Ahmed: Subsidy Removal Will not Cause Huge Spike in Inflation

The Minister of Finance, Budget and National Planning, Zainab Ahmed, in this interview at the just conclusion IMF/World Bank Spring meetings in Washington DC , speaks on the impact of fuel subsidy removal on Nigeria’s economy, the $800 million facility by the World Bank and other pertinent issues. Nume Ekeghe presents the excepts;

The World Bank recently approved a facility of $800m to cushion the effect of removal of fuel subsidies on vulnerable Nigerians, can you give an insight to how the funds would be utilised?
The $800 million has been negotiated and approved by the federal executive council and we now have a request before the parliament for approval. And once the parliament approves it, we roll. We’ve also been doing preparatory work side by side along the approval process. And that includes the building of the social register, which will be used for the electronic transfers of the funds. We needed to have this ready because when the government eventually removes the fuel subsidy, there will be an immediate transport palliative that will be provided to the most vulnerable members of our society who have been identified, registered, and now contained in our national social register. This effort is led by the Ministry of humanitarian affairs, disaster management, and social development. They developed that register with the support of the World Bank. The register has about 10 million households and that’s an equivalent of 50 million Nigerians.

The initial design is to disburse cash transfers of N5,000 per month per household for a period of six months. So, whether this is enough is an assessment that we are undertaking with the transition team. If it’s not enough, the country has to raise additional resources to be able to cover more people, extend the period or increase the amount; whichever is finally negotiated upon. When the subsidy is removed, there would be additional revenue that would now accrue to the Federation account. One of the things we are working on is how to use this incremental revenue would be used. The money belongs to the federal, state, and local governments. So, we need an of how to use this.

We hope that we’ll be able to still fence this incremental revenue and apply it to measures that will help to ensure that the fuel subsidy removal is actually sustained so that It won’t be another start-and-stop program. But this has to be a collective decision. The current administration and the incoming administration are working on a plan to make sure that we have a consensus on how to use that incremental revenue. In the issue of other palliatives beyond the transport sector, again it would be part of the compact so depending on what the various stakeholders we’ll be engaging with including what the organised labour will be asking for. You mentioned the issue of the transport sector, so there will be a consideration of whether some of the support to the transport sector directly but again it’s not a decision that has been taken yet on how to deploy the incremental palliative because it has to be a consensus between the various stakeholders and these stakeholders include the states different unions, the incoming administration as well as the outgoing administration.

The issue of debt sustainability came up in various sessions during the meetings, and you keep saying we are still within the thresholds but with the increasing borrowings how much more can we borrow until it becomes unsustainable? Also, what is the government thinking in terms of restructuring and creating more room to attend to other sectors of the economy?
On debt sustainability, debt was one of the main things that were discussed throughout the sessions at the World Bank. It is an issue for most developing countries. Today as we speak because of high inflation globally and the continuous quantitative easing by the central banks globally are undertaking, interest rates continue to rise.

So, if you have taken a foreign debt, your cost of debt just rises without you doing anything. So, we all have these challenges such that what you have planned in budget and provided for just keeps changing because interest rates keep changing. So, it is a global problem, there hasn’t been a specific landing but it is a lot of considerations that globally there must be some initiatives that would improve the fiscal space of countries that have high debt burden including things like debt standstill or the freezing interest rate at some certain point and several options that are being discussed but there has to be an agreement on what to do. During covid, there was a Debt Service Suspension Initiative (DSSI) as a global initiative and after that, there was a common framework. So, it is something similar that is being worked on. So, this discussion includes the debtor nation, creditor nation, credit rating agencies and the multi latria development banks.

There are reports that the federal government will pay $23.3 million to consultants who facilitated the $800 million loan from the World Bank, can you confirm this?
I have no clue as to what this is about. We raise our funds ourselves. We don’t need consultants to raise funds from these institutions. The $800 million, we raised this by discussing with the Debt Management office, the Ministry of finance, and the World Bank country office in Nigeria. We don’t need consultants to help us raise any kind of finance. We have internal expertise that has worked well over time, so we don’t need consultants for that.

