Economy
Experts weigh in as FG, World Bank/IMF clash over subsidy, forex
BY EMEKA EJERE
Policy steps in the management of petrol subsidy and foreign exchange have continued to be a big issue, as the multilateral financial institutions continue to warn that Nigerian economy is facing serious threats, with the federal government maintaining positions that negate the recommendations of the World Bank and the International Monetary Fund (IMF).
The Senate penultimate week approved the total sum of N4 trillion for petrol subsidy in 2022, a figure representing the amount contained in two separate requests by President Mohammadu Buhari, to the National Assembly for approval. The President, had in a letter to the Legislature dated 10th February, 2022, sought an additional N2.557 trillion to fund subsidy payments from July to December, 2022.
A plan by the government to deregulate the sector, following enactment of the Petroleum Industry Act (2021) that prescribes a free market for the downstream sector of the petroleum industry had been suspended by 18 months.
According to the latest data from the Nigerian National Petroleum Corporation (NNPC), the total cost of subsidy in January and February, 2022 alone was N396.72 billion while the cost of subsidizing the product in 2020 was N450 billion.
Despite the steep rise in crude oil price and Nigerias position as a major crude oil exporter, the country’s economic structure makes it more prone to the negative effects of the ongoing escalation between Russia and Ukraine.
The country has almost zero refining capacity as its four refineries remain comatose despite gulping several billions of naira annually on Turn Around Maintenance (TAM).
Crude oil prices spiralled above $100 per barrel, the first time since 2014, after Russia attacked Ukraine and continued a major aggressive push of what it called special military operation to demilitarise and denazify Ukraine by destroying the latters military capabilities.
The resultant rise in Nigeria’s import bill for petroleum products has conspired with other reserve-depleting activities of the government to complicate the woes of the naira, with the central bank making concerted efforts to defend the local currency, another measure the global economic experts find unsustainable.
The Central Bank of Nigeria (CBN) has maintained an official exchange rate of around $1/N415, while the parallel market reflects an exchange rate of around $1/570.
Briefing journalists during the just concluded World Bank/IMF Spring Meetings in Washington DC, the President of the World Bank Group, Mr. David Malpass, reiterated the need for the federal government to reconsider its policy on fuel subsidy, saying that the huge amount being expended on the policy could be channeled to other critical sectors.
The World Bank had last November warned Nigeria that further delay in removing the fuel subsidy which had been described as a major drain and waste on the economy could see federal and state governments unable to pay salaries from 2022.
The Lead Economist, Nigeria Country office of the World Bank, Marco Antonio Hernandez, had painted a gloomy picture of Nigeria if the country decides to continue with the controversial fuel subsidy.
But speaking during the media briefing, Malpass pointed out that generalised subsidies have significant negative effects on any system.
“One is that they are expensive because they go to everyone and they are often used by people with upper incomes than by people with lower incomes so they are not targeted,” he said.
“So, we encourage that when there is need for subsidy, either food or for fuel, that it should be carefully targeted at those most in need of it. And so, we have encouraged Nigeria to rethink its subsidy effort.”
Speaking further, the World Bank boss reiterated the need for the country to do away with multiple exchange rate system, which according to him was often, complicated and is not as effective as it would be if there were a single exchange rate.
He added: The most useful thing for developing countries is to have a single exchange rate that is market-based, that is stable over long periods of time as that attracts investment and so that would help.
The IMF has also maintained that the policies of fuel subsidies and official exchange rates are ineffective and advised the government to drop them to propel growth.
According to its Executive Boards conclusion of the Article IV consultation with Nigeria, which was released recently, Directors also urged the removal of untargeted fuel subsidies, with compensatory measures for the poor and transparent use of saved resources.
IMF advised the CBN to unify the exchange rate by abandoning the official exchange rate in favour of a free market.
