The “potential fiscal timebomb” the World Bank warned Nigeria of six months ago has become a reality, with reforms urgently needed to fix the government’s ailing finances, according to the multilateral lender.
The World Bank, in its latest Nigeria Development Update, outlines measures the country needs to take to defuse the timebomb, including petrol subsidy removal and restructuring of the federal government’s debt stock from the central bank.
Nigeria has seen its public debt grow steadily to levels that have left many worried as government revenues remain low despite the rally in the price of crude oil, the lifeblood of Africa’s biggest economy.
Its public debt stock increased to N44.06 trillion in the third quarter of this year from N39.56 trillion at the end of last year, according to the Debt Management Office. This does not include the debt owed by the federal government to the Central Bank of Nigeria (CBN) which surged to N23.77 trillion in October from N17.46 trillion at the end of last year, data from the CBN show.
Read also: ‘Fiscal time bomb’: Petrol subsidy hits N2.1trn
The World Bank said the government has resorted increasingly to costly CBN financing, which in turn has increased interest costs, causing severe fiscal and debt challenges.
“Multiple exchange rates, trade restrictions, and CBN financing of the public deficit are stoking inflation, creating large economic distortions, and severely undermining the business environment and the appetite to invest in Nigeria,” it said.
It said these policies have compounded longstanding weaknesses in revenue mobilisation, foreign investment, human capital development, infrastructure investment, and governance.
During 2020 and 2021, when oil prices were much lower, the government missed an opportunity to address one of the primary sources of fiscal vulnerability by choosing to maintain the subsidy for petrol, according to the report.
“Due to the petrol subsidy and low oil production, Nigeria now faces a fiscal timebomb,” the Bretton Woods institution said.
The federal government, which had initially budgeted to spend N443 billion on petrol subsidy between January and June, got the approval of the National Assembly in April to subsidise the product to the tune of N4 trillion this year.
The World Bank expects the petrol subsidy cost incurred this year to be N4.8 trillion, or 2.3 percent of projected GDP.
“Nigeria’s petrol subsidy imposes a massive and unsustainable fiscal burden, and an even greater opportunity cost,” it said. “By maintaining an inefficient price control on PMS, Nigeria is forgoing productivity-enhancing investments in essential public goods and services.”
Defusing the timebomb
The World Bank said that amid heightened risks, the government has maintained a “business-as-usual” policy stance that does not promote faster economic growth and job creation.
On how to defuse the fiscal timebomb, it said more reforms to spend better and mobilise domestic revenues “are urgently needed to strengthen Nigeria’s fiscal outlook”.
“The government has announced its intention to remove the petrol subsidy in 2023, which will be a welcome, critical reform to improve the allocative efficiency of spending and secure fiscal sustainability,” it said.
“Although this will support net oil revenues from 2023 onward, oil prices are not expected to increase in the base case, and the inability to significantly increase oil production will keep oil revenues stagnant.”
The report said undertaking critical reforms can significantly improve the medium-term fiscal outlook.
“Removing the petrol subsidy, strengthening tax reforms (gain of about 0.3 of GDP per year between 2023 and 2027), restructuring Ways and Means financing (savings of about 0.6 percent of GDP per year between 2023 and 2027), improving oil production to OPEC quota levels (1.6 percent of GDP between 2023 and 2027 per year), and addressing other macroeconomic policy reform priorities (especially in FX and inflation management), would allow for the fiscal deficit to narrow significantly over the medium term,” it said.
The World Bank said in such a reform scenario, the fiscal deficit would be around 4.7 percent of GDP in 2023.
This would still be higher than the legal limit of 3 percent of GDP set in the Fiscal Responsibility Act of 2007, but it would help improve fiscal sustainability and begin to rebuild space for development spending by reducing the debt stock to around 37.4 percent of GDP by 2027, and interest payments to around 42 percent of revenues, it said.
“Without structural reforms, revenues are expected to remain low over the medium term while expenditure pressures are projected to increase due to a surge in interest payments. Debt will continue to rise and the dependence on short-term financing is a cause for concern,” the World Bank said.
The International Monetary Fund projected last month despite higher non-oil revenues relative to 2021, the general government fiscal deficit would widen to 6.2 percent of GDP in 2022, mainly due to fuel subsidy costs.
“Public finance is under stress with elevated fiscal deficits, high debt servicing costs and public debt projected to increase over the medium term,” it said after a staff visit to the country.
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