#1Nigeria Development Update Seizing the opportunity NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP June 27, 2023 Jomy Twanse 20#2WORLD BANK GROUP WORLD BANK GROUP NIGERIA DEVELOPMENT UPDATE | NOVEMBER 2021 Time for Business Unusual NIGERIA DEVELOPMENT UPDATE | JUNE 2022 The Continuing Urgency of Business Unusual NIGERIA DEVELOPMENT UPDATE | DECEMBER 2022 Nigeria's Choice WORLD BANK GROUP BO NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP#3NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP WORLD BANK GROUP NIGERIA DEVELOPMENT UPDATE | JUNE 2023 Seizing the opportunity 2#4- June 2023 NDU: "Seizing the opportunity” – in a nutshell میرا The recently undertaken PMS subsidy & FX reforms are historic: NGN 3.9 trn in savings in 2023 alone Stops Nigeria from going over a fiscal cliff Sets the stage for a new, upward investment, growth, and development trajectory Inflation impacts should be temporary but will be significant, so provide some timely, temporary and targeted assistance: Move to provide quick support: cash transfers can help shield poor and vulnerable HHs It can be done affordably relative to the resources getting freed up from the reform, and financing is available It can be done based on robust identification of recipients who need help the most, and transparently by digital methods Beyond the immediate assistance, consider formulating and communicating a new, broader COMPACT around: Restoring fiscal sustainability, while also supporting poor and vulnerable HHs to weather the adjustment Spending better, to tackle development priorities Sustainably spending more, based on mobilizing more revenues Entrench the new approach to macroeconomic stability and faster growth through continued reforms: FX policy: focused on maintaining a unified exchange rate with transparent price discovery based on FX supply and demand Monetary policy: focused on price- stability through coherent policies and a revitalized nominal anchor Fiscal policy: focused on rebuilding fiscal space, through careful control of total spending, spending better, and mobilizing more revenues Trade and structural policies: focused on removing the regulatory bottlenecks and constraints to trade, investment and growth NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP 3#56,000 4,000 2,000 0 NIGERIA SEIZING THE OPPORTUNITY TO RISE TO ITS POTENTIAL: RECENT REFORMS CAN BEGIN TO BEND NIGERIA'S DEVELOPMENT PATH UPWARDS US$, 2017 PPP 18,000 16,000 14,000 12,000 10,000 8,000 Indonesia's GDP per capita Nigeria: rising to potential, with the reforms underway & complementary reforms 1970 1972 NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP 1974 1976 1978 1980 1982 1984 1986 Nigeria's GDP per capita 1988 1990 1992 1994 1996 1998 2000 Average GDP per capita growth 2002 - 2014: 5.1 percent Source: NBS, WDI, and World Bank estimates 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Reform reversal 2024f 2026f 2028f 2030f 4#6PART 1: UNDERSTANDING THE URGENCY OF REFORMS NIGERIA'S ECONOMY IN THE FIRST HALF OF 2023 NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP#7GLOBAL BACKDROP: OIL PRICES HAVE DROPPED SINCE LAST NDU, BUT ARE STILL ABOVE AVERAGE - YET NIGERIA HAS NOT BEEN BENEFITING Oil prices dropped in H1 2023 but remained above the but after recovering from the COVID-19 shock, US$/bbl 160 140 average price of the last two decades... 