According to the World Bank, if the Nigerian government doesn’t compensate or provide support, approximately 7.1 million impoverished Nigerians could experience further impoverishment following the removal of fuel subsidies.
A Washington-based institution has projected that inflation could reach 25 percent in 2023 due to the elimination of petrol subsidies. This projection was published in the June 2023 edition of the Nigeria Development Update.
In his inaugural speech on May 29, President Bola Tinubu announced the removal of fuel subsidies in Nigeria due to budgetary concerns. Consequently, fuel prices skyrocketed, leading to widespread panic-buying. Some bus companies were unable to refuel their vehicles, leaving many people stranded.
However, the Washington-based bank indicated that while a significant increase in inflation is expected in 2023, headline inflation is projected to decline by the first quarter of 2024.
The report explains, “The removal of petrol subsidies is expected to cause a temporary inflationary increase in the coming months, followed by a disinflationary effect in the medium term.
The price hikes resulting from the subsidy removal will primarily impact petrol purchases for transportation, power generation, and specific services.”
It further states that headline inflation is anticipated to rise from 18.8 percent in 2022 to 25 percent in 2023. Nevertheless, by Q1 2024, the subsidy removal will begin to have a disinflationary impact, mitigating inflationary pressures despite higher petrol prices.
This is attributed to the creation of additional fiscal space and reduced dependence on financing from the Central Bank of Nigeria (CBN), which helps control the growth of the money supply.
To minimize the risk of second-round effects, where initial price increases trigger broader inflation, including wage-price spirals, the report emphasizes the need for macro-fiscal policies that promote price stability.
Recently, the National Bureau of Statistics disclosed that inflation in Nigeria reached 22.41 percent in May, the highest in nearly 19 years.
The World Bank report also highlights that consumer price inflation in Nigeria has surged and is currently among the highest globally, indicating the urgency of reform efforts to address the country’s fiscal imbalance.
The report acknowledges that the CBN implemented measures to control rising inflation, such as a 700 basis point increase in the monetary policy rate. However, these measures proved ineffective, and monetary policy remained loose overall in the first half of the year.
The report concludes that high inflation has eroded purchasing power, leading to increased short-term poverty. It estimates that between January and May 2023, around 4 million Nigerians fell into poverty as a result.
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