Turning the corner

Nigeria’s economic revitalisation, as declared by President Bola Ahmed Tinubu on his inauguration day, marked a pivotal shift with the bold removal of fuel subsidies and the adoption of a unified foreign exchange (FX) rate – an aggressive approach to turning the corner.

The metaphorical expression “turning the corner” symbolises the shift from reform to results, as Nigerians await outcomes with bated breath. Unfortunately, these reforms bring painful adjustments, notably the removal of gasoline subsidies, resulting in a staggering 235 percent increase in the retail price of gasoline from N185 to N620.

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This surge has a cascading impact, leading to increased transport fares and persistent food inflation. Data from the Nigeria Bureau of Statistics (NBS) over the past seven months post-subsidy removal illustrates a steady rise in food inflation rates, revealing the unintended consequences of what was initially perceived as a sound policy. Analysis of BusinessDay shown:

The chart vividly illustrates the relentless surge in the cost of food in Nigeria, pushing vulnerable Nigerians over the edge.

A report from the National Bureau of Statistics (NBS) shows that the escalation in food inflation can be attributed to spikes in the prices of essentials such as bread, cereals, oil, fat, potatoes, yams, fish, meat, fruits, milk, cheese, and eggs.

Digging deeper into the data, the NBS reports that on a month-on-month basis, the food inflation rate in December 2023 reached 2.72%, marking a 0.30% increase from the preceding month’s rate of 2.42%. This statistical revelation underscores the ongoing challenges faced by the populace as the food crisis persists.

The metaphorical expression “turning the corner” symbolises the shift from reform to results, as Nigerians await outcomes with bated breath.

BusinessDay’s detailed report highlights the profound impact of rising food inflation, pushing many Nigerians into financial crises, elevating their cost of living, and straining their livelihoods.

NBS data reveals that out of 133 million people classified as multidimensionally poor, over 71 million are extremely poor, grappling with subsisting on less than $1.90 per day – aligning with the concept of a “vicious circle of poverty.”

Basit Shuaib, an economist, offers valuable insights, remarking, “I think it has contributed to the increase in the cost of living in Nigeria considering the face value of it. It has a primary effect on the cost of fuel and has affected the cost of transportation. Transportation is one of the most crucial aspects of people’s lives, involving both movement and trade.”

Additionally, a commentator on VOA reflects on the removal of the fuel subsidy, stating, “If he didn’t remove the fuel subsidy and you’re spending over 100 percent of your total revenue to support a social service, what do you think would’ve happened to the economy?”

“It would’ve collapsed. You won’t be talking about inflation anymore; you’ll be talking about hyperinflation. Sometimes economic development is a difficult thing, sometimes we need to pay some very hard prices.”

In addition, the adoption of a unified FX rate signals the intention of President Bola Ahmed Tinubu’s administration to allow market forces to determine the value of the naira. This policy will bridge the gap between the official rate and the parallel market rate thereby mitigating the rent-seeking act being practised in the sector.

The conversation reports that, in the past, there were multiple exchange rates for the currency. The International Monetary Fund has repeatedly called on Nigeria to end this. The huge gap between the official and unofficial rates caused severe shortages of foreign exchange by discouraging supply. So, liberalising the currency is good news.

But unfortunately, this is not the first time Nigeria will be liberalising the foreign exchange market. The first was in 1986; further efforts followed in 1995, 1999 and 2016. All were marred by various impediments.

There are three key problems that afflict Nigeria’s foreign exchange market the lack of transparency, foreign exchange shortages and volatility- The conversation.

Thus, despite the efforts of this current administration to mitigate the economic consequences of the huge gap between official and unofficial rates, the gaps still persist and the value of naira depreciates further.

BusinessDay findings reveal that the adoption of a unified exchange rate saw Naira’s official rate at 756.24 against $1 as at June 30th after the closure of the market, according to the FMDQ report. While there was not really a marginal difference between the official rate and parallel market rate.

