Global audit, consulting, and financial advisory firm Deloitte revealed that while the immediate impact of removing fuel subsidies in Nigeria may be negative, the long-term benefits for the economy could be substantial.
In a report titled “Short-term pain, long-term gain,” Deloitte emphasizes that redirecting the saved funds from subsidies towards capital expenditure rather than recurrent expenditure, such as wages and salaries, could lead to significant economic growth.
According to the financial advisory firm, the new price of petrol is more than a 150 per cent increase, implying that consumer prices will rise further.
In the short term, even though the bulk of food transportation across the country is via diesel-fired trucks, food prices are expected to skyrocket with the increase in petrol prices.
“Inflation numbers for June will be sharply higher. Nigeria currently has an inflation rate of 22.22 per cent as of April 2023. Higher fuel and energy costs coupled with the ongoing planting season will be inflation triggers in the next couple of months.
“This suggests that the tightening stance of the CBN may be here to stay for a little while longer.”
Deloitte says it expects Nigeria to fall below the global poverty line of USD 2.15 per day in the short term.
“This could lead to a further increase in the crime rate as Nigerians struggle to make ends meet. Nigeria currently has a multidimensional poverty rate of 63 per cent and a multidimensional poverty index of 0.257,16, one of the highest in SSA and West Africa.
They added Gross Domestic Product (GDP) may be affected negatively in the short term, due to an increase in consumer prices and the resultant erosion in consumer purchasing power.
“A further decline in consumer demand will affect sales and lead to a reduction in production and inventory levels.
“This will ultimately affect aggregate output. While the real economy and the large informal sector will be directly affected by the removal of fuel subsidies as these are major consumers of petrol, the services sector and industries that use diesel and gas plants will be impacted indirectly.”
They also noted that labour productivity could be affected due to the increased hardships that will be faced by Nigerians, citing that the hybrid work mode adopted by most organizations following the COVID-19 pandemic is likely to intensify as a means to address the welfare impact of the subsidy removal.
Deloitte forecasts that in the medium to long term, the Nigerian economy stands to benefit, especially if the money saved is spent on capital expenditure rather than recurrent expenditure such as wages and salaries.
“Investment in capital projects has the multiplier effect of boosting productivity and ultimately output. An increase in the supply of goods will ultimately lead to a decline in prices and inflation in the long term.”
Deloitte lists short, long term benefits of fuel subsidy removal
