New World Bank Report Calls for ‘Business Unusual’ approach to addressing Inflation, Foreign Exchange Management, and Fiscal Pressures
ABUJA — The Nigerian government took bold measures to mitigate the effects of the COVID-19 pandemic in 2020 through bold reforms, but the momentum of the reform agenda has waned, undermining Nigeria’s long-term growth prospects, highlights the latest World Bank Nigeria Development Update (NDU).
The report, titled “Time for Business Unusual,” says that the insufficient supply of foreign exchange (FX) issues related to the predictability of exchange rate management, the unsustainable subsidy on premium motor spirit (PMS), burdensome trade restrictions, and the sizeable fiscal deficit financing by the Central Bank of Nigeria (CBN) are undermining the business environment, compounding underlying constraints on domestic revenue mobilization, foreign investment, human capital development, and the delivery of public services.
The report indicates that despite a strong initial recovery and resurgent global oil prices, Nigeria’s pre-crisis challenges threaten the post-crisis recovery, highlighting the need to depart from business-as-usual policies.
“Even though Nigeria’s economy exited a pandemic-induced recession, several challenges persist including double-digit inflation, declining incomes, and rising insecurity. While the government took bold policy measures to mitigate the impacts of the COVID-19 crisis, the reform momentum has slowed which hinders Nigeria’s ability to reach its growth potential,” said Shubham Chaudhuri, World Bank Country Director for Nigeria.
The report notes mounting fiscal pressures due to lower-than-expected revenues in 2021 and the rising cost of the premium motor spirit (PMS) subsidy. In contrast to past periods of high oil prices, this time the government has not been able to fully benefit from the oil boom because oil production has fallen below Nigeria’s estimated capacity and the OPEC+ quota due in part to rising insecurity and the higher cost of the PMS subsidy.
“In 2022 the Federal government plans to spend about 3,000 naira (US$7) per person for health, while the cost of the PMS subsidy for next year could reach 13,000 naira (US$32) per person. Not only is the PMS subsidy costly, but it mainly benefits richer households. Nigeria has the opportunity to establish a “compact” with citizens that eliminates the subsidy and uses the savings to provide targeted cash transfers to lower-income-households, invest in job-creating programs, and improve its fiscal position,” said Marco Hernandez, World Bank Lead Economist for Nigeria and co-author of the report.
According to the Nigeria Development Update, under a business-as-usual scenario, GDP per capita will continue to decline, but reforms could accelerate growth. Thus, Nigeria faces a critical choice: it can continue to pursue a business-as-usual policy approach while its economy and job market deteriorates, or it can undertake bold measures that put Nigeria on a robust and sustainable long-run growth trajectory.
The Report highlights urgent policy priorities that can be implemented over the next 3 to 6 months in four key areas: (1) eliminating the PMS subsidy while protecting poor and vulnerable households from any inflationary impact; (2) reducing inflation through a coordinated mix of exchange rate, trade, monetary and fiscal policies; (3) catalyzing private investment by enhancing foreign exchange management, easing trade restrictions, and fostering a better business environment; and (4) addressing fiscal pressures through enhanced domestic revenue mobilization and reducing the reliance on CBN deficit financing.
In addition to assessing Nigeria’s economic situation, this edition of the NDU also discusses labor market challenges for the youth, opportunities to invest in digital infrastructure, and how to expand access to finance for small and medium enterprises.