THE LATEST World Bank Nigeria Development Update (NDU), released in Abuja on November 23, said Nigeria’s economic growth prospects have been undermined by the Federal Government’s failure to stick to reform measures implemented to mitigate the impact of the COVID-19 pandemic.
The report titled ‘Time for Business Unusual’ advised the Nigerian government to desist from business-as-usual policies in order to accelerate the country’s recovery from the impact of the COVID-19 pandemic.
Although it noted that the Nigerian economy has recovered at a fasterthan-expected pace in 2021, the World Bank, in the report, observed that pre-COVID-19 challenges are threatening post-pandemic recovery.
The report said: “In 2020, the COVID-19 pandemic served as a wakeup call and the (Nigerian) government took bold measures to mitigate the effects of the crisis, but the reform momentum waned in 2021, and unaddressed macroeconomic weaknesses have imperiled Nigeria’s recovery.”
According to the World Bank, in 2020, the Nigerian government began to address longstanding macroeconomic challenges by harmonizing the two main exchange rates, adjusting electricity tariffs to more cost-reflective levels, cutting non-essential spending, redirecting budgetary resources towards the COVID-19 response at both the federal and state levels, strengthening debt management and increasing the transparency of oil and gas operations.
The World Bank report observed that the “reform momentum weakened in 2021” and in the absence of continued progress, key macroeconomic challenges have re-emerged as major threats to economic growth.
Problems highlighted by the report include the Nigerian government’s inability to address issues concerning the predictability and credibility of exchange-rate management, insufficient supply of foreign exchange, unsustainable subsidy for premium motor spirit (PMS), burdensome trade restrictions and the sizeable fiscal deficit financing by the Central Bank of Nigeria (CBN).
The report said the problems have continued to undermine the business environment, compounding underlying constraints related to governance and the delivery of public services.
“Despite a strong initial recovery and resurgent global oil prices, the stalled reform agenda has undermined Nigeria’s long-term growth prospects,” the report added.
The World Bank report advised the Nigerian government to adopt a ‘business unusual’ approach in addressing inflation, foreign exchange management and fiscal pressures.
The report expressed particular concern at the country’s double-digit inflation rates which it said was depressing economic activity and exacerbating poverty.
Noting that rising food prices are eroding household purchasing power, the World Bank estimated that in 2020 and 2021, “inflation shock” alone pushed about eight million more Nigerians below the poverty line.
The report further observed that the inflation rate was declining more slowly than initially expected.
According to the World Bank, in 2021 the Nigerian government did not take concerted action to curb inflation.
Despite rebounding oil prices, Nigeria’s oil output has fallen and the World Bank noted that Nigeria’s fiscal deficit is now projected to reach 5.7 per cent of GDP by end-2021, the highest level in over a decade.
The World Bank blamed the fiscal pressure on lower-than-expected revenues and the rising cost of fuel subsidy.
Making a case against continued implementation of the subsidy, the World Bank report said, “Nigeria’s PMS subsidy imposes a massive and unsustainable fiscal burden. The cost of the PMS subsidy in 2020 rose from just four per cent of the oil and gas revenues that are first transferred to the NNPC ($0.3 billion) to a staggering 35 per cent in 2021 ($4.5 billion) or roughly two per cent of GDP.”
Meanwhile, Nigeria’s average daily oil production fell from 2.0 million barrels per day (bpd) in 2019 to 1.8 million bpd in 2020 and less than 1.6 million bpd in the first nine months of 2021, its lowest level in two decades.
The report further observed that despite the decline in production, oil and gas revenues collected by the NNPC in the first nine months of 2021 alone are estimated to broadly match those collected in the entire year in 2020 because global oil prices rose by more than 50 per cent between the two periods.
However, according to the World Bank, rebounding oil prices also increased the cost of the PMS subsidy by raising the price of imported PMS from less than $200 per ton in April 2020 to $840 per ton by November 2021, causing net oil and gas revenues transferred to the Federation Account by the NNPC to plunge from ₦1.1 trillion to ₦0.5 trillion.
The World Bank stressed that Nigeria was sacrificing critical investments in physical and human capital in funding the fuel subsidy.
“While the fiscal cost of the PMS subsidy is enormous, its opportunity cost is even greater. By maintaining an inefficient price control on PMS, Nigeria is forgoing productivity-enhancing investments in essential public goods and services,” the report said, adding that benefits of the subsidy overwhelmingly accrue to wealthier households, while a large share is captured by smugglers and black marketeers.
The World Bank said the Nigerian government should urgently discontinue fuel subsidy in order to fast track economic growth.
In the absence of fuel subsidy, it advised the government to introduce cash transfers for poor Nigerians and create job opportunities.
World Bank Lead Economist for Nigeria and co-author of the report Marco Hernandez said, “In 2022 the Federal Government plans to spend about 3,000 naira ($7) per person for health, while the cost of the PMS subsidy for next year could reach 13,000 naira ($32) per person. Not only is the PMS subsidy costly, but it mainly benefits richer households. Nigeria has the opportunity to establish a ‘compact’ with citizens that eliminates the subsidy and uses the savings to provide targeted cash transfers to lower-income-households, invest in job-creating programs, and improve its fiscal position.”
Commenting on the report, World Bank Country Director for Nigeria Shubham Chaudhuri said the decline in the momentum of the reform agenda was undermining the growth of the Nigerian economy.
“Even though Nigeria’s economy exited a pandemic-induced recession, several challenges persist including double-digit inflation, declining incomes and rising insecurity. While the government took bold policy measures to mitigate the impacts of the COVID-19 crisis, the reform momentum has slowed which hinders Nigeria’s ability to reach its growth potential.”
The World Bank noted that under a business-as-usual scenario, GDP per capita would continue to decline.
But it also stressed that reforms could accelerate economic growth.
According to the World Bank, the Nigerian government is facing a critical choice: continue to pursue a business-as-usual policy approach while its economy and job market deteriorates, or undertake bold measures that put the country on a robust and sustainable long-run growth trajectory.
The report highlighted urgent policy priorities that can be implemented by Nigerian authorities over the next three to six months: eliminating the PMS subsidy while protecting poor and vulnerable households from any inflationary impact; reducing inflation through a coordinated mix of exchange rate, trade, monetary and fiscal policies; catalyzing private investment by enhancing foreign exchange management, easing trade restrictions, and fostering a better business environment; and addressing fiscal pressures through enhanced domestic revenue mobilization and reducing the reliance on CBN deficit financing.