Nigeria Secures $1.5bn World Bank Loan for Subsidy Removal and Tax Reforms

The World Bank approves a $1.5 billion loan for Nigeria to support subsidy removal and implement tax reforms aimed at boosting economic stability and growth.

The World Bank, headquartered in Washington, has distributed a $1.5 billion foreign loan to Nigeria to support the federal government’s initiatives on fuel subsidy elimination and tax reforms.

This information comes from the World Bank’s recent document on the loan progress.

The loan was initiated as part of a six-month effort under the Reforms for Economic Stabilization to Enable Transformation Development Policy Financing initiative.

The document indicated that the loan received approval on June 13, 2024. The first tranche of $750 million was disbursed on July 2, 2024, with the most recent disbursement occurring in November.

As a result, the disbursement of the second tranche was linked to meeting certain economic reform conditions and took place in November 2024.

As a result, the World Bank’s total disbursement to Nigeria reached approximately $1.88 million, accounting for less than one percent of the overall approved $750 million allocated for the ARMOUR project.

Additional information revealed that the $1.5 billion loan granted to Nigeria was organized into two parts, each with a distinct maturity period.

The initial installment was a $750 million loan from the International Development Association, with a term of 12 years and a grace period of six years.

The second installment, a $750 million loan from the International Bank for Reconstruction and Development, comes with a repayment term of 24 years and includes an 11-year grace period.

The World Bank states that Nigeria exceeded the requirements for loan approval by implementing significant reforms, including subsidy removal, exchange rate harmonization, and changes in tax policies.

Remember that in October 2024, the Federal Government introduced a tax reform bill to the National Assembly for approval. This proposal sparked months of controversy due to concerns about its effects and opposition from Northern Nigerian leaders.

The World Bank document states that on October 3, 2024, the borrower presented a comprehensive tax reform package to the National Assembly. This package addresses reforms in the VAT system and aims to simplify both tax policy laws and tax administration.

This document provides a summary of the progress achieved under the Reforms for Economic Stabilization to Enable Transformation Development Policy Financing for Nigeria, which was approved by the Executive Directors on June 13, 2024.

The DPF operates independently and is divided into two parts: (1) the first part includes a $750 million credit from the International Development Association, featuring shorter loan terms with a 12-year maturity and a grace period of 6 years (Credit No. 7567-NG); and (2) the second part consists of a $750 million loan from the International Bank for Reconstruction and Development, which is US dollar-denominated with commitment-linked arrangements, offering a 24-year maturity along with an 11-year grace period (Loan No. 9683-NG).

The Financing Agreement and Loan Agreement were signed and became effective on June 19, 2024, and June 26, 2024, respectively. The initial tranche was disbursed on July 2, 2024.

Reforms have been introduced to completely deregulate the fuel market, allowing retail prices to be set by market forces and enabling competition in the sector. The authorities are upholding their pledge to stop deficit monetization, opting instead for traditional debt instruments to finance the deficit.

In recent months, the government’s dual policy of removing fuel subsidies and unifying exchange rates has garnered both praise and criticism.

Under these policies, fuel prices had increased by five times, and the exchange rate soared dramatically, significantly affecting the cost of living for most Nigerians.

Although the FG rolled out initiatives like distributing N25,000 to households as palliatives, fewer than two million households have received this aid.

The Compressed Natural Gas Initiative, intended as a cost-effective alternative to fuel to mitigate the effects of removing fuel subsidies, has yet to be fully implemented.

The result is a significant surge in inflation, with headline and food rates soaring to 34.60 percent and 39.93 percent, respectively.