Financial Markets and Regulatory System

PROJECTDebt Crisis: Experiences in Nigeria, North Korea, Indonesia and Greece

Submitted By-Astha Misra- 598Bushra Quasmi-600Km Shalini Singh-603Surabhi Gupta-613

INDEX1. debt crisis in nigeria....................................................................................4-241.1 introduction...........................................................................................4-51.2 history........................................................................................................5-81.3 causes..........................................................................................................8-91.4 impact of debt bureden on nigerian development.........9-111.5 debt relief..............................................................................................11-201.6 problems of debt management..................................................211.7 impact of debt management........................................................21-231.8 conclusion.............................................................................................242. debt crisis in indonesia...........................................................................25-312.1 indonesia economy...........................................................................252.2 crisis..........................................................................................................25-262.3 asian financial crisis in indonesia........................................262.4 indonesian crisis begins................................................................272.5 the imf arrives & chaos continues........................................27-292.6 the crisis hits its climax..............................................................292.7 a political system & start of recovery.............................302.8 lessons learned from indonesian financial crisis....313. debt crisis in north korea...................................................................32-453.1 economy of north korea.............................................................32-343.2 how it works........................................................................................34-353.3 north korea in debt........................................................................35-373.4 what brought crisis to north korea...................................37-403.5 how was the crisis immediately addressed.....................41-423.6 what major reforms have been implemented..................42-443.7 conclusion............................................................................................454. debt crisis in greece.................................................................................46-524.1 origin of debt crisis in greece..................................................46-484.2 ongoing outcome of crisis..........................................................494.3 tackling measures...........................................................................50-525. bibliography.................................................................................................53-54ForewordMassive 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.

Debt crisis in NigeriaIntroductionEconomic theory suggests that reasonable levels of borrowing by a developing country are likely to enhance its economic growth[footnoteRef:2]. When economic growth is enhanced (at least more than 5% growth rate) the economys poverty situation is likely to be affected positively[footnoteRef:3]. In order to encourage growth, countries at early stages of development like Nigeria borrow to augment what they have because of dominance of small stocks of capital hence they are 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[footnoteRef:4]. 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. [2: Pereira, A. and Z. Xu, Export growth and domestic performance. Rev. Int. Econ., 8: 60-73. http://ideas.repec.org/a/bla/reviec/v8y2000i1p60-73.html, 2000.] [3: Greene, J., The External Debt Problem of Sub-Saharan Africa. IMF Staff Papers, 36(4): 836-74, 1989..] [4: Amakom U. S., Nigeria Public Debt and Economic Growth: An Empirical Assessment of Effects on Poverty. August 2003]

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[footnoteRef:5] 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. [5: Stiglitz, J.E., Economic of the Public Sector: Third Edition New York and London, W.W. Norton & Company, p790, 2000.]

Reference[footnoteRef:6] 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 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. [6: Soludo, C.C., Debt, Poverty and Inequality, in Okonjo-Iweala, Soludo and Muhtar (Eds.), TheDebtTrap In Nigeria, Africa World Press NJ, p. 23-74, 2003.]

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 intention[footnoteRef:7]. 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. [7: Pattillo, C., H. Poirson and L. Ricci, External debt and growth.IMF workingPaper.WP/02/69, International Monetary Fund, Washington, D.C., 2002.]

History of Nigeria Debt CrisisThe African state Nigeria in the 1960s and early 70s were not indebted. However due to some trend of events during some of the successive governments and administration from the periods of General Obasanjos regime (1976-1979) till Babangida and Abacha regimes (1985-1998), surprisingly, caused the nations boast to begin to fade. It was discovered that to keep moving, Nigeria had to take foreign loans. Thus resulted in no time, Nigeria was caught up in a crippling foreign debt crisis that besides compromising its economic progress, political stability, social dignity and cultural integrity, also dealt a debilitating blow to the Nigerian masses, because of the pains and sufferings they inflicted as a result of implementation of the World Bank IMF policies.The phenomenon of external foreign debt by Nigeria dates back to the colonial period precisely in 1958 when the sum of US$28 million was contracted for railway construction.[footnoteRef:8]Between 1958 and 1977, debts contracted were the concessional debts from bilateral and multilateral sources with longer repayment periods and lower interest rates constituting about 78.5 per cent of the total debt stock.[footnoteRef:9] 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.[footnoteRef:10]It 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.[footnoteRef:11] [8: Adepoju 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.] [9: Ibid, pp. 15] [10: African Forum and Network on Debt and Development (2007) Nigeria: Foreign Debts, Stolen Wealth, IFIS and The West, A Case Study. Harare: AFRODAD.] [11: Chipalkatti, N. and Rishi, M. (2001).External Debt and Capital Flight in the Indian Economy.Oxford Development Studies, Vol. 29, No. 1.]

