Nigeria recently secured a $2.25 billion World Bank loan to support reform efforts and alleviate the cost-of-living crisis affecting over 60% of its population. Ghana also finalised a $5.4 billion debt restructuring with bilateral creditors on June 12, including China and France, and reached a $13 billion agreement in principle with international bondholders on June 21.
Debt sustainability has posed a significant risk to sub-Saharan African countries since Zambia and Ghana defaulted in 2020 and 2022, respectively. The IMF reports that SSA’s total external debt owed to multilateral, bilateral, and commercial creditors, including bondholders, rose 22.27% from $658.79 billion in 2018 to $805.51 billion in 2023. The IMF estimates this debt will reach $867.67 billion in 2025, accounting for 44.88% of the region's GDP.
Amid the high interest rate environment globally, interest payments have become unsustainable, making foreign investors cautious about the SSA region. For context, the US Federal Reserve
Nigeria’s World Bank loan
The World Bank approved a $2.25 billion conditional loan for Nigeria with a 40-year tenure and a 10-year principal moratorium. This loan, provided by the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), is split into two operations: a $1.5 billion Development Policy Financing (DPF) for the RESET program and a $750 million for the ARMOR program for Results (PforR). ARMOR funds will be disbursed on a rolling basis from 2025 to 2028.
Neither fund has been disbursed, but the Nigerian government will first have access to $750 million (from the $1.5 billion RESET tranche). According to the finance agreement, interest payments of 8.33% on this $750 million will start in 2030, due biannually on April 15 and October 15.
Nigeria can only access Tranche 1 funds if the World Bank is satisfied with the program implementation and the adequacy of the country’s macroeconomic policy framework. The World Bank will assess Nigeria’s program success in terms of the program conditions: building fiscal space and protecting the poor and vulnerable.
The multilateral lender acknowledges that Nigeria has made some efforts to meet the loan conditions but still expects further action before the funds are released this year. The table below details the loan conditions or additional actions the Nigerian government has to take.
Ultimately, the World Bank expects an improvement in Nigeria’s fiscal space and standard of living over the loan period, and the $1.5 billion disbursement will support the federal government's subsidy removal and forex market reform efforts that started in May 2023.
As a result, the country’s debt stock will increase by 2.46%, hitting $93.71 billion. This will increase the debt-to-GDP ratio to 53% debt-to-GDP, above the IMF’s 50% threshold for developing countries.
Implications
In the short term, we expect a positive impact on the naira from increased reserves and improved foreign investor interest.
The initial loan of $750 million to Nigeria will temporarily boost foreign exchange reserves, which are currently up 2.91%, from $32.69 billion (May 31) to $33.64 billion (June 20). The reserve increase will enhance the CBN's ability to support the naira in the forex market.
We will also see a more significant improvement in investor sentiments towards Nigeria, evidenced by a rebound in foreign portfolio inflows. FPI inflows rose 2.7x to ₦42.58 billion in April from ₦15.78 billion in January, and this upward trend will likely continue. This will also be supported by the affirmation of Nigeria’s positive credit rating.
Our forecasts predict the naira, having depreciated 39.42% since last year, will appreciate from ₦1,415.78/$ in Q2 2024 to ₦1,316.60/$ in Q3 2024 at the official market
The loan also supports the government's ₦6.6 trillion fiscal stimulus package, providing funds to MSMEs and cash transfers to households to boost consumer spending. These measures aim to strengthen Nigeria’s macroeconomic environment and protect impoverished citizens. However, successful implementation by the Ministry of Finance, the Central Bank of Nigeria, and the Ministry of Humanitarian Affairs and Poverty Alleviation, under World Bank guidance, is crucial. Nigeria's poor implementation track record poses a significant risk and could lead to the World Bank withdrawing the loan if actualised.
The long-term implication, however, is that debt sustainability concerns still linger, especially for long-term foreign direct investments. We expect these investors to remain cautious until they see sustained economic improvements in Nigeria. The Nigerian government must address the structural issues impeding productivity to unlock more substantial capital inflows.
Ghana’s debt restructuring agreement
After Ghana defaulted on its $30 billion external debt in 2022, it entered an Extended Credit Facility (ECF) with the IMF, where it would receive $3 billion, disbursed in installments. The loan disbursements are premised mainly on successful debt restructuring conversations with Ghana’s creditors, including domestic and international bondholders and bilateral creditors.
These debt talks are solicited under the G20 common framework, an initiative set up in 2020 to facilitate debt treatment arrangements with developing nations and their creditors. So far, Zambia is the largest beneficiary of the framework, and Ghana is next in line.
In its expansive debt restructuring negotiations, which began in 2022, Ghana successfully signed a Memorandum of Understanding (MoU) with its bilateral creditors to restructure $5.4 billion of its debt as part of the treatment arrangement by the G20 Common Framework. The Official Creditor Committee (OCC), including China and France, agreed to the restructuring agreements made in January 2024. The details of the MoU with bilateral creditors include reduced and delayed principal and interest payments, aligning with the IMF’s debt sustainability objectives to unlock more funding.
It is important to note that Ghana's debt treatment arrangement with bilateral creditors differs from the recently concluded $13 billion restructuring talks with commercial creditors, including international bondholders. Ghana has reached an agreement in principle with its international bondholders, who will undergo a 37% haircut on their principal investments while extending the bond maturity dates. This development follows the successful arrangement with bilateral creditors. Both agreements will alleviate Ghana’s near-term debt burden. The IMF estimates that Ghana's debt as a percentage of GDP will decrease from 93.3% in 2022 to 83.6% in 2024.
Implications
Ghana's headway with bilateral creditors and international bondholders, which jointly account for about 35% of the country’s debt portfolio, means the government can now secure the $360 million IMF funding due in July. The country will now have the necessary aid to meet its budget objectives by providing capital infrastructure to ensure sustained economic progress, including supporting its cocoa output to improve export earnings. Already, Ghana has seen its inflation rate cool to 25% in April 2024 from 54.1% in December 2022.
As with Nigeria, this development implies improved investor confidence in the Ghanaian economy ahead of its December elections. With the Bank of Ghana (BoG) providing substantially high yields on fixed-income securities, investors are garnering positive returns, which will likely continue. With positive investor sentiments following the loan disbursement from the IMF, supported by improving macro fundamentals, Ghana could also see a positive credit rating from its current junk status in the near term.
This has short-term implications for the Ghanaian cedi, which has depreciated 17.46% since 2023. Dollar inflows from the loan and foreign investors indicate that the BoG will have funds to support the cedi. However, a sharp appreciation of the currency is unlikely to happen in the near term. We foresee continued currency pressures, with a depreciation towards ₵14.02/$ by the end of Q3 2024, down from ₵11.89/$ in Q1 2024.
In the long term, the agreements mean that Ghana’s debt and interest payments will be easier to service over the next 30 years. If the country continues to pursue fiscal responsibility, ensuring improved revenue even as political risks emerge, this agreement could also pave the way for additional funding from other multilateral and bilateral creditors like the World Bank, easing Ghana's financial pressures and supporting dollar inflows.