120 100 80 May 60 60 40 20 Average 2006-2019 = US$62.8/bbl 0 May-06 May-07 May-08 May-09 May-10 May-11 Percent 6.0 Crude oil price 4.0 May-12 May-13 May-14 May-15 May-16 May-17 May-18 May-19 May-20 May-21 NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP Sources: CBN May-22 Mav-23 2.0 0.0 Historical average of -2.0 Real GDP growth 2018-19 2.1 percent -4.0 -6.0 -8.0 growth has softened Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Sources: NBS Real GDP growth Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 6 2.4#80 2 Jan-21 Mar-21 May-21 Jul-21 NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP 6 Global policy rates Sep-21 Nov-21 Jan-22 GLOBAL BACKDROP: CONTINUED TO ADD TO THE PRESSURE ON NIGERIA'S ALREADY HIGH FINANCING COSTS AND INFLATION Global financial conditions tightened as monetary policy tightened to reduce inflation The extent of global monetary policy tightening has been Percent 8 unprecedented... ...while commodity prices remain well above pre- Index, 2015-19 = 100 250 EMDES pandemic levels Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 Source: World Bank Advanced 150 economies 0 2015 50 2016 100 2017 2018 2019 200 2020 2021 2022 2023f 2024f 7 Energy Food Metals#9GROWTH WEAKENED IN Q1, HAMPERED BY CASH SCARCITY - The naira redesign caused a cash crunch, exacerbating the drag caused by external conditions and – mainly - by other domestic policies The naira demonetization reduced GDP growth in manufacturing and services... ...and did not improve either inflation or the FX parallel market rate premium Percent 7.5 Naira redesign 7.0 Non-oil, non-agriculture Percent 23 22 GDP growth 6.5 21 21 6.0 5.5 5.0 Counterfactual 20 19 Inflation 18 4.5 17 4.0 16 3.5 15 3.0 Q1 2022 Q2 2022 Q3 2022 Q4 2022 Q1 2023 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP Source: NBS, World Bank, FMDQ, and Aboki Rates. Naira redesign Percent 90 80 70 70 60 FX premium (rhs) 50 Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22 Jan-23 Feb-23 Mar-23 Apr-23 May-23 40 40 30 30 8#1015 INFLATION CONTINUED INCREASING AND REACHED A 17-YEAR HIGH Nigeria's high, structural inflation worsened as monetary and fiscal policy remained loose In contrast to the global trend, Nigeria's inflation Percent 25 surged in H1 2023... ...and policy rate increases were ineffective in controlling inflation because the overall policy stance stayed loose Index (2019-100) Percent 21.0 20 20 110 Nigeria 105 100 95 TIGHTER MONETARY POLICY Дам Monetary conditions index 10 00 90 Kenya South Africa MPR (rhs) UK 85 5 US 80 0 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 Jan-23 May-23 75 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Source: CBN, WDI, FMDQ, World Bank 19.0 17.0 15.0 13.0 11.0 9.0 LOOSER MONETARY POLICY 7.0 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21 Oct-21 Apr-22 Oct-22 Apr-23 5.0 6#11HIGH INFLATION MEANS THAT MORE NIGERIANS BECAME POOR Not only did poverty increase, but food insecurity rose too Inflation pushed an estimated 4 million more Nigerians into poverty in the first 5 months of 2023... Number of poor people (millions) 95 90 90 4 million additional Nigerians falling into poverty 4 ...and average prices of locally produced staples have increased faster than average inflation What does N1000 buy? April 2022 April 2023 Yam 1.7 tubers 0.9 tuber 85 55 Bread 2.3 loaves 1.8 loaves 80 89.8 89.8 75 70 Start of 2023 Kerosene 1.7 liters May 2023 K PE Pá K NIGERIA Source: World Bank estimates based on NBS data THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP Source: NBS 0.9 liter K 10#12FOREIGN EXCHANGE DISTORTIONS WERE SEVERE As CBN rationed supply and attempted to control demand in the FX market The premium between the parallel and official rate almost doubled in the year through May 2023 ...and Nigeria's FX premium was among the highest in the world Naira/US$ 900 800 700 600 500 FX premium = 37% 400 300 