IMF: Fuel subsidy, FX savings should be used for the poor
Relative stability is expected in the Naira very soon, the Central Bank of Nigeria, (CBN) Governor, Yemi Cardoso, has assured Nigerians.
Speaking exclusively with Saturday Telegraph newspaper in Washington D.C., he said he was confident with reforms at the foreign exchange market.
Besides, he said the bold reforms executed by Nigeria had made the international community to have more confidence in Nigeria.
“Last year, when we were in Marrakech for the World Bank/IMF meetings, the international community didn’t believe in us. But now, they are have more confident and things have generally changed,” he said.
Specifically, he said the current attractive interest rate regime in the country would attract citizens to hold Naira by way savings, which would in turn, reduce pressure on the foreign exchange market.
Before the devaluation of the Naira in June last year, a dollar exchanged for N477 on official market (NAFEM) and N770 per dollar on parallel market.
After the devaluation, the Naira fell to N750 per dollar on official market, nearly converging with parallel market at N770 per dollar.
As at yesterday, the naira closed at N1,600 per dollar on NAFEM, while it fell to N1740 on parallel market.
The benchmark interest rate, which determines other interest rates in Nigeria was recently raised to 27.25 percent to tackle inflation and discourage speculation in the foreign exchange market.
The optimism about the Naira came just as the International Monetary Fund (IMF) urged Nigeria to use savings from subsidy removal and foreign exchange rate unification to provide social safety nets for the poor and most vulnerable citizens.
Director, African Department, IMF, Abebe Aemro Selassie, made this call yesterday in Washington D.C. at the African Department press briefing of the World Bank/IMF meetings to unveil the Regional Economic Outlook update for Sub-Saharan Africa.
He said : “I know there are some steps that have been taken in that direction, but I think some of the savings from the fuel subsidy reforms, the exchange rate subsidy being removed, should in our view be directed to helping cushion the effect on the most low-level households.”
Social safety nets are programmes and policies that help individuals and families manage risk and volatility, and protect them from poverty and inequality. They can include cash transfers, in-kind transfers, and near cash benefits.
Although the removal of petrol subsidy is crucial to restore macroeconomic stability, Nigeria needs a new social contract to help poor and vulnerable citizens.
The World Bank in its Nigeria Development Update (NDU) report ‘Seizing the Opportunity’, had stated: “With the petrol subsidy removal, the government is projected to achieve fiscal savings of approximately two trillion naira ($2.6 billion) in 2023, equivalent to 0.9% of GDP. These savings are expected to reach over 11 trillion naira ($14.3bn) by the end of 2025.”
But Nigerians have not felt the impact of these savings, as cost of living continues to soar eliminating the once vibrant middle class from the society.
The IMF also attested to this, while responding to a question from the Nigerian press.
Selassie said he recognised that while these essential reforms are steps toward economic sustainability, they have increased hardship in Nigeria due to rising inflation and the cost of essential goods.
“The immediate effect, of course, of doing these changes always causes quite a lot of dislocation,” he expanded. “You have noted the inflation, we have absolutely no doubt that conditions at the moment are extremely difficult. The effect of the food price shock in recent years has been quite acute in our our region. Food accounts for a higher share of the consumption basket. Now you have fuel prices going up, which will have an additional effect on other essential goods.”
He said this was why the IMF always insisted that there was a “need to put in place measures to target the most vulnerable and social protection over the years, as these reforms are being implemented.
However, he acknowledged that both the petrol subsidy removal and unification of the exchange rate were crucial for Nigeria’s sustainable growth.
Selassie also noted that there has been no request from Nigeria for funding.
“There has not been a request for funding from the IMF from Nigeria,” he said. “But to just be very clear, you know, this is also a question that has come up in the context of some other countries.
“If and when countries turn to us, we hope that they do so by having a very clear plan of what they want and what kind of economic reforms they want to pursue.
“It is the right of every country that’s in good standing with IMF to borrow and have access to the concessional financing that we provide them. So, there is no request for funding from Nigeria at the moment.”
For years, the IMF had been advocating for Nigeria to remove the fuel subsidy and unify the foreign exchange market. However, the IMF noted that while it provided guidance, the decision to implement these reforms was ultimately a political and domestic choice made by Nigeria.
In a related development, speaking on Sub Saharan Africa (SSA), he noted that growth in region is projected at 3.6 per cent in 2024, unchanged from 2023, with a modest increase to 4.2 per cent in 2025, which is insufficient to significantly reduce poverty or address development challenges on the continent.
He also reiterated that macroeconomic vulnerabilities persist and inflation remains high in many countries. Besides, he said that policymakers face a tough balancing act in reducing vulnerabilities, addressing development needs and ensuring socially acceptable reforms amid tight financing constraints.
“Sub-Saharan African countries are navigating a complex economic landscape marked by both progress and persistent vulnerabilities, he explained. “While many of the region’s countries are among the world’s fastest-growing economies, resource-intensive countries particularly oil exporters continue to struggle with lower growth rates. Inflation is declining but remains in double digits in nearly one-third of countries. Public debt has stabilised at a high level, with rising debt service burdens crowding out resources for development spending.”
