Why Nigeria is courting the World Bank and not IMF

The latest victim of the fall in oil prices has called for help. The news that Nigeria, Africa’s biggest oil producer, needs $3.5bn in help to plug a $15bn government deficit is hardly surprising. A series of hydrocarbon producers, including Ghana and potentially Azerbaijan, have been caught by the downturn in oil and gas revenue and have brought in the International Monetary Fund to help finance their balance of payments.

So far, so sadly predictable. The twist with Nigeria is that it has asked the World Bank and the African Development Bank for loans rather than going to the IMF. This is understandable but mistaken. Nigeria’s immediate short-term problem is a classic balance of payments and budget deficit issue. The IMF, which is set up to do crisis lending, is the right institution to take the lead.

It is easy to see why Nigeria wants to borrow from development banks rather than the IMF, and why the World Bank in particular is keen to oblige. Although such loans will require the fund to approve Nigeria’s government policies, there is far less stigma involved in inviting in the structural engineers from the World Bank to improve the economic edifice rather than admitting it is ablaze and calling in the IMF fire brigade.

From the bank’s point of view, it is grateful for something to do, given that its role in longer-term development finance across the emerging world has often been supplanted, including in Nigeria, by lending from China. And the size of the problem is not, or not yet, too large for it to take on. Although some of the revenue from high oil prices was squandered, Nigeria at least resisted the temptation to rack up sovereign debt and its current budget deficit, at 3 per cent, is not catastrophic.

It is right that the World Bank continue to lend to Nigeria if its projects can show a return. Having extended credit to the country for decades, the bank has nearly 30 projects on the go and around $6bn in credit outstanding.

No doubt there is more that could be done. Nigeria has long-term structural and development needsrequiring investment. Oil income has driven up the real exchange rate and inhibited economic diversification. It has also inflicted huge damage on the quality of both national and state government, where politics has all too often involved a fight to control oil revenues rather than the conduct of constructive economic policy.

But Nigeria’s immediate issue is a classic balance of payments and fiscal deficit issue arising from a shortfall in oil export revenue. That is the concern of the IMF, which has the financial instruments, the expertise with conditionality and the credibility to do the task. The IMF can also require the kind of fiscal adjustments likely to be necessary if the oil price fails swiftly to recover a good portion of its recent losses.

The IMF and the World Bank have started dealing with what will no doubt be a string of oil exporters suffering from a fall in crude prices for which they are unprepared. The Venezuelan government, if it can accept that chavismo has failed and recognise the shambles it has made of its economy, looks like a prime candidate for a loan before long.

It is important that the two official lending institutions agree a division of labour based on comparative advantage rather than bureaucratic convenience and borrower preference. That Nigeria needs short-term balance of payments support and long-term development finance seems incontrovertible. The World Bank will stay involved in Nigeria but the IMF is the right agency to lead the crisis response.

FT