THE World Bank and the International Monetary Fund (IMF) have lauded President Bola Tinubu’s decision to effect key economic reforms as “bold choices.”
The World Bank estimates that Nigeria will save N3.9 trillion in 2023, equivalent to 1.6 per cent of the country’s gross domestic product (GDP), following petrol subsidy removal and foreign exchange unification move.
The Tinubu administration is riding on two key reforms of foreign exchange unification and fuel subsidy removal to reset the economy.
“The recently undertaken fuel subsidy removal and foreign exchange reforms are historic. N3.9 trillion in savings in 2023 alone stops Nigeria from going over a fiscal cliff and sets the stage for a new, upward investment, growth, and development trajectory,” the chief economist at World Bank Nigeria, Alex Sienaert, said on Tuesday, June 27 in Abuja at the launch of the Nigeria Development Update for June 2023.
“Headline inflation is expected to rise from 18.8 per cent in 2022 to 25 per cent in 2023. However, by Q1 (first quarter) of 2024, the subsidy removal will start to have a disinflationary effect, meaning that it will alleviate inflationary pressures despite higher petrol prices,” the Update stated.
Speaking about GDP performance in the first quarter of 2023, Sienaert said that increased poverty, accelerated inflation, severe forex distortions characterised the period.
He noted that the naira redesign caused a cash crunch, intensifying the drag caused by external conditions and other domestic policies.
He added that in contrast to the global trend, Nigeria’s inflation surged in the first half of 2023 as policy rate increases were ineffective in controlling inflation because the overall policy stance stayed loose.
“The naira demonetisation reduced GDP growth in manufacturing and services and did not improve either inflation or the forex parallel market rate premium. Inflation pushed an estimated four million more Nigerians into poverty in the first five months of 2023 as average prices of locally produced staples increased faster than average inflation,” he said.
Sienaert said that Nigeria’s debt-to- GDP ratio is estimated to hit 46 per cent, saying the Federal government would be paying off subsidy arrears to the Nigerian National Petroleum Company Limited (NNPC), in addition to other debts that must be serviced.
He expected public external debts to increase, though on a stable path, following the recent reforms.
He added that if there were no buffers to cushion the impact of the reforms, over 7.1 million Nigerians would be further thrown into the poverty net on the back of the reforms and rising inflation.
He advised the Tinubu administration to leverage on the reforms to bend the economic development path upwards and also optimise its full potential, while highlighting the need to provide some timely, temporary and targeted assistance.
He said the subsidy removal was preventing further deterioration, adding that savings from the subsidy can also be used for other pro-poor service delivery such as health, education and infrastructure.
“The current coverage of social protection programmes is low at 19 per cent of the population. Nigeria will continue to spend less than $20 per person monthly,” he said.
The special adviser to President Tinubu on monetary policies, Wale Edun, said that other than the $800 million loan from the World Bank, there may be a need for additional loans to ensure sustainability of the bold reforms. He admitted that the Federal government did not have enough money to spend.
Wale disclosed there were discussions between the chief of staff to the president, Femi Gbajabiamila, and stakeholders including unions, on interventions that would ameliorate reform effects, especially for the poor and most vulnerable people.
“And that involves using the World Bank’s financial muscle to have a loan that will be used as direct cash transfers for the poor. There are other elements in the medium and long term that will be put in place to deal with the immediate spike in inflation and ameliorate the initial pain,” he said.
He explained that the direct cash transfers option was adopted because research had shown that it can actually reduce poverty.
Some other options considered included using compressed natural gas for cheaper energy source, mass transit options, housing and education. According to Edun, there is a fiscal dividend by which state governors are beneficiaries to the tune of about N4 trillion cash dividend.
“What has been identified right now and is being processed is one source of funding. However, like Oliver Twist, we are pointing out that it is not enough and there should be additional sources of funding, which the government is exploring.
“We have identified some sources of funding, but we are going after many more because having taken bold reforms, the rewards should come. The free markets, the financial markets and international investors around the world have rewarded both steps taken by Nigeria,” he added.
Speaking about loans from the Central Bank of Nigeria, Edun said there are regulations that stipulate how much the government can get from the financial regulator, which he promised the administration would abide by, while maintaining the central bank’s independence.
The Country Director for the World Bank for Nigeria, Shubham Chaudhuri, said the bold reforms required some form of buffers to cushion the impact of its consequences over the next few months to rebuild the trust of Nigerians.
“There’s also need to restore the confidence of investors, which will be challenging. The World Bank is here to provide whatever support in terms of ideas, potential solutions, and additional concessional financing,” he said.
Chaudhuri revealed that the Bank’s board approved the $800 million loan in December 2021 as there was a sense that Nigeria was ready to embark on bold reforms.
The Resident Representative of the International Monetary Fund (IMF) in Nigeria, Ari Aisen, considered reforms being done in the country as long overdue.
“It is natural that these policies have some side effects. We have seen inflation already high and it is likely to increase further. In our view, it will be difficult to tailor macroeconomic policies to reduce inflation and achieve durable macro stability. The central bank has a key role in stabilising the economy and it will require much tighter monetary position and stance than we currently see,” Aisen said.
He promised continued IMF support in terms of capacity building, policy advice, and financing, as needed.
Commenting on the option of direct cash transfers as a buffer, Alex Otti, the governor of Abia state, said there should be a sustainable way of ensuring that the targeted people are the ones who benefit from palliatives to avoid a repetition of what happened during the COVID-19 pandemic.
Harrison Edeh is a journalist with the International Centre for Investigative Reporting, always determined to drive advocacy for good governance through holding public officials and businesses accountable.