Is the $3.4 billion approved by the IMF, a loan or a grant?
The International Monetary Fund (IMF) yesterday announced it had approved $3.4 billion to help Nigeria address the impact of the Covid19 pandemic and slump in crude oil prices.
“Where will this money go?”, you may ask.
Do note that the funding is being obtained by the Federal Government, and will go towards spending on its budget and helping with balance of payment issues.
Some have wondered. Is this a grant or a loan?
The funds are part of the IMF’s Rapid Financing Instrument. Minister of Finance, Zainab Ahmed at a press briefing a few weeks ago, had stated that the IMF funds were the country’s contribution over the years.
She also maintained that the country was also not entering into any IMF “programme”.
However, the wording of the IMF’s fact sheet seems to differ. According to a paragraph from the fact sheet:
“Financial assistance provided under the RFI is subject to the same financing terms as the Flexible Credit Line (FCL), the Precautionary and Liquidity Line (PLL) and Stand-By Arrangements (SBA), and should be repaid within 3¼ to 5 years.”
In the same document, it also ascribes some terms and conditions:
“A member country requesting RFI assistance is required to cooperate with the IMF to make efforts to solve its balance of payments difficulties and to describe the general economic policies that it proposes to follow.”
A grant typically does not come with such terms and conditions.
So what does balance of payments mean? It is simply the ratio of a country’s foreign exchange inflow and outflow.
This can be divided into two:
Current account — transactions are one time, Capital account — transactions are recurrent.
Nigeria had a current account deficit of $6.9 billion in the last quarter of 2019. For the entire year, it had a deficit of $17 billion.
Simply put, we have spent more on imports than we received from exports.
Q1 2020 numbers are not out, but will reflect the same pattern, since oil revenue is much lower.
Will the funding solve the country’s FX issues?
In the short term, yes. However, a few months down the line the pressure could rebound.
