Debt swaps refer to agreements between a creditor and a debtor wherein the existing debt is replaced by a new instrument or commitment, entailing some financial relief for the debtor and a reallocation of cash flows towards targeted objectives.
Nigeria is currently in throes of a veritable debt crisis. In the first quarter of 2022, Nigeria’s public debt stock stood at US$100.1b (N41.6 trillion). Out of this amount, US$39.9 billion (N16.6 trillion) was external debt. The country’s cost of debt servicing surpassed the government’s revenue in the first quarter of 2022. Nigeria’s unsustainable public debt discourages investment and hinders growth, in addition to undermining the country’s global competitiveness and increasing the susceptibility of the financial market to international shocks. It also has the potential to leave a huge burden to future generations and is thus unacceptable from an intergenerational equity perspective. More immediately, the debt crisis crowds out space for investment in social services and public infrastructure, as an increasing share of revenues continue to be spent on debt servicing as opposed to capital projects and programs.
There are several sound reasons for creditors and the GoN to agree to debt swap deals, including that, in light of the current financial situation, Nigeria cannot settle its enormous debt without going bankrupt. In turn, if Nigeria’s economy—the largest in Africa—falters there is great potential for a significant contagion risk for the rest of the continent.
Possible Focus of a foundation from DEBT SWAPS
Recent floods in Nigeria that killed 600 people and displaced another 1.5 million this rainy season are tied to human caused climate change, and extreme weather events in Nigeria and elsewhere are bound to become more common as the earth continues warming. However, as described above, the need to service government debt constrains the GoN’s ability to dedicate resources to address these challenges. As such, the need for debt-for-climate swaps is urgent. Such a climate-related debt swap could be valued in the hundreds of millions or even billions of dollars. Under the NEAT model, a portion of this would be set aside to endow an independent foundation dedicated to funding initiatives that support resilience, rebuilding, and Nigeria’s transition to clean energy. This approach to the management of these funds would remove the management of debt relief gains from the hands of government—where past experience has demonstrated they are likely to be absorbed into other priorities or fall into the corruption stream—and place that responsibility instead in a carefully designed, independent, and accountable nonprofit foundation. This approach would, in turn, help to alleviate concerns amongst lender countries that debt relief gains could be squandered by the government.