7-month into the announcement, the implication gave birth to a continuum fall of Naira value, as the naira depreciated against the US dollar, valued at N1413.94 at official and N1470 at the parallel market as at the time this report was written. Naira falls approximately by 86.96 percent in the official market and by about 94.38 percent in the parallel market.

Regrettably, renowned blue-chip firms like P&G and GlaxoSmithKline have exited the country, and the factors contributing to their departure can be traced back to the existing economic instability.

This instability is manifested in soaring inflation rates, reaching double digits (28.92 percent), and the volatility of the exchange rate, with potential repercussions on trade balances and foreign direct investment inflows. The uncertainty surrounding fiscal and monetary policies further exacerbates the challenges faced by businesses operating in Nigeria.

Adding to the concerns, the Medium-Term Expenditure Framework (MTEF) projects a substantial increase in debt servicing for the years 2024 to 2026, estimated at 8.25 trillion, 9.3 trillion, and 11.1 trillion respectively, assuming an exchange rate of N750 per $1.

However, the current exchange rate stands at N1413, reflecting a variance of N662.87. This discrepancy implies that there might be a need for a supplementary budget to fulfil the obligations of debt servicing, potentially leading to another financial crisis.

The implications of these economic challenges extend beyond financial considerations; they cast a shadow over the future of the next generation. The threat to economic stability and the sustainability of financial obligations necessitates urgent and strategic interventions to avert a looming crisis.

The World Bank, through Shubham Chaudhuri, its Country Director for Nigeria, emphasised the need for clarity on oil revenues, especially regarding the Nigerian National Petroleum Company Limited (NNPCL). Chaudhuri stated, “Turning the corner” is essential, believing transparency will go a long way.

Chaudhuri, noted that oil production in Nigeria had been declining, adding that it was a security issue among other things that needed to be addressed. Chaudhuri explained that between N300 billion –N400 billion was expended on fuel subsidy monthly before the removal of subsidy in June, adding that the expectation was that the NNPCL should have been paying such an amount to the Federation Account, regretting that this has not been the case.

He continued, “The basic point I think our team has been trying to understand is premium motor spirit (PMS) subsidies earlier were costing about N400 billion per month, and now, are those revenues now coming into the federation account? or has oil production dropped to the point where those N400 billion in revenues have gone? and it’s really about helping us. “

But not just as the Nigerian public understands because a lot of the Nigerian public view the removal of PMS subsidies as well, we’re going through this pain, is there a reward from that? I think that’s the main thing, and the NNPCL can just clarify what exactly is happening with the funds coming. That would really help.”

In furtherance, Chaudhuri added, turning the corner truly goes with ensuring coordinated fiscal and monetary policy actions in the short to medium term. “Continued reform implementation can ensure that Nigeria benefits from the difficult adjustments underway. This includes ensuring that improved oil revenues following the sharply increased PMS price accrue to the Federation.

Wale Edun, the Minister of Finance, stressed the importance of auditing NNPCL’s accounts for effective revenue contribution to the government. Lamido Sanusi, former CBN governor criticised NNPC as opaque, asking, “Where are the dollars?” post-subsidy removal.

Olumide Ariybi, a public sector analyst, stated, “Through transparency and periodic reporting of oil revenue and other FX public generation by public sector agencies is crucial for the economic trajectory in Nigeria.” He added that with this, the pains can be turned into gains.

“Now is the time for the Nigerian government to focus on solving urgent challenges rather than playing politics. We must address the reality and find practical solutions to the shortage of dollars, especially in sectors like NNPCL, where transparency is lacking in foreign currency generation. NNPCL significantly contributes to our country’s foreign currency reserves.

If President Tinubu politicised the lack of transparency in these sectors, everyone would be affected, with a more significant impact on the less privileged. This highlights the need for openness and responsibility in managing these critical financial matters to ensure the well-being of all. This perspective is shared by a group of economists, investment analysts, and professionals in their discussions.”