Can you speak on the discussions on the aviation sector with the International Finance Corporation (IFC)?
When we met with the IFC, they said they were engaging with the Nigerian aviation sector to see how they can provide financing for the operators of the sector. So, the operators of the sectors are airlines that are operating within the sector, so it would be the IFC funding the private sector to enhance their operations. It could be airlines, or other operators but not the government.

We learned the transition committee had meetings, can speak about their participation at these meetings?
We also understand they had meetings, they also joined some of our meetings but they didn’t join all of our meetings. The good thing in Nigeria today is that this transition process is guided by executive order. The executive order requires that there is a joint transition team. So, the transition team is both the incoming as well as the outgoing administration. And when we were preparing for this meeting, they sent a formal request that they want to participate and we welcomed it. And because of that, we organized some of the meetings to have them involved in. They were part of the bilateral meetings we had today. They also joined the deep dives that we did we had on Monday. So, we are working collaboratively.

Nigeria’s latest inflation figure is pegged at 22.04% and with subsidy removal in the horizon, how much more impact do you foresee the subsidy removal would have on inflation?
The fuel subsidy would always come with some challenges like increased inflation, which would naturally happen. It would happen initially, it would spike and then it will moderate and normalise. Anywhere in the world where you remove any kind of it has that effect. That is why that initial fund is necessary so that you are deploying it quickly and reducing the impact on the lives of the most vulnerable people in our society. So yes inflation may go up but our assessment is that it would not go up by much because as it is, the fuel cost in Nigeria or the cost Nigerians are already paying for fuel reflects the high cost of what would be attained when the fuel subsidy is removed. People are buying fuel at very high rates, it is not the pump price. So we think that inflation is already built into it. There might be some increase but it would not be a huge spike and even if there is, it would be transient and it would quickly come down and moderate.

What is being done to increase production in the oil and gas sector especially as this is still a major source of Nigeria’s revenue?
The National oil company is best suited to answer that but first of all, a lot of work has been done to enhance security since September last year, and there has been minimal disruptions in pipelines. But what we also find is that the National Oil Company reports that there is a need for increased investments in the sector and the NNPC Limited has been unable to increase investments in the sector because it is using a lot of its resources to fund fuel subsidy. So this fuel subsidy has effects in different facets. When the subsidy is removed, they will now be able to use their resources to invest alongside their operating partners. Their operating partners have been carrying them for some time and they are not doing that anymore to invest. So they have to invest in being able to pay given the cash call obligation that are now in default or in some arrears up and those investments will help to increase the production levels in addition to the work that has been security.

The IMF and World Bank have persuaded Nigeria to raise more revenues from taxes. Have there been any suggestions or recommendations from the multilateral to increase tax?
We need to increase revenue by expanding the tax base. The new administration has to consider the review of the VAT tax rate by way of increasing it. We have already introduced some new excise duties, so maybe when they stabilise, there may be reviews.

Lastly, we are just coming out of an election, why the rush to conduct the national census?
The census has been a work in progress for the past two years. There is a lot of work that goes on with preparing for a census. There is what we call delineation where the whole country is mapped, every single ward is mapped and numbered including geo-coordinates and GPS coordinates. The next and final step is the actual census. So there is all of the preparatory work and the equipment has been acquired. The actual census would take five days to a full week where every household, every person in the household would be enumerated. So they are going to physically go to houses to do this enumeration and the national population commission is ready.

They have given us notice that they are engaging about 885,000 ad hoc staff, they would train them on how to do the counting and how to use the tablet devices they have acquired and then they immediately deploy. There are two rounds, the first one is the housing census and then the second round is the population census. So the government has invested so much over the past two and half years in preparing for this census and the nature of this census is once you do the area delineation, by international standard if after 12 or 18 months you don’t use it you would have to do it all over again. So it would be wasteful if we don’t push the bar uncompleted. And we need the census because that is the base and credible data we need for planning and for everything we need a credible census. Over the last 16 years, what we have been doing is estimates and we are using estimates to plan and estimates to do everything. So we need the census to be done.