Professional Documents
Culture Documents
PROJECT
Debt Crisis: Experiences in Nigeria, North
Korea, Indonesia and Greece
INDEX
1. DEBT CRISIS IN NIGERIA....................................................................................4-24
1.1 INTRODUCTION...........................................................................................4-5
1.2 HISTORY........................................................................................................5-8
1.3 CAUSES..........................................................................................................8-9
1.4 IMPACT OF DEBT BUREDEN ON NIGERIAN DEVELOPMENT.........9-11
1.5 DEBT RELIEF..............................................................................................11-20
1.6 PROBLEMS OF DEBT MANAGEMENT..................................................21
1.7 IMPACT OF DEBT MANAGEMENT........................................................21-23
1.8 CONCLUSION.............................................................................................24
2. DEBT CRISIS IN INDONESIA...........................................................................25-31
2.1 INDONESIA ECONOMY...........................................................................25
2.2 CRISIS..........................................................................................................25-26
2.3 ASIAN FINANCIAL CRISIS IN INDONESIA........................................26
2.4 INDONESIAN CRISIS BEGINS................................................................27
2.5 THE IMF ARRIVES & CHAOS CONTINUES........................................27-29
2.6 THE CRISIS HITS ITS CLIMAX..............................................................29
2.7 A POLITICAL SYSTEM & START OF RECOVERY.............................30
2.8 LESSONS LEARNED FROM INDONESIAN FINANCIAL CRISIS....31
3. DEBT CRISIS IN NORTH KOREA...................................................................32-45
3.1 ECONOMY OF NORTH KOREA.............................................................32-34
3.2 HOW IT WORKS........................................................................................34-35
3.3 NORTH KOREA IN DEBT........................................................................35-37
3.4 WHAT BROUGHT CRISIS TO NORTH KOREA...................................37-40
3.5 HOW WAS THE CRISIS IMMEDIATELY ADDRESSED.....................41-42
3.6 WHAT MAJOR REFORMS HAVE BEEN IMPLEMENTED..................42-44
3.7 CONCLUSION............................................................................................45
4. DEBT CRISIS IN GREECE.................................................................................46-52
4.1 ORIGIN OF DEBT CRISIS IN GREECE..................................................46-48
4.2 ONGOING OUTCOME OF CRISIS..........................................................49
4.3 TACKLING MEASURES...........................................................................50-52
5. BIBLIOGRAPHY.................................................................................................53-54
Foreword
Massive debts incurred by the countries and their inability to pay has resulted in a shift in the
global economy as well as political world. The nature of debt crisis in third world country
like Nigeria is very different from the crisis faced by Greece. This is due to a number of
reasons, the foremost being the geopolitical situation and location of the countries. Nigeria is
situated in one of the poorest regions of the world and Greece has a strategic location inside
the Eurozone. North Korea on the other hand has been touted as a rogue state ruled by a
dictator. In such a scenario, it is important to analyse the nature of the crisis which may have
more than a few things in common.
The present project intends to study the crisis in these states individually on the basis of key
questions viz. the cause, outcome and tackling of the crisis in each of these countries.do the
same.
likely to have investment opportunities with rates of return higher than that of their
counterparts in developed economies. This becomes effective as long as borrowed funds and
some internally ploughed back funds are properly utilized for productive investment, and do
not suffer from macroeconomic instability, policies that distort economic incentives, or
sizable adverse shocks. Growth therefore is likely to increase and allow for timely debt
repayments. When this cycle is maintained for a period of time growth will affect per capita
income positively which is a prerequisite for poverty reduction 3. These predictions are known
to hold even in theories based on the more realistic assumption that countries may not be able
to borrow freely because of the risk of debt denial.
Although the debt overhang models do not analyze the effects of debt on growth explicitly,
the implication still remains that large debt stocks lower growth by partly reducing
investment with a resultant negative effect on poverty. But the incentive effects associated
with debt stocks tend to reduce the benefits expected from policy reforms that would enhance
efficiency and growth, such as trade liberalization and fiscal adjustment. When this happens
the government will be less willing to incur current costs if it perceives that the future benefit
in terms of higher output will accrue partly to foreign lenders. Reference 4 contributed that
government borrowing can crowd out investment, which will reduce future output and wages.
When output and wages are affected the welfare of the citizens will be made vulnerable.
Reference5 opined that countries borrow for two broad categories: macroeconomic
reasons[higher investment, higher consumption (education and health)] or to finance
transitory balance of payments deficits[to lower nominal interest rates abroad, lack of
domestic long-term credit, or to circumvent hard budget constraints. This implies that
economy indulges in debt to boost economic growth and reduce poverty. He is also of the
2 Greene, J., The External Debt Problem of Sub-Saharan Africa. IMF Staff Papers, 36(4): 836-74,
1989..
3Amakom U. S., Nigeria Public Debt and Economic Growth: An Empirical Assessment of Effects
on Poverty. August 2003
4Stiglitz, J.E., Economic of the Public Sector: Third Edition New York and London, W.W. Norton
& Company, p790, 2000.
5Soludo, C.C., Debt, Poverty and Inequality, in Okonjo-Iweala, Soludo and Muhtar (Eds.),
TheDebtTrap In Nigeria, Africa World Press NJ, p. 23-74, 2003.
4
opinion that once an initial stock of debt grows to a certain threshold, servicing them
becomes a burden, and countries find themselves on the wrong side of the debt-laffer curve,
with debt crowding out investment and growth. This seems to be the position of today
because investment, which will accordingly result to high-speed growth with a positive effect
on poverty, is moving sporadically in both positive and negative directions.
For the past two decades, has borrowed large amounts, often at highly concessional interest
rates with the hope to put them on a faster route to development through higher investment,
faster growth and poverty reduction but on the contrast economic growth and poverty
situations are staggering at the back door amidst excess debt, albeit that was the initial
intention6. It is then obvious that the Nigerian indebtedness has gone beyond such limits and
it is noteworthy if such limit is dictated to help the economy in their pursuit towards debt.
6Pattillo, C., H. Poirson and L. Ricci, External debt and growth.IMF workingPaper.WP/02/69,
International Monetary Fund, Washington, D.C., 2002.
7Adepoju A. A., Salau A. S. and Obayelu A. E. (2007) The Effects of External Debt Management on
Sustainable Economic Growth and Development: Lessons from Nigeria. Munich Personal Repec
Archive (MPRA) Paper. No. 2147, pp. 12.
5
constituting about 78.5 per cent of the total debt stock. 8 It is noted that Nigeria's external
debts have been increasing over time because of a proportional shortage of foreign exchange
to meet her developmental needs.9It therefore became necessary for government to borrow in
1978 for balance of payment support and project financing. As a result of this, government
promulgated Decree No 30 of 1978 which limited the external loans the Federal Government
could raise to 5billion Naira.10
In the same year government made the first jumbo loan of US$1 billion from the
International Capital Market. This increased the nations debt profile to US$2.2
billion.11Given this, Nigeria's external debts skyrocketed from the million-dollar category to
that of billion dollars. Nigerias external debt stock increasedto US$13.1 billion in
1982.12Two factors led to this sharp increase: one, the entrance of state governments into
external loan obligation and two, there was a substantial decline in the share of loans from
bilateral and multilateral creditors and a consequent increase in borrowing from private
sources at stiffer rates.
Nigerias inability to settle her import bills resulted in the accumulation of trade arrears
amounting to US$9.8 billion between 1983 and 1988. The insured components were US$2.4
billion while the uninsured were US$7.4 billion.13The insured component was rescheduled at
the Paris Club, while the uninsured was reconciled with the London Club. This reconciliation
which took place between 1984 and 1988 reduced the amount to US$3.8 billion. 14The
accrued interest of US$1.0 billion was recapitalised. This brought the amount to US$4.8
8 Ibid, pp. 15
9 African Forum and Network on Debt and Development (2007) Nigeria: Foreign Debts, Stolen
Wealth, IFIS and The West, A Case Study. Harare: AFRODAD.
10Chipalkatti, N. and Rishi, M. (2001).External Debt and Capital Flight in the Indian
Economy.Oxford Development Studies, Vol. 29, No. 1.
11 Supra note 9.
12 Central Bank of Nigeria (2004) Nigeria: Major Economic, Financial and Banking Indicators.
13 Supra note. 7, pp. 13
14 Ibid., p.16
6
billion in 1988 and the debt was eventually refinanced. In 1990, Nigerias external debt rose
again to US$33.1 billion.15After a brief decline to US$27.5 billion in 1991, it rose steadily to
US$32.6 billion at the end of 1995. As at 1999, Nigerias external debt stock was US$28.0
billion. 73.2 per cent of this was owed to the Paris Club while the rest was owed to the
London Club, the multilateral creditors, promissory note holders and others.16
Furthermore, servicing and rescheduling of debt became problematic for Nigeria from around
1985 when its external debt rose to up to US$19 billion. Before then, Nigeria had
experienced boom in oil revenue which was followed immediately by an unexpected decline.
