The World Bank has approved a $2.25 billion loan for Nigeria to shore up revenue and support economic reforms.
$1.5 billion of the loan will help protect millions who have faced growing poverty since a year ago.
$750 million, the bank said, will support tax reforms and revenue and safeguard oil revenues threatened with limited production caused by chronic theft.
Nigerian President Tinubu’s economic reforms, including ending decades-long but costly fuel subsidies and unifying the multiple exchange rates have resulted in surging inflation that is at a 28-year high.
Under growing pressure from citizens and workers protesting the hardship, Tinubu’s government said that it was seeking the loan to support its long-term economic plans.
The government said it was also taking steps to boost foreign investment inflows which fell by 26.7 per cent from US$5.3 billion in 2022 to US$3.9 billion in 2023, according to the Nigerian Economic Summit Group think tank.
Nigeria already has a high debt burden that has limited how much money the government can spend from its earnings. Its reliance on borrowings for public infrastructure and social welfare programs saw public debt surge by nearly 1,000 per cent in the past decade.
The World Bank, however, said it was “critical to sustain the reform momentum” under Tinubu. The government’s economic policies have placed the country “on a new path which can stabilise its economy and lift its people out of poverty,” according to Ousmane Diagana, the World Bank vice president for Western and Central Africa.
The World Bank loan to Nigeria
The World Bank has approved a $2.25 billion loan for Nigeria to shore up revenue and support economic reforms that have contributed to the worst cost-of-living crisis in many years for Africa’s most populous country.
The bank said in a statement that the bulk of the loan $1.5 billion will help protect millions who have faced growing poverty since a year ago when President Bola Tinubu came to power and took drastic steps to fix the country’s ailing economy.
The remaining $750 million, the bank said, will support tax reforms and revenue and safeguard oil revenues threatened with limited production caused by chronic theft.
President Tinubu’s economic reforms including ending decades long but costly fuel subsidies and unifying the multiple exchange rates have resulted in surging inflation that is at a 28-year high.
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Debt servicing burden
Nigeria has seen a significant surge in its foreign debt servicing costs, with an increase of 96 per cent year-on-year, according to a released by the Central Bank of Nigeria (CBN). By the end of May 2024, the country’s debt services and payments had reached $2.19 billion, a sharp rise from $1.12 billion recorded in the same period in 2023.
The cumulative foreign debt servicing costs for the first five months of 2024 amounted to $2.19 billion, nearly doubling the amount spent in the same period in 2023.
In January 2024, Nigeria’s debt servicing costs amounted to $560.52 million, an increase of 399 per cent compared to $112.35 million in January 2023. This significant jump underscores the growing burden of external debt on the country’s finances.
February 2024 saw a slight decrease in debt servicing costs, totalling $283.22 million. This is a 1.8 per cent decline from $288.54 million in February 2023. Despite the minor decrease, the overall trend indicates a steep rise in debt costs.
In March 2024, debt payments were recorded at $276.17 million, a 31 per cent decrease from $400.47 million in March 2023. This reduction suggests a temporary reprieve in the upward trend of debt servicing costs.
However, April 2024 witnessed a substantial increase in debt servicing payments, which rose to $215.20 million from $92.85 million in April 2023. This marks a 132 per cent increase year-on-year, reflecting the escalating debt obligations of the country.
The month of May 2024 saw a further spike in debt servicing costs, reaching $854.37 million compared to $221.05 million in May 2023. This represents a significant 286 per cent increase, highlighting the growing fiscal pressure on Nigeria’s economy.
Implications of debt burden in Nigeria’s economy
The soaring costs of servicing foreign debt have significant implications for Nigeria’s economy. The increased debt burden could potentially divert resources away from critical sectors such as healthcare, education, and infrastructure, exacerbating socio-economic challenges.
The World Bank recently expressed deep concern over the escalating debt service costs that are burdening developing countries worldwide. The World Bank’s Chief Economist, and Senior Vice President Indermit Gill, emphasised the gravity of the situation, highlighting the potential for a widespread financial crisis if immediate and coordinated actions are not taken.
According to Gill, the combination of record-level debt and soaring interest rates has set many developing nations on a precarious path, one that could lead to economic distress and tough decisions regarding the allocation of resources.
Fitch Ratings recently noted that pressure on interest-to-revenue ratios remains high at 38 per cent, driven by higher interest rates and structurally low revenue-to-GDP ratios.
The rating agency also projected a decline in Nigeria’s debt costs, although they are expected to remain significantly high.
The Nigerian government needs to adopt more stringent fiscal measures and explore debt restructuring options to mitigate the impact of rising debt servicing costs.
Enhanced revenue generation strategies and prudent economic management will be crucial in addressing the growing debt burden.