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.[footnoteRef:12]Given 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.[footnoteRef:13]Two 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. [12: Supra note 9.] [13: Central Bank of Nigeria (2004) Nigeria: Major Economic, Financial and Banking Indicators.]

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.[footnoteRef:14]The 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.[footnoteRef:15]The accrued interest of US$1.0 billion was recapitalised. This brought the amount to US$4.8 billion in 1988 and the debt was eventually refinanced. In 1990, Nigerias external debt rose again to US$33.1 billion.[footnoteRef:16]After 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.[footnoteRef:17] [14: Supra note. 7, pp. 13] [15: Ibid., p.16] [16: Supra note. 12] [17: Ibid.]

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.[footnoteRef:18]Government 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.[footnoteRef:19] 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.[footnoteRef:20] [18: Ibid.] [19: Borensztein, E. (1990). Debt overhang, debt reduction and investment: The case of the Phillippines. International Monetary Fund working paper No. WP/90/77, September.] [20: Ajayi, 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.]

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.Causes of Nigerias debtAccording to Sogo-Temi, (1999)[footnoteRef:21], the explanation for the growing debt burden ofdeveloping economies is of two-fold. Firstly, developing countries have become muchdependent on external funding than they used to even previously. Secondly, difficulties experienced by most countries in servicing external debt burden. [21: Sogo-Temi, J.S (1999), Indebtedness and Nigerias Development, in Saliu, H.A (ed), Issues in Contemporary Political Economy of Nigeria, Ilorin: Sally and Associates]

These two factors according to him, account for Nigerias indebtedness. Any assessment of the present dependency nature of Nigerian economy must take into cognisance the political economy of country during the colonial era.According to Ahmed[footnoteRef:22], he reflected the causes of debt problem as related to both the nature of the economy and the economic policies put in place by the government. He articulated that the developing economies are characterized by heavy dependence on one or few agricultural and mineral commodities and export trade is highly concentrated on the other. The manufacturing sector is mostly at the infant stage and relies heavily on imported inputs. To him, they are dependent on the developed countries for supply of other input and finance needed for economic development, which made them vulnerable to external shocks. [22: Ahmed, A., (1984), Short and Medium term approaches to solving African Debt Problems, Central Bank Nigeria Bullion, 12(22).]

The grand cause of the debt crisis is that, in most cases, the loan is not used for development purposes. The loan process is done in and shrouded with secrecy. The loan is, albinitio, obtained for the personal interest and parochial purposes. It is usually tied to party politics, patronage and elevation of primordial interest rather than the promotion of national interest and overall socioeconomic development.[footnoteRef:23] [23: Aluko, F and Arowolo, D (2010), 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]

The causes of Nigerias external debt burden could be grouped into six areas and these according to Aluko and Arowolo (2010)[footnoteRef:24] are: [24: Ibid.]

Inefficient trade and exchange rate policies, adverse exchange rate movements, adverse interest rate movements, poor lending and inefficient loan utilization, poor debt management practices, and accumulation of arrears and penalties.Inappropriate monetary policy also contributed to the problem of Nigerian external indebtedness. For instance, until recently little or no conscious effort was made to achieve financial discipline which was made necessary for effective and efficient mobilization ofdomestic savings. The negative real rates of interest which prevail for long had the effect,if representing the financial market, increase the dependence of Nigeria on external loans,and encouraging capital flight[footnoteRef:25]. [25: Adejuwon, Kehinde David, James, Kehinde S., and Soneye, Olakunle Adebayo, DEBT BURDEN AND NIGERIAN DEVELOPMENT, Journal of Business and Organizational Development, 2010 CenresinPublications, Volume 2, September 2010]

