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Dr. Chu Okongwu, Simon Kolawole And Debt Relief: A Comment

Sanusi Lamido Sanusi

LAGOS, AUGUST 8, 2005

I have read Dr Chu S. P. Okongwu’s article, “Bebt Relief? Nothing to Celebrate”, published in Thisday Newspaper on Friday, July 22, 2005 and reproduced verbatim by the editors of The News magazine in their August 1 edition under the title “On the so-called debt relief obtained from the Paris Club”. I had followed various criticisms-ranging from the sublime to the ridiculous-of the recent announcement of the Paris Club Debt Relief package by President Obasanjo and his Finance Minister, but refrained from making a comment. However, Dr Okongwu’s voice is a weighty one that deserves consideration. Unfortunately, his intervention in this matter, while raising-or rather, restating-a number of intelligent and valid criticisms, ended up with dangerous arguments that merit a word of caution. These arguments have been compounded by other, more dangerous ones, written by ThisDay’s bold columnist, Simon Kolawole. I had thought that the Finance Minister’s intelligent response to Kolawole had addressed the major issues he had concerning debt relief. Unfortunately, I woke up this morning (8/8/2005) to read his back-page piece, rather uncouthly titled “Before I was Rudely Interrupted”, which was filled with so much economic nonsense presented as intelligent analysis I had to make this intervention.

Dr Okongwu needs no introduction. He is a respected economist with antecedents in the World Bank and he was one of the king-pins of the economic reform programmes of the federal Government under General Babangida, in which he served in many capacities including Minister of planning and of Finance. Along with Dr Kalu Idika Kalu (from the IMF), Olu Falae and Alhaji Abubakar Alhaji (the notorious “Triple A”), Okongwu was one of the blue-eyed boys of the three sponsors of what, thanks to Joseph Stiglitz, we now refer to as the “Washington Consensus Policies”, and these are the IMF, the World Bank and the Government of the USA. In other words, Dr Okongwu was directly responsible for Babangida’s structural adjustment programme with all of the consequences of that obnoxious policy package-including but not limited to the massive devaluation of the national currency, collapse of governmental due process and credibility, huge disparities in income distribution, sale of national assets to a vulgar emergent class empowered through what Karl Marx called “Primitive Accumulation”, the destruction of the economy’s manufacturing base and decimation of the progressive middle classes, etc. I have elsewhere articulated my criticism of SAP from a theoretical perspective and will not repeat those arguments here.

Nigerians must not be allowed to forget who Dr Okongwu is and what policies his ministry pursued. In a sense many-but not all-of the major policy thrusts of the present economic reform team are aimed at cleaning up the mess that this country was thrown into by Chu Okongwu and his peers. We must always bear this in mind, when those who were the most willing tools of international finance capital pretend to speak with an air of patriotism and commitment to the national interest against their hitherto patrons. As stated by President Obasanjo in his speech to the National Assembly, Nigerian leaders, particularly between 1985 and 1995 “…signed all sorts of agreements with outrageous interest rates, squandered loans obtained in the name of development, drew down on foreign loans without executing any jobs, and in other cases stole or wasted such loans.” Okongwu was a key member of the government responsible for all of this.

As mentioned earlier, Dr Okongwu’s piece started with some valid criticism. Along the same lines as other critics like frontline journalist Mohammed Haruna, Okongwu asked valid questions as to what exactly the Paris Club has promised, vis a vis what the President and his ministers have been announcing. There is a difference between an invitation to negotiate debt relief and debt forgiveness; the offer of possible debt relief “up to Naples terms” is inconsistent with the same offer “on Naples terms”. We are also not informed of the content of the Policy support Instrument the government is negotiating with the IMF and the stage of those negotiations. Clearly there are so many ifs and buts to the announcement, and Nigerians have a right to ask if we have in fact not been celebrating prematurely. The stock response from ministers so far has been that this is just about semantics but the deal is a done deal. Objections from Okongwu, given his inside knowledge of the World Bank and experience in dealing with creditors, give reason for pause. We need more clarification, preferably from the creditors themselves, and Government needs to give us more information on the “fine print”, any “attached strings” and, in general, the salient aspects of the agreement. (Dr Mansur Muhtar, Director-General of the DMO, has started the good job of explaining these details to Nigerians in his reply to Okongwu.) It has also not helped the President’s image that he has latched on to the seeming progress out of this impasse to justify his wasteful foreign jamborees. The performance convinced no one, and it was, to say the least, a display of political naivete and immaturity. Nigerians will judge for themselves if those trips were worth it, and making the tenuous link was totally unnecessary and counter-productive.

