Failure to address petrol pricing, low non-oil revenues may hamper Nigeria’s reforms – W’Bank

by Sami Tunji

The World Bank has stressed the need for Nigeria to fix issues with fuel prices and improve non-oil revenue. It noted that if these issues are not fixed, Nigeria might lose the benefits of its economic reforms and face increased financial problems.

In its Macro Poverty Outlook for Nigeria for April 2024, the Washington-based lender predicts that Nigeria’s economy will grow by averagely 3.5% annually from 2024 to 2026. This growth is faster than the increase in the population. However, this growth depends on the country continuing its current economic reforms.

The World Bank expects the non-oil parts of the economy to grow slowly. The oil sector should become more stable with a slight increase in production and a decrease in prices. However, to see better growth rates, Nigeria needs to make more changes in its economy.

Inflation to remain high in 2024

The report mentions that inflation, or the rise in prices, will stay high at 24.8% in 2024 but should slowly decrease to 15.1% by 2026. This decrease will come from stronger rules on money and stabilizing the exchange rate. But, during this time, more people might fall into poverty, stabilizing only by 2026.

The report read:

• “The continuation of an ambitious reform program centered around macroeconomic stabilization is essential for Nigeria to reap the reforms’ benefits. The economy is projected to grow by 3.5 percent on average between 2024 and 2026, 0.9 pp higher than the population growth.
• “The dissipation of the reforms’ initial shock and the stabilization of macroeconomic conditions will instill a sustained but still slow growth in the non-oil economy, while the oil sector is expected to stabilize with some recovery in production and slightly lower prices. Higher growth rates will require structural reforms.
• “Inflation will remain elevated at 24.8 percent on average in 2024 but is expected to progressively moderate to 15.1 percent by 2026 on the back of monetary policy tightening and exchange rate stabilization. As a result, poverty rates are expected to increase in 2024 and 2025 before stabilizing in 2026.
• “Exchange rate liberalization is expected to contribute to both fiscal and external balances. Fiscal pressure is expected to moderate over the outlook due to higher dollar-denominated revenues and improved non-oil revenues.”

Debt may gulp 97% of Nigeria’s 2024 revenue

The bank further noted that Nigeria should see less pressure from debts because it will earn more money in dollars and improve other revenues. The amount of money needed for paying debts should drop from 97% of revenues in 2024 to 61% by 2026.

The World Bank suggests that changing how exchange rates are managed will help both the government’s finances and the country’s trade balance. The trade balance should show a surplus, meaning the country will earn more from its exports than it spends on imports. This could help attract more foreign investment if the economy stays stable.

The risk of weak policies

The World Bank’s report emphasizes the need for Nigeria to keep up with its economic reforms to ensure a stable and growing economy. It warned that if Nigeria stops its reforms or goes back on changes, it could face more economic problems. Weak policies on money might not control inflation well or attract foreign money, leading to more financial instability.

Not fixing fuel prices and not increasing other revenues could also hurt the country’s financial health. Other problems like growing insecurity, bad weather, and people unhappy with high prices could harm Nigeria’s economic recovery.

The report concluded:

• “The fiscal deficit is expected to drop to 4.3 percent of GDP on average between 2024-2026, and debt servicing to fall from 97 percent of revenues in 2024 to 61 percent of revenue in 2026. Exchange rate depreciation will also reduce imports, including gasoline, leading to a CAB of 1.2 percent of GDP on average between 2024-2026. Foreign investments will follow macroeconomic stabilization.
• “Risks to Nigeria’s outlook are substantial, especially if reforms lose momentum or are reversed. Relatively weak monetary policy tightening would be insufficient to rein in inflation and attract foreign capital inflows, raising the risks of an inflation-exchange rate depreciation spiral.
• “Failure to address imbalances in petrol pricing and to raise non-oil revenues would jeopardize the reforms’ revenue gains, which, in turn, would lead to continued high fiscal deficit and risks of its monetization. Rising insecurity, adverse climate shocks, and popular discontent with inflation would dent economic recovery.”

More Insights

• The Chief Executive Officer (CEO) of Rainoil Limited, Gabriel Ogbechie, recently claimed that the federal government has resumed the payment of the controversial fuel subsidy following the devaluation of the Naira in the foreign exchange market. He noted that with Nigeria’s daily fuel usage at 40 million liters and the foreign exchange rate at N1,300, the government’s subsidy per liter of fuel falls between N400 and N500, culminating in a monthly total of approximately N600 billion.
• The issue of fuel subsidy has been a contentious topic, with several stakeholders maintaining that the federal government has restarted the subsidy on petrol since its removal on May 29, 2023.
• Earlier, the former governor of Kaduna State, Nasir El Rufai, said the federal government is spending more on petrol subsidy than before.
• However, the federal government through its Ministry of Petroleum Resources and the Nigerian National Petroleum Company Limited (NNPCL) countered that the various claims by different individuals and groups on the alleged return of subsidy on Premium Motor Spirit, popularly called petrol, were wrong. The government also challenged those who make this argument to provide evidence to justify their allegations, stressing that since President Bola Tinubu had declared the end of subsidy on petrol, the situation remains so.
• Regarding non-oil revenue, the International Monetary Fund (IMF) said it is problematic that tax revenue to GDP in Nigeria is only 8-9% when it should be a lot higher so that more resources can be spent on infrastructures.
• The Minister of Finance and Coordinating Minister of the Economy, Wale Edun, recently said that approximately 90% of the tax revenue going into the government treasury originates from just nine tax heads.
• To address the concerns around non-oil sector revenue, the federal government plans to introduce an emergency economic bill to boosts its revenue from the non-oil sector in Nigeria.