The World Bank has stated that without adequate compensation, the removal of fuel subsidy will impact negatively on Nigerians.
The Bank in its June 2023 edition of Nigeria Development Update (NDU) titled “Seizing the Opportunity”, said most vulnerable Nigerian households could be pushed into poverty by higher petrol prices and have to resort to coping mechanisms with long-term adverse consequences, such as not sending children to school, or not going to health facilities to seek preventative healthcare.
The Bank said compensating transfers will be essential to help shield the most vulnerable Nigerian households from the initial price impacts of the subsidy reform.
On the impact of the subsidy removal, the World Bank stated: “In the immediate term, the removal of the petrol subsidy has caused an increase in prices, adversely affecting poor and economically insecure Nigerian households.
“Petrol prices appear to have almost tripled, following the subsidy removal. The poor and economically insecure households who directly purchase and use petrol as well as those that indirectly consume petrol, are adversely affected by the price increase.
“Among the poor and economically insecure, 38 per cent own a motorcycle and 23 per cent own a generator that depends on petrol. Many more use petrol-dependent transportation.
“The poor and economically insecure households will face an equivalent income loss of N5,700 per month, and without compensation, an additional 7.1 million people will be pushed into poverty.
“Many current, as well as newly, poor and economically insecure households, will likely resort to coping mechanisms that will have long-term adverse consequences, such as not sending children to school, or not going to the health facilities to seek preventative healthcare or cutting back on nutritious dietary choices.”
The report states that with the petrol subsidy removal, the government is projected to achieve fiscal savings of approximately N2 trillion in 2023, equivalent to 0.9% of GDP.
These savings, the report stated, are expected to reach over N11 trillion by the end of 2025.
The global institution says the removal of petrol subsidy and foreign exchange (FX) management reforms are crucial measures to begin to rebuild fiscal space and restore macroeconomic stability, and the opportunity should be seized to take further, necessary policy reform steps.
The NDU added that it is critical to implement a comprehensive reform package that encompasses a range of complementary measures, including a new social compact to protect the poor and most vulnerable, to maximize the collective impact on growth, job creation, and poverty reduction.
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According to the report, the move to harmonize the FX windows will help to improve the efficiency of the FX market, unlock private investment, and reduce inflationary pressures, but it is crucial to complete this important reform by removing FX restrictions, clearly communicating how the new FX regime will operate, and implementing supportive monetary and fiscal policies.
“The current move by the government to implement long-anticipated reforms such as the removal of costly and opaque petrol subsidy, and efforts to harmonize the multiple FX windows, are timely and crucial to set Nigeria on the path of economic growth. These reforms should be accompanied by compensatory actions to mitigate the short-term impact on the poor,” said Shubham Chaudhuri, World Bank Country Director for Nigeria.
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“Nigeria should now seize the opportunity to implement a robust, large-scale cash transfer programme to provide quick relief to the poor, near poor, as well as low-income households which are most directly affected by higher petrol prices, as part of a broader compact to redirect scarce fiscal resources towards development priorities.”
The World Bank report recommends specific, critical measures to build on the new government’s bold start in making critical reforms, to ensure that Nigeria rises to its full potential.
These include: (1) restoring macroeconomic stability by increasing non-oil revenue, reducing inflation through a sequenced and coordinated mix of trade, monetary and fiscal policies, and completing the FX reform, (2) expanding social protection to protect the poor and most vulnerable, and (3) developing and communicating how, as fiscal space recovers, resources will be redirected over time to meet urgent development challenges.
“The government has made a welcome, bold start to implement the critical macro-fiscal reforms needed to address the persistently high inflation and low fiscal revenues hindering economic growth. Deepening and sustaining these changes is imperative, to enable Nigeria to break out of the cycle of macroeconomic instability, low investment, sluggish economic growth, escalating poverty, and fragility.
“Having created momentum, the government has the opportunity to undertake further comprehensive reforms encompassing a range of complementary measures, such as lifting the FX import restrictions which continue to distort the FX market,” saidAlex Sienaert, World Bank Lead Economist for Nigeria and co-author of the Report.
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