Before proceeding let me make a few clarifications. I am a strong critic of the Obasanjo government and in 2003 I went public with my endorsement of the Buhari candidacy. I believe the 2003 elections were massively rigged, the judiciary did not do Nigerians justice by upholding those results, and that the achievements of this government are far less than they could have been with better commitment and focus. However, criticism of government should always be fair, objective and principled. The economic reform team of this government is not perfect, and it has many flaws some of which I have discussed elsewhere and will still highlight below. However, that team is the one light at the end of the tunnel, the one hope that all hope is not lost for this country. Given our experience with Okongwu, Kalu and Co most Nigerian economists were skeptical as to the ideological commitment and patriotism of a team filled with World Bank employees and consultants. I was personally not convinced that Okonjo-Iweala could deliver. Over time my skepticism has given way to pleasant surprise, respect and even admiration and I will not shirk away from the critical responsibility of applauding the good even as we censure the bad.

To continue, Okongwu’s intervention ended up as a fierce criticism of the government for “being too eager” to pay the debt he incurred. He suggests, in a manner surprising for a man of his stature and reputation, that “no one in the international financial community really expects these …debts to be paid off” and if we did nothing the debts would “die by semantics”. He would rather that the huge oil windfall we have be kept, even though our history is that it will be wasted by the government or kept for the next crop of leaders to steal. Okongwu also refers to payment of arrears and past-dues as “up front” payments thus misleading the reader on an important component of all debt forgiveness. He does not see why we are “in a hurry” to free ourselves from the burden that has compromised our independence and mortgaged our future and he uses such uncomplimentary words as “scandalous” to describe the arrangement. He thinks that by doing this we are being made into “fools” even though SAP, the policy he championed, was the most foolhardy economic programme ever pursued by a Nigerian government.

The point is that to criticize the government for misrepresenting or exaggerating the commitment of the Paris Club is one thing, to deny that debt repayment-which is never painless-is desirable is another. Okongwu craftily combines both, and in this he finds able support in other Babangida associates like the journalist Muhammad Haruna and former Information Minister Tony Momoh. One wonders why it is that Babangida’s supporters are not happy that we are paying off this debt. Obviously many would prefer that we keep the national reserves for him, since we do not know what the price of oil swill be if he comes to power in 2007 as planned. For this reason alone we should pray that all debt be paid off even if it means emptying the reserves before the locusts return for a second helping.

Nigerians must understand that debt write-off and repayment is a bold political step for the governments of the West. Writing off the national debt is not a free lunch. The citizens of western countries are paying taxes to fund their governments, and those governments gave loans to a country whose leaders stole the money. We have not punished those leaders. Instead they are our national heroes, elder statesmen and community leaders. We have made them ministers and governors and given them national honours. We are planning to bring them back into office in 2007. Why should the American or European citizen pay taxes to fund the corruption of our rulers and profligate lifestyles financed by larceny of the treasury. If we think of this fact alone, we will understand why debt-relief, if it materializes, will be a major achievement of the Obasanjo government which even those of us who are not his supporters should have the dignity to acknowledge and applaud in the interest of the nation and our own credibility.

This brings me to Kolawole’s article referred to above, an obvious reply to Dr Okonjo-Iweala’s earlier protest at his writings. Kolawole is a journalist for whom I have a lot of respect but his latest piece was a great disservice to his intellect. Take the first, rather sensational thesis he put up: there is in fact no debt-relief, because “the whole external debt stock discounted at 4% p.a comes to about the same amount ($12b) the Paris Club requires us to pay now for the offer to be valid”. This argument was apparently given to Kolawole by one of his readers, described by him as “obviously a financial expert”. With all due respect this dense argument shows the opposite of expertise in financial matters. I will explain.

