Inflation and Subsidy Removal: World bank raises alarm 7.1m Nigerians may become poorer

By Marvellous Gbadegesin On Jun 28, 2023

Inflation , Subsidy Removal, World bank ,Nigerians, poorer — Inflation and Subsidy Removal: World bank raises alarm 7.1m Nigerians may become poorer

The World Bank says removal of subsidy on premium motor spirit (PMS) could push as many as 7.1 million Nigerians into poverty unless adequate palliatives are extended to poor and most vulnerable individuals.

Even with the implementation of cash transfers to 10 million most vulnerable Nigerians, the bank says, the country would still suffer a net increase of 5.4 million extremely poor people as a result of the decision.

President Bola Tinubu, during his inauguration, pulled the plug on PMS subsidy payment on the ground that the 2023 budget does not make provision for the expenditure, leading to about a 300 per cent price hike.

Poor and economically-insecure households also face an equivalent monthly income loss of N5,700, the Bank also projects in its Nigeria Development Update (NDU) released yesterday in Abuja.

The planned N5,000 monthly palliative, the report argues, can only lift 1.7 million out of the 7.1 million individuals that could be rendered poorer by the removal of the social scheme, if extended to only 10 million people.

The report makes a case for expansion of the original 10 million vulnerable individuals, saying the “cash transfer will need to reach a substantial number of households for the aggregate impact to be significant”.

“Reaching 20 million beneficiary households will lift four million people out of poverty. Reaching 20 million beneficiary households will lift 56 per cent of them out of poverty. However, just aiming to reduce the poverty headcount rate will be a misplaced objective in this context, as this does not account for the welfare of the already poor people who are pushed deeper into poverty due to the petrol price increase,” the bank states.

It also estimates that petrol price hike would deepen poverty by 1.4 percentage points.

NDU argues that not many poor Nigerians benefited directly from the subsidy payment, though. According to the bank’s study, the bottom 40 per cent of the Nigerian people received less than three per cent of the subsidy directly, “whereas those at the top 60 per cent received over 23 per cent”.

“The majority—about three-quarters—of the subsidy went towards firms, transport operators and ministries, departments, and agencies, but also smugglers who sell the fuel in neighboring countries at a much higher price,” it declares.

The report underpins the importance of immediate implementation of the cash transfer noting that it “can substantially lower the burden of the price increase among the poor and economically insecure”. The amount, it states, accounts for six per cent of the expenditures of the poor and economically insecure and is slightly higher than the four per cent equivalent income loss they face owing to the subsidy payment cancellation.

“However, it may not be possible to provide immediate assistance to everyone due to financial as well as logistical constraints. In such cases, it would be prudent to direct more resources towards the poor and economically insecure who struggle more to cope with the adverse impacts of the petrol price increases,” World Bank rationalises, adding that effective targeting of the compensatory transfers could ensure that the poor and economically vulnerable receive a large share of the cash transfers.

It adds: “A simple approach of geographically targeting poorer wards first and screening out the very wealthy (say, the top 20 per cent) can be effective in the Nigerian context. Such an approach would ensure that, in case only a limited number of people can be reached, more resources go to the poor and economically insecure.

“For example, if only 10 million households can be reached, this approach would direct 88 per cent of the resources toward the poor and economically insecure households. The use of the registries as a gateway for the compensatory transfers and following a similar targeting approach can be even more effective to help the poor and economically insecure.”

The report insists removal of the petrol subsidy and the foreign exchange management reforms are critical steps to address long-standing macroeconomic imbalances and have the potential to establish a solid foundation for sustainable and inclusive growth.

“Nigeria can seize this window of opportunity to further implement a comprehensive reform package that encompasses a range of complementary fiscal, monetary, trade, and structural policy measures to maximize the collective impact on growth, job creation, and poverty reduction.

“To shield the poor and most vulnerable from increases in living costs, temporary and targeted cash transfers should be considered, as part of a new social compact to sustainably redirect resources towards addressing Nigeria’s most urgent development priorities,” a press statement accompanying the report unveiling states.

The report is also particularly concerned about the negative impacts of inflation on Nigerians and businesses. It estimates that falling purchasing power caused by elevated inflation has increased poverty in the short term and pushed an estimated four million Nigerians into poverty from January to May this year alone.

While the Central Bank of Nigeria (CBN) has been aggressive in monetary tightening, raising the benchmark interest rate to 18.5 per cent since May 2022, the Bank said, the monetary framework remains relatively loose.

Also, while it describes CBN’s money supply control measure as inefficient, it argues that the country’s inflation is high on a structural basis and “escalated in recent years, to the point where consumer prices are now increasing at their fastest pace in 17 years” .

“The most recent pattern of chronically high and increasing inflation has been in place since.

October 2019, when Nigeria’s land borders were closed,” it argues.

The report scores the foreign exchange rates convergence high, noting that previous slow currency depreciation was not insufficient in the desire to increase liquidity.

“Currency market distortions contributed to weak growth, the fragile fiscal position, and high inflation… The official rate depreciated by 11 percent from January 2022 through May 2023, while the parallel market rate depreciated by 30 percent, with the parallel market rate premium widening from 37 per cent in January 2022 to 63 per cent in May 2023,” the report recalls.

The World Bank is also seeking “a comprehensive reform package that encompasses a range of complementary fiscal, monetary, trade, and structural policy measures to maximize the collective impact on growth, job creation and poverty reduction” .

The report also raises concern about the rising debt servicing to revenue ratio and its impacts on the country’s fiscal position. While the Federal Government has sealed a deal for restructuring of the existing Ways and Means (W&M) facility totaling N22.72 trillion, it notes that the inability to reach an agreement on future accumulation poses a high risk for the cost of loan service. The cost, it projects, will cross 100 per cent of the government’s revenue in the medium term.