Nigeria’s economic reforms push vulnerable citizens over the edge

Ilorin, Nigeria — All day, Alhaji Sule drove around the streets of Ilorin, in Nigeria’s central region, but hardly got more than three passengers on each trip, leaving two empty seats in his taxi. This has been the 55-year-old’s daily ordeal since the federal government announced fuel subsidy cuts on May 29, forcing a price jump from 198 Nigerian naira ($0.26) to 617 naira per liter. Although Sule has doubled his base fare of 100 naira, it is hardly enough to earn him a decent take-home. “It is as if people have decided to trek instead of boarding taxis and I lose a lot of money that way. It hasn’t always been easy but this current situation is unbearable,” he explained to Devex. “Today, for example, I bought 4000 naira fuel and I have only made 7000 naira.” In May, the Nigerian government announced that it had discontinued the fuel subsidies which were introduced in the 1970s to keep petrol affordable in the country. It also announced a currency float — where market demand and supply determine the currency rate — marking the end of Nigeria’s fixed rate regime, where the naira rate was determined solely by the Central Bank of Nigeria. Since the currency float, the naira has fallen from the previous rate of about 460 naira to record rates of over 800 naira against the U.S. dollar, and the impact has been felt across industries including the energy sector. In July, electricity distribution companies increased energy tariffs by over 40% in response to the new exchange rates. Although experts say these policies are beneficial and can attract foreign investors, they also warn that they could adversely affect Nigerians — who are grappling with years-high inflation and soaring unemployment — and could push more people into poverty if the government does not launch urgent palliative measures to cushion the hard-hitting impact. Weakening purchasing power Tokunbo Afikuyomi, a senior economist at Lagos-based think-tank Stears, said the government was right to have removed the subsidy as the country was borrowing to keep it running. “These are the things that they [the International Monetary Fund and World Bank] have been asking the Nigerian government to do for a long time because [the] fuel subsidy has been very inefficient. Not only is there a lot of room for corruption in that subsidy scheme but it also favors the rich more than the poor,” he said. In the first month after the subsidy was cut, the Nigerian government saved $530 million. But this saving has not trickled down to low-income households. Like Sule, Taiwo Abodunrin is one of the vulnerable Nigerians affected by the new fiscal policies. The subsidy cuts have left her shop, where she sells frozen fish, turkey and chicken, bleeding. “We buy [stock] at exorbitant rates but what our government does is to remove subsidies and increase electricity tariff. It is hard to factor the increased cost into our rates because the little customers we see will get scared away,” the mother of four told Devex. She said the power supply in her area is erratic, making her heavily reliant on a petrol generator to keep her stock frozen, but with the increase in petrol prices, she has been dipping into her meager savings to keep the shop running — and that does not bode well for her family. The Nigerian Federal Inland Revenue Service's introduction of value added tax, or VAT, to be paid by market traders and others in the informal economy compounds her worries. “My stock has depleted and I do not have the financial strength to restock,” she said pointing at the chest freezer in her shop. Sometimes, I just open this shop just to keep up appearances, nothing more. I am frustrated," she said. Even though the fuel subsidy mainly benefited high-income households — that consume more petrol — the price increases are affecting everyone, Alex Sienaert, World Bank lead economist for Nigeria said. Sienaert said that this is why the World Bank is advocating for the government to provide timely, targeted, and temporary support to poor and vulnerable households, to help them cope with the price shock. “Specifically, the World Bank’s Board has approved concessional financing — an $800m IDA credit — to support a government program capable of providing cash transfers to about a quarter of all households, using a robust and transparent digital-payments based delivery mechanism,” Sienaert said. “Beyond providing much-needed, temporary relief, this program could be scaled up and extended as part of a comprehensive package to direct the fiscal savings from the subsidy removal towards meeting Nigeria’s most critical development priorities. This is under active consideration by the government.” Temitope Ajayi, senior special assistant to the president on media and publicity, told Devex that the government is aware of the momentary hardship some of the newly implemented fiscal measures have imposed on the people and it is working on ways to cushion the impact. “These fiscal measures are necessary for the long and