The Present Value of $29billion owed by Nigeria today is $29billion. Period. It is rather dis-ingenious to discount it over 23 years and arrive at $12billion. Think of it this way. If we do not pay off the debt today, we will owe the Paris Club $29billion. Assuming Kolawole’s rate of 4%, the creditors have an asset worth $29b paying 4% per annum over the next 23years on a reducing balance basis. If we pay $12billion today the creditors will have an asset that is just over 40% of the value of what they had, paying them the same rate of interest over 23 years. What Kolawole and his “expert” would have Nigerians believe is that the two streams are equivalent, which is the same as saying the $29billion is equal to $12billion. Now let us see where Kolawole went wrong. In his analysis he makes the implicit assumption that our $29billion debt stock will be interest-free for 23 years! That way, at the end of the period it will still be $29billion, the equivalent of $12billion today earning interest at 4%p.a over the period! In reality, as we know, this is not the case, and the future value of our debt stock is much higher that its present value. Using Kolawole’s own numbers-which I have not cross-checked for accuracy, by the way-as a base, we would say that if $12billion today is worth $29billion(i.e $12b times 2.416) in 23 years at 4%, then $29billion will be roughly worth $70billion over the same period at the same rate. So, using this logic, the creditors are giving up $70billion for $29billion over the tenor of the loans. And Kolawole says this is nothing!

There are other weaknesses in Kolawole’s argument. Debt is repaid from cash-flow and unfortunately for us in Nigeria, our cash-flow is dependent on a variable over which we have no control-the price of oil. Our capacity to repay debt is determined by the price of oil from time to time and indeed our debt crisis started when oil prices crashed in the early eighties. We cannot take it for granted that the high oil prices we are seeing due to an extraordinary international environment are sustainable over the long term. We had this situation during the first Gulf War with IBB in power. We all remember the circumstances under which the Nigeria correspondent of the FT of London was deported for asking questions about the windfall. We are yet to see the details of the Udoji report on those monies. If this government does not take advantage of the windfall and pay off the debt, as proposed by the likes of Kolawole and Okongwu, what is the guarantee that the next government will not just steal it the way the first windfall went?

A second flaw in the argument is the implicit assumption of low world interest rates. Not only did oil prices crash in the 1980s, interest rates sky-rocketed at one time reaching 22% in the US under Ronald Reagan. The annual debt service charge of $1billion we are looking at as affordable today could quadruple or quintuple if rates ever approach the 1980s levels. Now is the time to reduce the overhang and eliminate interest rate risk, while making sure that future contracts are properly structured with options such as caps and collars, or at least hedged against interest rate and third currency risks.

Kolawole’s piece also contained glaring errors of fact. He argues, with an air of authority, that “Nigeria’s Public Debt is 20% of her GDP” and compares this with figures from the US, UK, France, Switzerland, Japan and South Africa. Kolawole makes the strange argument that excessive debt is a sign of a robust economy and suggests that we should strive to be credit-worthy so we can borrow more, rather than repay the debt. The question whether debt repayment is one (albeit not the sole) component of sound economic policies that will lead to better credit rating is not addressed. In any case, the numbers given by Kolawole are simply false. We now all know that our external debt alone is in the region of $30billion. Total Public Debt is a combination of this number and gross domestic borrowing. We also know that our country’s GDP is less than $50billion. So how on earth can our public debt be “less than 20% of GDP”? The fact is that as recently as 2001 the Public debt was already around 120% of GDP and this number has only come down slightly due to the high oil prices and moderation in domestic borrowing and deficit-financing, resulting from improvement in the management of the economy. But most estimates would still place the ratio as somewhere in the 90s.

I can go on and on but will stop here. The point is that journalists and writers must respect the intelligence of their readers and understand that we read columns to be educated and not misled. This government still has a long way to go to convince Nigerians of its seriousness and sincerity. Ideologically, the naïve faith in the market, the lack of preparation for market failure, the urge to display the public sector as corrupt and pretend that the private sector is not equally corrupt-all of these should be exposed and criticized by progressive Nigerians. Economic policies aimed at reducing subsidies, unraveling the welfare state, widening income distribution inequalities and increasing the suffering of our masses to fuel obscene profiteering must be resisted. However, we ought to applaud debt repayment/cancellation, due diligence and increased transparency, a fight against corruption and drug trafficking, and those steps taken by the likes of Okonjo-Iweala, Mansur Muhtar, Nasir el-Rufai, Nuhu Ribadu, Oby Ezekwesili and Dora Akunyili to improve our image as a nation and reform the economy and society.

Those of us who criticize the government also have a burden. We must not mislead Nigerians, we must not fabricate evidence and, as they say, “give a dog a bad name in order to hang it.” To condemn debt-repayment, given all the damage done to the third world by debt is irresponsible. Okongwu, Kolawole, Haruna and Co should be big enough to rise above that.