World Bank Chief warns about dangers in petrol subsidies, multiple exchange rates

The World Bank President Group Chief, David Malpass, has warned Nigeria on the dangers in keeping petroleum subsidies amid global economic shocks and maintaining multiple exchange rate.

Speaking today, April 21 at the ongoing International Monetary Fund (IMF) spring meetings in Washington DC, the Worl Bank boss said that keeping subsidies and multiple exchange rates have a huge cost deficit to the economy, adding that subsidies benefit the rich more.

Malpass expressed concern that Nigeria would starve itself of funds for infrastructural development if it keeps up with unsustainable subsidies, saying: “we have encouraged the Nigerian government to re-think subsidies and multiple exchange rate systems in its foreign exchange management. Multiple exchange rate system is complicated and not as effective as it would be on a stable exchange rate.”

He encouraged Nigerian authorities to work towards having a stable exchange rate, which he stressed, would encourage fiscal discipline and increase investment inflows into the country.

“Nigeria trade inflows are distorted with multiple exchange rates, but a stable exchange rate will improve it. Businesses and investment inflows will grow Nigerian economy alongside a stable exchange rate,” he said.

This is not the first time the Washington-based lender has warned Nigeria’s economic managers of the complications associated with keeping subsidies and multiple exchange rates.

Just last week, the World Bank, in its bi-annual report known as African Pulse, stated that increasing fuel subsidy was putting the Nigerian economy at a high risk as subsidy payments could significantly impact public finance and pose debt sustainability concerns.

Apart from the World Bank, many analysts had warned the government over dangers of keeping the “unsustainable” subsidy.

A former chairman of the Major Oil Marketers Association of Nigeria, (MOMAN), Adetunji Oyebanji, said that subsidy is a misplaced priority by the government.

Oyebanji said: “There is no argument to justify subsidy payment, because we are spending away the funds for our infrastructural development. Labour does not have any justifiable reason to cow government to keep subsidies.”

Subsidy payments for the fiscal year of 2022 have seen the Nigerian government pass a supplementary budget of N4 trillion to that effect.

Analysts knowledgeable about the economy say the government must do away with subsidy.

“This is the part that led to the collapse of the Venezuelan economy. It is this subsidy that brought down that economy. Go and check the Venezuela economy, and it is an oil-producing country,” an economist and chief executive officer of the Centre for the Promotion of Private Enterprise (CPPE), Muda Yusuf, told The ICIR.

“Labour leaders and all of that, I am appealing to them to be a bit more realistic to their position and engage a lot more. We have to think about sustaining this economy. I mean, look at the fiscal position of the economy. Look at the amount of debt that we are accumulating and look at the amount of debt service.

“We can have engagement about the cost of governance generally, but that should not allow the continuous bleeding of the economy. The Nigeria Labour Congress said last week that it had listed key issues that should be addressed before the Nigerian National Petroleum Corporation (NNPC) will adjust the pump price of premium motor spirit (petrol),” Yusuf added.

The immediate past chairman of the Society of Petroleum Engineers, Joe Nwakwue, said that the petrol subsidy had become a tumour on the Nigerian economy, arguing that it must be removed for the economy to survive.

Also, the International Monetary Fund (IMF) has expressed a deep worry about subsidy impact on the economy.

The subsidy, IMF said, serves as “a fiscal drain.”

The Fund, in a recent report, described the petrol subsidy as a major incentive to petrol smuggling. “The PMS subsidy is seen as one of the incentives for petrol smuggling to neighbouring countries as smugglers take advantage of arbitrage,” it stated.

An energy economist, Adeola Adenikinju, said, “The maintenance of subsidy has brought us to a level where we have completely mismanaged the downstream sector.

“It has had a negative impact on our foreign reserves, exchange rate, government revenue, and the capacity of the Federal Government to perform its responsibilities.”

Notably, labour unions have been at daggers drawn with the Federal Government, with many meetings between the two parties over removal of subsidies suffering a deadlock.

The union officials insisted that before the subsidy removal, the NNPC must fix the country’s refineries in order to cut down on the importation of refined petroleum products.

The NNPC currently has four idle refineries, two in Port Harcourt (PHRC), and one each in Kaduna (KRPC) and Warri (WRPC).

Since 2019, none of the refineries has been able to refine a drop of fuel, hence the country relies entirely on imports to satisfy demands.

Source: ICIR.