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22 Jan-23 Percent 150 Parallel rate 125 FX premium = 63% IE rate 100 75 I I Parallel rate premium 50 50 25 0 Syria Iran Argentina Ethiopia Zimbabwe Burundi Nigeria Algeria Malawi Myanmar Congo, DR. Angola Bangladesh Lao PDR Libya ■ Ghana Mozambique■ Ukraine■ Sri Lanka■ Sudan ■ Venezuela Feb-23 Mar-23 Apr-23 May-23 Note: Latest data as of the end of Q1 2023 (May 2023 for Nigeria). Excludes Lebanon and Yemen. Source: FMDQ, World Bank, Aboki rates 11 11#1320 20 25 2011 NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP 30 45 50 US$ billion 55 FX RESERVES KEPT DECLINING, DESPITE HIGHER OIL PRICES As well as the negative impact of previous FX policies, the petrol subsidy also reduced net FX inflows 40 Oil price shock Reserves 35 2012 2013 2017 Sources: CBN US$/bbl Crude oil price (rhs) 140 COVID-19 and oil price shocks 120 I&E window created 2018 2019 2020 100 Additional SDR allocation 80 2021 60 Declining reserves despite high oil 40 prices 2022 2023 12 0 20#14Revenues remained below 7 percent of GDP (one of the lowest globally) despite the boost in non-oil revenues ... DETERIORATING FISCAL SITUATION PRIOR TO THE PMS SUBSIDY REFORM Despite some improvement in non-oil revenues, fiscal and therefore debt dynamics were worsening rapidly ...which led to interest costs surging, crowding out other spending such as capital expenditure Percent of GDP Percent of GDP 5.0 4.7 9.0 4.5 8.0 Capital expenditure 4.0 7.0 3.4 3.5 3.3 3.3 Non-oil 2.9 6.0 4.6 4.4 5.0 4.7 4.5 5.1 3.0 revenue 2.6 2.6 2.5 2.3 2.8 2.0 2.1 1.9 1.9 2.0 4.0 1.5 1.3 3.0 1.0 1.6 1.5 Interest payments 2.0 3.6 0.5 3.0 Oil 1.0 2.0 2.0 1.8 0.0 revenue 2015 2016 2017 2018 2019 2020 2021 2022 0.0 2018 2019 2020 Sources: BOF and OAGF 2021 2022 Sources: CBN and OAGF and World Bank estimates NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP 13#15AS A RESULT, PUBLIC DEBT INCREASED TO 40 PERCENT OF GDP As external markets were closed, the federal government borrowed more mainly from CBN to finance its deficit In 2022, the FGN was unable to meet its budgeted borrowing targets, resulting in more financing from the CBN... Naira billion 8000 and pushing debt service above 100 percent of revenues Percent of revenue 120.0 Percent of GDP 45.0 7000 6000 Budget 5000 Actual 4000 3000 2000 1000 0 40.0 Debt service (rhs) 100.0 35.0 30.0 80.0 25.0 60.0 20.0 Public debt stock 15.0 40.0 10.0 20.0 5.0 -1000 Domestic Borrowing External Borrowing CBN Ways and (excl. Means 0.0 0.0 2015 2016 2017 2018 2019 2020 2021 2022 NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP multilateral/bilateral loans) Sources: BOF and OAGF Sources: CBN and OAGF and World Bank estimates. 14#16PART 2: THE REMOVAL OF THE PMS SUBSIDY NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP#17THE PMS SUBSIDY REFORM REMOVES AN UNSUSTAINABLE FISCAL BURDEN In 2022, the petrol subsidy drained 32 percent of Nigeria's revenues Petrol subsidy accounted for 0.9 percent and 2.2 percent of GDP in 2021 and 2022 Naira, billions 9,000 8,000 Gross oil and gas 7,000 revenue 6,000 Petrol subsidy 5,547 Net oil and gas revenue 5,000 4,000 Other deductions -1,607 3,609 -331 3,000 2,000 1,000 0 NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP 2021 8,482 -4,532 3,578 -372 Sources: World Bank calculations based on data from OAGF and NBS 2022 16#18REMOVING THE PETROL SUBSIDY HELPS NIGERIA AVOID A FISCAL CLIFF AND EASES DEBT SUSTAINABILITY RISKS Percent of GDP -2.0 -2.5 Average fiscal deficit 2015-2019: 3.9 percent of GDP -3.0 -3.2 -3.5 -3.6 -3.8 -4.1 -4.0 -4.5 -5.0 Fiscal deficit after the subsidy removal -4.0 -4.0 -4.6 -5.0 -5.1 -5.1 -5.5 -6.0 -6.5 -7.0 