According to an authoritative source familiar with the International Monetary Fund (IMF), Nigeria’s President Muhammad Buhari is semi-secretly making arrangements with the IMF for a Policy Support Instrument. This program, introduced in May 2005, enables the IMF to support low-income countries that may not need or want financial assistance. This is really surprising as President Buhari has always denied that he needs of any form of assistance from the IMF.
This news comes at a time when Nigeria is headed for a recession with its inflation rate hitting the highest in over a decade, its interest rates rising to the highest in a decade and its interbank market exchange rate falling to an all time low. These have been largely due to the fall in oil price as a result of the country’s over dependence on oil as its prime source of revenue. The country also put in stringent monetary policies to save the Naira from falling instead, these have chased foreign investors away. According to the government, these policies are meant to help boost local production in the country. However, it is surprising how the country intends to boost local production when it doesn’t have the necessary infrastructure in place.
Following the approval of the PSI programme for Nigeria in October 2005, a Nigerian team, led by Dr Ngozi Okonjo Iweala the Minister of Finance at the time, was able to sign an agreement with its Paris Club creditors. Under this deal, 60 percent of its $30bn debt was written off on Naples terms with the remainder to be paid off in two tranches. One of the conditions for Nigeria’s debt restructuring negotiations with the Paris bank was to obtain an approval from the IMF on its economic reforms through the PSI. Nigeria, which was the first user of the program suspended the use of the programme in 2008 under the administration of the late President Musa Yar’Adua.
What you need to know about the Policy Support Instrument
A country resorts to the PSI, which is a non-lending program, when it no longer requires IMF funding but needs the IMF to endorse its economic policies. This is in order to send a positive signal to the world that it is pursuing strong economic objectives, which, in turn, make it a veritable destination for investing.
The way the IMF does this is by helping countries design effective economic programs, and once these programs are approved by the IMF’s executive board, it will signal to the donors and creditors alike that the IMF endorses those programs, which will reassure those donors and creditors.
Once the IMF approves a PSI, there is no need for the creditor or donor to conduct an independent analysis of its own and they can be assured that a proper examination has been carried out.
This can be seen in Nigeria’s debt restructuring with the Paris Club. The conclusion of a PSI was a condition for renegotiating Nigeria’s debt with the Paris Club. Without a PSI, the Paris Club creditors would still have wanted some guarantee about the viability of Nigeria’s economy in order to know that Nigeria was serious about its economic reforms. This guaranteed that the country could repay its debt and refrain from accumulating further debt.