Impact of Debt burden on Nigeria development It is commonly believed that the growing national debt against the background of declining and/or unstable foreign exchange earnings has serious consequences for the recovery of the Nigerian economy. But the common question which needs to ask is; how do determine the extent of Nigerias debt burden; and how is this going to affect the capacity of the economy to achieve substantial economic growth and development?[footnoteRef:26]Answers to these questions will be based on some principal indices. These are standard indicators for measuring the burden of external debt. These indicators, among others, include the ratios of the stock of debt to exports and to Gross Domestic product and the ratios of debt service to exports and to government revenue.[footnoteRef:27] [26: Supra note. 21] [27: Supra note, 25]

It has been noted that the debtor-countries have too much burden on their heads, the burden packaged with economic crisis and socio-political difficulties. Expending as much as 70 - 90% of export earnings on debt servicing connotes that little is left virtually for the countries to perform their constitutional obligations to the citizenry.It is also carefully noted that in its 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.[footnoteRef:28] [28: FunsoAluko, 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]

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.[footnoteRef:29] [29: Supra note. 28]

James[footnoteRef:30] 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[footnoteRef:31] 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. [30: 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.] [31: Oshadami, O.L (2006), The Impact of Domestic Debt on Nigerias Economic Growth, Unpublished B.Sc Project, Department of Economics, Kogi State University, Anyigba.]

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 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.[footnoteRef:32] [32: Hardy CS (1986), Africas Debt Burden and its Consequences, The Courier, African- Caribbean Pacific Dossier, No. 97, May-June.]

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 neo-colonial enterprise. It is in this light that the conception of debt relief, or worse still, debt forgiveness, offends.[footnoteRef:33] [33: Ake 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]

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.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: Embargo on new Loans and Directives to State Government to restrict external borrowing to the barest minimum: The embargo was to check the escalation of total debt stock and minimize additional debt burden. However, these have not been particularly effective as indiscriminate quest for external loans have not been adopted. Although rescheduling has conferred short term relief or debt service obligations, the debt over-hang has however hardly been abated as the debt stock has continued to increase significantly. Limit on debt service payments: This requires setting aside portion of export earnings to allow for internal development. Debt Restructuring: This involve the reduction in the burden of an existing debt through refinancing, rescheduling bring back, issuance of collateralized bonds and the provision of new money.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 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 ManagementIn 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 semi-annual publication)[footnoteRef:34]. 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. [34: Nyatepe-Coo, A. A.(1993),External Disturbances, Domestic Policy Responses and Debt Accumulation in Nigeria, World Development, Vol. 21, No.10, pp. 1621]

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.[footnoteRef:35] [35: Oshikoya, 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]

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)[footnoteRef:36]. With the establishment of the DMO, it is hoped that many of these lapses will be corrected. [36: Raheem, M. I. (1988), External Debt in the Development Process: A Macro-Econometric 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]

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.[footnoteRef:37] [37: Krugman, P. (1988), Financing Vs Forgiving a Debt Overhang. NBER Working Paper 2486, Cambridge, Mass: National Bureau of Economics Research.]

Policies and strategies of External Debt Management Statutory Provision of Maximum Level of BorrowingsAt 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 government[footnoteRef:38]. Another of the regulatory frameworks put in place was the External Loans (Rehabilitation, Reconstruction and Development) Decree of 1970 which 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 programmes[footnoteRef:39]. 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. [38: Iyoha, 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] [39: Ibid]

Issuance of Directives by the Federal GovernmentThe 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 revenue[footnoteRef:40]. 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 [footnoteRef:41]. 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. [40: Infra note. 40] [41: Uwatt, B. U. (1995), A Multi-Objective Model of External Debt Management for Nigeria ,Unpublished Ph.D. Thesis, Department of Economics, University of Ibadan.]

Embargo on New LoansThis 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.

Economic Reforms and Debt inflowsIn 1986, Nigeria introduced SAP which attracted trade and investment loans. For instance, foreign loans worth US$450 million and US$500 million were contracted between 1986 and 1989 (Uniamikogbo, 1994)[footnoteRef:42]. The SAP sought, among others, to realign domestic production, investment and consumption patterns as well as exchange rate, so as to reduce dependence on imports and enhance non-oil exports. This will in turn generate foreign exchange for debt service and put the economy on the path of steady and sustainable growth. The main debt management approaches under SAP included debt restructuring, limiting debt service to a maximum of 30 per cent of annual export earnings and attracting new loan facilities on concessional terms to ameliorate the debt burden. The SAP implementation facilitated the various debt restructuring agreements signed since 1986 with various creditors. [42: Umakrishman (1998), Debt-Servicing Capacity of Indebted Countries: Towards Developing A More Sensitive Index, Foreign Trade Review, Quarterly Journal of Indian Institute of Foreign Trade, Vol. XXXIII, No. 1& 2, April - Sept]