2015 2016 2017 2018 2019 2020 -6.6 -6.4 -6.8 -6.8 No subsidy removal 2021 2022 2023 2024 2025 NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP Source: World Bank estimates based on BOF, DMO, OAGF, and NNPC. 17#19EVEN WITH THE RECENT REFORMS, FINANCING NEEDS REMAIN ELEVATED And complementary measures are needed to reduce debt pressures Gross borrowing is expected to be high, albeit lower than in a no reform scenario... and debt servicing will remain a concern despite the increase in fiscal space Percent of GDP 12.0 Percent of revenues 180 No reforms 160 10.0 140 5.4 5.1 8.0 5.0 4.2 120 2.4 Ways and 6.0 100 0.8 1.9 0.7 1.7 Means/ 1.8 1.6 Residual 80 1.4 4.0 External With subsidy removal and borrowing 60 FX reforms 5.2 5.0 2.0 4.3 3.9 4.0 3.5 40 Domestic borrowing 0.0 20 2023 2024 2025 2023 2024 2025 No reforms Reform scenario 0 2022 2023 2024 2025 NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP Source: World Bank estimates based on data from BOF and DMO 18#20IT IS CRITICAL TO CHOOSE HOW SAVINGS FROM REFORMS WILL BE USED To maximize the impact of the petrol subsidy reform Paying off subsidy arrears to NNPC will reduce the fiscal savings for 2023... Naira, billions ...and if the government undertakes large new expenditures the fiscal situation for 2023 could rapidly deteriorate again Fiscal gains from 4,500 subsidy removal Payment of and FX reforms subsidy 4,000 3,906 arrears 3,500 3,000 2,500 2,000 1,500 1,000 -2,800 500 0 NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP Percent of GDP 0.0 2022 2023 2024 2025 -1.0 -2.0 -3.0 -4.0 Savings for Fiscal balance use by the -5.0 Federation 1,106 -6.0 -7.0 -8.0 Source: World Bank estimates based on NNPC and BOF data Fiscal balance including payment of NNPC arrears Fiscal balance including payment of NNPC arrears and higher wage bill 19#21AVOIDING THE CLIFF, BUT STILL CLIMBING THE MOUNTAIN: BREAKING OUT OF THE LOW REVENUES / LOW SPENDING FISCAL EQUILIBRIUM, AND IMPROVING SPENDING EFFICIENCY More reforms to strengthen revenues are needed to fund public services and development. On present trends, Nigeria will continue spending less than $20/person/month on non-interest expenditure for the foreseeable future Percent of GDP US$ 30 20.0 18.0 17.6 25 16.0 SSA average 14.0 20 12.0 00 10.0 8.4 8.6 8.6 8.7 8.8 8.9 Total 8 8 Monthly per capita 6 interest 5 5 expenditure 15 6 5 5 8.2 8.0 7.4 revenue 10 6.0 4.7 4.7 4.9 5.0. 5.1 5.2 4.6 Non-oil revenue 17 5.0 12 12 14 13 15 16 5 Monthly per 18 capita non- interest expenditure 4.0 Oil 2.0 3.7 3.5 3.9 3.8 3.7 3.8 3.7 revenue 2.4 0 0.0 2023 2024 2025 2026 2027 2028 2029 2030 2023 2024 2025 2026 2027 2028 2029 2030 Source: World Bank estimates based on data from BOF, DMO, and WEO NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP 20 20#22PART 2: FOREIGN EXCHANGE MANAGEMENT REFORMS NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP#23THE CBN UNDERTOOK A SUBSTANTIAL FX REFORM Multiple windows IN THE PAST: 4 official windows, each one with a different price discovery mechanism. NOW: All windows were merged into the I&E window. 250 Price discovery IN THE PAST: Willing buyer willing-seller mechanism was only available at the I&E window, and it was not fully enforced. ⚫NOW: Willing buyer-willing seller reintroduced. Transparency and predictability IN THE PAST: Not all orders were registered. NOW: Order Book reintroduced. . IN THE PAST: The rate for government- related transactions was within 2 percent of the NAFEX. NOW: The operational rate for all the government-related transactions is the weighted average rate of the proceeding day's executed transactions at the I&E window. IN THE PAST: RT 200 and Naira4Dollar Remittance Schemes: costly, subsidized FX windows. NOW: Schemes removed. NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP Source: CBN The Central Bank has communicated clearly to the public the operational changes to the FX market. 