled into water resources, power, roads, health and micro-finance for farmers, and will be monitored by the UK's Department for International Development and the World Bank to avoid diversion of funds.

Some economic experts and proponents of debt cancellation maintain that it is irresponsible for Nigeria to pay $12 billion when it is looking for money to fight AIDS, and health and education problems, among other issues. However, if the offer is not taken advantage of, the debt profile would only rise and further compromise the economic good of the country. What is in the best interest of a country that is trying to reform and re-position itself for growth?

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