Shubham Chaudhuri: Subsidy Removal Without Consensus, Compensatory Measures, is Recipe for Unrest

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It is without telling that Nigeria’s economic stability is a major concern to big economies of the world and equally massive corporations and institutions. With her arguably huge market, largely defined by her staggering population, Nigeria remains a darling of the world, her obvious inadequacies notwithstanding. This is why Shubham Chaudhuri, World Bank’s Country Director for Nigeria, with useful interjections from Marco Hernandez, the institution’s Lead Economist for Nigeria, warns of the dangers of Nigeria still sprawling in the bubble of business as usual. In this interaction with THISDAY, he stresses the need for Nigeria’s government to follow through its reform agenda, especially by removing the controversial fuel subsidy, among others, to accelerate growth in the economy and achieve its poverty alleviation targets. Excerpts:

What’s the overview of the recently-released Nigeria Development Update (NDU) by the World Bank?

The NDU as you know, every six months, we produce the report basically to share our assessment and take on what has been happening in terms of Nigeria’s economic development agenda. A lot of it is sharing our assessment of recent developments and what our advice for the next year is. And in trying to do this, we try to take a closer look at some issues that we think have really emerged and are topical. And we also use this as an opportunity to give the wider audience a sense of spotlight on issues that are part of Nigeria’s longer term development.

Of course, the first question you often get asked is what we are saying in this NDU that we weren’t saying six months ago. Let me try to summarise that. Firstly, we have for about a year and a half now, especially since the start of the COVID-19 crisis, been making the point that Nigeria is at a critical juncture in the sense that it has for a long time (I will say four decades or more) not really lived up to its full potential and it is now saddled with the COVID-19 crisis. The imperative of making some fundamental choices about structural reforms was critical, because otherwise going forward, not only will Nigeria not realise its tremendous potential, there is actually the risk of a downside where things start to take a downturn. So instead of 100 million people being lifted out of poverty, you have many more millions of people falling into poverty. You have growing insecurity, you have millions of young Nigerians coming of working age, who are unable to find the kind of economic opportunities they would like.

That in itself leads to growing insecurity. We have been saying this since at least a year and a half ago, because the COVID-19 crisis did have a huge impact on Nigeria. Over the course of 2020, and in December 2020 and again in June of 2021, we recognised that the government had taken some pretty bold choices and decisions; I think that helped Nigeria recover and emerge from the recession, and more quickly than any of us had anticipated, certainly it was good news. But we were also pointing out that Nigeria is not out of the woods yet. So in terms of the critical choices that it faces, I will describe them for you.

Six months ago, what was high on the agenda was Nigeria has come out of the recession more quickly, but inflation has reached very high double-digit levels. Most Nigerians are feeling the pinch, it is driving millions of people into poverty and the exchange rate now is part of what needs to be addressed. And what has changed in the last six months? The urgency of the reform has remained but what we are saying now is that the fiscal pressures that have built up as a result of the growing burden of petrol subsidy, are likely to hit Nigeria very hard next year unless they are addressed almost immediately. As of last month, the cost of petrol subsidy to the federation, meaning both the federal government and the states, was N250 billion monthly.

Just to put that in perspective, supposing you say federation’s gross revenues next year ( if oil production picks up) could be somewhere in the N12 trillion range. This N250 billion per month means N3 trillion over the next 12 months, which means the federation will essentially be spending 25 per cent of the entire federation’s revenue on premium motor spirit (PMS) subsidy. And then, that is the federation’s choice obviously, but is it an informed choice and does the public know who exactly is benefiting from this N3 trillion or who will benefit from this N3 trillion? And our concern is that if there is no action taken on PMS subsidy, there is a risk that the federation’s revenues in 2022 could actually be lower in ordinary terms. Not only compared to 2021, but compared to 2020, which as you know was a kind of hard year.

So if the federation revenues go down further in nominal terms, it means wages and salaries will be affected negatively and the cost of everything will go up, because of the high inflation. Whereas if revenues go down in nominal terms, one of two things is going to happen: either the government, both at the federal level and especially, at the state level, is going to start running into problems paying wages, making payments to vendors, financing basic services, which is essentially what happened back in 2015 and 2016, when there was a fiscal crisis at the sub-national. But you could also see this happening at the federal level, because the federal government revenue will be hard hit next year if the PMS subsidy continues and especially, if oil production does not pick up as much as it is currently anticipated in the budget.