22 22#24THE REFORMS HAD AN IMMEDIATE IMPACT ON THE OFFICIAL FX MARKET With the IEFX and parallel market rates converging, Nigeria has made rapid progress towards re-establishing a unified, market-reflective FX rate The re-introduction of the willing buyer willing seller mechanism has allowed price discovery in the I&E window... Naira/US$ 800 ...and the premium between the official and the parallel rates dropped substantially to below 10 percent 150.4 160 Parallel rate 140 750 120 700 100 Average June, 14 - 20: 711 N/US$ 80 650 60 600 40 20 550 0 500 IEFX rate 450 400 Jan-23 Feb-23 Mar-23 Apr-23 May-23 Jun-23 NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP Sources: FMDQ and Aboki rates Syria Iran Parallel rate premium 90.9 I I Argentina 87.1 Ethiopia 84.1 Zimbabwe Burundi NGA (May 2023) Algeria 72.1 63.0 63.0 53.5 Malawi 45.4 Myanmar 36.0 Congo, DR. 14.1 Angola 11.1 NGA (14-19 June) 8.6 Bangladesh 6.9 Lao PDR 6.8 Ghana 6.7 Sources: Aboki rates and World Bank Libya ■6.2 Mozambique 4.4 Ukraine 3.2 Sri Lanka 2.8 Sudan 2.6 Venezuela 0.9 23 23#25N/US$ 900 800 700 IMPACTS: INFLATION PASS-THROUGH IS EXPECTED TO BE MODERATE The parallel market had already passed through domestic prices The parallel rate moves first (depreciates), and this is followed by a rise in inflation... 600 500 400 Inflation rate / (rhs) 300 200 Parallel rate 100 I&E rate 2014 NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP Sep ΛΟΝ Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar 2015 2016 In April 2017, the IEFX window is created (an effective devaluation) and the supply of FX improves. With greater ER predictability the parallel rate comes down (appreciates), and this helps to bring down inflation. Similar dynamics since 2021. The parallel rate and inflation move closely together, but inflation is not as responsive to the IE rate. This implies that a large part of the "passthrough" between inflation and the ER is already accounted for. 5 May Jul Sep ΛΟΝ Jan Mar May Jul Sep Nov Jan Mar 2017 2018 Sources: FMDQ, NBS and Aboki rate 2019 May Jul Sep ΛΟΝ Jan Mar May Jul Sep Nov Jan Mar May Jul 2020 2021 Sep ΛΟΝ Jan Mar May Jul 2022 Sep ΛΟΝ Jan Mar 2023 May 24 24 0 10 15 Percent 25 20 20#26IMPACTS: PUBLIC EXTERNAL DEBT IS EXPECTED TO INCREASE DUE TO VALUATION EFFECTS, BUT WILL NOW BE ON A STABLE PATH Despite the increase in external debt, the improvement in nominal revenues is expected to reduce total borrowing Public debt without the subsidy removal and FX reforms would have been higher due to increasing CBN financing Percent of GDP Public debt without 50 Public debt subsidy removal 48 49 46 46 46 45 and FX reforms 40 40 40 60 30 20 20 10 0 NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP 2022 2023 2024 2025 Sources: DMO, CBN, and World Bank estimates 25 55#27PART 4: REFORM IMPLICATIONS WHERE TO FROM HERE TO SEIZE THE OPPORTUNITY TO RISE TO POTENTIAL NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP Jomy Nwany#28THE RECENTLY IMPLEMENTED MACRO REFORMS WILL HAVE A POSITIVE IMPACT ON MACRO STABILITY AND ECONOMIC GROWTH Growth is expected to increase... ...and while inflation will be higher in 2023, it will be lower in 2024-2025 if the right policy mix is sustained 4.5 30.0 Projected GDP growth (%): pre- and post-reform baselines 4.0 Projected annual inflation (%): pre- and post-reform 25.0 3.5 20.0 3.0 15.0 2.5 2.0 10.0 1.5 5.0 1.0 0.0 0.5 0.0 -5.0 2022 2023 Pre-reform baseline Pre-reform baseline 2024 2025 2022 2023 2024 2025 Post-reform baseline Post-reform baseline Pre-reform baseline Pre-reform baseline Post-reform projection ― Post-reform projection NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP Source: NBS and World Bank estimates. 