In 1980, Nigeria earned $25 billion from oil export. In 1982, it declined to $12 billion and
further to $6 billion in 1986.17Government spending had remained high within this period and
much of the projects were financedthrough external borrowing. Since Nigeria was an OPEC
member, it was not qualified for the soft-loan financing provided by multilateral and bilateral
aid agencies to other countries at that time. 18 As at the end of 2004, Nigerias debt stock had
reached almost $36 billion out of which $31 billion was owed to the Paris Club of Creditors
while the rest was owed to multilateral, commercial and other non-Paris Club of creditor.19
The debt service payment for Nigeria's debts started on a soft, tolerable level in 1958 until it
became a hard bargain years later. Matters came to a head in 2003 when one of Nigeria's
creditors, the Paris Club, demanded $3 billion annually for debt service payment.
Dr.NgoziOkonjo-Iweala considered the payment economically unsustainable. She therefore
negotiated with the club. The $18 billion debt cancellation for Nigeria in 2005 by The Paris
Club and subsequent settlement of some outstanding debts reduced the total external debt of
the country substantially.
15 Supra note. 12
16 Ibid.
17 Ibid.
18Borensztein, E. (1990). Debt overhang, debt reduction and investment: The case of the
Phillippines. International Monetary Fund working paper No. WP/90/77, September.
19Ajayi, R. (2000). On the Simultaneous Interactions of External Debt, Exchange Rates, and Other
Macroeconomic Variables: The Case of Nigeria. Centre for Economic Research on Africa, October.
7
zeal to break out of economic shackles to achieve economic and socio-political development,
the Third World has chosen the option of seeking foreign loan to achieve this development.27
Development, to them, might mean embarking on capital intensive projects such asschools,
hospitals, road and bridges, radio and television stations. The implication of thisis that, the
loan, well packaged with a number of conditionalities, needs to be serviced and as such, the
recipient-countries are expected to invest the money in the business that will bring returns for
servicing and paying back of the loan but, with the implementation of these non-profitable
social projects.28
James29 opined that public debt has no significant effect on the growth of the Nigeria
economy because the fund borrowed were not channelled into productive ventures, but
diverted into private purse. He suggested further, that, for the gains of the debt forgiveness to
be realized the War against Corruption should be fought to the highest. Oshadami 30 in her
own study concluded that the growth of debt has affected negatively the growth of the
economy. This situation is premise on the fact that majority of the market participant are
unwilling to hold longer maturity and as a result the government has been able to issue more
of short term debt instruments. This hasaffected the proper conduct of monetary policy and
affected other macroeconomic variables like inflation, which makes proper prediction in the
economy difficult.
External control and manipulation of the domestic economy is another by-product of debt
crisis. In addition to executing the conditionalities in the host country, officials of IMF, and
other western based capital institutions often invade and take over the economic policies and
administrations of debtor-nations banking and financial systems. Import earnings are strictly
27FunsoAluko, Dare Arowolo, Foreign aid, the Third Worlds debt crisis and the implication for
economic development: The Nigerian experience, African Journal of Political Science and
International Relations Vol. 4(4), pp. 120-127, April 2010, Available online at
http://www.academicjournals.org/ajpsir ,ISSN 1996-0832
28Supra note. 28
29 James, F (2006), The Effects of Public Debt on the Growth of Nigerian Economy, Unpublished
B.Sc Project, Department of Economics, Kogi State University, Anyigba.
30Oshadami, O.L (2006), The Impact of Domestic Debt on Nigerias Economic Growth,
Unpublished B.Sc Project, Department of Economics, Kogi State University, Anyigba.
10
monitored and this is capable of significantly increasing the plight of the domestic populace.
The overall effect of the above on the development of the debt of country is that the economy
often graduates from bad to worse. The debt burden increases Nigerias dependence on the
outside world; slows the prospects of economic recovery and growth; jeopardises the stability
of Nigerian governments and increases the poverty of Nigeria and her peoples.31
The foregoing put together therefore raises another question of whether what Nigeria actually
needs is debt relief. As it is being made operational, the debt relief has been made to appear
as if the western world is doing Nigeria a special favour. This ought not to be so. For, the
deepening crisis and contradictions in Nigeria are largely attributable todecadesof
exploitation of Africa through the slave trade and colonialism. These were to be followed by
years of marginalisation and continuing exploitation of African resources through the neocolonial enterprise. It is in this light that the conception of debt relief, or worse still, debt
forgiveness, offends.32
DEBT RELIEF
It is believed that debt relief would engender increased saving and investment in the domestic
economy. This has the potential to engineer growth and reduce poverty, capable of leading to
improved conditions of living. This is especially so if the proceeds from debt relief are well
managed in the overall interest of the Nigerian economy.
EXTERNAL DEBT MANAGEMENT STRATEGIES.
In the 1980, the management of the external debt became major responsibility of the Central
Bank of Nigeria (CBN). This necessitated the establishment (setting up) of a Department in
collaboration with Federal Ministry of Finance to the management of external debt. Although,
the debt management strategies and measures varied from time to time since the early 1980s
when the external debt became pronounced. The following measures were used by the
Government as guidelines to external borrowing. Economic sector should have positive
Internal Rate of Return (IRR) as high as the cost of borrowing i.e. interest.
31 Hardy CS (1986), Africas Debt Burden and its Consequences, The Courier, African- Caribbean
Pacific Dossier, No. 97, May-June.
32Ake C, (2000), The Feasibility of Democracy in Africa, Dakar: CODESRIA Books. Akhakpe, ;
Ochonu M, (2005),Debt Cancellation, Aid and Lives: A moral response to critics, ACAS Bulletin,
71, Fall, pp. 16
11
External loans for private and public sectors projects with the shortest rate of returnshouldbe
sourced from the international capital market while loans for social services or infrastructure
could be sourced from confessionals financial institutions.
- State Government, Parastatals, Private sectors borrowing receive adequate approval from
the Federal Government so as to ensure that the borrowing conforms to the national
objectives.
- Projects to be financed with external loan should be supported with feasibility studies which
include loan acquisition, deployment and retirement schedule.
- State Governments and other agencies with borrowed funds should service their debts
through the foreign exchange market and duly inform the Federal Ministry of Finance for
record purposes. Any default will attract deduction (in Nigeria equivalents) at source before
the release of statutory allocations.
-Private sector, industries that are export oriented are expected to service their debt from
their export earnings while others should utilize the Foreign Exchange Market facilities for
debt servicing. The government over the years adopted the under listed strategies and
measures to deal with the debt problem. They include:
increase significantly.
Limit on debt service payments: This requires setting aside portion of export earnings
The Federal Government in year 2001 established a semi autonomous debt management
office under the Presidency. The creation of DMO (Debt Management Office) consolidated
the debt management functions in a single agency, ensuring proper coordination of the
12
countrys debt recording and management activities, including debt service forecast, debt
service repayments, and advising on debt negotiation as well as new borrowings.
THE
ROLE
OF
DEBT
MANAGEMENT
OFFICE(DMO)
IN
DEBT
MANAGEMENT
In Nigeria, before September 2000 when the Debt Management Office (DMO) was created,
debt management functions were conducted by the Federal Ministry of Finance (FMF),
Central Bank of Nigeria (CBN), and the National Planning Commission (NPC). The FMF
wasresponsible for servicing the debt and debt recording, particularly public and publicly
guaranteed medium-and long-term debts. It generally provides the main criteria and
regulations for borrowing abroad. It was also responsible for identifying the sources of the
loans, approving such sources and drawing-up agreements. The CBN was charged with the
recording of private sector external debt and debt analysis (e.g. Debt Trends - CBN semiannual publication)33. Besides being directly in charge of managing, monitoring and
controlling private sector non-guaranteed debt and other short-term debts, the CBN is directly
in charge of foreign exchange remittance and verification of foreign exchange payments. It is
also responsible for ensuring the availability of foreign exchange to meet the countrys debt
service obligations.
The NPC, apart from being charged with managing grants, it identifies projects that require
external financing and gives information on the relationship between projects and loans. The
new DMO has since assumed some of these responsibilities. The DMO is made up of three
main units responsible for external debt management activities. These are the International
Capital Market (ICM) Unit, the Multilateral Institutions Unit, the Africa and Bilateral
Economic Relations Unit (ABER). The functions of these units is complemented by that of
the Office of the Accountant-General of the Federation. The common problem frequently
experienced in the institutional arrangements was the rivalry that existed between the FMF,
NPC and the CBN. These institutional lapses may be due to the lack of clear-cut delineation
of responsibility for authorising, monitoring and managing public and private sectors debts.