That doesn’t have to be the case, instead, funds for PMS subsidy could be directed towards things like basic education, primary healthcare, rural roads, or things that Nigeria needs to grow inclusively and reach its potential. In terms of the latest Gross Domestic Product (GDP) numbers that the National Bureau of Statistics (NBS) recently put out, I think it is good news there. The economy is picking up, growth is a bit faster. But we are raising our growth projections both for GDP growth for this year and for next year, but not quite much. Even the pick-up is going to be a little above population growth rate, which means per capita incomes won’t be declining, but they will barely be rising and will be flat. I think the bottom-line is that fiscal risks are serious to the point where we think urgent action is needed. And that is the reason for the title of the report – Time for Business Unusual. Business as usual means literally that Nigeria’s aspiration of lifting 100 million Nigerians out of poverty will not be realised.

Your concerns in the report about fuel subsidy removal are founded. But the Petroleum Industry Act (PIA) categorically stipulates that fuel subsidy should be removed and the government has fixed a timeline of around May/June next year for its removal, do you think June 2022 would be too late or must they do that before June?

I think the PIA says it must be removed six months after it was enacted. So according to the PIA, fuel subsidy should be eliminated around February 15. The fact that people are talking about June already tells you that this is something everyone is hesitant about. If you go by the language of the PIA, it says six months after it was enacted. I believe it was enacted on August 16th. It would be good that the provisions of the PIA are implemented and PMS subsidy will just disappear completely.

But then, there are two things that we say: the high rate of inflation that Nigeria has experienced in the last 18 months, it has hurt ordinary Nigerians. And when the PMS subsidy disappears, there will be an uptick in inflation and what we think other countries have done is to help ordinary Nigerians cope with that further uptick in inflation, which is why we think that as part of the PMS subsidy going away, large-scale cash transfer programme, time-limited, to help ordinary Nigerians cope with any increasing prices over and above what they are already experiencing.

The second thing is that part of the high rate of inflation has been driven by a lot of reasons. But one of the key reasons has been the way that the exchange rate and access to foreign exchange have been managed. We think a clear and more predictable and a more workable responsive approach, especially, managing the supply of foreign exchange would help bring down inflation. So it is really a package of reforms. When I think about what the PIA says, I see two things happening. Either the late February date will be ignored, because it will be too politically sensitive, and there is not enough consensus. And I think in general, for such a big policy move, there should be a consensus, not just within the government but the people as well. The people should understand why this is happening. So if that happens without any kind of consensus, and without any kind of compensatory measures to bring down inflation or help households cope with the price increase, then I think there is a potential for unrest.

On the other hand, another possibility is that PIA’s February deadline will be allowed to come and go and the PMS subsidy will continue. It will not be the first time that something that is on paper is not fully implemented. And that is where the fiscal risk and pressure will come in. Then the cash burden every month will be N250 billion that should have been flowing into the federation account that won’t be. And what we try to do is that we have recognised that for many Nigerians who know the fact that there is a PMS subsidy and therefore, the prices of PMS are a bit lower than it otherwise should be, they feel it is the only benefit they are getting from the government. And if that gets taken away, things will be worse off. We are trying to make the case that it doesn’t have to be that way. There are many ways of using those funds to directly benefit ordinary people. That is because right now, with N3 trillion, it is mostly benefiting the wealthy and super wealthy.

Also, in the NDU report, you stated that the momentum for reforms you observed in 2020 appears to have waned, why do you have that impression?

Number one, you know that the PMS price was adjusted upward throughout the course of 2020, as oil prices started going up and landing cost of imported gasoline, and PMS also went up and the domestic retail prices of PMS were adjusted upward until it got to N165 per litre in December. What happened in January? Since January, the domestic retail price has been capped at N165 per litre. It was no longer allowed to adjust with the landing cost of PMS. So if you look at the breakdown of the federation revenues, the way it works is that you have gross oil and gas revenues, then you have the deductions that the Nigerian National Petroleum Corporation (NNPC) make before it transfers to the federation account. In 2021, because PMS price has been capped since January, the deductions so far to September, were already about N800 billion and by the end of the calendar year, it will be over N1 trillion.

And because oil prices have continued to go up, the deductions are growing every month. So that’s what I told you about the N250 billion, that is the deduction just recently. That is one of the places where I thought the government in the middle of the crisis would have allowed PMS price to adjust. That would have been a bold move. But as soon as you came out of the recession, there was a bit of complacency. PMS is one example, where that momentum was not sustained through the course of 2021 and as a result, we are now in November 2021, where what was a small problem, which didn’t have to get bigger has now become a huge problem. You just keep thinking about that N3 trillion, which is 25 per cent of government revenues, at a time when Nigeria already has lower government revenues than any country.