In February 1988, the federal government introduced new policy guidelines aimed at minimising the increasing debt service burden. The guidelines stipulated vigorous viability testsfor projects to be financed by external loans. The guidelines were issued with regard to the viability and ranking of economic and social services as well as priorities for foreign borrowing by governments (federal and states), parastatals and private sector[footnoteRef:43]. External loan requirements of private and public sector projects that are of a commercial and quick yielding nature may be sourced from the International Capital Market(ICM) while concessionary financing may be secured for social service and infrastructural projects [footnoteRef:44]. In addition, federal government approval must be obtained before fresh loans are contracted 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 export-oriented 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 [footnoteRef:45]. [43: Underwood, J.(1992),The sustainability of International Debt, International Finance Division, The World Bank, mineo] [44: Cohen, 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] [45: Ibid]

Debt Conversion SchemeIn 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 debts[footnoteRef:46]. [46: Villanueva, 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.]

Refinancing ProgrammeRefinancing 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[footnoteRef:47]. 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 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[footnoteRef:48]. 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. [47: Hadjimicheal, M. T. et al.,(1995),Sub-Saharan Africa: Growth, Savings, and Investment, 1986 - 93. Occasional Paper 118, International Monetary Fund, Washington DC.January.] [48: Greene, J. E. and M. S. Khan(1990), The African Debt Crisis African Economic Research Consortium, Special Paper 3, February]

Debt Buy-Back SchemeThe 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 amount[footnoteRef:49]. [49: Ibid. p. 34]

Debt ReschedulingRescheduling 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[footnoteRef:50]. 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[footnoteRef:51]. The amount wasconsolidated and rescheduled over a twenty years period including a three years grace period. [50: Fisher, 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] [51: Dooley, M. P. (2000), Debt Management and Crisis in Developing Countries, Journal of Development Economics, Vol. 63, pp.45]

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 rescheduled/refinanced. In 1991, Nigeria succeeded in rescheduling the repayment of debt stock[footnoteRef:52]. [52: Iyoha, M. A. (1997),An Econometric Study of Debt Overhang, Debt Reduction, Investment And Economic Growth in Nigeria NCEMA Monograph Series, No. 8. , (1999),]

As at 1998, Nigeria has signed a total of 14 bilateral agreements under the Paris Club Agreed Minutes. It is viewed that even though the Paris Club rescheduling has provided some temporary cash-flow relief, it has not reduced thedebt stock. This is because the package was always structured to apply to current maturities falling due within a consolidation period of about 15 months and not the entire debt stock, and the capitalisation of the interest thereon[footnoteRef:53]. Thus, instead of reducing the debt stock has tended to increase it without the country contracting new loans[footnoteRef:54]. 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. [53: Chhibber, A. and S. Pahwa (1994), Investment Recovery and Growth in Nigeria: The Case for Debt Relief African Debt Burden and Economic Development, Selected Papers for the 1994 Annual Conference, The Nigerian Economic Society.] [54: Nyatepe-Coo, A. A.(1993),External Disturbances, Domestic Policy Responses and Debt Accumulation in Nigeria, World Development, Vol. 21, No.10, pp. 1621]

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 debt[footnoteRef:55]. In 2001, the Federal Government established a Debt Management Office for the purpose of managing and advising on the governments overall debtobligations[footnoteRef:56]. [55: Iyoha, M. A. (1997), External Debt and Economic Growth in Sub-Saharan African Countries: An Econometric Study, African Economic Research Consortium, RP 90, March] [56: Higgins, M. and T. Klitgaard(1998),Viewing the Current Account Deficit as a Capital Inflow, Current Issues in Economics and Finance, Vol. 4 No. 13, December.]

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 billion[footnoteRef:57]. 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 billion[footnoteRef:58]. [57: Supra note. 50] [58: Ibid]

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.Problems of Debt Management in NigeriaThere are lots of problems that militate against effective debt management in Nigeria and some of them are stated below[footnoteRef:59]:- [59: Missale, A. (1999), Public Debt Management., Oxford: Oxford University Press.]