The institutional structure was deficient as reflected in the lack of data which further
complicates the formulation of sound debt management policies.34
Paucity of statistical information and ineffective centralised control over external borrowing
in Nigeria, have made the formulation of appropriate macroeconomic policies impossible as
these were often formulated without a mediumterm borrowing plan based on an explicit
analytical framework or an explicit overall balance of payments target(Raheem, 1994) 35.
With the establishment of the DMO, it is hoped that many of these lapses will be corrected.
Several debt management policies and strategies have been proposed and applied in
managing the external debts of the LDCs including Nigeria1. The measures taken so far have
been aimed at reducing the debt stock outstanding and increasing debt inflow, while
embarking on economic reform to correct macroeconomic imbalances. The internal control
measuresadopted by Nigeria so far include, setting of limits on the volume of debt to be
contracted;statutory provision of maximum level of commitments; issuance of directives or
guidelines bythe Federal Government on foreign borrowings; placing of embargoes on new
loans; refinancingof trade arrears and debt rescheduling.36
POLICIES AND STRATEGIES OF EXTERNAL DEBT MANAGEMENT
Statutory Provision of Maximum Level of Borrowings
At independence, some form of regulatory framework was set in place to guide and monitor
the inflow, usage and repayment of external debt incurred; the Promissory Notes Ordinance
and the External Loans Act were enacted in 1960 and 1962, respectively. The former
specifically established a Sinking Fund for loan redemption as at when due while the latter
explicitly stipulated that external loans should be used for development programmes and for
on-lending to regional government37. Another of the regulatory frameworks put in place was
the External Loans (Rehabilitation, Reconstruction and Development) Decree of 1970 which
34Oshikoya, T., (1994),Macroeconomic Determinants of Domestic Private
Investment in Africa: An Empirical Analysis, Economic Development and Cultural
Change, Vol. 42, No. 3, April, pp. 573
35Raheem, M. I. (1988), External Debt in the Development Process: A MacroEconometric Case Study of Nigeria Unpublished Ph.D. Thesis, Dept. of
Economics, University of Ibadan. ------------- (1994) Assessing and Managing
External Debt Problems in Nigeria, World Development, Vol. 22, No. 8, pp. 1223
36Krugman, P. (1988), Financing Vs Forgiving a Debt Overhang. NBER Working
Paper 2486, Cambridge, Mass: National Bureau of Economics Research.
14
made provision for the maximum level of commitment by Nigeria. The Decree authorised the
Federal Government to raise external loans not exceeding 1 billion Naira for the purpose of
rehabilitation, reconstruction and development programmes38. In 1978, the size of external
loans that can be outstanding at any time was raised to 5 billion Naira by External Loans
Decree No. 30 of 1978. This was done because the old ceiling became inadequate to cater
for the then developmental needs.
Issuance of Directives by the Federal Government
The 1980 external debt guideline stipulated some conditions for external borrowings by states
governments, because under the Federal Constitution of Nigeria, only the federal government
can borrow from external sources and state governments need to get a federal government
guarantee before they can contract external loans. Among these conditions were the need for
states governments to demonstrate viability of projects to be financed, possess acceptable
debt service ratio and that the debt-servicing should not exceed 10 per cent of the states
fiscal revenue39. Following the non-compliance with this guideline, the federalgovernment
placed a ceiling of 200 million Naira on state governments and the use of Euro-dollar
International Capital Market(ICM) borrowing to finance on-shore cost components of
approved capital projects 40. The austerity measures initiated between 1982 and 1984 by the
federal government attempted to introduce measures that include embargo on new loans, a
limit on debt service payments, counter-trade, and debt restructuring. Under the limits on debt
service payment, a fix proportion of export earnings was set aside to meet debt service
obligations. This was done in order to allow for sizable resources for internal development.
Embargo on New Loans
37Iyoha, M. A. (1997),An Econometric Study of Debt Overhang, Debt Reduction,
Investment And Economic Growth in Nigeria NCEMA Monograph Series, No. 8.
----------- (1999), External Debt and Economic Growth in Sub-Saharan African
Countries: An Econometric Study, African Economic Research Consortium, RP
90, March
38Ibid
39Infra note. 40
40Uwatt, B. U. (1995), A Multi-Objective Model of External Debt Management for Nigeria
,Unpublished Ph.D. Thesis, Department of Economics, University of Ibadan.
15
This involves temporary stoppage of further external borrowings until the debt situation
improves. It is aimed at preventing additional debt burden. The embargo on new external
loans aimed at preventing accretion to the burden was applied in 1984 to governments
borrowings from abroad, certain exceptions were, however, granted in respect of on-going
core projects. The embargo on sourcing new foreign loans was lifted in January 1999.
under the guidelines. Other measures as contained in the guideline include: economic sector
projects should have positive internal rate of return not lower than the cost of borrowing;
state government and publicparastatals should service the debts through the Foreign
Exchange Market (FEM) and failure of these organs to service their debts would attract the
deduction of the Naira equivalent at source. For the private sector, industries that are exportoriented should service their debt from their export earnings, while others should patronise
the FEM to service their debts. Moreover, approval of private sector borrowing will no longer
receive the federal government guarantee 44.
Debt Conversion Scheme
In Nigeria, the Debt Conversion Programme (DCP) was established in July 1988 to
complement the other debt management initiatives aimed at reducing the burden of private
debts. The DCP involves the sale of an external debts instrument at a discount for domestic
debt or for equity participation in local enterprises. The programme is meant to reduce the
external debt stock and lighten the debt service burden, encourage capital inflows including
repatriation of flight capital, and assist the capitalisation of the private sector investment and
the generation of employment opportunities. Eligible debt for conversion were initially
limited to promissory notes but later expanded to cover other bank debts45.
Refinancing Programme
Refinancing of short-term trade debts and commercial bank debts involves the procurement
of a new loan contracted either from the same or new creditors by a debtor to pay off an
existing debt. It is aimed at shifting repayment forward and easing the medium-term foreign
exchange liquidity squeeze. In July 1983, Nigeria undertook its first refinancing exercise
when it successfully refinanced almost US$2 billion worth of trade arrears on confirmed
lettersof credits outstanding as at July 1983 46. The arrears were refinanced at an interest rate
of 1 per cent above the London Inter-Bank Offer Rate (LIBOR), with a repayment period of
43Cohen, D.,(1989), The Management of the Developing Countries Debt: Guidelines and
Applications to Brazil World Bank Economic Review. Vol. 2, No. 1.(1996),The Sustainability of
African Debt, Policy Research Working Paper 1621, The World Bank, July
44Ibid
45Villanueva, D. and I. Otani(1989), Theoretical Aspects of Growth in Developing Countries:
External Debt Dynamics and the Role of Human Capital IMF Staff Papers, Vol. 36, No. 2, June.
17
30 months and a grace period of six months. Another refinancing of arrears of uninsured,
short-term trade debts outstanding as at December 1983 was contracted in 1984 worth
$3.2billion. Other refinancing agreements were contracted between 1984 and 1988 47. During
this period, trade arrears amounting to over US$4.8 billion were refinanced and covered with
promissory notes. The amount was refinanced over a 22-year period with a two years grace
period and at 5 per cent interest rate.
Debt Buy-Back Scheme
The debt buy-back scheme involves a situation where a substantial discount is offered to pay
off an existing debt. Under this programme, Nigeria bought US$3.4 billion or 62 per cent of
the commercial debt owed the London Club of creditors at 60 per cent discount in February
1992, that is, $1.4 billion paid to liquidate the commercial debt. Under the collateralisation
option, the remaining 38 per cent of the commercial debts or the sum of US$2.1 billion was
collateralised as a 30-year par bonds with the London Club. It is expected that the yield on
the bonds within the collateralised period should offset the collateralized amount48.
Debt Rescheduling
Rescheduling involves changing the maturity structure, interest spread and repayment period
of a loan. The objective is to postpone payment of matured debt in order to correct the
underlying economic fundamentals in order to expand the countrys productive and export
capacity. In 1986, commercial banks debt amounting to $1.6 billion, due to the London Club
was rescheduled to extend to 1996 with a four years grace period 49. Nigeria succeeded in
November 1987 to reschedule arrears of commercial banks debts due to the London Club.
The amount totalling US$5.8 billion outstanding by end of 1987 was rescheduled 50. The
46Hadjimicheal, M. T. et al.,(1995),Sub-Saharan Africa: Growth, Savings, and Investment, 1986 93. Occasional Paper 118, International Monetary Fund, Washington DC.January.
47Greene, J. E. and M. S. Khan(1990), The African Debt Crisis African Economic Research
Consortium, Special Paper 3, February
48 Ibid. p. 34
49Fisher, S. and J. Frenkel (1974), Economic Growth and Stages of the Balance of Payments, in G.