medium-term economic well-being and sustainability of the country. They are necessary measures to bring back confidence into the economy, unlock the economy for local and foreign investments, and remove trade barriers,” Ajayi said. Rejuvenating the economy Afikuyomi said the new policies are key to resuscitating the country’s economy. He explained that Nigeria needs foreign investment which has been detrimentally low in the last few years due to foreign currency shortage. This has caused a major scare among investors who worry they may not be able to repatriate their dollars as and when due. Presently, about $812 million in foreign airline funds are trapped in the country. “The truth of the matter is that Nigeria’s official exchange rate was overvalued. The parallel market was always around 700 naira and the official one was 460 naira. Having those multiple exchange rate systems meant the CBN had to put a lot of restrictions on who could access the dollar at 460 naira,” he said. The foreign currency reforms will incentivize and hopefully attract more foreign investors to come in and help build industries and exports, which is critical for development, he said. “But the thing that is fundamental to all of this happening is that the government must help the poorest of the country to get through this hard time. There is no point getting to a better place if the transition to getting there is too costly, if we are losing lives along the way,” he added. Sienaert said Nigeria must employ a new approach to macroeconomic stability and faster growth through continued reforms by focusing on maintaining a unified exchange rate with transparent price discovery based on foreign currency supply and demand, price stability through coherent policies and a revitalized nominal anchor, rebuilding fiscal space, through careful control of total spending, spending better, and mobilizing more revenues, and removing the regulatory bottlenecks and constraints to trade, investment and growth. Finding solutions Though experts say the government must utilize targeted cash transfers for the most vulnerable, they also acknowledge that a lack of data makes it difficult for the government to identify recipients. “The government should also ramp up its identity system to enable it to provide a wholesome social safety scheme for its citizens. Other ideas such as alternative mass systems are important to mitigate the suffering faced by Nigerians,” said Oluseun Onigbinde, director of BudgIT, a civic organization leveraging technology for citizen engagement. President Bola Tinubu announced the government's plan to disburse 8,000 naira to 12 million vulnerable families for six months, but it has been stalled and is now being reviewed after pushback from critics. Ajayi said the savings from fuel subsidy removal will go to fund critical economic infrastructure such as better road networks, modern rail networks, regular power supply, and expansive broadband network, which will improve the quality of life of Nigerians. “All of these are critical infrastructure we need for economic growth. Without these infrastructure, doing business becomes more difficult and they make our country unattractive for local and foreign investment,” he said. “Money to be saved will also fund social infrastructure in education, healthcare and public transportation among others. Nigerians will surely see the benefits of the savings in their lives as we get along.” Although the removal of the petrol subsidy reduces the fiscal deficit and is a critical step in stabilizing Nigeria’s fiscal situation, Sienaert said it only “stops the bleeding” and does not necessarily result in an immediate fiscal windfall, as it will take complementary measures and some time to rebuild fiscal space. “We project a fiscal deficit of 5.1% of GDP in 2023, which although more manageable than the 5.9% of GDP deficit which would have resulted had subsidies continued, still requires a lot of borrowing to finance. Thanks to the reforms, however, there is now a path for Nigeria’s debt service to peak as a share of revenues this year and thereafter begin to decline, contributing to a more manageable fiscal deficit in 2024 (4.1% of GDP, base case) and beyond,” he said Sienaert added that beyond providing immediate assistance to households in need this year, the World Bank believes the government should consider formulating and communicating a new, broader compact with the Nigerian people around: restoring fiscal sustainability, while also continuing to support poor and vulnerable households to weather the adjustment; spending better, to tackle development priorities; and sustainably spending more, based on mobilizing more revenues. Back in his old taxi, Sule is skeptical about the advantages of the policies, arguing that it might be the politicians’ move to con the people. “When they [his family] ask me for money, I do not know what to say at times. My family starves because I cannot provide,” he said. “I hope this hardship does not break my home, a man is a man when he is able to provide.”