![[Kenya] Digital credit provider Tala disbursed Sh240 billion in loans in eight years](https://theafricanbusiness.com/wp-content/uploads/2023/02/TALA-APP-360x180.jpg "[Kenya] Digital credit provider Tala disbursed Sh240 billion in loans in eight years 18")
Subsidy removal won’t spike inflation, says World Bank
World Bank Country Director for Nigeria, Shubham Chaudhuri, yesterday, spoke extensively on the planned removal of subsidy on Petroleum Motor Spirit (PMS), lingering foreign exchange crisis, rising sovereign debts and other macroeconomic issues, suggesting that the removal of subsidy may not remarkably cause a spike in inflation.
Speaking during a courtesy visit to The Guardian, Chaudhuri, who has served in his current capacity since 2019, said historical data, including statistical analyses carried out by the World Bank, have not shown that there would be a remarkable rise in inflation should Nigeria remove fuel subsidy and PMS price increases.
The Minister of Finance, Budget and National Planning, Zainab Ahmed, had last week said the government would scrap the controversial social scheme next year and replace it with N5,000 monthly transportation grants to about 40 million poor Nigerians for a year.
The statement has expectedly raised fresh debate on the subsidy scheme, which is said to have gulped trillions of naira. Labour, the organised private sector (OPS) and other stakeholders have described the proposal as absurd.
The Nigerian Labour Congress (NLC) said the plan was an open invitation for unrest and revolt, while the Trade Union Congress (TUC) expressed shock that government could come up with the idea when negotiations on subsidy removal were yet to be concluded. The Senate, on its part, said the grant proposal was not captured in the 2022 budget, wondering how the government intends to implement it.
Beyond the absurdity, there is a question as to which, between PMS subsidy and transportation grant, is most cost-effective for the government. With the Minister’s estimations, the country will spend between N180 billion and N240 billion monthly on the transport grant programme as against N150 billion projected spending on PMS subsidy, which suggests the deficit created by subsidy payment would not still go away, at least for a year.
This new proposal comes just as the Conditional Cash Transfer Programme has come under intense scrutiny. President Muhammadu Buhari disclosed that 1.6 million poor and vulnerable households, comprising more than eight million individuals benefit from the cash transfer programme. But his critics have punctured the figures. There has been flip-flops from his cabinet members on the numbers reached and amounts disbursed.
On the new proposal, there are questions on the credibility of data the government will use in dispensing the transportation grants. The most basic source of data, the national census, has not been conducted in the past 15 years. The last exercise – carried out in 2006 – was mired in controversy and protests.
THE World Bank Country Director, who engaged The Guardian management and editorial team on the issue and related matters for about two hours at the newspaper’s corporate headquarters in Lagos, was not specific on the subsidy exit strategy, but he was certain the programme is not sustainable anymore even though there was ‘no answers’ to the lingering questions it has raised.
He, thus, suggested a healthy dialogue as a necessary route to achieving “a national consensus” on the exit strategy and how to manage the impacts its eventual removal could leave on struggling Nigerians. He insisted that the scheme does not benefit the majority of poor Nigerians, as most public transport vehicles run on diesel.
Contrary to the World Bank executive’s position, a previous report on data analysis by The Guardian had established a strong positive correlation between PMS price and inflation rate, which has increased the level of poverty in the country.
According to the data trend, Nigeria experienced stable or falling inflation in periods when the PMS price was held constant, suggesting that a likely hike in the price as a result of subsidy removal could hit more millions of Nigerians, who are barely surviving, below the belt and widen the inequality gap.
In the data analysis, extremely high PMS prices were also marked with extraordinary fast inflation rates. For instance, between 1986 and 1993 when the official pump price was increased from 20 kobo to N5, inflation increased from 5.7 per cent to 57.2 per cent.
The 2,400 per cent increase in the price of PMS in the seven years triggered (alongside other factors) a 51.5 percentage point jump in the inflation rate. The economy witnessed the fastest inflation and the steepest rise in PMS pump price then.
In one fell swoop on November 8, 1993, the interim administration of Chief Ernest Shonekan increased the price from 70 kobo to N5 (about 614 per cent). Prices of essential commodities responded, leaping to an all-time high of 72.8 per cent inflation rate after a year.
All through history, the data followed a fairly similar trend. The inflation rate had moderated from 13.7 per cent in 2010 to 10.8 per cent, translating to a year-on-year change of -3.7 per cent until Goodluck Jonathan tinkered with the price of PMS, which had remained at N65 per litre since 2007 when the late Umaru Musa Yar’Adua reduced the going price immediately after Olusegun Obasanjo left.
The general price crisis that followed the N85 per litre Jonathan settled for after a labourious negotiation with the organised labour raised the headline inflation in 2012 by 1.38 per cent.
From 2012 to 2016, the steepest yearly inflation growth was 0.95 per cent. In 2013 and 2014, the change in headline inflation was negative. But the 67 per cent pump price jump, which saw a litre selling for N145, altered the inflation figure in a leap. In that same year, inflation jumped from a single digit to an average of 15.7 per cent.
From 1973 when Gen. Yakubu Gowon’s regime moved pump price from 6 kobo to 8.45 kobo, till date, PMS price and inflation curves tend to move in the same direction and at a similar speed.
