AfDB Comes to Nigeria’s Aid

The African Development Bank will help Nigeria to overcome its recession but the oil producer should increase taxes and lift hard currency curbs to ease the dollar shortages choking Africa’s biggest economy, the bank’s chairman says.

The country has been hammered after a plunge in oil revenues, which make up 70% of national income, eroded public finances and currency reserves needed to fund imports, Reuters reported.

“Nigeria is too big to fail. The African Development Bank will rally strongly around Nigeria to overcome its recession,” bank chairman Akinwumi Adesina said in an interview in London.

In a first step the lender’s board was expected to grant a $1 billion loan at a rate of around 1.2%, which Nigeria could use to plug its 2016 budget deficit of 2.2 trillion naira ($7.1 billion).

Nigeria has been trying for months to borrow abroad to fund a record budget to get the economy back on track.

“They have a liquidity problem,” said Adesina, a former Nigerian agriculture minister. “We want to make sure Nigeria gets resilient.”

Nigeria had agreed on several reforms, such as increasing its value-added and corporation taxes to offset a loss of oil revenues, he said, adding that the tax-to-GDP ratio was 4% -5%, less than other countries in the region at around 15%.

But the government should also lift hard currency curbs imposed by the central bank, Adesina said.

The restrictions effectively ban the import of almost 700 goods Nigeria wants to make at home, such as cement or basic food. Dozens of factories across a variety of sectors have been forced to close as they cannot import raw materials.

“In our view it would be better to have gradual customs tariffs as opposed to forex restrictions,” he said, adding that such a move would end the pressure on the naira.

 High Interest Rates

Nigeria abandoned its currency peg in June hoping to attract more inflows. But with hard currency curbs still in place, few foreign investors are willing to put their money to work there, and those who need hard currency have to pay a 40% premium on the black market.

Attracting investment was the only way for the central bank to lower its interest rates. “The interest rate is way too high,” Adesina said. “You cannot drag the economy out of recession with those interest rates.”

In September the central bank left its benchmark rate at 14%, resisting government calls to lower borrowing costs.

The African Development Bank would also fund development projects for around $750 million in the near future. The bank is expected to lend Nigeria a total of $4.1 billion over 2016 and 2017, and more than double that to about $10 billion by 2019.

Adesina also said the bank was ready to release a loan of $1.5 billion to Egypt once Cairo requested it. Egypt had agreed in December 2015 to a $1.5 billion program to be disbursed over three years.