Horwich and P. Samuelson(eds) Trade, Stability, and Macroeconomics, NY: Academic Press pp.503
18
amount wasconsolidated and rescheduled over a twenty years period including a three years
grace period.
Due to non-performance on the rescheduled debt, again in March 1989, Nigeria rescheduled
its debt with the London Club. The annual debt service obligation to the London Club was
reduced from US$1.345 billion to US$711 million. The high debt service obligation made it
impossible for the country to meet its commitment and hence, it defaulted. Consequently,
Nigeria approached the Club again for restructuring of the entire debt, the deal was closed on
January1992, in which the country bought back 62 per cent of the debt and issued collaterised
par bonds for the remaining 38 per cent. So far the London Club debt has been reduced from
$5.8 billion to $2.1 billion after the restructuring exercise. Of the $2.1 billion debt left, the
sum of $2.05 billion was fully collateralised. Nigeria has also rescheduled or restructured
debts due to the Paris Club and multilateral creditors.
Debt rescheduling has also been the principal tool for the alleviation of the official debt,
especially the Paris Club debt.Nigeria had its first rescheduling agreement with the Paris Club
in December 1986. Since then there has been two other similar agreements in 1989 and 1991.
The first rescheduling witnessed debt worth over $6.2 billion rescheduled/refinanced by the
Club.
The
second
agreement
in
1989
saw
debts
worth
over
$5.2
billion
country contracting new loans53. As at December, 1995, the arrears on Paris Club debt
amounted to $10.29 million, it moved up to $11.12 million in 1996. As at September, 2000,
US$19.0 billion was in arrears to the Paris Club of creditors.
On
December
13,
2000,
in
Paris,
the
Nigerian
government
signed
another
rescheduling/refinancing agreement with the Paris Club, with respect to debts owed to it. A
summary of the agreement show that after paying off $820 million between December 29,
2000 and March 31, 2001 and after taking cognisance of the $2.76 billion to be paid over the
period between March 31, 2001 and September 30, 2009, the remaining debt not repaid
would be rescheduled over a 20-21 year period with grace periods ranging between 3 and 10
years, depending on the category of debt54. In 2001, the Federal Government established a
Debt Management Office for the purpose of managing and advising on the governments
overall debtobligations55.
Nigeria and the Paris Club of creditors in Nov. 2005, signed another agreement to formalize
the US$18 billion debt relief granted the country on June 29, 2005. The agreement is to be
implemented in two phases. The first requires Nigeria to pay all her debt arrears,
whichamount to US$6.36 billion, after which 33 percent of the debt will be cancelled. In the
second phase which will be implemented from March, 2006, Nigeria is expected to pay a
second tranche of US$6.1 billion56. The Paris Club will then grant it a relief of another 34 per
cent of the sum of US$30 billion it owes. That will bring Nigerias debt relief to US$18
billion or 67 per cent of the debt sum. According to the agreement, Nigeria obtained a debt
cancellation estimated at US $18 billion including moratorium interest, which represents an
overall cancellation of about 60 per cent of its US$30 billion debt to the Paris Club. At the
end of the implementation Nigeria would have paid out about US$12.4 billion57.
In conclusion, some of the initiatives discussed above have resulted in small reduction of the
debt stock of Nigeria, particularly private debt mainly through debt equity swap. The past
military regimes accumulated the debt and have not been successful with the management of
the official debt, notably the Paris Club debt, except under Babangidas regimes when
threerestructuring agreements (1986, 1989, and 1991) were signed. Even then as earlier
noted, the restructuring agreements did not lead to significant reduction in debt stock as the
debt problem continued.
Scarcity of Statistical Data: Scarcity of statistical data on both internal and external
debt is a major problem in Nigerias debt management because Nigeria has been
calculating its internal and external debt grossly, under its estimation of the actual
debt. That is, Nigeria has been basing the calculation of its debt on assumption.
Institution Arrangements:Institutional arrangements for external debtmanagement is
a hindrance to its effectivemanagement in Nigeria, that is, the CentralBank of Nigeria
(CBN) is taking care of theprivate sector short term trade debt while theFederal
Ministry of Finance creates the erroneousimpression that external debt managementis
57 Ibid
58Missale, A. (1999), Public Debt Management., Oxford: Oxford University Press.
21
22
(ix) It allowed the DMO to lower to lower the cost of raising funds for government through a
concerted effort at restructuring domestic debt stock and put in place measures to prevent the
accumulation of unsustainable foreign debt again
(x) It assisted in developing guidelines on external borrowing as well support the passing of
Fiscal responsibility bill into law.
(xi) It had also served as a mechanism for institutional change
(xii) The savings from the debt relief has assisted in the implementation of the National
Economic Empowerment Development Strategy(NEEDS) and the attainment of the
Millennium Development Goals (MDGs).
(xiii) Making resources available for critical infrastructural needs will encourage private
sector-driven job creation to boost economy-wide employment.
After the Paris Club debt deal in 2005 and the London Club debt exit in 2006,,Nigeria still
has external debt outstanding of about US$5 billion owed to Multilateral Financial
Institutions, Promissory Notes Holders, and Non-Paris Club Bilateral Creditors. Nigeria has
continued to meet its obligations to these groups of creditors as at when due, this shows the
sustainability of the debt. The debt has however increased as other debt deal has been
contracted with Multilateral and International Capital Market.
23
CONCLUSION
The high indebtedness of Nigeria has been observed to result from internal and external
factors which include over reliance on petroleum as the main source of export earningagainst
the backdrop of rising import bills worsening terms of borrowing, expansionary monetary
and fiscal policies; pricing and exchange rate policies, and poor economic management and
misuse of resources 59. The question of how to successfully manage Africas debt crisis has
been a central theme in the discourse of international political economy. Debt sustainability
connotes a countrys ability to meet itsexternal obligations in full, without future recourse to
debt rescheduling, or relief or theaccumulation of arrears over the medium or long term and
without compromising economic growth 60.
In this paper, it had been critically engaged the question of Nigerias debt crisis with specific
emphasis on the current regime of debt relief. From the preceding analysis, it has been made
clear that debt relief does offer some prospects for Nigerias development. At least, it
represents an important burden-lifting in the form of debt servicing and capital flight from
Nigeria, which has hindered economic growth. With this development, room may have been
created for boosting investment in human welfare on the country. In spite of these prospects,
59Sogo-Temi, J.S (1999), Indebtedness and Nigerias Development, in Saliu, H.A (ed), Issues in
Contemporary Political Economy of Nigeria, Ilorin: Sally and Associates
60Obadan, M.I, (20040, Foreign Capital Flows and External Debt: Perspective on Nigeria and the
LDCs Group, Lagos: Broadway Press Ltd
24
debt relief also presents threats to Nigerias development. The debt relief have not altered
theunderlying inequalities in the structure and composition of the prevailing world order 61.
Indeed, many aspects of globalisation have reinforced Nigerias position on the lowest rung.
While it is true that the debt burden arising from conditionalities has stiffened the economic
opportunities of the Nigeria to grow and develop, it is equally true that a succession of bad
and inept leadership foisted and hoisted on Nigeria and her peoples has made their debt
unpayable. A series of opportunistic leaders has brought Nigeria to its knees. Absence of good
leadership has really turned the game against Nigeria. It is paradoxically ironical that a
producer of goods is actually not the determinant of the price of the goods.
Indonesias Economy
Indonesia has the largest economy in Southeast Asia and is one of the emerging market
economies of the world. The country is also a member of G-20 major economies and
classified as a newly industrialized country. It has a market economy in which the
government plays a significant role through ownership of state-owned enterprises (the central
government owns 141 enterprises) and the administration of prices of a range of basic goods
including fuel, rice, and electricity. In the aftermath of the financial and economic crisis that
began in mid-1997 the government took custody of a significant portion of private sector
assets through acquisition of nonperforming bank loans and corporate assets through the debt
restructuring process. Since 1999 the economy has recovered and growth has accelerated to
over 4%-6% in recent years.62
61Omotola, J. S &Enejo, K.E (2009), Globalization, World Trade Organization and the Challenges
of Sustainable Development in Africa, Journal of Sustainable Development in Africa, Vol,10. No 4,
pp. 520
25
Crisis
In June 1997, Indonesia seemed far from crisis. Unlike Thailand, Indonesia had low inflation,
a trade surplus of more than $900 million, huge foreign exchange reserves of more than $20
billion, and a good banking sector. But a large number of Indonesian corporations had been
borrowing in U.S. dollars. During the preceding years, as the rupiah had strengthened
respective to the dollar, this practice had worked well for these corporations; their effective
levels of debt and financing costs had decreased as the local currency's value rose.