Talking about inflation, what level would you say is ideal for Nigeria?

First of all, the government of Nigeria, especially the Central Bank already has a target and the target band of between six to nine per cent. The last time it was nine per cent, was in 2014. That target has remained, but what hasn’t followed the target is the actual level of inflation. So the target is very clear, because it is based on everything that has to do with monetary policy indicators and the coordination with fiscal policy; but that target has not been kept. We can put this in comparative analysis to show how it compares with some other countries. In sub-Saharan Africa, the targets are more or less around 11 per cent. There is a basic rule that once you get to double-digit inflation, that is really bad news. So no one wants to be on nine per cent, 10 per cent, 11 per cent or more. The prices will start rising way too fast. In terms of targets, the target in Sub-Saharan Africa, some of them have it close to five per cent, some of them have it closer to seven or eight per cent and it really depends on the structure of the economy, etc. That is in sub-Saharan Africa. But if you are talking about emerging markets, you are talking about one per cent, two per cent, three per cent or four per cent or more than.

Your report further talks about having a ‘compact’ with the people, is it different from the measures the government is considering to cushion the impact of fuel subsidy removal?

The compact, I think more than anything else, is in the area of trying to rebuild or address the four steps. The idea that many Nigerians don’t think that the government is going to do anything to help them. The removal of the PMS subsidy is yet another thing that the government may be doing to just make life more difficult for them. So for the compact, we are basically saying at the minimum, and a commitment to the Nigerian people that as PMS subsidy is removed, they will also help cushion the effects to protect them from the impact of that removal by providing this large-scale cash transfer. It would even be better that the compact went beyond that, to actually talk about how some of the revenues that will now start coming will not be lost to PMS subsidy and how that can be used, whether it is for basic education, primary healthcare, rural roads – just think about it. It would be a compact between Nigeria’s leaders at the federal, state levels and the people to state the reasons why subsidy is being removed and what the governments are promising them in return. So the nature of the compact is making things clear to the Nigerian people.

On exchange rate, the currency was adjusted three times in 2020 as you also alluded in the report, what else do you want the CBN to do, considering that forex inflow has dropped significantly since last year, when COVID-19 struck?

The foreign currency market, capital markets and in general, financial markets – a lot is based on confidence. It is having confidence and clarity. Clarity is about saying, if I am making an investment, what sort of returns can I expect? So if I am not sure of what kind of returns I will expect, then, most investors would hold back and wait until they get some clarity. The confidence part comes in, in terms of whether or not I can trust what is out there in the public or what the government is saying about their policy. Or is it that the government is saying one thing one day and tomorrow, it might do something else? What has held that back, we think, is the exchange rate management policy of the central bank, and because there has not been clarity, I think the confidence has suffered.

So investors, whether it is domestic investors or foreign investors, are not quite sure about access to foreign exchange. And of course every central bank wants to maintain some degree of exchange rate stability. They don’t want disrupted movement. That in itself adds to uncertainty. But here, we have the other extreme, where in an effort to keep the exchange rate, the NAFEX rate is pretty much flat, not allowing it to grow. Our assessment is that the overall uncertainty has actually increased. So if I bring my money into Nigeria, am I going to be able to get it out? If so, when and how long? We have talked to firms that have established businesses here but are seeking potential for growth. But they are cautious. Even domestic established firms have some costs that are in foreign currency and right now, they don’t know. If we do this, will we get the foreign currency that we need to expand? So without confidence, investors won’t put their money.

But the communication from the central bank has continuously been that it has been meeting legitimate forex demands for manufacturers and others?

I think you have to talk to the private firms and don’t limit yourself to multinationals; talk to domestic firms as well. There is the Manufacturers’ Association of Nigeria (MAN), CEOs Confidence Index (MCCI), that they release every quarter. From the last one we saw, the exchange rate issue was number one in terms of the constraints to private investments, that is especially for domestic firms, so imagine international ones. And exchange rate management is related to the predictability of the availability of foreign exchange. So it is a major constraint and it has been hindering growth like power or other issues.

So what can be done to enhance confidence in that market?

I think the main thing here is not necessarily getting fixated on a particular rate. It is more about just the policy itself and how it’s communicated and also the level of information that provides all market participants with the information that they need to make investment decisions. For example, at the moment, there is not much clarity on what is going to happen in the coming months in terms of availability of foreign exchange. If this will be communicated, for example, through the publication of a specific offshore mechanism and say this is the amount that would be auctioned in foreign exchange, the intervention that the central bank is planning to have at this particular price, etc, that will provide more clarity on what is coming up next. In addition, if other players are allowed to exchange in a market that is more flexible as it happened before, for example, commercial banks.

