World Bank and the International Monetary Fund (IMF) have commended President Bola Tinubu’s decisive economic reforms as “bold choices.” These reforms, which include the removal of petrol subsidies and the unification of foreign exchange, are estimated to save Nigeria N3.9 trillion in 2023, equivalent to 1.6% of the country’s GDP.
According to the chief economist at World Bank Nigeria, Alex Sienaert, these historic reforms will not only prevent Nigeria from facing a fiscal crisis but also pave the way for increased investment, growth, and development. The fuel subsidy removal and foreign exchange reforms are expected to have a disinflationary effect by the first quarter of 2024, alleviating inflationary pressures despite higher petrol prices.
However, the first quarter of 2023 saw challenges in Nigeria’s economy, including increased poverty, accelerated inflation, and severe forex distortions. The cash crunch caused by the naira redesign, coupled with ineffective policy rate increases, contributed to these issues. Inflation rose faster than average inflation, pushing an estimated four million more Nigerians into poverty in the first five months of 2023.
Despite the reforms, Nigeria’s debt-to-GDP ratio is projected to reach 46%, and the government will need to pay off subsidy arrears to the Nigerian National Petroleum Company Limited (NNPC) along with other debts. Public external debts are expected to increase but remain on a stable path following the recent reforms. Without proper buffers, over 7.1 million Nigerians could be further pushed into poverty due to the reforms and rising inflation.
To maximize the potential of these reforms, the Tinubu administration is advised to leverage them for upward economic development. It is also crucial to provide timely, temporary, and targeted assistance. The savings from subsidy removal can be redirected toward pro-poor service delivery in health, education, and infrastructure. Currently, Nigeria’s social protection programs cover only 19% of the population, with monthly spending per person remaining below $20.
Wale Edun, the special adviser to President Tinubu on monetary policies, acknowledged the need for additional loans to ensure the sustainability of the bold reforms, besides the $800 million loan from the World Bank. Discussions are underway between the government and stakeholders, including unions, to mitigate the effects of the reforms, particularly for the less privileged and vulnerable.
Options such as compressed natural gas, mass transit, housing, and education are being considered to provide cheaper energy sources and alleviate the impact of the reforms. Edun emphasized the importance of securing additional sources of funding to support the rewards of the bold reforms.
While there are regulations on loans from the Central Bank of Nigeria, the government commits to abide by them and maintain the central bank’s independence. The World Bank and IMF expressed their support for Nigeria, acknowledging the need for buffers to mitigate the consequences of the reforms and rebuild the trust of Nigerians and international investors.
The IMF pledged continued support in terms of capacity building, policy advice, and financing, as needed. As for direct cash transfers, there is a call for sustainable measures to ensure that the right people benefit from these palliatives, learning from the lessons of the COVID-19 pandemic.