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 one integrated activity. Ineffective Law and Regulation: Another dimension to the institutional problemis the neglect or ineffectiveness of lawand regulation. If the provision of the PublicBodies Act of 1965 was put into effectiveuse, it could have forged a cohesive link inthe statistical data on external borrowing ofFederal, State governments and the parastatals,a situation where information on foreignborrowing is picked by bits is detrimental toher national economy. Low Yield on Debts Instruments: Thelow rate of interest that were administeredon debts instruments for a long time priorto the introduction of Structural AdjustmentProgramme (SAP) in 1986 made the instrumentsvery unattractive giving low yield vis-vis other instrument outlets.IMPACT OF DEBT MANAGEMENT ON THE GROWTH OF THENIGERIAN ECONOMYIt is difficult to identify the macro economic impacts of debt relief in Nigeria due to the diverse influences of reform agenda. However, the positive trend seems to dominate the negative effect on macroeconomic performance in Nigeria. The reduction in debt stock and the corresponding reduction in foreign debt servicing, immediately freed up resources. It released roughly US$1billion a year to the Nigerian government: US$750 million in savings for the Federal government, and an aggregate of US$250 million to the state governments. The tagging and tracking structure created a set of budget codes that labels a portion of government expenditures as poverty-reducing, funded by debt relief or both. A series of budget control codes were created and a new reporting platform was adopted by the Office of the Accountant general of the Federation (OAGF) known as the Accounting Transactions Recording and Reporting System (ATRRS) that would produce consolidated reports on debt relief expenditures. This was integrated into the standard budget coding structure of Federal government from 2006 Fiscal year.Other Economic impacts of the debt deal include:(i) It created a platform for reforming national debt institutions(ii) It has injected needed cash into the social sector of government by funding critical priority sectors such as health, basic education, water, power, roads etc.(iii) It has provided an opportunity to introduce a social protection strategy to the country(iv) It served as a new way of planning, budgeting and executing projects.(v) It removed a significant financial burden from the government(vi) It enabled Debt management Office DMO to refocus its energy on the core business of public debt management(vii) It enables Nigerian governments to move away from reliance on unpredictable and unsustainable donor funding.(viii) It also helps avoid a return to unsustainable debt accumulation and crisis(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.

CONCLUSIONThe 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 [footnoteRef:60]. 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 [footnoteRef:61]. [60: Sogo-Temi, J.S (1999), Indebtedness and Nigerias Development, in Saliu, H.A (ed), Issues in Contemporary Political Economy of Nigeria, Ilorin: Sally and Associates] [61: Obadan, M.I, (20040, Foreign Capital Flows and External Debt: Perspective on Nigeria and the LDCs Group, Lagos: Broadway Press Ltd]

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, 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[footnoteRef:62]. Indeed, many aspects of globalisation have reinforced Nigerias position on the lowest rung. [62: Omotola, 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]

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.

DEBT CRISIS IN INDONESIAThe Asian financial crisis was a period of financial crisis that gripped much of East Asia beginning in July 1997 and raised fears of a worldwide economic meltdown due to financial contagion. Indonesia, South Korea and Thailand were the countries most affected by the crisis.Indonesias EconomyIndonesia 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.[footnoteRef:63] [63: http://www.acicis.murdoch.edu.au/hi/dspp1.html; last accessed on March 02,2015]

CrisisIn 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".[footnoteRef:64] [64: Raghavan, Anita, "Japan Stocks Slide Again on Fears About Stability". Wall Street Journal; retrieved on 15 February 2015.]

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.[footnoteRef:65] [65: ]