27 27#29400 600 J.2022 NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP Bps 1400 1200 1000 800 FL Σ FINANCIAL MARKETS ALSO SHOW INCREASED OPTIMISM ABOUT FUTURE ECONOMIC PERFORMANCE Nigeria's risk premium has fallen in the international capital market Eurobond spreads A M J A S Source: JP Morgan. O N D J.2023 FL M A M J 28 Nigeria Angola Kenya#30HOWEVER, THE REMOVAL OF THE SUBSIDY WILL TEMPORARILY INCREASE INFLATION Inflation will increase in H2 2023, before decreasing below 20 percent in 2024... ...as the financing gap, and hence reliance on inflationary CBN financing, decreases Percent of estimated revenues 35 Percent 30 30 25 25 20 20 15 10 5 120 Ways and Means 100 financing if subsidy had continued Inflation forecast 80 Jan-23 Feb-23 Mar-23 Apr-23 May-23 NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP Sources: NBS and World Bank estimates Jun-23 Jul-23 Aug-23 Sep-23 Oct-23 Nov-23 Dec-23 Jan-24 Feb-24 CBN inflation target (6-9 percent) Apr-24 Mar-24 May-24 Jun-24 Jul-24 Aug-24 Sep-24 Oct-24 Nov-24 Dec-24 60 Financing gap 40 20 0 2023 2024 Sources: World Bank and CBN. 2025 29 29#31THE NEAR-TERM ADDED PRESSURE ON HOUSEHOLD FINANCES MAKES IT CRITICAL TO ACCOMPANY THE REFORMS WITH A SOCIAL COMPACT Including temporary cash transfers to help shield poor and vulnerable households. The current coverage of social protection programs (SPPs) is low at 19 percent of the population 7.1M additional Nigerians would be pushed into poverty by inflation in the absence of any compensation Expected income loss per month per household 20,000 Economically insecure Others 18,000 16,000 14,000 12,000 10,000 Poor 8,000 6,000 4,000 2,000 0 1 2 3 456 Consumption deciles 7 8 9 10 INVEST in a social protection system that can provide timely, targeted and temporary support to HHs experiencing a shock (like the increase in PMS prices due to subsidy removal) . Currently: Nigeria spends only 0.7% percent of GDP on social safety nets (SSA: 1.2%) 19% of the population covered (SSA: 25%) Social benefits: • Human capital investment Education outcomes Health outcomes Economic benefits: Trust in the government Support for and therefore sustainability of reform efforts NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP Source: 2018/19 NLSS and World Bank estimates. 30 30#32NIGERIA CAN DELIVER A CASH TRANSFER TO POOR AND VULNERABLE HOUSEHOLDS AS ONE ELEMENT OF A BROADER SOCIAL COMPACT Using a robust targeting method and transparency based on digital payments Registries cover 44 percent of all HHs, span across Nigeria, ... and targeting & transparency benefit from digital and target the poor... delivery Percentage of households captured in the registry 80 Transfers align with CBN's know-your- customer (KYC) requirements Mobile wallets can be set up for recipients 5 7 Rapid Response Registry: 2.7M HH וווווויייי National Social Registry, 15.7M HH Biometric verification increasingly used 0 1 - Least wealthy 3 Source: World Bank staff based on Smythe and Blumenstock (2022) and administrative registry data from NASSCO. NSR: National Social Registry, 15.7M households RRR: Rapid Response Registry: 2.7M households NIGERIA THE WORLD BANK IBRD⚫IDA WORLD BANK GROUP Savings from the subsidy can also be used for other pro-poor service delivery (ex. health, education, infrastructure) 31 34#33A POSSIBLE WAY FORWARD: