Jide Akintunde, Managing Editor/CEO, Financial Nigeria International Limited

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Subjects of Interest

  • Financial Market
  • Fiscal Policy

Nigeria and World Bank loans 21 Jan 2021

Last month, Nigeria secured approval for another external loan. When Punch newspaper broke the news of the $1.5 billion facility from the World Bank on Twitter, the reactions of Nigerians on that “street” were overwhelmingly negative. The dominant views were that the money would be mismanaged by the government and that the World Bank is complicit in Nigeria’s public debt bubble.
Both views are not unfounded, even if the sentiment against the World Bank is not apparently supported by data. As of June 30, 2020, World Bank lending to Nigeria accounted for only 12 per cent of the country’s total outstanding public debt of N31 trillion ($85.9 billion) or 33 per cent of total external debt.

In five and half years of the administration of President Muhammadu Buhari, over N19 trillion has been added to the public debt. Despite the historic debt level, the economy is in recession. The prospects of economic growth in the medium term is subdued, based on the weak outlook of crude oil prices in the international market. The near-term projections of both unemployment and poverty rates are that they would keep rising.

Where the World Bank has had a major influence is in Nigeria’s policymaking. The approval of its new loan had been delayed for months as it pressed for more pro-market policies. Earlier last year, as the government was seeking loans from the International Monetary Fund (IMF) and the World Bank, it announced that it had eliminated the long-term subsidy on the price of petrol in the country. This was followed up with the hiking of electricity tariffs. Both Bretton Woods institutions said the subsidy on petrol was mistargeted to disproportionately benefit the rich. Cost-reflective electricity tariffs are expected to make investment in the power sector more attractive for investors.

It is noteworthy that these policies have had a direct inflationary backlash. Between January and November of last year, the headline inflation rate rose by 291 basis points. Accordingly, the short-term impact of the policies on poverty alleviation has been negative, contradicting the main policy and financing goal of the World Bank in developing countries. Implementing such policies in the middle of the economic shocks of the COVID-19 pandemic was not only counter-intuitive. It was anti-poor and inhumane.

In granting approval for its new loan, the World Bank arguably obtained another policy concession from the government by way of reopening the Nigerian land borders. The order to reopen the borders came in tow with the loan approval. Trade liberalisation is one of the policy prescriptions of the World Bank. Without drawing the connection with the loan, Nigerians were surprised why the government would suddenly reverse the border policy it had insisted on for 16 months despite its inflationary effect on food prices.

Removal of petrol subsidy, hiking electricity tariff and reopening the land borders may have only met the minimum requirements of the World Bank for granting the $1.5 billion loan. Concerns remain for the bank about the Nigerian policy space. Accordingly, in its statement announcing the loan, Shubham Chaudhuri, World Bank Country Director for Nigeria, said “To realize its long-term potential, the country has to make tangible progress on key challenges and pursue some bold reforms.” Such reforms include floating the naira exchange rate, rolling back fiscal financing through the Central Bank of Nigeria and reducing CBN’s intervention funds. These would, at least in the short-term, cause further sharp depreciation in the value of the currency, compound the difficulty in funding the national budget, and raise market interest rate.

But if the Nigerian policymakers were to accept the policy bitter pills, like the other ones, there is no assurance that the desired economic outcomes would be achieved. The current shambolic policy implementation milieu is anything but assuring of success.

But, to start with, the economic transformation of a country should not depend on external policy advice. Haphazard implementation of such policies for meeting the conditions for securing external loans further erodes the possibility of good outcomes. While creditors may advise on reasonable market policies and make their implementation a condition for lending, they cannot directly implement the policies.

Where the World Bank is culpable is that it often provides loans for funding capacity building and development of expertise at the bureaucratic level. The high impacts of this remain to be seen. And the capacity gap at the lower level of project execution are hardly addressed. The World Bank, in most cases, lends to government, however incompetent it might be. Therefore, in spite of its posturing over policies, in the end the bank simply carries on with its business as usual of lending (for interest) to continue to justify its existence despite its underwhelming success stories.

Nigeria’s debt spiral has gained a powerful momentum. Lack of economic vision by the leaders, incompetent bureaucracy, public sector corruption and lack of fiscal saving had left the economy sapped of growth and jobs before the COVID-19 pandemic. The shift from the real economy to the financial economy before and after the 2009 Global Financial Crisis, the transition to renewable energy and advancements in technologies had depressed the price outlook of oil and consequently government’s revenue in oil-dependent Nigeria. The near-term outlook has further worsened by the devastating effects of the pandemic on the demand for crude oil.

The oil revenue gap and the demand for investment in pro-growth and job-rich sectors, including human capital development, infrastructure and the value chain of agriculture, have made borrowing inevitable for the government. This is now a short- to medium-term reality, regardless of whether the country gets a competent president in 2023 or not. Whereas a competent president would establish the foundation for long-tern economic performance, the borrowing binge of the Buhari administration will only necessitate more borrowing as over 60 per cent of government’s revenue is used for debt service. It is in this regard that the World Bank loans, and other external financing, have become imperative.

Although Nigeria has over-borrowed, based on the extant debt service obligations, not on the ratio of the debt to the GDP, which was 21.5 per cent as of June 2020, its financial reality compels it to continue to borrow. Nevertheless, the current debt strategy is past its sell-by date. In its place should now come a cocktail of homegrown policies. The implementation of such policies has to be orchestrated, moving from own phase to another when some key milestones have been achieved. Such a policy cannot be determined or implemented on the basis of the advice of the creditors.

The vision, wisdom and capacity to coordinate the orchestration of such policies are key responsibilities of the president. They cannot be delegated. Under Nigeria’s “unitary federalism,” it is even more so. This means the performance of the orchestra would likely be delayed for another two years. Until then, the borrowing binge will continue to keep the system floating and not sinking.

Jide Akintunde is the Managing Editor, Financial Nigeria magazine and Director, Nigeria Development and Finance Forum.