The World Bank has warned that the high cost of subsidies, due to the spike in oil prices, may deteriorate Nigeria’s fiscal balance, saying that shielding the Nigerian consumers from the high cost of fuel will pile up more debts for the country.
For a nation with a lot of economic baggage on the eve of a general election, it is understandable why the Nigerian economy is open for scrutiny by members of the international economic community.
Besides this, the nation’s economy has been tottering as a result of a chain of economic developments which include the instability in the international crude oil market, the backlash of the Covid-19 pandemic, and the attendant reduction in the flow of foreign investment into Nigeria and of course, the ongoing hostilities between Russia and Ukraine, which have continued to put pressure on the commodities market globally.
Amidst these unfavourable economic realities, the current administration is expected to start winding down for a transfer of power after the next year’s general election. In the light of these, economic affairs commentators said there are quite a several unfinished businesses that if not properly handled may turn out to be landmines to the incoming administration.
Two of such issues are the controversial policy of fuel subsidy payment and debt sustainability. In its latest report on Nigeria’s economy, the global financial institution, the World Bank cautioned against the continued retention of the controversial policy, warning that fuel subsidy payments by Nigeria could significantly impact public finance and pose debt sustainability concerns.
Nigeria’s bank credit to the government surged to N14.9 trillion as of February 2022, an uptick from the N14.2 recorded in January 2022.
The concern of the global lender was contained in its new biannual report known as Africa’s Pulse, where the World Bank said the increasing fuel subsidy puts the Nigerian economy at high risk.
It said Nigeria is projected to have a 3.8 per cent growth in 2022, adding that as an oil-dependent country, weak oil production hampers economic recovery.
Apart from the red signal from the World Bank, another multilateral institution that raised the alarm was the International Monetary Fund (IMF), which stated that there is a reason to worry about this nexus between banks and governments.
“Large holdings of sovereign debt expose banks to losses if government finances come under pressure and the market value of government debt declines,” it stated.
The bank stated that a crisis with the credit to the government could force banks, especially those with less capital “to curtail lending to companies and households, weighing on economic activity.”
Meanwhile, the World Bank said increasing fuel subsidy puts the Nigerian economy at a high risk as subsidy payments could significantly impact public finance and pose debt sustainability concerns.
Although the World Bank and economic analysts have continued to raise concerns over the surging external debts, the Debt Management Organisation (DMO) insisted that Nigeria’s public debt remains within a sustainable profile, but is susceptible to revenue shocks.
In the just-released report of the 2020 Debt Sustainability Analysis (DSA) posted on its website, the DMO noted that the Risk Rating from the 2020 (DSA) revealed that Nigeria’s external debt remains at a Moderate Risk of Debt distress, but is sensitive to export shocks.