A COMPACT WITH THE NIGERIAN PEOPLE UNSUSTAINABLE FISCAL BURDEN OF PMS SUBSIDIES REMOVAL of PMS SUBSIDIES while ensuring ADEQUATE SUPPLY and COMPETITIVE PMS PRICING post- DEREGULATION VERY LOW EXPENDITURES ON CRITICAL SERVICES AND INVESTMENTS: HEALTH, EDUCATION, ROADS, ... A SPIKE IN INFLATION MAKING IT HARDER FOR MILLIONS TO MEET THE COST OF BASIC NEEDS PARTICULAR HARDSHIP FOR NEAR- POOR AND LOW- INCOME WHO USE PMS DIRECTLY POSSIBLE SOCIAL UNREST BECAUSE OF HARDSHIPS IN A CONTEXT OF A TRUST DEFICIT A more FLEXIBLE MARKET- REFLECTIVE APPROACH TO EXCHANGE RATE MANAGEMENT to dampen the increase in the PMS price and MITIGATE THE IMPACT ON INFLATION A LARGE-SCALE CASH TRANSFER PROGRAM to provide QUICK RELIEF to the POOR, NEAR POOR as well as the LOW- INCOME who are most DIRECTLY AFFECTED A BROADER COMPACT-a commitment EX-ANTE to a set of PRIORITY PROGRAMS that benefit ordinary Nigerians A PUBLIC SENSITIZATION CAMPAIGN of the OPPORTUNITY COSTS of PMS subsidies and the ALTERNATE USES to which the RECOVERED REVENUES can be put ENGAGEMENT with CRITICAL STAKEHOLDERS to BUILD THE CONSENSUS SECURING FINANCING NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP 32 32#34KEY MACRO-FISCAL POLICY RECOMMENDATIONS FOR THE NEXT SIX MONTHS TO KEEP SEIZING THE OPPORTUNITES To sustain and deepen FX policy reform • Remove the FX restrictions for the list of 43 items. • • Keep actively communicating and ensuring clarity about the new FX policy with the focus on a unified, market- reflective, transparently-determined rate. Reorient monetary policy operations towards achieving price stability, which will help to anchor the exchange rate. To tackle inflation Continue reducing subsidized CBN lending to medium and large firms. • End government borrowing from the CBN. Replace import and FX restrictions with tariffs that reflect the ECOWAS Common External Tariff. To build on the PMS reform and rebuild fiscal space Sustain the PMS subsidy removal: keep prices deregulated, foster fair competition and curb any commercial malpractice so that efficiency gains are passed onto consumers. • VAT: increase rate, while allowing for input tax credit on capital and services; remove exemptions on petrol products. Improve tax administration to ensure the collection of the newly introduced excises on telecommunication, single use plastics, and high-polluting vehicles. Adopt a data-driven approach to tax audit. ⚫ Link residential property with PIT returns. Introduce a simple turnover tax on SMEs at state level instead of various existing fees & levies. NIGERIA THE WORLD BANK IBRD⚫IDA WORLD BANK GROUP 33 33#35Thank You Feather flakes By Jimmy Nwanne Jomy Twanse 20#36WORLD BANK GROUP WORLD BANK GROUP WORLD BANK GROUP NIGERIA ECONOMIC UPDATE | FALL 2019 Jumpstarting Inclusive Growth: Unlocking the Productive Potential of Nigeria's People and Resource Endowments NIGERIA DEVELOPMENT UPDATE | JUNE 2020 Nigeria in Times of COVID-19: Laying Foundations for a Strong Recovery NIGERIA DEVELOPMENT UPDATE | DECEMBER 2020 Rising to the Challenge: Nigeria's COVID Response WORLD BANK GROUP WORLD BANK GROUP WORLD BANK GROUP NIGERIA DEVELOPMENT UPDATE | JUNE 2021 Resilience through Reforms ODEYEME 20 WORLD BANK GROUP WORLD BANK GROUP NIGERIA DEVELOPMENT UPDATE | NOVEMBER 2021 Time for Business Unusual BO This and previous editions of the NDU are available at: worldbank.org/en/country/nigeria NIGERIA DEVELOPMENT UPDATE | JUNE 2022 The Continuing Urgency of Business Unusual NIGERIA DEVELOPMENT UPDATE | DECEMBER 2022 Nigeria's Choice NIGERIA DEVELOPMENT UPDATE | JUNE 2023 Seizing the opportunity NIGERIA THE WORLD BANK IBRD ⚫IDA | WORLD BANK GROUP 35