The new administration has initiated critical reforms to address macroeconomic imbalances. This window of opportunity could have a transformative impact on the lives of millions of Nigerians and establish a solid foundation for sustainable and inclusive growth. The removal of the petrol subsidy and foreign exchange (FX) management reforms are crucial measures to begin to rebuild fiscal space and restore macroeconomic stability, and the opportunity should be seized to take further, necessary policy reform steps, says the latest Nigeria Development Update (NDU). The June 2023 edition of the NDU, titled "Seizing the Opportunity", 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 the first part of 2023, Nigeria's economic growth weakened, and real gross domestic product (GDP) growth fell from 3.3% in 2022 to 2.4% year-on-year (y-o-y) in Q1 2023. The challenging global economic context has put pressure on Nigeria's economy. However, domestic policies play the major role in determining Nigeria's economic performance and resilience to further external shocks. The previous mix of fiscal, monetary, and exchange rate policies, including the naira redesign program, did not deliver the desired improvements in growth, inflation, and economic resilience. The new government has recognized the need to chart a new course and has already made a start on critical reforms, such as the elimination of the petrol subsidy and reforms in the FX market.
With the petrol subsidy removal, the government is projected to achieve fiscal savings of approximately 2 trillion naira in 2023, equivalent to 0.9% of GDP. These savings are expected to reach over 11 trillion naira by the end of 2025. However, compensating transfers will be essential to help shield the most vulnerable Nigerian households from the initial price impacts of the subsidy reform, as without compensation, many households could be pushed into poverty by higher petrol prices and have to resort to coping mechanisms with long-term adverse consequences. Similarly, the move to harmonize the FX windows will help to improve the efficiency of the FX market, unlock private investment, and reduce inflationary pressures, but it is crucial to complete this important reform by removing FX restrictions, clearly communicating how the new FX regime will operate, and implementing supportive monetary and fiscal policies.
"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.
