There is a reason critics say the prudence of this Tinubu administration lacks purpose. After proposing to borrow N20 trillion from the pension fund, they are considering taking N3.15 trillion from the World Bank.
All these are because of their three counterproductive economic policies: partial fuel subsidy removal, unification of a floating exchange rate and increase in interest rates. I call it partial removal because the Minister of Finance has projected that they will be paying fuel subsidy, albeit partially.
This $2.25bn loan, equivalent to N3.15trn when converted at the rate of N1400 per dollar, is divided into two duplicated parts. The RESET-DPF project, $1.5bn, is expected to strengthen the economic policy framework by building fiscal space and protecting the poor and economically insecure. $800 will go to another cash transfer programme.
The second project, ARMOR, will support raising non-oil revenues and safeguard oil and gas revenues. It is a duplication of the fiscal space building with tax revenue leading the project here. The project will allocate $730m to Program-for-Results to digitise the tax system and a $20m Investment Project Financing.
In non-technical terms, Nigeria wants to borrow a total sum of $2.25bn from the World Bank to support its austere fuel subsidy removal policy. It is predicted to increase revenues, provide more palliatives to Nigerians, and digitise the tax revenue system. These policies are counterproductive because an austerity policy involves cutting public spending, including welfare programmes, to reduce budget deficits.
The loan contrasts with the Fiscal Responsibility Act of 2007. The government can only borrow for capital expenditure and human development. This loan is for consumption and duplication of a working tax system. For example, there will be $800m for cash transfers from the RESET project. FIRS and Customs will get $10m for technical assistance from the AMOR project. But there are more reasons to be concerned.
First, the current loan agreement allocates another $800m to the cash transfer programme. The plan under the new loan wants 67 million people to be reached by December 2024. The same amount was allocated last year under the National Social Safety Net Programme Scale-Up, which has not been fully disbursed.
Second, the platform for the fiscal space already exists. The Nigerian financial sector is fully digitised. It is surprising to see why trillions are needed to reform a world-leading system. The visible initiatives that are in place include the Integrated Tax Administration System (ITAS), e-filing Platforms, Tax Identification Number (TIN) System, e-payment Channels, Automated VAT Collection, and Electronic Tax Clearance Certificates.
There is also a Nigerian software electronic payment platform called Remita. Its key features include the Treasury Single Account, Payroll Management, real-time transaction tracking and integration with Enterprise Resource Planning (ERP) systems.
These improvements have modernised the tax administration and increased revenue. For example, the FIRS, Customs and NUPRC reported a 131 per cent increase in revenue in the first quarter of 2024.
Third, we must consider the risks involved. In an overall rating, the World Bank rated the loan as a high risk. The high risks include the political and governance situation, which may lead to policy reversal. Under the RESET project, it is predicted that the high macroeconomic stability risk could change the loan’s outcome. A decline in oil production or delays in increasing non-oil revenues will increase financial pressure on the country. It is happening. In May, we produced 1.25 million barrels per day, which is below OPEC’s quota of 1.5 million.
They called on the CBN to stop printing money to finance government spending, and increasing interest rates is desirable. But this contradicts their June 2024 report titled Global Economic Prospects. They noted that “There is the possibility that the tightening of monetary policy stops short of reining in inflation.” One wonders if they would encourage such projects in saner climes. This makes one suspect whether the intention behind this loan is a dubious one.
Lastly, it is surprising that the World Bank did not consider the wage demands by the NLC as a risk because it will increase the fiscal burden. The government is now pressed to increase public sector wages. This means higher deficits, higher inflation, increased cash transfers, and interest rate payments.
If the World Bank loan fails, as predicted, it will only compound the fiscal burden, raise the inflation rate and lower economic growth. An unsolicited advice to the administration is to reverse all three policies; there is time to rework new ones, otherwise, this subsidy removal of palliative loans will become an annual occurrence. And before you know it, there will be no businesses to tax in the future.
The only institution standing between the federal government and this loan is the Senate. Even though we know they will get their way regardless of the consequences and priorities, the Senate needs to reflect on this loan proposal. Is this what they promised their constituents?
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