How will Nigeria address the impact of subsidies removal?

The Nigerian government has announced its intention to remove subsidies on premium motor spirit and electricity in 2022, citing the unsustainable nature of the subsidies and their negative impact on the economy. In a bid to mitigate the effects of the subsidy removal, the government has proposed various interventions. The discussion surrounding the removal of subsidies has sparked a range of economic debates and policy discussions across the country. During a recent segment on CNBC Africa, Lucia Kimby, MD of ZCAP Partners, shared her insights on the implications of the subsidy removal and the government's proposed measures to cushion the impact. The decision to maintain the benchmark interest rate at 11.5% during the recent Monetary Policy Committee (MPC) meeting was discussed as a strategic move to monitor the effects of current policies. Lucia Kimby emphasized that the MPC's decision was in line with expectations, considering the recent economic data, including GDP growth and inflation figures. She mentioned that the GDP growth of around 4%, though a decline from the previous quarter, still represented an improvement. Kimby suggested that the MPC's cautious approach indicated a potential for more aggressive actions by the Central Bank of Nigeria (CBN) in the upcoming year, based on economic indicators. The conversation then shifted to the foreign exchange (FX) markets, with a focus on the management of the Naira's value against the dollar. Kimby highlighted the CBN's stance on recognizing only the official window for FX transactions, despite activities in the parallel market. She noted that the CBN's consistent interventions aimed to stabilize the Naira's value and supply adequate liquidity in the market. Regarding the government's plan to remove subsidies on petrol and electricity, Kimby acknowledged the longstanding discussions on the subject, dating back to the government's engagement with the International Monetary Fund (IMF) for budgetary support. She emphasized the financial strain caused by subsidizing fuel and electricity, surpassing allocations to critical sectors like health and education in the national budget. Kimby raised concerns about the proposed transportation stipend for 40 million vulnerable Nigerians, suggesting that the funding source for this initiative would likely come from subsidy savings. While acknowledging the immediate relief the stipend could offer, she expressed doubts about its long-term sustainability in alleviating economic pressures. Kimby emphasized the need for strategic investments in infrastructure and creating an enabling environment for private sector participation to address transportation challenges. The impending removal of subsidies is expected to have inflationary repercussions, given the historical trend of subsidized fuel contributing to higher inflation rates. Kimby recognized the potential for a temporary spike in inflation following the subsidy removal but stressed the necessity of discontinuing unsustainable subsidy practices for long-term economic stability. She also highlighted the prevalence of cross-border smuggling due to price differentials, underscoring the need to curb such illicit activities. In conclusion, while the subsidy removal poses short-term challenges and inflationary pressures, experts like Lucia Kimby view it as a critical step towards steering Nigeria's economy towards a more sustainable path. The government's proposed interventions, including the transportation stipend, are seen as initial measures to cushion the impact of the subsidy removal, with broader reforms in infrastructure and investment climate deemed essential for long-term economic resilience.