The Fuse

For Petro-states, World Bank Offers Stopgap Before IMF

by Leslie Hayward | February 04, 2016

Headlines have surfaced that a number of oil exporting countries, namely Nigeria and Azerbaijan, are in discussions with the World Bank and, to a far lesser extent, the International Monetary Fund (IMF) around securing loans to weather the continued collapse in oil prices.

The burden of a $15 billion state deficit has prompted Nigeria to ask the World Bank and African Development Bank for $3.5 billion in assistance to bridge the gap, even though the Financial Times notes, this is more the role of the IMF.

Meanwhile, Azerbaijan seeks to borrow $3 billion from the World Bank and $1 billion from the IMF. An IMF team has been in the country since January 28 on a fact-finding mission to discuss technical and financing needs. Although Azerbaijan is a minor crude oil exporter compared to some of its neighbors, oil and gas account for 95 percent of Azeri exports and 75 percent of government revenues. The oil prices collapse has wreaked havoc on its economy, and the country has resorted to capital controls, imposing a 20 percent tax on exporting foreign currency. Azerbaijan’s central bank burned through 60 percent of its reserves last year, and the country’s currency lost half of its value relative to the dollar.

IMF loans have strings attached

There are handful of reasons that Azerbaijan and Nigeria are looking to the World Bank more than the IMF for assistance, even though the IMF is the world’s de-facto crisis lender. “The IMF doesn’t consider Nigeria to be in sufficiently bad shape yet to merit a loan. Getting an IMF loan is more a signal to investors and financial markets that the country is really in trouble in a way that a World Bank loan is not,” says Michael Ross, Professor of Political Science at the University of California, Los Angeles, and Author of The Oil Curse: How Petroleum Wealth Shapes the Development of Nations. “The conditions that the World Bank attaches to loans will not be as far reaching as those that the IMF would attach.”

“The conditions that the World Bank attaches to loans will not be as far reaching as those that the IMF would attach.”

Typically, IMF loans come with a long list of conditions designed to improve transparency in the banking sector, and improve accountability from country leadership. According to an IMF Factsheet on loan conditionality, “When a country borrows from the IMF, its government agrees to adjust its economic policies to overcome the problems that led it to seek financial aid from the international community. These loan conditions also serve to ensure that the country will be able to repay the Fund so that the resources can be made available to other members in need.” Meanwhile, the World Bank routinely grants loans to countries that are developing well and have high growth rates.

Such strict oversight won’t necessarily appeal to Nigeria and Azerbaijan, which Steve Levine points out in Quartz, are “two of the most corrupt petro-states on the planet,” ranking 136th and 119th respectively out of 168 countries on Transparency International’s 2015 Corruption Index. The corruption under Nigeria’s former President Goodluck Jonathan was well documented in the media, while Azerbaijan’s government has been criticized by both the Department of Defense and groups like the Organized Crime and Corruption Project for its “feudal” approach.

Additionally, in the case of both Nigeria and Azerbaijan, although their economies are troubled, neither country is necessarily at the point where the IMF needs to come in and restructure from the ground up. Additionally, in Nigeria, Ross cites the possibility that President Muhammadu Buhari has “bad memories” from the administration of an IMF loan during his first turn as the country’s head of state.

World Bank striving to stay relevant

But there’s another force at play, which is the World Bank’s role in the international community. “I think the World Bank is deeply concerned about staying relevant,” says Ross. “It’s become significantly less important over the last decade, partly because countries that once relied on it like Indonesia and China have been doing well, and partly because world financial flows are simply dwarfing development programs in many low income countries. I think there’s definitely some motivation from the Bank’s own internal desire to stay in the game, and so that they can provide critical assistance.”

In May 2015, Sargon Nissan of the Bretton Woods Project wrote in the Financial Times, “As obituaries are written for the World Bank, the IMF is set to become indispensable.” He argued that fresh competition from institutions like China’s Asian Infrastructure Investment Bank and various other forces are diluting the World Bank’s role in global governance, and creating a greater void for the IMF to fill. But the current events in Nigeria and Azerbaijan suggest that instead, the World Bank could provide cover for countries that aren’t yet desperate enough to seek the IMF’s help—and don’t want to accept various trappings of economic reform and increased transparency.

“The IMF is tailor made for the kind of crisis that Venezuela is on the verge of falling into. But it has to be invited in, and it brings with it conditions that Maduro might find bitter medicine to swallow.”

There’s a long list of petro-states that desperately need economic assistance, with no end in sight as oil prices continue to languish. Brazil is mired in the worst recession in over a century, Ecuador is similarly constrained. “These are bad times for oil producers and their creditors,” Oxford Economics wrote in a recent client note. “History provides reason for extreme pessimism on the likely fortunes of commodity producers; suggesting that [emerging markets] are prone to default and that commodity slumps are possibly the biggest cause of defaults.”

It’s possible that the next test will come from Venezuela, which has been narrowly avoiding credit default for over a year. “The IMF is designed and has functioned for 70 years almost as the institution that rescues countries when their financial systems collapse,” says Ross. “It’s tailor made for the kind of crisis that Venezuela is on the verge of falling into. But it has to be invited in, and it brings with it conditions that Maduro might find bitter medicine to swallow.”