Debt Relief for a Green and Inclusive Recovery, By Luckscheiter, Adeniran, Okereke & Kwaga

Given Nigeria’s institutional knowledge and experience in leading debt restructuring negotiations since the last round of debt cancellation, aligning 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 weak fiscal capacity to move away from the fossil economy, the idea of ​​debt relief for a green recovery and inclusive looks promising.

Nigeria’s debt is growing rapidly and approaching unsustainable levels. The country will struggle to deliver on its development and climate commitments given growing fiscal constraints. 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 effects of the COVID-19 pandemic. In 2020, the country recorded its largest quarterly contraction since the 1980s, at around minus 6% in the second quarter. Oil exports in 2020 fell by around 43% and tax revenues by 28%.

Although the Nigerian economy grew by 3.4% 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 brings the number of Nigerians living in poverty to around 95 million (or 46% of the population) according to the World Bank. More than a third of the labor force is still unemployed or underemployed.

Nigeria’s medium to long-term economic prospects are also of concern. Despite the spike 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. As the European Union (EU) is currently striving to diversify its oil and gas imports away from Russia and is looking to Nigeria in this regard, the European Commission’s REPowerEU plan has increased the overall target to 2030 for renewable energies from 40 to 45%. A 2021 report by think tank Carbon Tracker estimates that countries dependent on fossil fuels could see a 51% drop in government oil and gas revenues as part of a shift to a low-carbon world over the next few years. next two decades.

Partly due to the heavy debt burden, Nigeria lacks the fiscal capacity to meet its commitments to achieve the Sustainable Development Goals (SDGs) and contribute to the achievement of the Paris climate goals. What the United Nations has defined as a “decade of action” begins 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 public finances were on shaky ground as the country struggled to emerge from 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. As of June 2021, this figure has risen to around 39 trillion naira and it is expected to reach 45 trillion naira by the end of 2022. While the debt-to-GDP ratio remains below the self-imposed bar of 40%, debt service costs have reached a worrying level. In 2021, Nigeria at the federal level spent about 76% of its revenue on debt service. At the same time, Nigeria’s external debt structure has fundamentally changed, with commercial debt now accounting for a large share (about 40%) compared to the early 2000s. Bilateral debt is largely owed to China by opposition to Paris Club countries.

Partly due to the heavy debt burden, Nigeria lacks the fiscal capacity to meet its commitments to achieve the Sustainable Development Goals (SDGs) and contribute to the achievement of the Paris climate goals. What the United Nations has defined as a “decade of action” begins with Nigeria and many other developing countries regressing, instead of making accelerated progress.

The investments needed for the country’s development and climate commitments appear more daunting than ever. Nigeria’s financing gap to achieve the SDGs by 2030 is estimated at N125 trillion. The estimated cost of implementing the country’s Nationally Determined Contribution, which would reduce Nigeria’s emissions by up to 47%, compared to the business as usual scenario by 2030, is N74 trillion.

An international debt relief initiative for a green and inclusive recovery could provide innovative solutions to address these challenges. The Vulnerable Twenty (V20) Group of Finance Ministers of the Climate Vulnerable Forum to which a number of Nigerian peers from the ECOWAS region belong – including Senegal, Ghana, Niger and Liberia, among others – issued a statement before the last UN climate meeting. conference in Glasgow advocating for a major debt restructuring initiative for countries burdened with debt, development and climate challenges.

To ensure the participation of private creditors, 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 exchanged for debt. old debt with discount. In addition, strict transparency and accountability measures should be put in place to ensure the development impact of any debt relief.

At its core, the proposal suggests that the debts and debt service costs of developing countries must be reduced in return for clear and measurable commitments and investments in programs and projects aimed at achieving the SDGs and the Paris Climate Agreement. In deciding which countries are eligible, the World Bank and IMF should improve their debt sustainability analysis to include climate and sustainability risks and needs in their assessment. If they find that a country has unsustainable public debt, debt relief, involving equal shares of public and private creditors, would be granted. To ensure the participation of private creditors, 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 exchanged for debt. old debt with discount. In addition, strict transparency and accountability measures should be put in place to ensure the development 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.

Nigerian political leaders are increasingly warming to the need 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, Speaker of the House of Representatives Femi Gbajabiamila joined African Speakers of Parliaments in another call for full debt cancellation. As any international debt initiative seems 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 the proposals of its peers.

Given Nigeria’s institutional knowledge and experience in leading debt restructuring negotiations since the last round of debt cancellation, aligning 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 weak fiscal capacity to move away from the fossil economy, the idea of ​​debt relief for a green recovery and inclusive looks promising. Even if only limited debt relief were granted, the proceeds would easily be a multiple of the 15 billion naira raised through Nigeria’s second green bond issuance in 2019.

Jochen Luckscheiter works at the Abuja office of the Heinrich Böll Foundation, Adedeji Adeniran at the Center for the Study of African Economies, Chukwumerije Okereke at the Center for Climate Change and Development, and Vahyala Kwaga at BudgIT.


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