The recent decision by the World Bank to remove several loan fees that will make borrowing more affordable for vulnerable countries, including Nigeria, is good news. However, it should not be seen by the poor countries as a subtle way to embark on a borrowing spree that has put their economies on fiscal edge and hampered economic growth. The move should be seen for what it is: a part of broader efforts to expand financial capacity, to address climate change, inequality and economic inclusivity.
By this measure, the global bank has eliminated the repayment premium on International Bank for Reconstruction and Development (IBRD), which has introduced a grace period for commitment fees on undisbursed balance, and extended its lowest pricing to small, vulnerable nations.
These changes are also designed to ease financial pressures on most nations currently facing acute economic challenges. The Bank says the latest reform aligns with its vision of building a “better, more efficient, and bigger institutions capable of addressing overlapping global crisis.” The removal of the loan fees will also increase lending capacity by $150billion over the next ten years. This can be achieved through innovations, financial instruments, leveraging shareholders’ support and optimising available capital.
Besides, the reform includes adjustment to IBRD’s equity-to-loan ratio, which has been reduced from 20 per cent to 18 per cent. This will enable additional lending of approximately $70billion over a ten-year period. This can be accessed by beneficiary nations through bilateral guarantees from the Asian Infrastructure Investment Bank. All this is critical for tackling the trillions of dollars needed annually to combat climate change, support fragile nations and provide digital inclusion.
However, despite these lofty plans to make borrowing more affordable, the World Bank has warned that developing countries like Nigeria risk losing a significant portion of their investments or a third of public spending due to poor and wasteful spending that hitherto hurts their economic growth. This often happens when government’s spending does not create equal value in return.
The warning is contained in its recent report titled, “How can developing countries power up public investments”? According to the report, more than 70 per cent of public investment in emerging and developing economics is lost to inefficiencies, which undermine potential economic growth. Nigeria happens to be a classic example of this colossal inefficiency, especially by Ministries, Departments and Agencies (MDAs). Such inefficient spending occurs when one dollar of public investment does not result in equivalent increase in productive public capital.
In other words, there is no return in investment, but rather a case of “white elephant”, that is, investment in grandiose projects with limited economic returns with high costs that always lead to sovereign risk and debt unsustainability. For example, Nigeria’s debt stock has been projected to hit N187trillion this year largely as a result of inefficient public spending. It is imperative that Nigeria and other low and middle-income countries to focus on improving efficiency in public spending.
It is also advised that these poor countries, of which Nigeria is one of them, should adopt transparent procurement processes, establish effective project monitoring and evaluation systems that will ensure proper maintenance of infrastructure that will extend the lifespan of projects. Though the federal government had long established Procurement Office, the efficiency of the office has been hampered by bureaucratic red tape. Besides, other recommended measures to enhance efficiency in public spending should include enhancing domestic revenue mobilisation, reallocating resources from inefficient subsidies and implementing sound debt management frameworks that can help boost governments’ ability to invest in critical sectors such as education, health and infrastructure.
Currently, institutional weaknesses such as regulatory bottlenecks and corruption have become the bane of underdevelopment in poor countries. The result is lower-quality projects. Going forward, putting Nigeria on a sustainable fiscal path with improved service delivery will require multi-pronged approach anchored around these interlinked and mutually reinforcing pillars of efficient and effective public spending, as well as improving transparency and accountability, reducing bureaucratic processes, checking corruption and improving labour productivity. These measures must align with World Bank’s guidelines that will ensure that the execution of projects meet public expectation.