The International Monetary Fund “IMF” on Tuesday, April 28th approved the sum of $3.4 billion as financial assistance to Nigeria. This is the first time in recent history that Nigeria is obtaining funding support from the IMF.
Is this a loan or a grant?
The Financial Support of $3.4 billion obtained by Nigeria from the IMF is a loan. The IMF has various loan types for member countries depending on the reason for needing finance. In this case, the loan was issued as an “Emergency Support” under its Rapid Financing Instrument facility.
Nigeria being a member country has what they call Special Drawing Rights, which allows us to draw money in times of need to the maximum of our contribution to the fund. Think of it like a cooperative where you contribute money and can draw from it. In this case, the loans are provided via the Rapid Financing Instrument.
The Rapid Financing Instrument is an IMF facility that is usually tied to funding arising from commodity price shocks, natural disasters, conflict and post-conflict situations, and emergencies resulting from fragility. As such, it is rapidly approved. It is also available to member countries who have a major balance of payment problems.
Balance of payment refers to a situation where a country’s dollar inflow (supply)can no longer pay for its dollar outflows (demand). Nigeria’s balance of payment is estimated at $17 billion.
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 0.15% and as high as 0.6%. The service charge is about 0.5% for each amount that is withdrawn. The lending rate is 0.05% (also called the Special Drawing Rights) plus a margin of 1% totaling about 1.05%.
The higher a country draws on the loan beyond its quote the higher the margin it pays. Margins can go as high as 3%. Nigeria is taking 100% of its quota so we expect the interest rate to be about 1.05%.
Based on the terms of the Rapid Financing Instrument, Nigeria is expected to pay back the loan between within 3¼ to 5 years.
Why is Nigeria Seeking an IMF Loan?
The Nigerian government faces a major revenue crisis due to the impact of the fall in oil prices and the lock-down of the Nigerian economy due to the Covid-19 situation.
The government relies heavily on oil for about 85% of its revenue and because of the crash of the price of oil from its target $57 to under $20 it no longer has money to fund its budget. This means the government will struggle to pay for salaries of civil servants, take on capital projects and even more importantly, combat the effect Covid-19 pandemic which is ravaging the economy bit by bit.
The government needs money to pay for testing equipment, treat victims of the virus, and provide palliatives for millions of Nigerians who may have lost their jobs or face business losses due to the pandemic. It is based on the above that the government had no choice but to approach the IMF for funding support.
Why is the IMF giving Nigeria the loan?
According to the IMF, it has also looked at issues we highlighted above as well as other reasons in deciding whether to give Nigeria a 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 COVID-19 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.
Are there strings attached?
Due to the type of loan accessed by Nigeria, there are no strings attached to this loan. According to the IMF’s definition, Rapid Financial Support “provides rapid and low-access financial assistance to member countries facing an urgent balance of payments need, without the need to have a full-fledged program in place.”
This suggests there are no strings as loans requiring a “full-fledged program” are typically tied to major reforms. Should Nigeria in the nearest future go for a different loan from IMF it may have to meet the IMF’s reform requirements.
Does this loan solve all Nigeria’s economic issues?
This loan does not solve all of Nigeria’s economic challenges. In Naira terms, assuming an exchange rate of N360/$1 the loan is about N1.2 trillion. Nigeria’s initial 2020 budget was N10 trillion and included revenue targets of about N8 trillion.
This is the first of many steps that the government needs to take to plug the revenue hole that the crash in oil prices and the COVID-19 pandemic has caused.
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.
Will the money be disbursed to state governments?
The money is not available to State governments. 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.
What will the money be used for?
The funds are expected to be used for meeting government expenditure related to the fight against Covid-19. It is also expected to aid Nigeria’s balance of payment needs, allowing the economy to pay for import for critical procurements required to get the businesses back to work.
In fact the IMF explains that it expects Nigeria to “implement proper governance arrangements—including through the publication and independent audit of crisis-mitigating spending and procurement processes—is crucial to ensure emergency funds are used for their intended purposes.”
Will this loan get Nigeria out of recession?
As mentioned above, the 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.
However, loans like these if applied appropriately can provide a major cushion for the country’s revenue shortages and be a major bridge until we secure more funding support and the economy bounces back.