World Bank lists conditions that could justify canceling $1.5 billion loan to Nigeria

Story climax

• The World Bank has warned Nigeria that it could cancel a $1.5 billion loan unless the country meets strict criteria for economic reform, including tax transparency and an increase in the VAT rate.
• Nigeria has taken initial steps like increasing gasoline prices and launching cash transfer programs, but must fully comply with macroeconomic policies to secure the loan.
• The loan comprises an IDA credit and an IBRD loan with long-term repayment terms, conditional on Nigeria’s compliance with specified conditions and deadlines.

---

The World Bank has indicated that it could cancel a large loan of $1.5 billion if Nigeria fails to meet specific requirements set out in financing agreements.

This is evident from the financing agreement documents for the Nigeria Reforms for Economic Stabilization to Enable Transformation (RESET) Development Policy Financing Program (DPF) project, accessed by Nairametrics.

The documents were signed by Nigeria’s Finance Minister, Wale Edun, and the World Bank’s Acting Country Director for Nigeria, Taimur Samad.

The $1.5 billion loan includes two separate agreements between Nigeria and the World Bank: a $750 million International Development Association (IDA) credit and an International Bank for Reconstruction and Recovery loan. development (BIRD) of 750 million dollars.

One of the documents said: “No withdrawals will be made from the Single Withdrawal Tranche unless the Bank is satisfied, after an exchange of views as described in paragraphs (a) and (b) of Section 3.01 of Article III of this Agreement on the evidence base satisfactory to the Bank:

1. with the progress made by the Borrower in the execution of the Program;
2. that the macroeconomic policy framework of the borrower is adequate;
3. that the measures described in section IB (which are the main requirements presented in the next section of this report) of this annex have been taken.

“If, after this exchange of views, the Bank is not thus satisfied, it may notify the Borrower to this effect and, if within ninety (90) days following the notice, the Borrower has not taken action satisfactory to the Bank, with respect to paragraphs (a), (b) and (c) above, the Bank may then, by notice to the Borrower, cancel all or part of the loan balance not withdrawn.

This means that the borrower can only withdraw a specific loan tranche if the bank is satisfied with the progress of the program, the macroeconomic policy framework and the required actions; otherwise, the bank may cancel the remaining loan if the issues are not resolved within 90 days.

The document highlights macroeconomic reforms already implemented by Nigeria, such as increasing gasoline prices, removal of some tax rebates, introduction of new taxes, elimination of negative list imports to improve accessibility and trade, and improving income transfer systems. He also noted measures in place to protect the poor and economically precarious through a targeted cash transfer program.

Key requirements

The IDA and IBRD loan agreements have the same requirements, according to loan agreement documents obtained from the World Bank.

The actions to be undertaken as part of this loan project are as follows:

Presidential decree: A mandate that all fiscal transfers to the federal government, including those from crude oil sales and gasoline imports, be executed at the prevailing market exchange rate within a specified implementation period.

Value added tax (VAT) reforms: Submission of a preliminary bill to the National Assembly to gradually increase the VAT rate to at least 12.5% ​​by 2026 and allow input tax credits for capital and services .

National Social Investment Program Bill: Presentation of a revised bill to the National Assembly mandating the use of the national social register as the main tool for targeting social investment programs.

Loan repayment conditions

IDA credit repayment conditions: The principal amount of the credit of $750 million is to be repaid in equal installments on April 15 and October 15 of each year, beginning on October 15, 2030 and ending on April 15, 2036. It begins with repayments of 8, 33334% of the principal amount, with the last payment adjusted slightly to 8.33326%​.

There is a maximum commitment fee rate of 0.5% per year on the undrawn funding balance.

IBRD loan repayment conditions: The principal amount of the loan of $750 million is to be repaid semi-annually on April 15 and October 15 of each year, beginning on October 15, 2035 and ending on April 15, 2048. The installment for each repayment date is set at 3.85% of the total principal amount, with a slight adjustment to 3.75% for the final payment.

There is an entry fee of 0.25% of the loan amount, totaling $1,875,000, and a commitment fee of 0.25% per annum on the undrawn balance of the loan.

What you should know

So far, Nigeria has made progress in some areas, such as increasing gasoline prices and beginning the implementation of cash transfer programs. However, continued monitoring and compliance with agreed reforms will be carried out to ensure continued availability of funds.

The World Bank team should closely monitor Nigeria’s compliance with these conditions. The government must demonstrate strong commitment to implementing these reforms to avoid the risk of losing the $1.5 billion loan, vital to the country’s economic stability and growth.

Both funding agreements include strict auditing and reporting requirements to ensure transparency and accountability.