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On the $800m Loan and Cash Transfers
Postscript by Waziri Adio
In two separate letters to the National Assembly last week, President Bola Tinubu took the initial steps towards cushioning the negative impacts of petrol subsidy removal on some categories of Nigerians. The first letter requested for the allocation of N500 billion as palliatives for subsidy removal and the second asked for Senate’s approval of $800m as a loan from the World Bank. While there is hardly any disagreement on the need for the government to provide some urgent reliefs for the pains inflicted by petrol subsidy removal, the president’s proposal has generated some concerns and fears—some legitimate, some unfounded.
The concerns and fears range from the wisdom of taking a loan to fund the relief, the impact of the loan on our growing debt stock and of the resultant consumption on our soaring inflation, the adequacy, spread and format of the proposed palliatives, and the possibility of the proposed succour turning into another avenue for patronage and corruption. Not all these concerns should be dismissed. The government has a responsibility to provide the necessary clarifications and the needed reassurance.
I understand the basis for these concerns and I share a few of them. But, on the whole, I think the idea of providing cash relief to the poorest of the poor as a temporary relief is a good idea, if effectively, transparently and accountably implemented.
However, I think we need to look beyond just providing some palliatives to the poor and the vulnerable, as necessary and as important as this is. We need a larger and more comprehensive package for repurposing the savings from petrol subsidy removal into areas that will improve the productivity and the welfare of Nigerians. I will return to this shortly.
Before we look at the some of the issues, let’s start with some background.
The cash transfer proposal is not new. In anticipation of deregulation of the downstream sector of the petroleum industry as mandated by the Petroleum Industry Act, the President Muhammadu Buhari administration approached the World Bank for a concessionary loan of $800 million to provide some succour to poor Nigerians. The board of the World Bank approved the loan for Nigeria on 16 December 2021. But the plan to remove subsidy was put on hold. In May this year, President Buhari sought, as required by law, the approval of the National Assembly for the loan. While the House of Representatives approved the request, the Senate did not get round to it before the expiration of the term of the 9th National Assembly. This is why President Tinubu wrote to the Senate, which gave expedited approval.
What is new is that the amount per household and the number of households have increased. While the previous administration proposed N5,000 per month to 10 million households for six months, the current administration has raised it to N8,000 per month to 12 million poor households for the same period. It can safely be assumed that the increases are as a result of the change in the official exchange rate.
It is worth noting that Tinubu also asked the National Assembly to amend the 2022 supplementary budget of N819 billion. The amount remains the same, but he is seeking to reallocate the money, with N500 billion assigned to palliatives, an item not included in the original supplementary budget that the National Assembly had approved in December 2022. So, this is basically a request for approval for virement of the previously approved supplementary budget. It should be noted that it is illegal for the executive to spend appropriated money on different items or subheads without seeking and securing legislative approval to do so. This process is called virement. The two letters were thus intended to help scale two technical hurdles: allow Tinubu to take the World Bank loan and accommodate palliatives in the previously approved budget.
Now, to some of the issues raised from the president’s proposal. The first is the concern around why Nigeria is taking a loan to fund the palliatives. This is not a trivial concern, especially with our mounting debt burden. According to the Debt Management Office, Nigeria’s total debt stock as at 31st March 2023 was N49.8 trillion (this is excluding the N22.7 trillion from Federal Government’s indebtedness to the Central Bank of Nigeria and the increase in the Naira value of external debt from the change in official exchange rate). Also, data from the World Bank shows that Nigeria spent 96.3% of its revenues to service debt in 2022. Many Nigerians are justifiably worried about taking on new debts. This is understandable.
But if government has to provide immediate reliefs to those who are disproportionately affected by subsidy removal, its options are limited. The easiest way would be to fund the relief from subsidy savings. The problem is that these savings will not start coming until later in the year or until early next year. The state oil company claims that it is owed N2.8 trillion by the Federation, largely due to past petrol subsidy. Also, recent news reports indicate that Federation share of oil had been pledged in advance by the national oil company for imported petrol. One option will be to hold on to the reliefs until the savings start coming into the Federation Account. This is not advisable. If government has to provide immediate relief, it has to look for how to fund it, and that, for now, can’t be from increasing taxes.
This is where the World Bank loan, approved by the Bank’s board about two years ago, comes in handy. Besides, it is concessionary, and as such the cheapest and the most flexible the country can find domestically or externally. The loan is for 30 years, with a moratorium of five years and an interest rate of 2.5%. By contrast, interest costs associated with other financing sources of loans are much higher: Nigerian Treasury Bills’ rates today are around 5 – 6%; Eurobonds’ yields are hovering 10- 11%; FGN bonds’ yields are around 13 – 14%; and CBN’s Ways and Means at MPR plus 300 basis points will be at 21.5%. It is legitimate to worry about external debts, but the $800 million loan adds only 1.88% to our total external debt of $42.6 billion (this is before factoring in the $500 million Eurobond we repaid recently).