In July 1997, when Thailand floated the baht, Indonesia's monetary authorities widened the
rupiah currency trading band from 8% to 12%. The rupiah suddenly came under severe attack
in August. On 14 August 1997, the managed floating exchange regime was replaced by a
free-floating exchange rate arrangement. The rupiah dropped further. The IMF came forward
with a rescue package of $23 billion, but the rupiah was sinking further amid fears over
corporate debts, massive selling of rupiah, and strong demand for dollars. The rupiah and the
Jakarta Stock Exchange touched a historic low in September. Moody's eventually
downgraded Indonesia's long-term debt to "junk bond".63
Although the rupiah crisis began in July and August 1997, it intensified in November when
the effects of that summer devaluation showed up on corporate balance sheets. Companies
that had borrowed in dollars had to face the higher costs imposed upon them by the rupiah's
decline, and many reacted by buying dollars through selling rupiah, undermining the value of
the latter further. In February 1998, President Suharto sacked Bank Indonesia Governor J.
SoedradjadDjiwandono, but this proved insufficient. Suharto resigned under public pressure
in May 1998 and Vice President B. J. Habibie was elevated in his place. Before the crisis, the
exchange rate between the rupiah and the dollar was roughly 2,600 rupiah to 1 U.S. dollar.64
The rate plunged to over 11,000 rupiah to 1 U.S. dollar on 9 January 1998, with spot rates
over 14,000 during 2326 January and trading again over 14,000 for about six weeks during
62http://www.acicis.murdoch.edu.au/hi/dspp1.html; last accessed on March 02,2015
63Raghavan, Anita, "Japan Stocks Slide Again on Fears About Stability". Wall Street Journal; retrieved on 15
February 2015.
64
26
JuneJuly 1998. On 31 December 1998, the rate was almost exactly 8,000 to 1 U.S. dollar.
Indonesia lost 13.5% of its GDP that year.
After the crisis, on 2000, the Malaysia's SOE acquired Indonesia's SOE, the example is the
banking sector, Maybank (Malaysian Banking Berhad, Malaysia state-owned bank) acquired
BNI (Bank Negara Indonesia, Indonesia state-owned bank) on December 29, 1999 January
1, 2000, with the agreement signature by Abdurrahman Wahid (4th President of Indonesia)
and Salahuddin of Selangor (11th Yang di-PertuanAgong of Malaysia). The crisis also
brought independence to East Timor.
Indonesian companies (including banks; some of which were known to be very weak) would
suffer huge losses. New foreign exchange supplies were scarce as new loans for Indonesian
companies were not granted by foreign creditors. As the government of Indonesia was unable
to cope with this crisis it decided to seek financial assistance from the International Monetary
Fund (IMF) in October 1997.
private capital flows to Indonesia. In order for this to happen the patronage system had to be
broken down.
GDP Growth
(annual
1996
1997
1998
8.0
4.7
-13.6
6.5
11.6
65.0
percentage
change)
Inflation Growth
(annual
percentage
change)
A third agreement with the IMF was signed in April 1998. The Indonesian economy and
social indicators were still showing worrying signs. But this time, however, the IMF was
more flexible in its demands than on previous occasions. For instance, large food subsidies
for low-income households were granted and the budget deficit was allowed to widen. But
the IMF also called for the privatization of state-owned companies, faster action on bank
restructuring, a new bankruptcy law and a new court to handle bankruptcy cases. It also
insisted on a closer monitoring of its implementation as recent experiences had shown that
the Indonesian government was not fully committed to the reform agenda.
market. After the government decided to reduce the subsidies on fuel in early May, largescale riots broke out in Medan, Jakarta and Solo. Although the IMF had given Suharto time
until October to reduce these subsidies gradually, he decided to do it all at once, probably
underestimating its impact or overestimating his own position. The tense atmosphere came to
a climax when four Indonesian students were killed during a protest at a local university in
Jakarta. It is suspected that an army unit of the special forces was behind these shootings
('Trisakti shootings'). The next couple of days Jakarta was plagued by the worst riots ever. As
had happened before, the ethnic Chinese - disliked for their assumed wealth - were often
target during these violent riots. Chinese stores and houses were burned to the ground and
Chinese women brutally raped. When the riots calmed down, over one thousand people had
lost their lives and thousands of buildings were destroyed. On 14 May 1998 Suharto stepped
down from the presidency when all politicians refused to join a new reorganized cabinet. The
financial crisis had fully grown into a social and political one.
30
It is interesting to question what chances are of such a crisis occurring again in Indonesia in
the foreseeable future. Most likely chances are small. First of all it needs to be stressed that
the Asian Financial Crisis hit Indonesia hardest of all involved countries because it was not
just an economic crisis. It started out as an economic crisis but became severely aggravated
because it was accompanied by a deep political and social crisis in which the government was
not willing to implement much needed economic reforms but instead was trying to cling on to
their hold of power. As an orderly and conducive political climate is of vital importance for
investor confidence, the uncertainties and tensions in Indonesian politics made many
investors turn their back to the country. Also after Suharto's fall, political uncertainties put off
many investors (foreign and domestic) to (re)enter the Indonesian market. Today, however,
Indonesia is well on its way towards full democracy, albeit its a process that is accompanied
by growing pains. Decades of authoritarian rule have depoliticized the people and political
institutions to a considerable extent. It will take time before the country can leave behind the
rank of 'flawed democracy' as measured by Economist Intelligence Unit for its Democracy
Index. But fair and free elections make sure that there has been more popular support for the
governments during the Reformation period than ever before. The decision to have the
president directly elected by the people is an important one, psychologically. Nonetheless, it
should be underlined that the Indonesian political climate is more volatile than longestablished democracies due to many dissenting forces looking to establish their position in
the young democracy. For a detailed account on this topic please visit our Reformation
section.
Another important factor that seriously aggravated the financial crisis in Indonesia was the
terrible state of the Indonesian financial sector. This was caused by a culture of patronage and
corruption which lacked a decent supervision model. Even the Central Bank had no idea
about the flows of money (and resulting huge short-term private debt) which entered
Indonesia and caused a 'bubble economy'. The culture of patronage and corruption (and lack
of legal certainty) seriously hampered the functioning of an efficient economy and was a time
bomb waiting to explode. Since the end of the crisis, however, Indonesian governments have
made prudent financial measures to make sure a similar crisis cannot happen. Supervision on
liquidity of the banking sector is strict and transparent, 'hot money' is more carefully handled
(for example by halting short-term debts), and the government's debt-to-GDP is lower
(around 25 percent and showing a decreasing trend) than most economic advanced countries.
When the 2008 crisis hit, Indonesia saw a large outflow of money again but was able to
31
guarantee a stable economy due to good economic fundamentals. Even during this 2008-2009
crisis Indonesia showed robust growth with 4.6 percent GDP growth, mainly due to domestic
consumption.
Graft scandals, however, still fill the pages of Indonesian newspapers almost on a daily basis.
Corruption and the clustering of capital in a small elite are still serious problems in the
country and hamper the economy from being efficient and righteous. In particular political
corruption is widespread and often used for benefit in the nation's business sector.
realign its foreign economy relations, including increased economic exchanges with South
Korea.68
North Korea, one of the world's most centrally planned and isolated economies, faces
desperate economic conditions. Industrial capital stock is nearly beyond repair as a result of
years of underinvestment and shortages of spare parts. Industrial and power output have
declined in parallel. During what North Korea called the "peaceful construction" period
before the Korean War, the fundamental task of the economy was to overtake the level of
output and efficiency attained toward the end of the Japanese occupation; to restructure and
develop a viable economy reoriented toward the communist-bloc countries; and to begin the
process of socializing the economy. Nationalization of key industrial enterprises and land
reform, both of which were carried out in 1946, laid the groundwork for two successive oneyear plans in 1947 and 1948, respectively, and the Two-Year Plan of 1949-50. It was during
this period that the piece-rate wage system and the independent accounting system began to
be applied and that the commercial network increasingly came under state and cooperative
ownership.
The basic goal of the Three-Year Plan, officially named "The Three-Year Post-war
Reconstruction Plan of 1954-56", was to reconstruct an economy torn by the Korean War.
The plan stressed more than merely regaining the prewar output levels. The Soviet Union,
other East European countries and China provided reconstruction assistance. The highest
priority was developing heavy industry, but an earnest effort to collectivize farming also was
begun.
North Korea, one of the world's most centrally directed and least open economies, faces
chronic economic problems. Industrial capital stock is nearly beyond repair as a result of
years of underinvestment, shortages of spare parts, and poor maintenance. Large-scale
military spending draws off resources needed for investment and civilian consumption.
Industrial and power outputs have stagnated for years at a fraction of pre-1990 levels.
