According to a new World Bank report released on Tuesday, Nigeria’s new administration has started important reforms to address macroeconomic imbalances, giving the continent’s most populous country a window of opportunity to improve millions of people’s lives and lay a strong foundation for sustainable and inclusive growth.
The paper states that “reforms in foreign exchange (FX) management and the elimination of the gasoline subsidy are crucial steps in starting to rebuild fiscal space and restore macroeconomic stability, and the opportunity should be taken to take further, necessary policy reform steps.”
The Brenton Woods institution adds 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” in its June 2023 edition of the Nigeria Development Update, NDU, titled “Seizing the Opportunity.”
In the first quarter of 2023, Nigeria’s economic growth slowed, with real gross domestic product (GDP) growth falling from 3.3% in 2022 to 2.4% year-over-year (y-o-y) in Q1 2023, according to the research. Pressure on Nigeria’s economy is a result of the difficult global economic environment.
“However, Nigeria’s economic performance and resistance to additional external shocks are mostly determined by domestic policies.
The naira redesign initiative was part of the prior combination of fiscal, monetary, and exchange rate policies, but it did not result in the intended improvements in growth, inflation, or economic resilience.
The new administration has begun work on crucial reforms, including the removal of the gasoline subsidy and changes to the foreign exchange market, after realizing the need to set a new route for the country.
“The withdrawal of the gasoline subsidy is expected to result in budgetary savings for the government of almost 2 trillion naira in 2023, or 0.9% of GDP. By the end of 2025, these savings should total more than 11 trillion Nigerian Naira.
“However, compensating transfers will be necessary to protect the most vulnerable Nigerian households from the initial price impacts of the subsidy reform. Without compensation, many households risk being plunged into poverty by rising gas prices and forced to use coping mechanisms that have long-term negative effects.
“Similarly, the effort to harmonize the FX windows will help to increase the efficiency of the FX market, unlock private investment, and lessen inflationary pressures. However, it is essential to finish this significant reform by removing FX restrictions, clearly articulating how the new FX regime will operate, and enacting supportive monetary and fiscal policies.
“To put Nigeria on the path of economic growth, the government’s present efforts to enact long-anticipated reforms, such as the elimination of the pricey and ambiguous gasoline subsidy, and efforts to harmonize the different FX windows, are essential and opportune. To lessen the immediate effects on the poor, these reforms should be complemented by compensatory measures, according to Shubham Chaudhuri, the World Bank’s country director for Nigeria.
“As part of a broader agreement to redirect limited fiscal resources towards development priorities, Nigeria should now seize the opportunity to implement a robust, large-scale cash transfer program to provide quick relief to the poor, near poor, as well as low-income households that are most directly affected by higher gasoline prices.”
“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.
“Nigeria should now seize the opportunity to implement a robust, large-scale cash transfer program 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 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,” said Alex Sienaert, World Bank Lead Economist for Nigeria and co-author of the Report.
