Last week, the Reuters news agency carried very important news on Nigeria’s quest for $1.5 billion from the World Bank. According to the report, the money is being delayed because of the inability of the Federal Government to carry out necessary reforms.
It follows a similar and related story by BusinessDay on August 6, about the cancelation of an internal meeting of the World Bank to discuss the matter. While this is a fresh loan for the purpose of budget support this year, it is a clear reminder of the dynamics in 2016 for which the loan and budgetary support sought that year never materialised.
As the end of the year approaches, there is no clear indication yet that the World Bank’s board will meet to decide whether to provide the loan that was first sought in Q1 2020, even before the emergence of COVID – 19 in Nigeria. So far, it appears that at least two key windows have been missed and it is now expected that the two remaining windows for the decision are September and October.
But missing the September meeting will be most critical to missing the loan altogether. Ahead of the meeting, sources in government say they are not sure what the World Bank wants. As far as they are concerned, they have met all the conditions set out by the Bank, including the changes in the official flows and NAFEX rate, the removal of fuel subsidies, and work on accountability in the National oil company, Nigerian National Petroleum Corporation (NNPC).
But even if the government can squeeze further reforms out of itself in order to please the World Bank, it may yet likely not receive the loan if the six months of the country’s International Monetary Fund (IMF) macroeconomic assessment lapses next month without a decision. The World Bank can only use this assessment for its decision within six months; otherwise, a new one will be required. The existing macroeconomic assessment was conducted in April for which the IMF released the $3.4 billion Rapid Financing Instrument (RFI).
Few weeks ago, BusinessDay sources had gathered that the sticking points of the discussions and negotiations between the government and the World Bank were on three main points. The first was the requirement for Nigeria’s monetary authorities to monetise foreign fiscal inflows at + – 2% of NAFEX rate and avoid multiple currency practices.
According to sources in government, this has been done, and they pointed to two cycles of the Federal Accounts Allocation Committee (FAAC) for which that was done. However, other sources close to the World Bank suggest that there is also the growing disparity between the parallel exchange rate and the NAFEX rate, and the Bank expects the monetary authorities to deal with that as well.
The second sticking point was the fuel subsidy. On this point, the jury is still out as oil prices have just started to recover sufficiently to test the government’s nerves on payment of subsidies. This month, average oil prices remain at $44.61, compared to $43.74 in July and $40.27 in June. While it has risen in the last three months, and more than the below $30 average between March and May this year, it has not reached the levels of $63 experienced in January, for which there will be clear subsidies at current pump prices.
For instance, at Brent crude price of $42, our calculations show that petrol should be selling for N155 a litre without subsidy. It is selling for N10 less per litre and this creates a subsidy of N10 times estimated 56 million litres (N.56bn subsidy) daily, and this is if dollar rate is at N385. Though unlikely, it is the source of foreign exchange, but if the dollar rate of N470 is used, petrol should be selling for N174 a litre without subsidy, and the level of under recovery will be an estimated subsidy of N1.624 billion daily.
The third sticky point was for some measures of blocking leakages in fiscal revenues and accountability. On this point, the government can point to the release of the NNPC’s audited accounts on its refineries, and the continued fight against corruption. And there is also the matter of the expectation of the enthronement of a service reflective electricity tariff. Though the Bank recently approved $750 million, it is yet to be disbursed on the stalling of reflective cost tariffs.
In the August 6th story on the matter published by BusinessDay, there was a quote from a senior World Bank official that said, “We are still having discussions with the Federal Government and are working on a comprehensive package support for Nigeria and so we want to be sure everyone is on board.”
But what is clear from the developments by shifting the meeting dates for the decision, is that the World Bank is not convinced either by the policy environment, the sustainability of the decisions taken, or the bank itself has shifted the requirements for the loan as time went by.
Ahead of this analysis, we have contacted the World Bank to ask if the loan will still be given, especially because we have been on this journey before, specifically in 2016. (There is no response from the World Bank yet). Then, and as it is now, the government waited endlessly for the loan that never materialised. But then also, all the reforms, including fuel subsidies that were initially carried out, were scaled back.
While the budget support programmes under the name development policy financing (DPF) remains elusive, the World Bank has actually provided different forms of loans and support to Nigeria of about $3 billion already this year. Those supports include the recently approved Nigeria’s COVID – 19 preparedness and response project, the power sector recovery performance based operation and Nigeria’s digital identification for development project.
In the last decade, Nigeria and developing countries have relied more on loans from the World Bank compared to other regions. For instance, the World Bank loans to the African region were $15 billion in 2019 for 152 operations, accounting for 33% of the Washington-based global commitments.
