Nigeria’s Pursuit of $1.5 billion World Bank Loan Could Just Be Needless – DPR

There is a wide gap between what Nigeria has budgeted to spend on salaries, healthcare, school buildings, roads, pensions etc. and the actual revenues of the government i.e. what is available to spend as a result of the fall in oil prices , which provides about 75% of Nigeria’s revenue ( and is thus the primary source of funds for the country’s budget). Apart from the direct impact on families that will not receive salaries, scaling down government investment in social and other government services and in physical infrastructure means a contraction or reduction in economic demand and output. This is because people paid by the government, either salaries or payment for goods and services supplied, spend their income on “demanding” many other things produced or supplied by others in the economy.  The loan that the Federal Government is seeking from the World Bank appears to a “budget support” facility; this sort of loan goes directly to augment revenue available to finance the expenditure contained in the budget. (The World Bank usually lends towards specific projects e.g. the power sector or setting up a land registration system). Apart from the domestic budget deficit i.e. the gap between planned revenue and expenditure on one side and actual revenue on the other, Nigeria also has an external financing problem i.e. its foreign exchange income is insufficient to pay for exports. Nigerian companies export very little so the country relies on revenue from oil exports for about 90% of its foreign exchange earnings.

The new coronavirus pandemic met Nigerian finances in a very poor state, happening just as the country was hoping for stronger economic growth after the weak recovery that followed the 2016/2017 recession. The Nigerian Government refused to devalue the naira or eradicate electricity and fuel subsidies during the 2016/2017 in order to access IMF/World Bank loans. The stance of the Washington institutions is usually that countries seeking assistance should “correct” unsustainable policies and focus their resources on expenditure which can generate economic growth e.g. spending fuel subsidies on rural roads or primary education.

The Buhari Government is left with very few options this time; it has removed the fuel subsidy and allowed electricity companies to charge cost reflective tariffs i.e. prices that cover the cost of producing and supplying electricity rather than paying power companies to subsidize consumption. But the Nigerian Government is yet to satisfy a critical condition – allowing the naira’s value to be determined by or to reflect market supply and demand. The Central Bank of Nigeria has continued the historic practice of fixing the value of the naira at a higher rate than what obtains in the “black market” (more like the real market which better reflects the demand and supply for foreign currency in the country). History shows that the Central Bank of Nigeria has never been able to control the foreign currency it supplies at the official or subsidized rate from being sold at a markup in the black market.  Nigeria thus suffers the worst of both worlds. A chunk of foreign currency inflows, government revenue from selling oil abroad,  which could be used to stabilise a single rate is captured by actors who sell it at a higher rate. The artificial official rate also prevents investment from flowing into Nigeria because foreign investors can see that the exchange rate is not sustainable, they expect a devaluation and refuse to bring foreign currency into Nigeria until they see an exchange rate which domestic and foreign investors consider sustainable i.e. a rate at which the CBN could comfortably meet the demand  for foreign exchange. Since the CBN lacks the foreign currency to supply people demanding it at the artificial, i.e. non-market, it has fixed, it engages in “demand management” i.e. refusing to sell foreign exchange for the purposes of importing certain goods. This is effectively a subsidy- selling foreign currency to fund approved imports at a higher exchange rate rather than selling it to fund all imports at a lower rate. But this does not result in a lower exchange rate as the officially excluded demand for forex is transferred to the “black market” rather than eliminated, thus resulting in an even lower exchange rate i.e. a weaker naira. The arbitrage opportunity multiple exchange rates allow is perhaps the world’s biggest long running financial crime.

The Department of Petroleum Resources should not be making public statements about monetary or fiscal policy, the decision to augment revenues through loans or liberalise certain sectors of the economy. Its mandate should stop at making known to the Finance Minister the funds it could possibly collect on the FGN’s behalf from the oil and gas industry. Advising the government not to take World Bank loan is tantamount to publicly opposing an economic policy direction the FGN has committed to.

World Bank and IMF progammes and the loans that come with them often provide a country with the discipline to use their own resources more prudently or sustainably. More importantly, they may signal to investors that a country has adopted economic policies that will, in the short term, not make them lose money (a devaluation shortly after an investment make the investment immediately “expensive”) and in the long term, will grow national income sustainably and thus the profitability of their investment. The DPR may have been performing for the public gallery, but its statement creates the impression that Nigerian government elites still do not understand that age-old Nigerian economic policy choices have reached the end of the road. As Dr. Sam Amadi, former Chairman of the Nigerian Electricity Regulatory Commission (NERC) stated in an interview with Arbiterz, Nigeria should embrace market tariffs for electricity because Nigerians know it is the way to attract investment into and grow the sector, not because it is a World Bank demand. More than anyone else, the DPR should know it is futile to plan to finance Nigeria’s social expenditure and economic growth with oil revenue that is always liable to crash now and then, bringing the economy down with it.