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 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.Asian Financial Crisis in IndonesiaThe Asian Financial Crisis started on 2 July 1997 when the Thai government, burdened with a huge foreign debt, decided to float its baht after currency speculators had been attacking the country's foreign exchange reserves. This monetary shift was aimed at stimulating export revenues but proved to be in vain. It soon led to a contagion effect in other Asian countries as foreign investors - who had been pouring money into the 'Asian Economic Miracle countries' since a decade prior to 1997 - lost confidence in Asian markets and dumped Asian currencies and assets as quickly as possible.The Indonesian Crisis BeginsAlthough the Asian region showed worrying signs, foreign investors initially kept confidence in the Indonesian technocrats' ability to weather the financial storm (as they had done before in the 1970s and 1980s). But this time, however, Indonesia would not get off scot-free. It became the hardest-hit country because the crisis not only had economic but also significant and far-reaching political and social implications.When pressures on the Indonesian rupiah became too strong, the currency was set to float freely starting from August 1997. Soon it began depreciating significantly. By 1 January 1998, the rupiah's nominal value was only 30 percent of what it had been in June 1997. In the years prior to 1997 many private Indonesian companies had obtained unhedged, short-term offshore loans in dollars, and this enormous private-sector debt turned out to be a time bomb waiting to explode. The continuing depreciation of the rupiah only worsened the situation drastically. Indonesian companies rushed to buy dollars, thus putting more downward pressure on the rupiah and exacerbating the companies' debt situation. It was certain that 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.The IMF Arrives and Chaos ContinuesThe IMF arrived in Indonesia with a bailout package totaling USD $43 billion to restore market confidence in the Indonesian rupiah. In return it demanded some fundamental financial reform measures: the closure of 16 privately-owned banks, the winding down of food and energy subsidies, and it advised the Indonesian Central Bank (Bank Indonesia) to raise interest rates. But this reform package turned out to be a failure. The closure of the 16 banks (some controlled by Suharto's cronies) triggered a run on other banks. Billions of rupiah were withdrawn from saving accounts, restricting the banks' ability to lend and forcing the Central Bank to provide large credits to the remaining banks to avert a complete banking crisis. Moreover, the IMF did not try to curb Suharto's system of patronage that was damaging the country's economy and undermining the IMF accord. This patronage system was Suharto's tool to maintain power; in exchange for political and financial support, he gave powerful positions to his family, friends and enemies (thus becoming cronies). Other developments that were negatively impacting on Indonesia towards the end of 1997 were a serious El-Nino drought (causing forest fires and bad harvests) and increased speculation about Suharto's deteriorating health (causing political uncertainties). Gradually, Indonesia was heading towards a political crisis. A second agreement with the IMF was needed as the economy was continuing its downward spiral. In January 1998 the rupiah lost half of its value within the time-span of five days only, causing Indonesians to hoard food. This second IMF agreement contained a detailed 50-point reform program, including provisions for a social safety net, a gradual phasing out of certain public subsidies and the tackling of Suharto's patronage system by ending monopolies of a number of his cronies. However, reluctance of Suharto to implement this structural reform program faithfully, meant that the situation did not improve. Critics of the IMF, however, point out that the institution pushed for too much reform within too little time, thereby worsening the Indonesian economy. The IMF indeed made errors in its initial approach to the Indonesian crisis but it did come to realize that the key in overcoming this crisis was to restart private capital flows to Indonesia. In order for this to happen the patronage system had to be broken down.Indonesian GDP and Inflation 1996-1998[footnoteRef:66]: [66: Source: Hill, H. (2000). The Indonesian Economy, p. 264]

1996

19971998

GDP Growth(annual percentage change)8.04.7-13.6

Inflation Growth(annual percentage change)6.511.665.0

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.The Crisis Hits its ClimaxIn the meantime, major social forces were at work as well. Demonstrations and criticism directed towards the government of Suharto intensified severely after he was re-elected and formed a new cabinet in March 1998. This provocative new cabinet contained a number of members from his crony-group and therefore did little to restore confidence in the Indonesian market. After the government decided to reduce the subsidies on fuel in early May, large-scale 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.

A New Political System and the Start of RecoveryBacharuddinJusufHabibie, vice-president in Suharto's last cabinet and thus - by law - replacing Suharto as Indonesia's next president, turned to the economic technocrats to deal with the ongoing financial crisis. This resulted in a fourth agreement with the IMF. It was signed in June 1998 and allowed the budget deficit to widen further while new funds were pumped into the economy. Within the timespan of a couple of months there were some signs of recovery. The rupiah began to strengthen from mid-June 1998 (when it had fallen to 16,000 rupiah per dollar) to 8,000 rupiah per dollar in October 1998, inflation eased drastically, the Jakarta stock exchange started to rise and non-oil exports started to revive towards the end of the year. The banking sector (center of the crisis) remained fragile as the number of non-performing loans were high and banks were very hesitant to loan money. Moreover, the banking sector had caused a sharp increase in government debt as this debt was primarily due to the issuance of bank restructuring bonds. But, albeit fragile, the country's economy improved gradually through 1999, partly due to an improving international environment which caused a rise in export revenues.Lessons Learned from the Indonesian Financial CrisisIt 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 long-established 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 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.

