Expert from the US reveals hidden risks in Nigeria’s most recent $2.5 billion IMF loan

As Nigeria secures a $2.5 billion loan from the International Monetary Fund (IMF) to meet its financial needs, there is discomfort in some quarters.

Despite the naira’s depreciation, the loan must be repaid in Western currencies, and since repayments do not start until 2034 — long after the current politicians have left office — the loan’s terms and conditions have the potential to lead to long-term insolvency for the country, reports Nigerian Tribune.

Some analysts have referred to the phrase “The devil is in the details,” indicating that while something may seem simple, the details can be complicated and likely to cause problems.

There are also concerns that the country might end up repaying the loan with as much as $30 billion. Recently, the Minister of Finance and Coordinating Minister of the Economy, Wale Edun, announced that Nigeria had secured a $2.5 billion World Bank loan with a 1 percent interest rate. This brings Nigeria’s total debt obligations to over $110 billion.

Edun, speaking at the annual meetings of the IMF and World Bank Group on April 20, revealed that the loan offers a 40-year term, a 10-year moratorium, and a 1 percent interest rate. This means the loan will be paid off over 40 years, with repayments starting from 2034.

The minister claimed that given the loan’s conditions, it is almost like offering someone free money.

“It is virtually a grant. It is about 40 years, 10 years moratorium, and about one percent interest. That also is part of the flow that you can count,” Edun stated.

Commenting on the economic implications of the loan, Bradley Rohrs, President of Rohrs Team, a US-based real estate consulting firm, highlighted the dangers to Nigeria’s economy.

In a video shared on social media, Rohrs said that while the $2.5 billion loan at a 1 percent interest rate over 40 years seems fair on the surface, there are deeper economic problems that the country will face in ten years when repayment starts.

According to Rohrs, the loan’s terms and conditions would “contribute to the long-term insolvency” of the country. One condition is that the loan must be repaid in dollars. With the persistent depreciation of Nigeria’s currency, the naira, the country is bound to spend more on both interest and principal.

“The loan needs to be paid back in Western currencies, and the naira is losing significant value every year, meaning this loan is going to end up costing tens of billions of dollars to Nigeria within a decade.

“From an economic sense, the effective interest rate would be 1 percent plus the depreciation of the naira relative to the US dollar,” the US-based realtor stated.

Rohrs, noting that the naira had depreciated by 50 percent in the past year, asserted that this means the interest would effectively be 51 percent if the naira’s depreciation continues.

“This is an economy-destroying debt obligation,” he lamented, adding, “Of course, because payments don’t start until 2034, when all the current politicians will be long gone when the loan comes due. I can understand why this was a tempting loan to take, but let’s say the naira depreciation is only 10 percent per year, which is very generous. Even in the best-case scenario, that means by 2034, the principal of this loan will effectively grow from $2.5 billion to $7 billion. The payments will then be the equivalent of a billion dollars a year and continue for 30 years. So, for $2.5 billion today, Nigeria is agreeing to pay the Western banks $30 billion under a 10 percent inflation rate.”

Rohrs further pointed out that the loan comes with other concessions that should worry Nigerians. Nigeria will have to keep a large portion of the money as foreign reserves, making the country unable to spend much of it. Other concessions include removing subsidies on oil and electricity, which will hurt the economy, and enacting reforms to make it easier for Western banks to compete with domestic Nigerian banks.

Rohrs noted that in many ways, the current administration of President Bola Ahmed Tinubu inherited these problems, but the terms of this IMF loan will not be in the country’s best economic interest in the long term. He stated that Nigeria has many assets, both in natural resources and a talented labor pool, and shouldn’t be at this level of debt burden.

He concluded by warning that the longer Nigeria remains reliant on Western banks for bailouts, the longer the country will operate below its economic potential.

On the use of the $2.5 billion, Minister of Budget and Economic Planning, Senator Atiku Bagudu, disclosed in June before the Senate and House of Representatives Joint Committee on National Planning and Economic Affairs that part of the fund would be used to finance the proposed 2024 Appropriation Bill.