Funmilayo Odude, Partner, Commercial and Energy Law Practice (CANDELP)
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Policies to implement in addition to removal of subsidies 17 Aug 2023
President Bola Ahmed Tinubu signalled his intention to introduce far-reaching fiscal and monetary reforms while delivering his inaugural address on 29 May 2023. Forthwith, he announced the removal of subsidy on Premium Motor Spirit, otherwise known as petrol. Two weeks later, the market received a policy directive on the introduction of a market-based exchange rate, which was later affirmed by the Central Bank of Nigeria (CBN). Two months into his administration, Nigerians have begun to experience quite serious impacts of these policies.
Although these policies were well anticipated, their potential impacts had been underestimated. Citizens who had been grappling with tough economic realities now see their welfare being further heavily eroded by sharp increases in the cost of living, as higher petrol prices translate to increases in the cost of transportation and prices of consumer goods. It is, therefore, important for the administration to provide adequate palliative measures to garner public support for unlocking the potential compound benefits of the policy changes.
Undoubtedly, the Tinubu administration inherited a sputtering economy. The failed naira redesign policy, high debt service cost, and high inflation, poverty, and unemployment rates were already choking the economy. But the cessation of subsidies on petrol and multiple foreign exchange rates has so far tended to pile more pressure on Nigerians and businesses. The new administration also seems set to end subsidy in tertiary education with the signing of the Student Loans (Access to Higher Education) Act 2023.
The World Bank’s latest Nigeria Development Update (NDU) report, which was released on 27 June 2023, indicates that the removal of petrol subsidy could push an additional 7.1 million Nigerians into poverty. To forestall this sad prospect and strengthen reform measures to deliver positive economic outcomes, the report recommends the provision of adequate palliatives to the vulnerable members of the society. “The removal of the petrol subsidy and the FX reforms have opened a window of opportunity that, if effectively seized by sustaining and building on these reforms, could have a transformative impact on the lives of millions of Nigerians and establish a solid foundation for sustained growth,” according to the NDU.
Nevertheless, it would be quite difficult to build on and sustain these reforms without the support of the populace. Labour relation in Nigeria tends to become volatile if a new government policy has the potential to adversely impact the welfare of workers specifically and Nigerians generally. Therefore, this administration should not trifle with the need to provide adequate measures to cushion the effect of these reforms. For a nation already struggling with poverty and inflation, a further rise in the cost of living will stretch the resilience of the poor and vulnerable population, with an adverse effect on the economy and security.
So far, the most notable measure announced by the government was the N500 billion conditional cash transfer programme for the provision of N8,000.00 per month to 12 million poor and vulnerable households for a period of six months. The programme is now under review following agitation on its inadequacy. However, the Presidency also announced the release of fertilisers and grains to approximately 50 million farmers and households in all the 36 states and the FCT.
In its aforementioned report, the World Bank commends the decision to use cash transfer programme to cushion the immediate effects of the subsidy removal. Such a programme, the bank notes, “can substantially lower the burden of the price increase among the poor and economically insecure”. However, the report also notes the logistical constraints that might prevent immediate deployment to everyone that requires the conditional cash transfer. “A simple approach of geographically targeting poorer wards first and screening out the very wealthy (say, the top 20 per cent) can be effective in the Nigerian context. Such an approach would ensure that, in case only a limited number of people can be reached, more resources go to the poor and economically insecure,” World Bank advises.
But these measures are short-term in nature. Other measures with long-term benefits need to complement a palliative programme. For instance, it is important to continue the drive of the last administration to improve Nigeria’s business environment and ease of doing business. This is with the aim of attracting foreign investments into the country and ensuring the private sector is more productive as the major driver of the economy.
Other measures to boost the economy and the welfare of the people include significant improvement in capital investment to increase the stock of infrastructure in the country. Investment in power and security are imperative: without it, private enterprise will be hampered no matter how friendly the business laws and regulations are. One of the major obstacles to non-inflationary increase in public spending is the outsized non-debt recurrent expenditure (NDRE). At N8.27 trillion, NDRE accounted for 40 percent of the 2023 budget. With agitation for a dramatic increase in the national minimum wage, NDRE will become bigger – at least in nominal terms – and further stoke inflationary pressure. With the economy more naira awash, an escape to the safe haven of the US dollar will further exacerbate the downward pressure on the Nigerian currency.
Therefore, the government needs to curb certain uneconomic expenditures. In the context of a belt-tightening by the people, government officials should not continue to be lavish in allocating resources for their own welfare. It is in this regard that the administration must reconsider its allocation of N40 billion for members of the National Assembly for the purchase of foreign cars.
Such prudence in public expenditure should be a starting point in a wider cut in the wasteful, high cost of governance. A careful review of the recommendations of the Steve Oronsaye report on civil service reform could be helpful in this regard. The report identified 102 government agencies and parastatals that should be abolished or merged. It further identified 14 agencies that should be reverted to departments in ministries. The report also recommended the discontinuation of government funding for professional bodies and councils.
After years that the previous administrations had harped on “economic diversification”, proceeds from oil and gas exports still account for about 95 percent of government’s foreign exchange revenue. The Tinubu administration needs to succeed where its predecessors had failed. It must unlock productivity in the nonoil sector, especially the SMEs. In this regard, the government might need to delay any aggressive tax policy it may wish to implement as a means of increasing government revenue as it may impact the SME sector.
It is gratifying that the President has issued executive orders on suspending the implementation of various tax measures signed by President Muhammadu Buhari shortly before the end of his term. President Tinubu signed the Finance Act (Effective Date Variation) Order 2023 which moved the commencement date of the Finance Act from 23 May 2023 to 1 September 2023. He also signed the Customs, Excise Tariff (Variation) Amendment Order 2023, moving the commencement date of the 5 percent excise tax on telecommunication services as well as the excise duties escalation on locally manufactured products from 27 March 2023 to 1 August 2023. He also suspended the newly introduced Green Tax and the Import Tax Adjustment levy on certain vehicles. Although, it was stated that the executive orders were issued in order to comply with the 90 days minimum advance notice for tax changes as contained in Nigeria’s 2017 National Tax Policy, there have been calls for the President to suspend the implementation of the reviewed taxes altogether.
The government cannot rely too heavily on taxation; it must provide policy incentives to catalyse progress on the economic diversification agenda and foster improvement in GDP growth, macroeconomic stability, job creation, sustainable public finances, and promotion of greater private sector activity. But despite government’s rhetorical effusion about diversification, Nigeria remains one of the least diversified economies in the world, even as Africa is home to eight of the world’s fifteen least diversified countries, according to the International Monetary Fund’s Export Diversification Index (2020).
Nigeria now needs to latch on the opportunities of the African Continental Free Trade Area (AfCFTA) to improve its trade with other African countries. To enhance the process, capital investment is required in core infrastructure such as power, telecommunications, transportation, and logistics. This will support diversification into non-resource activities, such as manufacturing and services, and improve market access and penetration.
The potential benefits of subsidy removal will not materialise without improvement in public financial governance to drastically curb public sector corruption. Most importantly, policy must begin to reverse the hardship Nigerians are currently facing for the structural adjustment in public finance to deliver its targeted long-term benefits.
Funmilayo Odude is a Partner at Commercial and Energy Law Practice (CANDELP).