Frequent weather-related crop failures aggravated chronic food shortages caused by on-going
systemic problems, including a lack of arable land, collective farming practices, poor soil
quality, insufficient fertilization, and persistent shortages of tractors and fuel. Large-scale
international food aid deliveries have allowed the people of North Korea to escape
68 Ruediger Frank (October 2, 2012). "An Atmosphere of Departure and Two Speeds, Korean Style:
Where is North Korea Heading?
33
widespread starvation since famine threatened in 1995, but the population continues to suffer
from prolonged malnutrition and poor living conditions. Since 2002, the government has
allowed private "farmers' markets" to begin selling a wider range of goods. It also permitted
some private farming - on an experimental basis - in an effort to boost agricultural output. In
December 2009, North Korea carried out a redenomination of its currency, capping the
amount of North Korean won that could be exchanged for the new notes, and limiting the
exchange to a one-week window.69 A concurrent crackdown on markets and foreign currency
use yielded severe shortages and inflation, forcing Pyongyang to ease the restrictions by
February 2010. In response to the sinking of the South Korean warship Cheonan and the
shelling of Yeonpyeong Island, South Korea's government cut off most aid, trade, and
bilateral cooperation activities, with the exception of operations at the Kaesong Industrial
Complex. In preparation for the 100th anniversary of KIM Il-sung's birthday in 2012, North
Korea continued efforts to develop special economic zones with China and expressed
willingness to permit construction of a trilateral gas pipeline that would carry Russian natural
gas to South Korea. The North Korean government often highlights its goal of becoming a
"strong and prosperous" nation and attracting foreign investment, a key factor for improving
the overall standard of living. In this regard, in 2013 the regime rolled out 14 new Special
Economic Zones set up for foreign investors, though the initiative remains in its infancy.
Nevertheless, firm political control remains the government's overriding concern, which
likely will inhibit changes to North Korea's current economic system.70
the US backed southern region (Republic of Korea), resulting in the devastating Korean War
(1950-53).
Kim II Sung's aspiration of bringing the entire peninsula under his communist rule failed.
Soon after, North Korea (DPRK) established itself as a centrally planned economy but with
dynasty succession and not just one-party supremacy. Pyongyang adopted three guiding
policies: a self-sufficient national economy, heavy-industry-first development and
military-economy parallel development. Outsider experts feel that these policies have been
an obstacle in the countrys economic development. The shortcomings of the policies got
accentuated by the regimes focus on son gun (military-first politics) which have landed
North Korea in a state of chronic economic problems. There is stagnation in industrial and
power output along with food shortages because of the systemic problems. According to the
Central Intelligence Agency (CIA) World Fact book, Industrial capital stock is nearly
beyond repair as a result of years of underinvestment, shortages of spare parts, and poor
maintenance. Large-scale military spending draws off resources needed for investment and
civilian consumption.71
The economy of North Korea was hit hard since the fall of the Soviet bloc in 1991, the
impact of which is explicit in its average annual growth rate of -4.1 percent from 1990 to
1998. This resulted in a more than 50 percent fall in its total production from what it was at
the end of 1980s. There was a change of pace in 1999 when the economy showed signs of
recovery. During the period 2000-2005, the North grew at an average growth rate of 2.2
percent. There was a downturn yet again in 2006, and during the five year period 2006-2010,
only 2008 registered positive growth. DPRK has inched up since 2011.
72
The Gross Domestic Product (GDP) of North Korea is estimated at $33.3 billion (2013), a
rise of 1.1 percent over the year 2012. In terms of GDP per capita, North Korea ranks at the
194 spot with its per capita GDP of $1,800 according to the CIA Fact book. As per the 2012
estimates, approximately 23.4 percent of GDP is contributed by agriculture, 47.2 percent by
industry and 29.4 percent by services. The agricultural sector employs around 35 percent of
the 12.6 million labor force. The main industries in the country are military products;
machine building, electric power, chemicals; mining (coal, iron ore, limestone, graphite,
copper, zinc, lead, and precious metals), metallurgy; textiles, food processing; tourism as per
CIA Fact book.
London-based Morgan Grenfell & Company, which heads one of the lending syndicates to
North Korea. Bankers in London said they hoped that a loan-rescheduling agreement, under
which North Korea would resume debt payments, would be signed by Oct. 2. The first
payment would be due the same day. No U.S. Banks Involved
North Korea's debts are relatively small and are not a significant worry for Western banks.
American banks are not allowed by law to lend to North Korea, and so the creditors are
European and Japanese institutions.
However, North Korea is regarded in banking circles as one of the most intransigent debtor
nations. European bankers say that North Korea has never repaid any principal on some $770
million lent by two bank syndicates in the early 1970's for construction projects and grain
purchases.
Japanese banks have lent North Korea at least that much money, and North Korea is believed
to owe even more to the Soviet Union, China and Eastern European countries. The limit to
the patience of the Western European banks came earlier this year when North Korean
officials not only refused to make repayments but also demanded fresh loans of $200 million,
bankers said. As a result, the bankers last month formally declared North Korea to be in
default.
While such a step could have been taken against many Latin American debtors, banks have
preferred to work with borrowers instead of suing them. It is up to the bank whether to
declare a delinquent borrower in default, and such a decision is usually followed by attempts
to seize the borrower's commercial property abroad. Legal Action Suspended
Bankers said Tuesday that they would suspend legal action to seize North Korean assets until
Oct. 2, to give North Korea a chance to sign a restructuring agreement and make a down
payment.
''We want to make sure this isn't a stalling tactic,'' one banker said.
Following the declaration of default, North Korea agreed in principle to a restructuring
proposal originally made by the banks in March, bankers said. North Korea was also said to
ask for two changes in the March proposal: a reduction in the down payment to $33 million
from $55 million, and an extension of the grace period to four years from three.
37
The leaders of the bank syndicates, the ANZ Banking Group and Morgan Grenfell, have
agreed to the two changes and other creditors are expected to go along. The down payment of
$33 million amounts to about 15 percent of the overdue interest.
If the down payment is made, and the restructuring agreement is signed, the state of default
would be lifted, bankers said.
Under the restructuring accord, interest will accumulate at a base rate of one and threequarters percentage points over the London interbank offered rate for West German marks.
Interest is to be paid regularly during the four-year grace period, and then the principal is to
be retired over the next eight years.73
73 Nicholas D Kristof, North Korea in Default Said to Relent on Debt, New York Times, 17
September 1997
38
capital market opening. But it chose to liberalize short-term capital inflows ahead of longterm capital inflows.74
Indeed, the government in effect discouraged long-term foreign borrowing by business firms
as it required detailed disclosure on the uses of the funds as a condition for its permission. On
the other hand, short-term borrowing was mainly regarded as trade-related financing
requiring no strict regulation. These de facto incentives for short-term borrowing led banks
and business firms to finance long-term investments with short-term foreign borrowings. The
result was that in the banking sector, short term external debts accounted for 61% of total
external debts in 1996. Needless to say, such policies and practices created not only maturity
mismatches but currency mismatches as well.
Furthermore, the government policy allowed a rapid increase in the number of financial
institutions engaged in foreign currency-denominated activities in a rather short time. This
was particularly the case with merchant banks. Their number increased from six to thirty
from 1994 to 1996. Many of these merchant banks were owned by chaebols, and they acted
as the funding channel for chaebol investments. These merchant banks were heavily engaged
in borrowing cheap short-term Japanese funds from Hong Kong to finance mostly long-term
investment projects. Commercial banks also borrowed abroad at short-term maturities to
compete with the merchant banks for business. This further aggravated maturity as well as
currency mismatches on balance sheets of the financial and business sectors in Korea. This
was well demonstrated in the fact that 80% of short-term foreign debts were put into 70% of
long-term assets.75 At the end of 1997, total short-term external debts amounted to $63.8
billion while usable gross foreign reserves were only $9.1 billion. In short, by then it was
impossible for North Korea to solve the so-called double mismatch problems on its own.
As noted already, the mismatch problems stemmed significantly from weak prudential
supervision. The accounting and disclosure standards expected of financial institutions were
below international best practices, and market-value accounting was not widely practiced.
Due to weak financial supervision and high chaebol dependence on bank financing, risk was
concentrated on banks. Furthermore, chaebol leverage was extremely high for two reasons. In
the 1970s and 80s, they enjoyed preferential access to credit, and the nations tax laws
74 Y. C. Park, W. Song, and Y. Wang, 2004, 15-17.
75 Park, Song, and Wang, 2004, 18
39
allowed deductions for debt-related expenses. In any case, the average debt-equity ratio for
the manufacturing sector reached nearly 400% in 1997, double the OECD average, and the
average ratio for the top 30 chaebols exceeded 500%. Obviously Korea was suffering from a
high dose of capital structure mismatches as well.
