WED, JUNE 28 2023-theGBJournal | The Federal Government is projected to achieve estimated fiscal gains of about N3.9 trillion in 2023, equivalent to 1.6 percent of GDP With the removal of the petrol subsidy, and the implementation of FX reforms,
”These gains are expected to reach over N21 trillion between 2023 and 2025, compared with a scenario in which the fuel subsidy had persisted,” says the World Bank in its latest Nigeria Development update.
The Bank notes that fiscal risks remain elevated, as the Government’s subsidy arrears to the NNPC Limited are estimated at N2.8 trillion.
”If these arrears are promptly settled, the fiscal savings for 2023 would be significant, resulting in a fiscal deficit increase of around 0.8 percentage points of GDP, reaching 5.9 percent. Conversely, failure to sufficiently cover the arrears could potentially impact repairs and maintenance, security, and joint-venture cash calls, which could adversely affect oil production and revenue generation.”
The World Bank in the Update highlighted the impact of inflation, noting first, that the removal of is anticipated to cause a temporary increase in inflation in the upcoming months before contributing to disinflation in the medium term.
Secondly, the price increases resulting from the subsidy removal will have a one-time impact on prices, primarily affecting petrol purchases for transportation, power generation, and certain services.
Headline inflation is expected to rise from 18.8 percent in 2022 to 25 percent in 2023. However, by Q1 of 2024, the subsidy removal will start to have a disinflationary effect, meaning that it will alleviate inflationary pressures despite higher petrol prices.
”This is because the subsidy removal creates additional fiscal space and reduces reliance on financing from the CBN, curbing growth of the money supply.”
To limit the risk of so-called secondround effects, where one-off price increases trigger more generalized inflation including through wage-price spirals, the Bank said it will be important to adopt macro-fiscal policy settings that are conducive to price stability.
”Compensating transfers will be essential in helping to shield Nigerian households from the initial price impacts of the subsidy reform.
Without compensation, many households could be pushed into poverty by higher petrol prices and forced to resort to coping mechanisms with long-term adverse consequences, such as not sending children to school, or not going to health facilities to seek preventative healthcare.
In addition to providing immediate cash compensation, the Government could also elaborate on the use of the freed-up resources in a new compact with the Nigerian people, outlining support in the immediate as well as medium and long term, at the federal, state, and local government levels.
The recent proposal to implement a set of measures to alleviate the impact of the subsidy removal, led by the National Economic Council, should clearly identify priority areas for government investment and effectively communicate these to the public to garner support.
A public commitment to identifying development (including infrastructure) spending priorities, pro-poor service delivery, and a role for social protection programs to help households cope with shocks could guide such a compact.
The compact should also be anchored in a clear commitment to fiscal realism, as a large expansion in spending could have fiscal implications, potentially leading to increased fiscal deficits over the medium-term.”
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