KPMG, a multinational audit, tax, and advisory services firm, has warned that the ongoing withdrawal of petrol subsidies in Nigeria may result in a significant increase in the inflation rate, potentially reaching 30% by June. The firm has recommended implementing measures to mitigate the impact of this new policy.
According to KPMG’s projections, the inflation rate is expected to decline from 2024 onwards. The firm also noted that while the general increase in prices of goods and services would not heavily impact food and transportation costs, the removal of fuel subsidies would lead to a temporary inflationary surge. As of April 2023, Nigeria’s inflation rate stands at 22.22%. KPMG’s prediction aligns with the World Bank’s forecast, which indicates that a one-off adjustment will cause higher inflation in 2023 and 2024, followed by a subsequent decrease.
KPMG emphasized that without compensating measures to shield the population from the price shock, more Nigerians could be pushed into poverty as inflation continues to rise. The firm outlined several factors that could influence the duration of the inflationary trend, including the extent to which petrol price increases have already been incorporated in various parts of the country where the market price exceeds the regulated price.
The report also highlighted the importance of the Central Bank of Nigeria’s (CBN) ability to effectively manage inflation through monetary policy. However, KPMG acknowledged that the CBN, like monetary authorities worldwide, faces challenges in containing runaway inflation due to significant supply-side and geopolitical drivers such as China’s recovery from COVID-19 and the impact of the Russia-Ukraine war.
To ensure the successful deregulation of fuel subsidies, KPMG stressed the need for a robust and sustainable market for eligible importers to access foreign exchange liquidity at a consistent rate. This would require substantial reforms to the CBN’s current approach to foreign exchange management, aiming to enhance the supply of foreign exchange and reduce the parallel market rate.
In addition, KPMG emphasized the importance of transparent communication regarding the removal of fuel subsidies to the Nigerian public. It advised the government to provide clear information about the rationale behind the subsidy removal, along with the expected benefits and compensatory measures to cushion the impact on the poor and vulnerable. The report suggested utilizing various communication channels, including social media, print and electronic media, town hall meetings, and community outreach programs.
KPMG also emphasized the need to reduce the cost of governance, increase public trust, and strengthen the social contract between citizens and the state to engage Nigerians in supporting the subsidy removal reforms proposed by the Bola Tinubu government. The report highlighted past challenges related to fuel subsidy removal, including corruption, inefficiencies, disinformation, and opposition from interest groups.
While acknowledging the complexity of removing petrol subsidies and its potential economic, social, and political impacts, KPMG stressed the necessity of coordination with the states, fiscal authorities, and the CBN to manage the monetary aspects of deregulation and subsidy removal. The firm asserted that foreign exchange reforms, along with the elimination of the gap between official and parallel exchange rates, are crucial for the success of the reforms.
To minimize the negative impacts of subsidy removal, KPMG proposed a coordinated set of actions that consider the inflationary impact, potential social unrest, and the need for compensatory measures to support the poor. One suggestion was to increase the minimum wage to lessen the effect of subsidy removal on consumer purchasing power. Additionally, KPMG recommended exploring alternatives to money supply boosting actions, such as transport vouchers for the rural and urban poor and tax cuts for the middle class, which could be effective without exacerbating inflation.
The report also called for transparent processes and demonstrated efforts to reduce wasteful expenditure and the rising costs of running the government. KPMG urged the government to have the necessary courage and political will to fully implement the Orosanye report, which is estimated to save the government N1.3 trillion.