It is significant to note that in spite of all the risks associated with these mismatches that
should have been evident long before the onset of the 1997-98 crisis, North Korea was, at
least on the surface, doing fine economically. North Korea was still one of the worlds fastest
growing economies with an average annual growth rate of 7-9% and a modest inflation rate
of about 5% a year for the three years leading up to the crisis. The ratio of its foreign debt to
GDP was less than 30%, the lowest among developing countries and less than that of many
industrially advanced countries. In addition, the governments budget was balanced. Based on
these macroeconomic indicators, even IMF pre-crisis surveillance concluded that Korea was
not likely to become a victim of the financial crisis that was beginning to engulf Southeast
Asia in the summer of 1997.76 Thus, mismatches alone cannot fully account for the actual
crisis.
In my view, there were at least three major developments that served as triggers for the
Korean financial crisis of 1997-98. One of these was the movement of the US dollar. A large
part of the investment in Korea, and for that matter elsewhere in the AsiaPacific region during
the first half of the 1990s, was undertaken with the expectation that the dollar would stay
weak. Moreover, while the dollar continued to weaken, the prospect of borrowing in the
dollar was too great a temptation for Asian investors to resist. However, from mid-1995, at
about the time Mr. Robert Rubin took over the US Treasury, Washington reversed its policy
of benign neglect of the dollar. For better or for worse, the US considered a strong dollar in
its national interest. As the dollar became stronger, particularly against the Japanese yen,
Koreas export competitiveness suffered. This was the case for two reasons. As the US dollar
weighed heavily in the determination of the Korean won under the managed float system, the
Korean won failed to depreciate as much as the yen. In addition, Korean exports were similar
in composition to Japanese exports and hence competed directly in the international markets.
Consequently, as the dollar became stronger against the Japanese yen, Korea not only
experienced an accelerated increase in its trade deficit, but also a severe drop in the
profitability of investments undertaken for exports in particular. Some large business
76 IMF, 2003, 2-3
40
conglomerates ran into financial difficulties around this time and non-performing loans
(NPLs) at Korean banks sharply increased, thus undermining the financial soundness of
domestic banking institutions.77
A second trigger was a series of domestic developments that took place in 1997. In January,
the Hanbo group began to experience serious financial difficulty. In Korea, especially since
the days of the government-led industrialization drive, there had been the widely accepted
notion that when the chips were down the government would not dare to allow a big horse to
die, meaning that a large conglomerate whose survival had serious consequences in terms of
the stability of the whole economy would receive a financial bailout. There is little question
that in line with this notion the Hanbo management expected that the government would
arrange a bailout loan for the group at the very last minute. However, the government
economic policy team then in office refused to honor the notion. The team truly believed that
in an economy run on market principles, a chaebol group should stand on its own feet.
Furthermore, there were no resources in the public sector to provide help to chaebols in
financial difficulty such as Hanbo. The consequence was the beginning of bankruptcy
proceedings for Hanbo, Sammi, Jinro, and others.
The third trigger was a combination of international and domestic developments. While the
doubts in the minds of foreign investors were growing, the currency crisis of Southeast Asian
countries continued to deepen. This soon developed into a region-wide contagion. In late
October 1997, the contagion spread to Hong Kong in the form of a speculation attack on the
currency and a sharp decline in the stock market. Although the currency attack subsequently
failed, at the time it was not clear whether Hong Kong government authorities had the
capacity to prevent the contagion from developing into a full-fledged crisis. With Hong Kong
in difficulty, foreign creditors, particularly American and Japanese banks, refused to roll over
their loans to Korean financial institutions. This forced the Korean government to use its
limited foreign currency reserves to help Korean financial institutions honour their short-term
obligations. In this process a substantial portion of the nations foreign reserves was advanced
to the overseas branches of Korean banks. This quickly reduced the nations usable foreign
reserves to a dangerous level.
How was the Crisis Immediately AddressedThe crisis in North Korea was not a traditional balance of payment crisis due to excessive
external debt. It was truly a liquidity crisis due to serious mismatches in maturity, in currency,
and in the capital structure in the balance sheets of the financial and non-financial sectors of
the economy. Since the crisis was a liquidity crisis, a rapid infusion of hard currency reserves
was critical more than anything else. However, what the IMF and the Korean government
agreed upon on December 3, 1997 was far from this. The total amount of money that the IMF
together with other international financial institutions offered to bail out Korea was $58.4
billion. Out of this, $23.4 billion was reserved as a second line of defence that would be made
available to Korea by G-7 countries only if the initial amount of $35 billion contributed by
the IMF and other multilateral institutions proved inadequate. The disbursement of the $35
billion was to be spread over more than two years until the year 2000, with each instalment
conditioned upon the progress Korea was to make in structural reforms and the further
tightening of its monetary and fiscal policies. It is worth noting that the amount Korea was
allowed to withdraw immediately after reaching the agreement with the IMF on December 3
was $5.6 billion. North Korea was allowed to withdraw an additional $3.5 billion on
December 18. Thus, the total amount Korea was able to withdraw during this 15-day period
was only $9.1 billion.
Foreign banks judged these amounts to be altogether inadequate, even in terms of meeting the
nations short-term obligations. Given the large amount of short-term obligations and the
precarious level of official foreign reserves, this judgment became a self-fulfilling prophecy.
As rollovers were refused, the limited foreign reserves were rapidly depleted. An internal
memorandum prepared by the Bank of Korea on December 18 that took into account both the
inflows of foreign funds expected during the ensuing 12-day period plus the foreign reserve
balance on hand and the outflows expected to take place during the same period showed that
the foreign reserve balance expected on December 31 would be anywhere from negative
$600 million to positive $900 million.78 No wonder foreign creditors further accelerated the
withdrawal of their funds from Korea, pushing the country to the verge of a sovereign default
in less than two weeks after the initial agreement was signed. Korea was able to avoid this
worst possible situation only with the help of the United States.
78 Kim Tae Hong (August 6, 2012). Economic Collapse Reflected in Scarce Electricity"August 6, 2012
42
On December 19, at the Korean governments request, the U.S. government not only
persuaded the IMF to quickly enter into a new round of negotiations with the Korean
government for a further frontloading of bailout money, it also exerted its influence on the
financial institutions of G-7 countries to roll over their short-term credits to Korea for one
month. In return for this favor, they were promised to have an opportunity to reach an
agreement with the Korean government in restructuring their outstanding short-term loans to
Korea. In accordance with this promise, the Korean government and foreign banks managed
to reach an agreement on January 28, 1998 that led to restructuring nearly 95% of Koreas
short-term debt by March 18, 1998. However, it is important to note that in rescheduling
these debts, foreign banks charged extraordinarily high interest rates, ranging from 2.25% to
2.75% point above the then prevailing six-month LIBOR interest rate of 5.66%.79
made by the Presidential Financial Reform Commission that had been launched in January
1997, and the bills were for all practical purposes the same bills the national legislature had
refused to act on on November 16. In any case, thanks to this legislation, the Financial
Supervisory Commission (FSC) was established on April 1, 1998, and in January 1998,
existing separate financial supervisory organs were merged into a consolidated Financial
Supervisory Service (FSS) to serve as an administrative body for the FSC. In addition, the
Financial Industry Restructuring Act was amended so as to give FSC and FSS effective
statutory authority to order write-offs, mergers, suspension, and closure of ailing financial
institutions. Earlier, the Korea Asset Management Corporation (KAMCO) was reorganized
and an NPL resolution fund was created within KAMCO to facilitate the purchase of
nonperforming loans from financial institutions.80
Rehabilitating Financial Institutions.
Koreas banking sector had two major problems: inadequate capitalization and poor-quality
assets. This was of course due to the large number of chaebol bankruptcies that damaged
banks balance sheets. These balance sheets carried many non-performing loans. In order to
address these problems, the government had to step in with public funds. Although the
injection of public funds was sure to generate public controversy, the government had no
choice if it wanted to have a workable financial system for the nation. Once the government
decided to inject public funds to rehabilitate the financial system, the first question it had to
resolve was what exactly constituted non-performing loans. Before the crisis, only loans in
arrears for six months or more had been classified as non-performing loans. In estimating the
true magnitude of the NPLs, the government decided to include loans in arrears for three
months in line with internationally acceptable standards. Using this standard, the government
estimated the total size of the outstanding NPLs at 118 trillion won or roughly 28% of
Koreas GDP in 1998 This was twice the amount of NPLs estimated earlier on the old asset
classification standards.
Other non-bank institutions including securities companies, insurance companies, investment
trust companies, mutual savings and financial companies, credit unions, and leasing
companies went through more or less similar restructuring processes as commercial and
merchant banks.
