World Bank halts power sector funding over foreign exchange liberalization challenges

The Federal Government and World Bank have cancelled the undisbursed portion of a critical power sector support program in May 2026, marking a significant setback for Nigeria's energy infrastructure expansion. The decision stems from complications arising from the naira's ongoing depreciation and forex market volatility, which have undermined project implementation timelines and cost projections.

Nigeria's partnership with the World Bank on power sector recovery has fractured, with both parties agreeing to restructure and cancel remaining funds from a key support facility. The collapse of the program represents a blow to the government's electricity generation and transmission targets, even as the country grapples with acute energy deficits that constrain economic growth.

The program, designed to bolster Nigeria's power infrastructure through targeted investments and technical support, initially showed promise during its early implementation phases. Completed projects and operational facilities demonstrated the World Bank's commitment to addressing one of Africa's largest economies' most persistent development challenges. However, the decision to wind down the initiative signals growing frustration with Nigeria's macroeconomic environment, particularly the instability in foreign exchange markets.

The naira's persistent weakness against the dollar has created severe implementation headaches for internationally-funded projects. Contractors and equipment suppliers operating in naira-denominated contracts face currency losses when naira values decline sharply. The World Bank, bound by fiduciary requirements and project accounting standards, cannot absorb such losses indefinitely. When the naira weakens unexpectedly, project costs spike in dollar terms, exhausting budgets faster than anticipated. This dynamic forces difficult choices about completion timelines and scope reductions. The liberalization of Nigeria's forex market, while intended to stabilize the currency through market mechanisms, has instead introduced unpredictability that discourages multilateral lenders from sustained commitments.

For ordinary Nigerians, this withdrawal threatens electricity supply stability. Nigeria's power sector remains critically short of capacity. Generation capacity hovers around 13,000 megawatts, yet load shedding continues across the country. Private businesses face constant brownouts that destroy productivity and increase operating costs. Manufacturing firms relocate to countries with reliable power. The World Bank's retreat removes crucial external financing that could have expanded capacity and improved transmission networks. Without this funding, the government must rely on domestic resources already stretched thin by debt servicing obligations and security spending.

Businesses dependent on forex access face additional complications. The World Bank's decision reflects broader international lender concerns about Nigeria's macroeconomic management. When major development institutions scale back involvement, it signals risk to other investors and lenders. This perception typically results in higher borrowing costs and stricter credit terms for Nigerian enterprises seeking external financing. Companies competing for scarce dollars in a volatile forex market face further headwinds as confidence in Nigeria's economic trajectory weakens.

The government's task now involves salvaging what remains of the program and negotiating revised terms with the World Bank. Policymakers must address the underlying forex volatility that prompted the cancellation. The naira's stability depends on sustained oil revenues, disciplined fiscal management, and orthodox monetary policy. Without these foundations, even market liberalization cannot produce the stable currency that international lenders require. The Central Bank of Nigeria faces mounting pressure to defend the naira while maintaining adequate foreign reserves.

Longer term, this episode underscores a painful reality for Nigeria's development agenda. Large infrastructure projects require stable macroeconomic conditions and predictable currency regimes. Temporary forex fixes and ad hoc interventions cannot replace fundamental economic soundness. The World Bank's withdrawal suggests that incremental improvements no longer suffice; the institution wants evidence of systemic reform. This places immense pressure on the government to demonstrate commitment to orthodox fiscal and monetary discipline. Without such measures, future partnership opportunities with multilateral lenders will remain constrained, limiting Nigeria's capacity to fund critical infrastructure that could unlock broader economic potential.