In April 2006, Nigeria paid off all her foreign debt.
It was a good deal, Nigeria essentially paid $12b to settle over $30b in debt, in effect an over 50% discount.
Should Nigeria have used $12b to build rails or pay debt?
A very short trend
Borrowing is front loaded consumption.
When Nigeria Borrowed $30b (principal plus interest) she essentially consumed "tomorrow's $30b earnings "today".
To repay, Nigeria has to take current earnings and apply to current obligations.
What are the current earnings? Crude oil
Let's step back, did Nigeria actually borrow $30b?
No
$30b represented principal and accrued intrest..As long as a loan were "open", intrest accrued.
The debt had ballooned not because Nigeria borrowed more but that Nigeria serviced the loan less
..
What would have happened in 2007 if Nigeria owned $30 and crude oil fell to $30b
Well Nigeria will simply restructure $ loan, incurre more intrest and "management fees"
The problem is simple, Nigeria means of repayment (crude oil) is sold at a price Nigeria does not control.
Paying off the foreign currency denominated loan eliminated a huge contingent liability for Nigeria.....at a 50% discount.
That 'light" debt sheet was a key reason Nigerian sovereign bonds were priced and added to the JP Morgan Bond index, because debt to revenues were low.
In summary, a $30b debt today plus subsequent foreign currency borrowings would have sucked every cent from the Central Bank of Nigeria to simply meet $ interest payments.
The Naira would have no support and imports and trade would have stalled.
Thank you
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In May 1998, The Government of Pakistan froze all foreign currency accounts (FCA) estimated to hold $7.56b in an emergency action declared to protect the economy.
The Government of Pakistan instructed banks to pay Pakistanis receiving $ salaries from offshore companies in local currency at inter-bank rates. All dollar assets were converted to the local currency.
The effect of these actions was devastating to the economy of Pakistan.
The primary impact was a loss of confidence in Pakistan's Government, which was evident in many ways, including private sector remittances stopping completely, with Pakistan losing $2.5b in remittances projected inflow for that year.
1. Nigeria needs forex to settle her FX obligations including an outstanding obligation of over $7b; thus, the NNPC arranged a $3.3b emergency loan from AFRIEXIMBANK (AFEX) on behalf of the Federal Government of Nigeria.
2. The loan structure involves the NNPC Limited receiving cash today via an SPV called Project Gazelle Funding Limited, sponsored by the NNPC Limited. The NNPC promises to repay AFEX with crude oil, equivalent to the principal borrowed plus an interest element of 11.85% APY.
3. The NNPC Limited borrowing is backed by its future sales of crude oil.
Let us talk about inflation and my small town in a Local Government Area called Ohafia in Abia State.
My Town In Ohafia
In my town, there is one big shop. It's got everything: groceries and also a fridge. In the evenings, locals gather for a cold beer in front of the shop.
It's the "mall", the centre of entertainment.
In regular times, prices in that shop reflect prices in Nigeria with a bit of margin for the cost of transportation. My town is an agrarian community with little disposable income.
The shop owner knows that prices cannot be sky-high because the residents can't afford to spend large sums on imported luxuries. The shop sells local palm wine and Nigerian beer, no foreign brands; why?
1. Local refining will reduce the cost of local PMS. FALSE. PMS pricing is based primarily on the cost of crude priced in $, not the cost of refining
2. Currency float will make $ flow in. FALSE. A float is a necessary but not sufficient measure to attract $ inflow
3. A strong currency translates to a strong economy. FALSE. A Strong currency means exports from that county are not competitive. Exports boost GDP and a weak currency makes exports competitive.
South Korea and Japan have weak currencies
4. Imports are bad. FALSE.
The largest importer on earth is China, largest exporter on earth is China. What boosts GDP is net exports. Nations can import goods they have no comparative advantage in and export goods they have a comparative advantage in, just export more