The World Bank on Tuesday joined the International Monetary Fund (IMF) to call on Nigeria to discontinue the costly fuel subsidy within the next three -to-six months, improve exchange rate management and speed up other reforms to accelerate growth.
The World Bank said the petrol subsidy has cost Nigeria N864 billion in the first nine months of 2021, up from N107 billion in 2020 and the highest deduction in six years, as oil prices increase the cost of imports.
Fiscal pressures have increased for Nigeria as higher petrol subsidy costs cut revenues, the bank said in a report, urging bold reforms to boost income.
“The Premium Motor Spirit (PMS) subsidy is eroding Nigeria’s limited fiscal space to provide essential services,” it said. “Aggressive reform effort could contribute more to growth than a sustained period of high oil prices.”
Nigeria has fallen behind on implementing reforms started at the height of the COVID-19 pandemic, the bank said, adding that growth rates will lag those of other emerging economies, unless momentum is restored.
The World Bank revised Nigeria’s GDP projection to 2.4% this year, from 1.8% earlier, after the economy grew just over 4% in the third quarter, its fourth consecutive quarterly rise, following the COVID-19-induced recession in 2020.
The World Bank said the economy’s prospects have improved, but the recovery is fragile and action is needed to reduce poverty arising from high inflation.
“Urgent priorities for the next three to six months include reducing inflation, improving exchange-rate management … eliminating the PMS subsidy … and improving infrastructure,” the report said.
The bank called for tighter monetary policy to attract investment, saying the naira’s black market premium was fuelling inflation, as was the central bank’s financing of the government’s deficit.
IMF had on Friday Nigeria to remove fuel subsidies and move to a market based pricing mechanism by early next year in accordance with the recently passed Petroleum Industry Act (PIA).
IMF in its Staff Concluding Statement of the 2021 Article IV Mission, said in addition, the country should not delay the implementation of cost-reflective electricity tariffs as of January 2022.
Nigeria’s finance minister, Zainab Ahmed said the government planned to remove the subsidy by the middle of next year and replace it with N5,000 monthly payments to the poorest families.
“The subsidies regime in the (petroleum) sector remains unsustainable and economically disingenuous,” Ahmed said during the launch of the report.
Ahmed, who spoke on Tuesday at the launch of the World Bank Nigeria Development Update (NDU), said the final number of beneficiaries will depend on the resources available after the removal of the fuel subsidy.
“The subsidies regime in the [oil] sector remains unsustainable and economically disingenuous,” she said.
“Ahead of the target date of mid-2022 for the complete elimination of fuel subsidies, we are working with our partners on measures to cushion potential negative impact of the removal of the subsidies on the most vulnerable at the bottom 40% of the population.