Commercial banks, currently, our understanding is that their functions are intermediaries, so they cannot do the transactions themselves; they do the transactions on behalf of third parties. If they would be allowed to participate in foreign exchange market, directly exchanging amongst themselves, that could also lead to what we call price discovery. So by having more conversations, people understand each other better; they will know when things are low and when things are high and they will be able to make decisions. We have given you right now, two complete examples of things that would improve: the regularity of information and also the predictability of how things may involve in the revenue short term. And we believe that, that is just one way to enhance not only the flexibility, but also the predictability.

Have you seen the country’s new National Development Plan and what do you think about it?

I think it has got all the ingredients on all parts. What we really appreciated, I think is great, is recognising that the bulk of the financing will need to come from being able to crowd in private investments, the emphasis on macro-physical, all of these are good. The truth is, will it be implemented and with what sense of urgency? So it is not the content, it is the implementation that we are waiting for and we are focused on. And that is the case with so many things in Nigeria. If it is not the plan, it is not the quality of the plan; it is the implementation. And that remains to be seen.

Do you think the President’s plan to lift 100 million people out of poverty in the next 10 years is realistic?

There are two ways of thinking about things when we make projections or when people ask us what the prospects for a country are. There are two ways of approaching this: one way is just to think about it or what are the natural resources endowments? What are the technological strengths? What are the human endowments that a country has? And they say a country cannot change overnight. If you combine that with the right policy and with robust and timely implementation, you can say what a country’s potential could be. From that prospective, Nigeria absolutely has the potential to have what they call accelerated growth between now and 2030, that you could see tens of millions of people being lifted out of poverty.

So from that, I want to say that Nigeria has that potential in terms of its resource endowments – both physical and human. The key, of course, is whether it has the political consensus and requisite institutional focus on implementation and formulating the right policies and the right choices. And that is what is going to make the difference. That is why we keep saying that it is Nigeria’s choice. Nigeria still has the choice to put the right policies and follow through on implementation to get close to the target with the kind of potential it has, even in the next nine years. But it requires that consensus and requires that choice and it requires moving away from business as usual. That is the essence of what we are saying. Business as usual will not result in that potential being realised and 100 million Nigerians will not be lifted out of poverty, in fact, many more millions will fall into poverty.

Nigeria’s Minister of Finance believes the country does not have a debt problem, but a problem of low revenue generation. Do you think so?

That was one of the first things I heard the Minister say when I started in my new position. And yes, though from one perspective, just take two facts. If you look at the public debt-to-GDP ratio, Nigeria is very much in the middle of the pack globally. Usually globally, the kind of threshold where people start saying this is a high debt country is 60 per cent ratio. She is also right in the sense that if you look at government revenues to GDP, Nigeria is the lowest of 115 countries. In that sense, Nigeria is in the middle of the pack globally in terms of debt to GDP and at the bottom of the pack in terms of revenue to GDP ratio. So revenues have to be increased, but there is a caveat. One is that, it doesn’t matter what your level of debt is, it still has to be used for productive purposes, and to ensure that it is being used in the right ways to invest in Nigeria’s infrastructure and people.

I think that is critical, and the best way to ensure that, is to be absolutely transparent about the terms and conditions and the uses. So every single credit that the World Bank provides and anything you want to know about the credit in terms of credit and what it is being used for, everything is published. And the Debt Management Office now is doing the same thing for all the sovereign debt that Nigeria takes. The second thing is that in the short term, if you think about debt to GDP as a sign of sovereignty, can a country sustain itself for a long run from a fiscal point of view in terms of its obligations? There is a separate measure, which is more of a liquidity problem, which is debt service to revenue.

Nigeria’s debt service to revenue is very high. But the mere fact that the revenue is so low, the debt service in absolute terms is not that high for a country of Nigeria’s size and much of it is domestic, but Nigeria’s revenue level is unbelievably low. You are talking about seven per cent of GDP, when most other countries are at least 15 per cent, which ought to be the minimum that is needed to keep the government functioning, to provide law and order and basic services. Nigeria is at seven per cent, it could have been higher by two per cent if it wasn’t for the PMS subsidy. That is because the money spent on subsidies should be coming in as revenue. On the debt side, it has to be properly acknowledged and transparent. One of the things you will see in the report, especially in the policy options that we laid out, is the importance of making sure that all the financing follows that rule and is fully transparent and accounted for.