While Nigeria should not be borrowing indiscriminately, our country cannot completely stop borrowing until we can sort out our finances. It would be nice if we could double or triple our revenues but that won’t happen overnight. The concern should be where we are borrowing from and for what purposes. I don’t think it is bad to get a long-term and low-rate loan to lessen the pains imposed on the poor from a necessary reform. Also, I think we are better off with concessionary loans and we should actually be talking to the World Bank and other multilaterals to consider us for more of such to tie us over revenue shortfall and the ongoing forex scarcity, and to diversify our loan portfolio away from expensive loans to less expensive ones.
The second issue is about the inflationary impact of transferring N8,000 per month for six months to 12 million households, especially when the money will most likely go to food. This is also a valid concern, more so with inflation at 22.41% and food inflation at 24.82%, and with both projected to jump higher. More money in people’s hands without a corresponding increase in the supply of goods will push up prices, in this case the prices of basic food items. This will affect the poor more because they spend a disproportionate amount of their money on food.
However, this may be an overstated fear. According to the CBN, Nigeria’s money supply (using broad money, M3) as at May 2023 was N55.8 trillion. The entire N576 billion earmarked for cash transfers over six months or N96 billion per month is not significant enough to bump up money supply in the country. The entire N576 billion is just about 1% of our money supply while the N96 billion is 0.2% of money supply. Also, the impact will be less if the CBN resells the forex rather than keep it and just print Naira. That said, it is important to also pay attention to how to increase food supply to match extra money in the hands of the poor. The proposed emergency on food security may help, as well as allowing importation to boost food supply, even if in the short term.
The third issue is about the rationale behind giving cash to the poor rather than giving food bought directly by the state from our farmers and traders, which would in turn boost our economy. Across the world, from Bangladesh to Brazil, there is abundant evidence that cash transfers work in uplifting the poor and in boosting development outcomes (especially when they are conditional). There is also enough evidence that individuals are the best judges of their needs.
It is thus better to give people the cash and let them decide if they want use if for food (and what kind of food) or for some other things or even just keep it. There are also those who argue that N8,000 per month is too small for a household. Yes, it is—by our standards. But we should not forget that there are many households in our country today for whom this amount will make a world of difference. There are those also bothered that a total of N48,000 per household in six months will not reverse poverty. This is true, but it is worth remembering that the transfers are meant to assist in addressing temporary shocks from petrol subsidy removal, not designed to reduce or eliminate poverty. These are other tools for addressing poverty.
What I consider the most significant concern or fear is that many Nigerians do not believe that the money would not be stolen or not be turned to an instrument for politicians to oil their patronage and electoral networks. It is difficult to blame those who feel this way. Over time, our politicians and bureaucrats have not covered themselves in glory. They have not demonstrated that they have scruples from even stealing from the lowly. The stories of how COVID-19 palliatives were cornered, hoarded, and diverted are still harrowingly fresh to most Nigerians.
Nigeria has one of the biggest social registers in the world, built and updated over a decade, in conjunction with states and with the support of donors. It is managed by the National Social Safety-Nets Coordinating Office (NASSCO). As at the last count, that register has data for more than 15 million poor and vulnerable households spread across almost all the local government areas in the country.
Ordinarily, the existence of such a register should settle questions about how the beneficiaries will be selected and by whom. But we live in a justifiably low-trust environment. Experience has made many Nigerians cynical. It is not enough for the government to say ‘trust us this time.’ The administration has to earn the trust. The onus is on the government to unfold and run the programme in a very transparent and accountable way.
Now, to my own concerns. As I have stated many times on this page, I think the planned cash transfer can only be a starting point. The N576 billion cannot be the whole package. In any case, that is about what we were spending on petrol subsidy per month, based on the N3.36 trillion allocated for six months in the 2023 budget. The N576 billion is way too small as the total relief package for the pains that came with the removal of petrol subsidy.
Some of us believe in and advocated for petrol subsidy removal. Spending about half a trillion Naira on petrol subsidy per month does not make sense and is not what Nigeria can afford or sustain. But I have never been in doubt that removing the subsidy will impose some pains, even if temporary and with a heavier burden on the poor. After removing the subsidy and getting a lot of applause for it, the government also needs to give something back to Nigerians. This is both in exchange for the subsidy that many had developed a sense of entitlement around and as a cushion for the attendant shocks.
But it is important to bear in mind that the idea is not to remove petrol subsidy, and simply get more money for government to do whatever it likes after dropping some crumbs for the poor. The underlining philosophy is to ensure better and more optimal application of scarce resources. It is possible that the government gets this message. But apart from discussing with the unions to avert a strike, the government has not rolled out a comprehensive, carefully-designed and coordinated programme on what it plans to do with the money that would have gone into subsidy for the next four years or so. We need to see the full picture, and soon too.
The idea of earmarking potential savings is not as strange or as new as it sounds. Nigeria did something similar with savings from increase in petrol prices and the PTF under General Sani Abacha and with virtual savings from debt servicing after President Olusegun Obasanjo secured debt relief for Nigeria. The latter was managed by the MDG Office.
The desired relief programme should have concrete activities, definite timelines and clear responsibilities spread across the three tiers of government. Such a plan should also incorporate how governments across the board plan to trim the fats and wastes in their operations—government should be run with a frugality that aligns with the dire finances of our country and in tandem with the burden imposed on the citizens. And all of these need to be communicated clearly and coherently, not in the current drip-drip version.
