The World Bank has expressed its support for the decisions of the Nigerian government to remove fuel subsidy and float the forex market, saying it will result in enormous fiscal gains for the country.
The Washington-based financial multinational was a staunch advocate for the removal of the fuel subsidy, citing its impact on the economic and infrastructural development of the country.
Despite the calls, it was until May 29, 2023 that the newly-elected President, Bola Tinubu, announced the removal of the subsidy.
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Subsequently, the Central Bank of Nigeria announced the unification of Nigeria’s multiple exchange rates, collapsing them into the official Investor and Exporter window.
World Bank Country Director, Dr. Subham Chadhuri, said Tuesday during an event organized by the financial organization to assess Nigeria’s economy in the last six months, that the policy, though painful, remains key to rebuilding the economy of the nation.
The impact of the decisions was immediately felt across the country as petrol prices were adjusted upward – rising as much as N557 per liter. The cost of goods and services also went up to reflect the floated forex market rates.
However, the World Bank indicates that the gain in unifying the exchange rates outweighs the pains in the long term. Alex Seinhart, a senior economist at the World Bank said the previous foreign exchange management approach impeded investment and growth, contributed to inflation, and undermined the efficacy of the monetary and fiscal policies.
Given the inevitable economic hardship that follows the policies, Chadhuri said the government needs to put measures that will reduce the impact on the people going forward in place.
Already, the World Bank has approved a fresh $800 million loan to Nigeria. The loan is aimed at cushioning the effects of the policies through the provision of palliatives to poor Nigerians.
The World Bank earlier this month explained that the $800 million loan request was approved in December 2021, but was withheld due to former President Muhammadu Buhari’s lack of political will to remove the subsidy.
Chadhuri clarified that the $800 million was not a grant but a loan, putting the World Bank’s concessionary funding to Nigeria at over ten billion dollars.
The Nigerian government is working with Civil Society Organizations to chart a framework for sustainable workers’ salary review.
Nigerians have relied on the fuel subsidy to buy some petroleum products at cheaper rates. However, the cost of subsidizing the fuel has risen to trillions of naira over the years, prompting calls for the subsidy removal.
According to Seinart, the elimination of the fuel subsidy is anticipated to result in fiscal gains of approximately 3.9 trillion Naira in 2023.
Furthermore, it is projected that these gains will accumulate to more than 21 trillion Naira between 2023 and 2025. But the economist also forecasts that the removal of the fuel subsidy is likely to contribute to an initial rise in inflation in the coming months, followed by a subsequent period of disinflation in the medium term.