Nigeria - Debt Relief for a Green and Inclusive Recovery

opinion

An international debt relief for a green and inclusive recovery initiative could contribute innovative solutions to address present challenges.

Given Nigeria's institutional knowledge and experience in undertaking debt restructuring negotiations from the last round of debt forgiveness, the alignment of the use of debt-for-climate swaps with the government's plan to further develop the country's green bond market, and the country's urgent need but low fiscal capacity to transition away from the fossil economy, the idea of debt relief for a green and inclusive recovery appears to be a promising fit.

Nigeria's debt is fast rising and approaching unsustainable levels. The country will be hard-pressed to achieve its development and climate commitments given the growing fiscal constraints. A debt relief for a green and inclusive recovery initiative could provide innovative solutions to address these challenges.

Nigeria's economy has been hit hard by the impacts of the COVID-19 pandemic. In 2020, the country recorded its deepest quarterly contraction since the 1980s, at about minus 6 per cent in the second quarter. Oil exports in 2020 fell by around 43 per cent and fiscal revenues by as much as 28 per cent.

Although the Nigerian economy grew by 3.4 per cent in 2021, more than five million Nigerians will have fallen into poverty by 2022 due to the lingering impact of the COVID-19 pandemic. This takes the number of Nigerians living in poverty to about 95 million (or 46 per cent of the population) according to the World Bank. More than one third of the labour force continues to be without employment or is underemployed.

Nigeria's medium to long-term economic outlook is equally concerning. Despite the surge in global energy prices due to the war in Ukraine, the pace of the global energy transition away from fossil fuels is set to accelerate. While the European Union (EU) is currently scrambling to diversify its oil and gas imports away from Russia and looking towards Nigeria in this regard, the EU Commission's REPowerEU Plan increased the headline 2030 target for renewables from 40 to 45 per cent. A 2021 report by the think tank Carbon Tracker estimates that fossil fuel reliant countries could see a drop of 51 per cent in government oil and gas revenues in a shift to a low-carbon world over the next two decades.

Not least due to the large debt burden, Nigeria lacks the fiscal ability to fulfill its commitments to achieve the Sustainable Development Goals (SDG) and to contribute to the attainment of the Paris climate goals. What the United Nations framed as a "Decade of Action" is starting with Nigeria and many other developing countries regressing, instead of making accelerated progress.

But even before the impacts of the COVID-19 pandemic hit, Nigeria's economy and state finances were on shaky terrain as the country struggled to come out of the 2016 recession caused by a slump in oil prices. Between 2015 and 2019, the country's debt more than doubled from N12.6 trillion to N27.1 trillion. By June 2021, this figure rose to about N39 trillion and it is expected to reach N45 trillion by the end of 2022. Whilst the debt-to-GDP ratio remains below the self-imposed 40 per cent mark, debt servicing costs have reached a worrisome level. In 2021, Nigeria, at the federal level, spent an estimated 76 per cent of its revenue in debt servicing. At the same time, the structure of Nigeria's external debt has fundamentally changed, with commercial debt now making up a large chunk (about 40 per cent) in comparison to the early 2000s. Bilateral debt is largely owed to China as opposed to the countries of the Paris Club.

Not least due to the large debt burden, Nigeria lacks the fiscal ability to fulfill its commitments to achieve the Sustainable Development Goals (SDG) and to contribute to the attainment of the Paris climate goals. What the United Nations framed as a "Decade of Action" is starting with Nigeria and many other developing countries regressing, instead of making accelerated progress.

The investment needed for the country's development and climate commitments appear more daunting than ever before. The financing gap for Nigeria to achieve the SDGs by 2030 is an estimated N125 trillion. The estimated cost of implementing the country's Nationally Determined Contribution, which would lower Nigeria's emissions by up to 47 per cent, compared to the business-as-usual scenario by 2030, is N74 trillion.

An international debt relief for a green and inclusive recovery initiative could contribute innovative solutions to address these challenges. The Vulnerable Twenty (V20) Group of Ministers of Finance of the Climate Vulnerable Forum to which a number of Nigeria's peers from the ECOWAS region belong - including Senegal, Ghana, Niger and Liberia among others - issued a statement ahead of the last United Nations climate conference in Glasgow advocating for a major debt restructuring initiative for countries overburdened by debt, development and climate challenges.

To ensure private creditor participation, multilateral agencies could establish guarantee facilities that would facilitate debt relief negotiations and provide credit enhancements for new "green and inclusive recovery" bonds that would be swapped for old debt with a haircut. In addition, stringent transparency and accountability measures would need to be put in place to ensure the developmental impact of any debt relief.

At its core, the proposal suggests that the debts and debt servicing costs of developing countries are to be reduced in return for clear and measurable commitments and investments into programmes and projects towards the achievement of the SDGs and the Paris Climate Agreement. To decide which countries are eligible, the World Bank and IMF should enhance their debt sustainability analysis to include climate and other sustainability risks and needs in their assessment. If they find a country to have unsustainable public debt, debt relief, equally involving public and private creditors, would be granted. To ensure private creditor participation, multilateral agencies could establish guarantee facilities that would facilitate debt relief negotiations and provide credit enhancements for new "green and inclusive recovery" bonds that would be swapped for old debt with a haircut. In addition, stringent transparency and accountability measures would need to be put in place to ensure the developmental impact of any debt relief. This could take the form of a dedicated "green and inclusive recovery" fund with its own accounting, auditing and reporting systems that encourage citizen oversight and participation.

Nigeria's political leadership is increasingly warming up to the idea of the necessity for debt relief in Africa. President Muhammadu Buhari advocated for debt cancellation for African countries at the United Nations General Assembly in September last year. More recently, the speaker of the House of Representatives, Femi Gbajabiamila rallied African speakers of parliament in another call for total debt cancellation. As any international debt initiative appears more likely if tangible plans and commitments are put on the table by a broad coalition of countries seeking relief, the Nigerian government should closely interrogate their peers' proposals.

Given Nigeria's institutional knowledge and experience in undertaking debt restructuring negotiations from the last round of debt forgiveness, the alignment of the use of debt-for-climate swaps with the government's plan to further develop the country's green bond market, and the country's urgent need but low fiscal capacity to transition away from the fossil economy, the idea of debt relief for a green and inclusive recovery appears to be a promising fit. Even if only limited debt relief was granted, the proceeds would easily be a multiple of the N15 billion raised through Nigeria's second green bond issuance in 2019.

Jochen Luckscheiter is with the Heinrich Böll Foundation Abuja Office, while Adedeji Adeniran is with the Centre for the Study of the Economies of Africa, Chukwumerije Okereke is with the Centre for Climate Change and Development, and Vahyala Kwaga is with BudgIT.

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