The World Bank has urged the Federal Government to utilize the savings obtained from the removal of fuel subsidy to alleviate the suffering of Nigerians, which has been exacerbated by the negative consequences of the policy.
In its recent Nigeria Development Update titled “Seizing the Opportunity,” the World Bank emphasized the importance of reallocating a portion of the subsidy savings to address the adverse effects on the population, as an estimated 7.1 million more Nigerians could be driven into poverty without appropriate measures to counterbalance the impact of subsidy removal.
The World Bank acknowledged the significance of removing petrol subsidies and implementing foreign exchange (FX) management reforms in rebuilding fiscal space, restoring macroeconomic stability, and initiating critical reforms to tackle macroeconomic imbalances.
It stressed that the current administration should capitalize on this window of opportunity to bring about transformative changes that would positively impact the lives of millions of Nigerians and establish a strong foundation for sustainable and inclusive growth.
The World Bank’s report, “Seizing the Opportunity,” underscored the necessity of implementing a comprehensive reform package that encompasses various complementary measures.
This package should include a new social compact aimed at safeguarding the poor and vulnerable segments of society, maximizing the collective impact on growth, job creation, and poverty reduction.
According to the report, Nigeria’s economic growth weakened in the first part of 2023, with a decline in real Gross Domestic Product (GDP) growth from 3.3% in 2022 to 2.4% year-on-year (y-o-y) in Q1 2023.
The challenging global economic environment has exerted pressure on Nigeria’s economy, but the report emphasized that domestic policies play a crucial role in determining the country’s economic performance and resilience to external shocks.
The World Bank highlighted the inadequacy of previous fiscal, monetary, and exchange rate policies, including the naira redesign program, in delivering the desired improvements in growth, inflation, and economic resilience.
With the removal of petrol subsidies, the government is projected to achieve fiscal savings of approximately N2 trillion in 2023, equivalent to 0.9% of GDP. These savings are expected to reach over N11 trillion by the end of 2025.
However, the World Bank noted that the immediate consequence of subsidy removal has been an increase in prices, adversely affecting poor and economically vulnerable Nigerian households.
Petrol prices have nearly tripled, and this price hike has a negative impact on households that directly purchase and use petrol, as well as those who indirectly consume petrol.
This includes households that own motorcycles or generators dependent on petrol, as well as those who rely on petrol for transportation.
The World Bank estimated that poor and economically insecure households will experience an income loss of N5,700 per month due to the subsidy reform. Without compensation, an additional 7.1 million people could be pushed into poverty.
The report highlighted the potential long-term adverse consequences as households, both current and newly poor, may resort to coping mechanisms such as forgoing education for children, avoiding healthcare facilities for preventive care, or reducing their access to nutritious food options.
To mitigate the negative impact of subsidy removal on Nigerians, the World Bank emphasized the necessity of compensating transfers to shield households from the initial price impacts of the reform.
In addition to immediate cash compensation, the government should articulate how the freed-up resources will be utilized in a new compact with the Nigerian people. This compact should outline support in the short, medium, and long term at the federal, state, and local government levels.
The World Bank recommended that the government, led by the National Economic Council (NEC), clearly identify priority areas for government investment and effectively communicate these to the public to gain support.
The compact should also commit to fiscal realism, considering the potential fiscal implications of substantial spending expansions that could lead to increased deficits in the medium term.