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World Bank, IMF, others back Tinubu’s economic reforms

Between Tinubu’s blame game and governance

The World Bank and the International Monetary Fund (IMF) have lauded President Bola Tinubu’s decision to carry out what they termed as bold reforms.

The World Bank estimates that Nigeria will save N3.9 trillion in 2023, equivalent to 1.6 percent of GDP, following petrol subsidy removal and FX unification move.

“The recently undertaken PMS subsidy an FX reforms are historic, NGN3.9 trillion in savings in 2023 alone, stops Nigeria from going over a fiscal cliff and sets the stage for a new, upward Investment, growth, and development trajectory,” Alex Sienaert, chief economist at World Bank Nigeria, said on Tuesday in Abuja at the launch of the Nigeria Development Update for June 2023.

“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,” the report said.

Speaking about GDP performance in the first quarter of 2023, he said that increased poverty, accelerated inflation, severe FX distortions characterised this period, noting that the naira redesign caused a cash crunch, intensifying the drag caused by external conditions and other domestic policies.

He added that in contrast to the global trend, Nigeria’s inflation surged in first half of 2023 as policy rate increases were ineffective in controlling Inflation because the overall policy stance stayed loose.

“The naira demonetisation reduced GDP growth in manufacturing and services and did not improve either inflation or the FX parallel market rate premium; Inflation pushed an estimated 4 million more Nigerians into poverty in the first 5 months of 2023; as average prices of locally produced staples Increased faster than average inflation,” he said.

Sienaert said that Nigeria’s debt to GDP ratio is estimated to hit 46 percent, saying the federal government will be paying off subsidy arrears to the Nigerian National Petroleum Company Limited, in addition to other debts that must be serviced.

He said with the recent reforms, public external debt is expected to increase due to valuation effects but will be on a stable path.

He added that if there are no buffers to cushion the impact of these reforms, over 7.1 million Nigerians will be further thrown into the poverty net on the back of these reforms and rising inflation.

He advised that the country can leverage these reforms to bend its development path upwards and also optimise its full potential, highlighting the need to provide some timely, temporary and targeted assistance.

He said the subsidy removal is preventing further deterioration, adding that savings from the subsidy can also be used for other pro-poor service delivery such as health, education and infrastructure.

“The current coverage of social protection programs is low at 19 percent of the population; Nigeria will continue to spend less than $20 per person monthly,” he said.

Sienaert said temporary cash transfers to help shield poor and vulnerable households can be done, adding that investments in other social benefits like human capital investment, education outcomes and health outcomes are necessary.

Wale Edun, special adviser to President Tinubu on monetary policies, said that other than the $800 million loan from the World Bank, there may be a need for additional loans to ensure sustainability of the bold reforms. He said the government does not have enough money to spend.

He said there are discussions between the chief of staff to the president and stakeholders including unions to discuss interventions that will ameliorate these effects, especially for poor and most vulnerable people.

“And that involves using the World Bank’s financial muscle to have a loan which will be used as direct cash transfers for the poor and it is a policy recommendation that is pretty much been accepted; there are other elements in the medium and long term that will be put in place to deal with the immediate spike in inflation and ameliorate the initial pain,” he said.

He said the direct cash transfers was opted for because research has shown that it can actually reduce poverty.

Some other options considered include the cost of governance, using compressed natural gas for cheaper energy source, mass transit options, housing and education. According to Edun, there is a fiscal dividend which state governors are beneficiaries of to the tune of about N4 trillion cash dividend.

“What has been identified right now and is being processed is one source of funding; however, like Oliver Twist, we are pointing out that it is not enough and there should be additional sources of funding, which we are exploring,” he said.

“We have identified some sources of funding but we are going after many more because having taken bold reforms, the rewards should come; the free markets, the financial markets and international investors around the world have rewarded both steps taken by Nigeria,” he added.

Speaking about loans from the Central Bank of Nigeria, Edun said there are regulations that stipulate how much the government can get from the financial regulator, which the administration will abide to while maintaining the bank’s independence.

Shubham Chaudhuri, country director for World Bank for Nigeria, said the bold reforms require some form of buffers to cushion the impact of its consequences over the next few months to ensure that the trust of Nigerians is rebuilt.

“There’s also need to restore the confidence of investors, which will be challenging; World Bank is here to provide whatever support in terms of ideas, potential solutions, and additional concessional financing,” he said.

Chaudhuri revealed that the $800 million loan was approved by the board in December 2021 as there was a sense that the country was ready to embark on the bold reforms.

Ari Aisen, resident representative of the IMF in Nigeria, said the reforms were long overdue.

“It is natural that these policies have some side effects; we have seen inflation already high and it is likely to increase further, and in our view it will be difficult to tailor macroeconomic policies to reduce inflation and achieve durable macro stability. The central bank has a key role in stabilising the economy and it will require much tighter monetary position and stance than we currently see,” he said.

He added that the IMF will continue to support in terms of capacity building, policy advice and financing as needed.

Commenting on the option of direct cash transfers as a buffer, Alex Otti, governor of Abia State, said there should be a sustainable way of ensuring that the targeted people are the ones who benefit from the palliative to avoid a repetition of what happened during the COVID-19 pandemic.

Read also: Financial inclusion: IMF outlines five priority policy options for Nigeria

“The N4 trillion that will be saved from subsidy removal would impact the federal allocation directly; so how do we use that money to support those who need it?”

Seyi Makinde, governor of Oyo State, described the reforms as a step in the right direction, saying: “Social protection programs must be taken with systemic approach towards long-term objectives.”

Aigboje Aig-Imoukhuede, founder and chairman of Coronation Group, said the private sector as a stakeholder has a role to play. He, however, said investors want price stability and a situation where they can plan and understand that expected returns will be realised.

“The key is unleashing the private sector, giving them the right policies and the enabling environment to thrive; when the fiscal and monetary policies are in harmony, the private sector becomes a fantastic orchestra in the hands of a conductor government,” he said.