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The June 2023 edition of the Nigeria Development Update (NDU) by the World Bank provides significant macro-fiscal policy recommendations aimed at revitalizing the Nigerian economy.
Since President Bola Tinubu took office, several reforms, including the removal of fuel subsidies and the unification of the foreign exchange rate, have been implemented. While these measures are crucial to rebuilding fiscal space and restoring macroeconomic stability, they have also had far-reaching effects on the Nigerian economy. The World Bank’s report emphasizes the importance of these reforms and further highlights key macro-fiscal policy recommendations to foster economic growth in the second half of the year.
With the subsidy removal, the Nigerian government is projected to achieve fiscal savings of approximately N2 trillion in 2023, equivalent to 0.9% of GDP, and this figure is expected to rise to over N11 trillion by the end of 2025. However, the policy has led to higher fuel prices and hardships for citizens. To mitigate the impact of the subsidy reforms on the public, the World Bank advises the government to provide immediate cash compensation to Nigerian households. In response to this recommendation, President Tinubu has sought the National Assembly’s approval for N500 billion in palliatives.
To strengthen fiscal space and build on the PMS reform, the World Bank proposes the removal of tax exemptions on petrol products, suggesting that Nigeria should start levying taxes on petrol. Additionally, the report advocates for improvements in tax administration to ensure the collection of newly introduced excises on telecommunication, single-use plastics, and high-polluting vehicles. President Tinubu has recently established a committee on fiscal policy and tax reforms to address these tax-related issues.
Regarding foreign exchange policy reform, the World Bank suggests lifting the restrictions on the list of 43 items. Despite the unification of forex windows into the Investors & Exporters (I&E) window, importers and exporters still face limitations in obtaining FX from official windows for these 43 items. Experts argue that this restriction contradicts the idea of exchange rate unification and creates demand in the parallel market. The World Bank urges the CBN and President Tinubu to consider eliminating this restriction to achieve true exchange rate unification.
Effective communication and clarity about the new FX policy are also emphasized in the NDU report. The World Bank encourages a unified, market-reflective, and transparently-determined exchange rate. The acting CBN governor recently expressed the bank’s commitment to fostering FX market efficiency and easing the demand for FX.
In response to surging headline inflation, the World Bank advises the CBN to continue reducing its subsidised lending to medium and large firms and end government borrowing. The Nigerian Senate’s decision to raise the federal government’s borrowing threshold from the CBN raised concerns over rising debt. The World Bank stresses the importance of prudent fiscal management to mitigate inflationary pressures.
Implementing the World Bank’s recommendations can pave the way for a stronger and more stable Nigerian economy, promoting sustainable growth and prosperity.
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