DEBT CRISIS IN NORTH KOREAEconomy of North Korea-North Koreas economy is a centrally planned system, yet the roll of market allocation schemes is limited. Although there have been scattered and limited attempts at decentralization, as of 2015, PYONGYANGS basic adherence to a rigid centrally planned economy continues, as does its reliance on fundamentally non pecuniary incentives.[footnoteRef:67] There have been reports of economic liberalisation, particularly after KIM JONG UN assumed the leadership in 2012, but recent reports conflict over what is happening.[footnoteRef:68] [67: Andrew Jabobs (October 14, 2012). North Koreans See Few Gains Below Top Tier. The New York Times. October 15,2012.] [68: Jeff Baron (March 11, 2013). Book Review: A Capitalist In North Korea.38, North. School of Advanced International Studies. March 11,2013.]

The collapse of communist governments around the world in 1991, particularly North Koreas principal source of support, the Soviet Union, forced the North Korean economy to realign its foreign economy relations, including increased economic exchanges with South Korea.[footnoteRef:69] [69: Ruediger Frank (October 2, 2012)."An Atmosphere of Departure and Two Speeds, Korean Style: Where is North Korea Heading?]

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 theJapanese 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 one-year 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 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.[footnoteRef:70] 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.[footnoteRef:71] [70: Asia Times Online:: Korea News and Korean Business and Economy, Pyongyang News. Atimes.com. July 17, 2010. March 31,2014] [71: "CIA World Factbook". CIA. 20 June 2014. 15 January2015.]

How the North Korea Economy WorksNorth Korea, officially known as the Democratic Peoples Republic of Korea (DPRK), is regarded as an unreformed, isolated, tightly controlled, dictatorial command economy. The Korean peninsula was a Japanese colony from 1910-1945. As World War II drew to a close, the Japanese forces in the northern region of Korea surrendered to the Soviet troops while the American troops took charge of the southern region. The supposed reunification through elections never took place in the Korean peninsula and the two regions appointed their respective leaders. In 1950, Kim II Sung backed by the Soviets made an attempt to capture 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 acentrally 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 onson 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.[footnoteRef:72] [72: PrableenBajpai, How The North Korea Economy Works. ]

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.[footnoteRef:73] [73: Source: Bank Of Korea: Ministry of Unification]

TheGross 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.North Korea in DebtLess than a month after becoming the first country to formally default on its loans since the international debt crisis began in 1982, North Korea has agreed in principle to begin repaying its Western creditors, according to banking sources. Apparently alarmed by a wave of embarrassing publicity and the threat of legal action to seize its assets abroad, North Korea has agreed to make its first payment to European creditor banks since March 1984, the sources said Tuesday.''It's an encouraging step forward, but we won't call off legal action for good until we see the money and the rescheduling agreement is signed,'' said Michael P. Barrow, an executive of 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 InvolvedNorth 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 SuspendedBankers 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.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 three-quarters 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.[footnoteRef:74] [74: Nicholas D Kristof, North Korea in Default Said to Relent on Debt, New York Times, 17 September 1997]

What Brought Crisis to North KoreaIn 1990, North Koreas current account balance started to deteriorate because of rising inflation, appreciation of the Korean won, and the recession of the world economy. The current account in 1991 recorded a deficit of $8.7 billion, which was more than four times the level of the preceding year. In order to finance the growing current account deficits, the government encouraged capital inflows. In part to achieve this objective, in 1991, capital account liberalization was accelerated by amending the Foreign Exchange Management Act. The limited capital account liberalization implemented resulted in substantial capital inflows. However, as policymakers were more concerned about the effect of these inflows on the competitiveness of Korean exports through the appreciation of the Korean won, they tended to overlook the resulting financial instability. In 1993, the Korean government also announced a blueprint for financial sector liberalization that deregulated restrictions on asset and liability management of financial institutions. However, the government neglected the need for adequate prudential regulation in this move. This led to an increase in the short-term foreign currency debts of financial institutions. Furthermore, as part of the requirements for joining OECD in 1996, the government implemented further financial deregulation and capital market opening. But it chose to liberalize short-term capital inflows ahead of long-term capital inflows.[footnoteRef:75] [75: Y. C. Park, W. Song, and Y. Wang, 2004, 15-17.]

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.[footnoteRef:76] 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. [76: Park, Song, and Wang, 2004, 18]

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 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.[footnoteRef:77] Thus, mismatches alone cannot fully account for the actual crisis. [77: IMF, 2003, 2-3]

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 doll