A few weeks ago, reports began to appear in local and International outlets suggesting that the US$1.5 billion loan Nigeria had arranged with the World Bank had been delayed owing to concerns the Bank had over Nigeria’s commitment to reforms mainly around the country’s currency regime. Reuters reported that:
“They are not convinced about the reforms,” a source close to the government said. All three sources declined to be named due to the sensitivity of the negotiations. The source added that the currency was the core issue.
World Bank loans are often contingent upon reforms. It has not outlined any demands, but said previously that it was “recommending” a more unified, flexible exchange rate. Fuel subsidies and electricity tariffs are also being discussed.
A short history of a loan
The now much delayed loan began its life in late February this year when the World Bank reached out to Nigeria, informally, offering it a loan to deal with the coming impact of the coronavirus. By March 23rd, the World Bank made a presentation to Nigeria on the loan’s conditions and what it thought it might be needed for. This was a short 4-page presentation with the summary of it being that the loan would be to support Nigeria’s response to the pandemic. The presentation barely made mention of a healthcare response let alone anything to do with economic reforms.
On April 6th, the World Bank made a more detailed presentation (18 pages) to Nigeria which began to hint at reforms of Nigeria’s I&E foreign exchange (window) market. But while this loan was ostensibly to support Nigeria’s response to the pandemic, the presentation curiously made no mention of a healthcare response, as one might reasonably expect. At any rate, in Nigeria’s defense, the pandemic was not the country’s doing and it was the World Bank who approached Nigeria and not the other way round.
By this point, a target date for disbursement of the loan was set at June 2020 and beyond the mention of the I&E window in the presentation, no other reforms were required as a condition for disbursement. The World Bank does not typically require macroeconomic reforms – it often subcontracts that function to the IMF through the Letter of Assessment instrument which allows it to leverage on the IMF’s expertise in that area.
By April 28th, the IMF had concluded its own separate assessment of Nigeria’s situation and approved its request for a Rapid Financing Instrument (RFI) of US$3.4 billion. This was a record amount and was disbursed to Nigeria in one tranche specifically to aid the country’s response to the pandemic. In advance of the IMF’s approval, the United States’ Executive Director at the IMF, Mark Rosen, had written to Nigeria on April 26th promising the United States’ full support for Nigeria’s request, a commitment which was kept.
Even though an email from the World Bank’s country director to Nigeria’s Central Bank (CBN) spoke of ‘quick disbursing financing’, the loan remained elusive and by May 28th, another message from the World Bank was received by Nigeria with a whole new list of conditions including demands that Nigeria’s PPPRA – the body which sets the price of petrol – should make its pricing formula public.
It also asked the CBN to commit to an exchange rate within 2 percent of the Nigerian Autonomous Foreign Exchange (NAFEX) rate. To the CBN’s credit, it moved fairly quickly and by July had implemented the NAFEX requirement (Nigeria’s Finance Minister got the request from the CBN and approved it the same day.)
The sound of goalposts moving
Rather than approve the loan, the World Bank then came up with a new demand – the CBN had to clear the backlog of foreign exchange demand which it calculated at $6 billion. The CBN’s own calculations put the backlog at US$2 billion while in a separate calculation, the IMF put the figure at $2.5 billion. To be clear, the backlog from foreign dividends, such as the one that recently embarrassed Nigeria’s largest bank, as well as those from correspondent banks is not included in CBN’s calculations. Still, it will be a stretch to imagine that even with those numbers included the number would reach the World Bank’s $6 billion figure.
The World Bank then brought up the issue of Nigeria’s notorious parallel market where rates are always higher than official markets. It demanded that the I&E window somehow reflect the parallel market rate. The CBN’s position on this has always been that the parallel market only serves seven per cent of Nigeria’s forex demand (it is not difficult to pick hole in this CBN position, though) and as such makes no sense to use it as any kind of official rate.
What’s going on?
It is difficult to understand why the World Bank appears to be leading Nigeria on a merry dance over a relatively small loan amount that is less than half of what the IMF already approved and disbursed. One can consider a scenario where the funds were actually to help with Nigeria’s response to the pandemic and it had not yet been released by the end of August. Nigeria has fortunately been spared the worst scenario from the virus for reasons that remain unclear. Yet, had the worst happened, how might the World Bank defend withholding a loan to help with the country’s pandemic response on account of reforms to the country’s foreign exchange regime?
The IMF’s country assessment is usually valid for 6 months and the World Bank typically relies on it for that period. Yet it has simply ignored the IMF’s position this time and continued to move the goalposts.
One speculation is that the World Bank is unhappy that foreign portfolio investors are now stuck in the country unable to get the dollars they need to exit their positions and leave the country.
But this is also not the first time the World Bank will lead Nigeria on such a dance that ultimately ends in disappointment. In 2016 there were extensive talks about a loan which went on and on and ended with no funds being disbursed.
Most disturbing is that the World Bank now seems to be using the media to selectively leak information to the public designed to paint a picture of the country’s resistance to reforms as the sole reason for the delay.
It is not hard to find fault with much of what Nigeria does as a policy response and the World Bank is right to ask the country for reforms at any time, if only on behalf of Nigerians who would otherwise be ignored by their government. Yet, to lead the country on an endless dance over something as serious as a response to a global pandemic is, to put it mildly, in very poor taste.
And it really ought to be upfront as to what it wants from the country. Without delay