IMF provides extra details on why Nigeria took $3.4bn loan
About four months ago, the executive board of International Monetary Fund (IMF) approved the historic disbursement of $3.4 billion to Nigeria as an assistant for coronavirus pandemic and failing oil price.
The fund Nigeria received from IMF is the second-highest of the countries that have benefitted from RFI during the Covid-19 pandemic. South Africa got $4.3billion, Côte d’ivoire – $886.2million, Egypt – $2.77 Billion, Tunisia – $745 million, amongst others.
Four key commitments expected from Nigeria
International Monetary Fund (IMF) Mission Chief and Senior Representative in Nigeria, Jesmin Rahman, explained that there are four important policy commitments Nigeria must adhere to, in order to not only ensure proper use of the fund but also address long-standing macro-economic weaknesses in the country.
The important policy commitment include, exchange rate unification and greater flexibility; resume domestic revenue mobilization once the crisis passes; transparent use of emergency fund through various measures introducing budgetary lines; having an expository audit of these funds, and safeguard assessment of the central bank.
Reason for RFI loans
Jesmin Rahman noted that RFI loan is an emergency window which was developed for low income countries.
“Tons of countries have come to us and we have been providing emergency assistance through these windows,” Rahman said.
Why is IMF giving Nigeria the loan?
The IMF explains that the immediate economic impact of COVID-19 is expected to be severe in Nigeria especially as things have been bad even before the twin calamity of the coronavirus and the fall in oil prices.
It also remarked that the pandemic along with the sharp fall in oil prices has made Nigeria even more vulnerable and this could lead to a recession and a huge funding gap.
The IMF also explains that the current situation could make the average Nigerian even poorer and so the need to extend the financial assistance.
One other major reason for this loan, which we had mentioned above was to help the government meet its balance of payment obligations.
Will the money be disbursed to State government or local government?
The money is not available to State governments or local government. It is a loan to the Federal Government and will be used for Federal expenditures. States will probably seek funding support from the World Bank and other multilateral institutions.
Does the loan come with an interest rate and are we meant to payback?
The IMF loan comes with a concessionary interest rate and is expected to be paid back by Nigeria. According to data from the website of the IMF, the interest charged is not flat and applies to several factors. The IMF charges a lending rate, annual commitment fees, and service charge.
The commitment fee can be as low as 0.15percent and as high as 0.6percent. The service charge is about 0.5percent for each amount that is withdrawn. The lending rate is 0.05percent (also called the Special Drawing Rights) plus a margin of 1percent totalling about 1.05percent.
The higher a country draws on the loan beyond its quote the higher the margin it pays. Margins can go as high as 3percent. Nigeria is taking 100percent of its quota so we expect the interest rate to be about 1.05percent.
Based on the terms of the Rapid Financing Instrument, Nigeria is expected to pay back the loan between within 3¼ to 5 years.
Does this loan solve all Nigeria’s economic issues?
This loan does not solve all of Nigeria’s economic challenges.
With the COVID-19 pandemic set to take a toll on an economy that was already on slippery ground, the IMF expects the economy to contract 5.4 percent this year, the worst contraction since 1987. That prediction means per capita GDP will contract even further, a painful squeeze for a country with per capita GDP of around $2,222.
It means Nigerians will get even poorer than they are now for another five years, as their incomes continue to shrink and the economy bleeds.
The IMF explained it as follows; “The emergency financing under the RFI will provide much-needed liquidity support to respond to the urgent BOP needs. Additional assistance from development partners will be required to support the government’s efforts and close the large financing gap.”
So, to solve Nigeria’s revenue challenges, the government will still need to rely on a combination of more foreign currency loans, local bonds, increased revenue, and economic reforms.
Does this loan get Nigeria out of recession?
Nigeria is in trouble and the economy is tilting towards a recession; if it is not in one already.
The IMF loan is not expected to solve all of Nigeria’s problems. It is therefore not expected to singularly avoid Nigeria from getting into recession or get Nigeria out of recession.
The last time Nigeria suffered a recession in 2016, global crude oil prices dropped, resulting in forex reserves also dropping, due to the country’s over-reliance on oil revenue.