2000, and raising the limit of bank ownership of domestic residents from 4% to 10% in April
2002.82
ConclusionFirst point relates to the sequencing of capital account liberalization. North Koreas decision
to liberalize short-term capital flows ahead of long-term capital flows was a serious mistake.
North Korea should have realized that short-term capital flows are more volatile than longterm. North Korea believed that short-term capital flows are largely related to trade financing.
In this day of financial globalization, trade financing accounts for 20 only a very small part of
international capital flows. Anyhow, by liberalizing short-term before long-term flows, Korea
accumulated far too much short-term liability, which led to uncontrollable mismatches in
maturity and currency.
Second point has to do with the superiority of a pure floating exchange rate system over a
managed floating system. Under a managed floating system, the market mechanism is
hindered from correcting trade or current account imbalances. Furthermore, in todays world
it is beyond the capacity of policymakers to adjust exchange rates correctly in a timely
fashion. Not only do they not have information needed for this task, but they are also often
shackled by political forces in making necessary adjustments in a timely way. Whats more,
in periods leading up to a full fledged crisis, policymakers often fear that if they start making
big adjustments, at once the exchange rate will freefall, leading to a situation beyond their
control. As a result, they make small adjustments, which encourage speculative attacks on the
currency.
Last point has to do with the extent of liquidity a country needs to secure once it is in crisis. It
has been noted in this presentation that the initial assistance package worked out between the
IMF and North Korea fell far short of the countrys liquidity needs. Recall that the further
front loading of funds agreed to at the end of the second round of negotiations was not
sufficient to deal with the countrys liquidity needs. Only when foreign lenders were
persuaded by the US government to keep rolling over the existing short-term debts in return
for an opportunity to renegotiate these debts were North Koreas liquidity needs met.
loans disbursed quarterly over a three-year period in exchange for the Greek governments
commitment to an ambitious macroeconomic adjustment plan. The EU-IMF programme had
the dual objective of undertaking a large fiscal adjustment to address fiscal insolvency and,
simultaneously, achieving internal devaluation to close the competitiveness gap. The EU
and the the IMF have provided a total of 240 billion in emergency funding in return for
austerity measures83.
Unfortunately, these measures further slowed the Greek economy, reducing the tax revenues
needed to repay the debt. The funding only gave Greece enough money to pay interest on its
debt and keep banks capitalized and barely running. Unemployment rose to 25%, riots
erupted in the streets, and the political system was in an upheaval as voters turned to anyone
who promised a painless way out. A snap parliamentary election was held in January 2015
following the rejection of the governments candidates for the president in parliamentary
votes in December 2014. The premature election threatened to endanger the recently gained
Greek economic recovery, because of the political uncertainty of what would follow and the
unavoidable delay of continued implementation of structural reforms. 84 The rising political
uncertainty also caused the Troika to suspend all scheduled remaining financial aid to Greece
under its bailout programme, while noting its support would only resume pending the
formation of a newly elected government respecting the already negotiated terms 85. Opinion
polls ahead of the election provided the anti-bailout party Syriza with a lead, causing adverse
developments on financial markets, with the Athens Stock Exchange suffering an
accumulated loss of roughly 30% since the start of December 2014, and the interest rate of
the ten-year government bond rising from a low of 5.6% in September 2014to 10.6% on 7
January 2015. The Syriza Party won the election and formed a new government, which
declared the old bailout agreement was now cancelled, while requesting acceptance of an
extended deadline to 31 May 2015 for the process to negotiate a new replacing creditor
83 Antonio G Pascual and PierroGhezzi, the Greek Crisis: Causes and
Consequences CESifo working paper series, November 2011.
84"Stakes rise for Greece as risky election looms". News reported on CNN dated
23 December 2014 available at
http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_29/12/2014_545772
85 News report dated March 3, 2015 available at
http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_29/12/2014_545787
48
agreement with the Eurogroup. On 4 February 2015, the European Central Bank applied
87The most useful guide to levels of manageable debt is the debt to GDP ratio. Therefore, a fall in
GDP and rise in debt means this will rise rapidly. For example, between, 2007 and 2011, UK public
sector debt almost doubled from 36% of GDP to 61% of GDP (UK Debt and that excludes financial
sector bailout). Between 2007 and 2010, Irish government debt rose from 27% of GDP to over 90%
of GDP (Irish debt)
49
Italy). However, after the credit crunch, investors became more skeptical and started to
question European finances. Looking at Greece, they felt the size of public sector debt was
too high given the state of the economy. People started to sell Greek bonds which pushes up
interest rates. Unfortunately, the EU had no effective strategy to deal with this sudden panic
over debt levels. It became clear; the German taxpayer wasnt so keen on underwriting Greek
bonds. There was no fiscal union. The EU bailout never tackled fundamental problems.
Therefore, markets realized that actually Euro debt wasnt guaranteed. There was a real risk
of debt default. This started selling more leading to higher bond yields.Usually, when
investors sell bonds and it becomes difficult to roll over debt the Central bank of that
country intervenes to buy government bonds. This can reassure markets, prevent liquidity
shortages, keep bond rates low and avoid panic. But, the ECB made it very clear to markets it
will not do this. Greece had a very large debt problem even before joining Euro and before
the credit crisis. The credit crisis exacerbated an already significant problem. The Greek
economy was also fundamentally uncompetitive.
than a lackadaisical structure and debt. There is no competitiveness. There are no free
enterprises. The whole system is clogged with corruption, red-tapism threatens the system
and public sectors are overprotected.In the World Economic Forum's latest Global
Competitiveness Report, Greece ranks awfully for wastefulness of government spending
(140th out of 148 countries), burden of government regulation (144th), efficiency of the
judicial system (138th), and the effects of taxation on incentives to invest (142th) and on
incentives to work (137th).
Tackling Measures
Since the beginning of 2010, the Greek economy is going through a transformation process.
The economic policy mix, founded on frontloaded fiscal consolidation and wide-ranging
structural reforms, has moderated markedly the macroeconomic and fiscal imbalances. The
Economic Adjustment Program of Greece has resulted to a sizeable reduction in
macroeconomic and fiscal imbalances. An unprecedented fiscal adjustment has yielded a
general government deficit decline by more than 9 percentage points of GDP, from 15.6% in
2009 to 6.1% in 2012 while according to the more recent Eurostat data the deficit declined
even further in 2013 reaching 2.1 %. (excluding the one-off bank recapitalization costs).
Similarly, the primary budget deficit improved from 10.4% of GDP in 2009 to 1.1% in 2012
while primary surplus was recorded in 2013, for the first time after more than a decade. The
Economic Adjustment Program has also yielded considerable gains in terms of price and cost
competitiveness that reflect the sizeable improvement in unit labour costs as well as the
phasing-out of the downward price stickiness associated with hurdles in the business sector
competition and of increases in indirect taxation and administered prices. In terms of
structural competitiveness, considerable progress has been achieved.
There have been numerous reforms introduced in the country that seek to develop and
protect entrepreneurship and include investment licensing reform. The government
has adopted strategy paper in june 2013. The primary objective of the reform is to
implement a radical change and simplification of the current licensing regime under a
single regulatory framework that governs both compliance rules and control systems.
The main principles of the reform are:
51
Declaration
of
Compliance
Responsibility to demonstrate proof of compliance by the enterprise Compliance
audit
Transfer of the audit burden from the stage of licensing to the stage of activity
operation.
Establishment of accreditation for all public and private sector licensing stakeholders,
The involvement of OECD, has been critical on identifying, collecting and mapping existing
regulations and laws in four vital sectors i.e. tourism, building materials, retail and food
processing. Support extroversion via a new Agency set to promote exports and attract FDI,
while utilizing resources more efficiently and effectively. The World Bank (WB) has already
identified the deficiencies in the sector and has advised the Greek authorities to move quickly
to the direction of improving the conditions for investments in logistics. Following the WB
assistance a National Logistics Strategy has been presented by Ministry of Development
together with the Ministry of Transport, with a view to:
Guarantee that Greece can deliver competitive and high quality logistics services.
Reinforce reliability on doing business in Greece Remove barriers to entry and
Other reforms have been undertaken to support start-ups including reduction of capital
requirements and simplification of procedures along with reduction of administrative
burdens. Several measures are adopted in order to help Greek enterprises and especially
SMEs, which are the backbone of the Greek economy, to access capital with improved terms
and conditions, given the gap in comparison to their European counterparts. Apparently, the
bulk of the capital is envisaged to come through private funds and FDI, however part of the
structural funds and other mechanisms and institutions can have an important added value in
this respect. A reform of the public procurement legislation including works, supplies and
services under the coordination of the SPPA has been planned with a view to:
52
i.
ii.
legislation;
rationalising the administrative structures and processes in public procurement to
iii.
53
54
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