Subsidy proves costly as World Bank walks away from Nigeria power deal

The federal government and the World Bank agreed to cancel $717.7 million in undisbursed financing under the Power Sector Recovery Performance-Based Operation, a program the lender had built over five years and more than a billion dollars to rescue one of Africa’s most dysfunctional electricity markets.

The World Bank agreed on March 26, 2026. The program’s closing date, originally set for June 2027, was pulled forward to May 31, 2026, more than a year early, and with most of its ambitions unmet.

It is a significant defeat for a country that generates roughly a fifth of the power its economy needs and where blackouts remain so routine that diesel generators are a standard fixture in offices, hospitals, and middle-class homes.

It is also a cautionary tale about the limits of multilateral lending when a government lacks either the political will or the fiscal breathing room to absorb the pain of reform.

“Due to the mismatch between electricity generation costs and sector tariff revenues, the tariff shortfalls increased sharply in the last three years,” the World Bank said in its restructuring paper.

BusinessDay’s findings showed Nigeria’s electricity subsidy rose from roughly N140 billion in 2022 to approximately N1.9 trillion in 2025, a thirteenfold increase in three years, and a number that now rivals the budgets of major federal ministries.

“Not having a financing plan in place and the decreasing trajectory of tariff shortfalls has prevented the achievement of the global Disbursement Linked Indicator in 2023, 2024, and 2025,” the World Bank said.

When President Bola Tinubu liberalised Nigeria’s foreign exchange market in June 2023, the naira collapsed against the dollar.

That was largely the right policy; the old managed rate had distorted the economy for years, but it had devastating consequences for power generators.

Gas used to fuel Nigeria’s plants, which supply more than 70 percent of grid electricity, is priced in dollars. Generation costs surged. Retail tariffs, for most consumers, did not.

Only customers classified as Band A, those receiving at least 20 hours of supply daily, a category that covers better-served urban enclaves, saw meaningful price adjustments when the regulator acted in April 2024.

Everyone else continued paying rates that bore no resemblance to the underlying economics. The subsidy, implicit and unbudgeted, ballooned.

“That particular programme was not yielding the desired results,” Yakubu Usman, energy analyst, who has tracked Nigeria’s power sector for years, said. “The question is, what progress are we making in the power sector when there is no policy direction?”

He argues that Nigeria’s electricity reform process has been persistently undermined by a fundamental mismatch between the legal architecture being constructed around the sector and the economic and operational realities of running a power system in one of Africa’s most complex environments.

“We are struggling because we draft laws without taking cognisance of the realities of the power system and the economic implications,” he said.

Vahyala Kwaga, deputy director at the fiscal transparency organisation BudgIT, warned that the withdrawal of financing will compound the investment deficit that already constrains electricity supply.

“The implication is that potential power will not be available. Nigeria is already struggling to meet energy demand and such investment would likely have created more energy,” Kwaga said. “This means Nigerians will keep struggling with energy availability. It also means that energy prices will remain high.”

Kwaga argued that the path to lower electricity costs runs through scale, specifically through the kind of large, efficient distribution infrastructure that stronger Discos could enable.

“The more power available, especially if there are strong Discos that utilise economies of scale, the lower the price,” he said.

Achieving that, he stressed, will require long-term and patient capital directed at transmission infrastructure, distribution networks, and metering systems, precisely the categories of investment that the cancelled programme was meant to catalyse.

The World Bank had seen the electricity subsidy problem coming. As far back as May 2025, its lead economist for Nigeria, Alex Sienaert, singled it out by name while presenting the institution’s Nigeria Development Update in Abuja.

“There is still one kind of wasteful, regressive subsidy, which is the electricity subsidy,” he told the audience. “Work to address that.”

The Nigeria Electricity Regulatory Commission has estimated the cost of that subsidy at roughly N200 billion per month.

The cancelled financing represented the undisbursed balance of a $1.52 billion program approved between 2020 and 2023.

Under the original operation, the results were actually encouraging: tariff shortfalls fell by 71 percent between 2019 and 2022, dropping from N581 billion to N166 billion.

Regulatory cost recovery climbed from 56 percent to 94 percent. Electricity supplied to the distribution grid rose 13 percent between 2018 and 2021.

The World Bank rated implementation satisfactory and moved to extend and expand the program with an additional $750 million tranche approved in 2023.

That second phase went badly almost from the start. The key disbursement indicators were not achieved in 2023, 2024, or 2025.

Of the $750 million in additional financing, only around nine percent was ever released.

The bank rated the overall additional financing implementation as “Moderately Unsatisfactory”, diplomatic language for a program that failed to deliver.

It cited not just the tariff problem but also weak distribution company performance, transmission bottlenecks, high technical and commercial losses, and what it described as a failure by authorities to establish “a credible and fiscally sustainable financing plan capable of addressing the growing tariff deficits.”

Nigeria remains the World Bank’s third-largest borrower under the International Development Association, the concessional lending arm that serves lower-income countries.

Its exposure stood at $18.5 billion as of March 2026, accounting for roughly eight percent of the IDA’s total portfolio.

That relationship is unlikely to cool. Abuja needs external financing, and the Bank needs deployable capital, but the terms of the next engagement in the power sector may look quite different.

The Bank signalled as much in its restructuring paper, noting that future support should focus on “targeted investments capable of delivering measurable improvements in electricity access” rather than broad performance-based programs contingent on politically difficult tariff reforms.