Directors welcomed the removal of the official exchange rate and recommended further measures towards a unified and market-clearing exchange rate to help strengthen Nigeria’s external position, taking advantage of the current favourable conditions. They noted that exchange rate reforms should be accompanied by macroeconomic policies to contain inflation, structural reforms to improve transparency and governance, and clear communications regarding exchange rate policy, the report stated.
But the CBN has insisted that it will not float the naira to avoid an exchange rate spiral. Speaking with journalists also at the just concluded World Bank/IMF Spring Meetings, the CBN governor, Godwin Emefiele explained that the apex banks managed float system was adopted to address the peculiar challenges of the country.
The governor said despite advice offered by IMF and the World Bank, developing economies such as Nigeria had the liberty of adopting homegrown solutions to their economic problems.
“The IMF and World Bank provide advice that we work with. But even at some of our private meetings, we realise that there are challenges, leading us to adopt homegrown solutions to address them. We cannot adopt what is being proposed; we cannot adopt a free float of our currency,” Emefiele said.
Experts views
Chief Executive Officer, Centre for the Promotion of Private Enterprise, Dr. Muda Yusuf, is among experts who share the view of World Bank. He noted that rather than a blessing, the rising global crude oil price is a penalty for the economy.
Yusuf, a former Director General of the Lagos Chamber of Commerce and Industry (LCCI), in an interview, said the soaring oil price should ordinarily be a blessing and good news for the country as an oil producing entity.
“This is because such development will naturally translate to more foreign exchange and revenue earnings for the country; more profits for the oil companies operating in Nigeria and for other stakeholders in the oil sector,” he said.
He, however, regrets that because the countrys oil sector has been grossly mismanaged, the obvious boom in the price of the commodity cannot be celebrated.
The rising oil price cannot be celebrated by Nigeria because it penalises the Nigerian economy and this is a paradox. The implication of this rise in oil price is that our import bill for petroleum products is going up; the subsidy payment on petrol is going to increase.
“If this trend continues this way in another six months, then Nigeria should be looking at a subsidy cost of about N5 trillion or more, Yusuf warned.
On forex, Yusuf called for an urgent review of the current foreign exchange policy.
He said, My proposition is that we should adopt a flexible exchange rate policy regime. Let me clarify that this is not a devaluation proposition. Rather is it is a pricing mechanism that reflects the demand and supply fundamentals in the foreign exchange market.
It is a model that is sustainable, predictable and transparent. It is a policy regime that would reduce uncertainty and inspire the confidence of investors. It is a policy framework that would minimize discretion and arbitrage in the foreign exchange allocation mechanism.
Similarly, Director, Centre for Petroleum, Energy Economics and Law, University of Ibadan, Professor Adeola Adenikinju, noted that the governments decision to continue subsidy payment was more political than economic, given the revenue challenges facing governments at all levels.
He argued that by retaining the petrol subsidy, the government would find it difficult to meet other commitments.
“It is a political decision, not an economic one. Economically, we know that subsidies have been very costly to the country and this is going to have serious implications on government revenue, particularly the state governments.
The states are going to feel it more because they depend heavily on revenue from the Federation Account and secondly, they do not have the leverage to borrow like the federal government.
“If it goes ahead, the states are going to be hard-hit financially and it is going to be extremely difficult for them to meet all their commitments in terms of payment of salaries and keeping their obligations to pensioners.”
However, a public affairs analyst, Mr. Stanley Johnson, described IMFs recommendations as unrealistic, given the peculiar situation inAfrica.
What baffles me is that over the years, the IMF has seen that deep seated corruption, indiscipline and impunity by African leaders would never allow these countries to reap the benefits of some of these recommendations, yet they continue to give them, Johnson observed.
“Maybe, its time for the IMF to adjust their policies with regard to corrupt countries like Nigeria which may include but not limited to appointing their own personnel to run the economies of qualifying countries heavily indebted to the Fund for a stipulated number of years, to ensure the attainment of the economic paradise their recommendations promised.
