Africa's Largest Economy Seeks Loans to Finance Budget Deficit

Africa’s largest economy, Nigeria, is seeking loans from the World Bank and African Development Bank (ADB) to help fund its forecasted budget deficit. Historically, Nigeria’s budget has been financed primarily with oil revenues, but the recent plummet in oil prices has slashed the amount of funding produced by this sector. Nigeria is not alone in this situation, as other nations such as Azerbaijan, Venezuela, Algeria, and Iraq are also in dire economic straights due to an overreliance on oil production.

The extent of the forecasted budget deficit is exacerbated by plans to increase spending on infrastructure development in the coming year. If approved by parliament, Nigeria’s 2016 budget will be the nation’s largest ever, as it plans to make long-overdue improvements to its infrastructure. A larger budget coupled with a major drop in oil revenues has led Nigeria to seek loans from outside sources. Specifically, Nigeria is seeking out loans amounting to $3.5 billion, comprised of a $2.5 billion “development policy” loan from the World Bank and a $1 billion loan from the African Development Bank. Nigeria’s finance minister believes it is still plausible to utilize the Eurobond market; however, interest rates would be significant due to Nigeria’s current risk profile.

A nation that is heavily reliant on one industry is extremely vulnerable to the present conditions of the global industry. Without a diversified economy, in which many industries make an integral contribution to the economy, an external shock such as a drop in oil prices will put the nation in a precarious economic position. Loans from the World Bank and African Development Bank are certainly a short-term solution to Nigeria’s problem, but major changes to the economy’s structure are needed to prevent a similar situation from reoccurring.