Fuel subsidy removal may push more people into poverty, KPMG warns

Fuel subsidy removal may push more people into poverty, KPMG warns

A multinational audit, tax and advisory services firm, KPMG, has predicted that the removal of petrol subsidy in Nigeria could see the inflation rate climb to 30 per cent from June.

Indeed, it warned in its latest report that the precarious situation could push more people into poverty unless compensating measures are put in place with effective communication to mitigate its effects on the people.

Removal of petrol subsidy was one of the highlights of President Bola Tinubu’s inaugural address on May 29. The announcement was followed by increase in petrol price by the Nigerian National Petroleum Company (NNPC) Limited.

The price hike elicited quick reactions from the organised labour which accused the government of failing to engage in necessary consultations before removing the subsidy.

The KPMG report stated that the removal of fuel subsidies would result in a temporary increase in inflation, which was at 22.22 per cent, as at April 2023.

It said its prediction aligned with the World Bank projection that a one-off adjustment would lead to higher inflation in 2023 and 2024, and lower thereafter.

KPMG stated, “Our internal macro model also supports the World Bank’s findings with a forecast of an increase of about six per cent over June 2023 inflation rate to bring it to about 30 per cent.

“In mid-2024, however, all other things remaining constant, and as year-on-year base effects kick in, the pace of inflation will drop significantly, though overall prices of goods and services will remain elevated.”

According to the firm, the capacity of the Central Bank of Nigeria (CBN) to manage inflationary pressures through effective monetary policy would be a major factor in halting the inflationary pressures.

However, KPMG stated that the CBN, like monetary authorities in other parts of the world, was struggling to contain runaway inflation while there were legitimate questions regarding the efficacy of interest rate hikes to contain inflation.

It stated, “However, for gradual or immediate deregulation to be effective, several conditions will have to be met, vis-a-vis establishing a robust and sustainable market for eligible importers to access, on a non-discriminatory basis, sufficient supply foreign exchange liquidity at the same rate for all eligible fuel suppliers.

“This will require significant and far-reaching reforms to CBN’s current approach to foreign exchange management to enhance supply of FX and bring down the parallel market rate.”

The organisation said a robust coordination with the states as well as with the fiscal authorities and the CBN in managing the monetary aspects of deregulation and subsidy removal was vital.

KPMG also warned that without foreign exchange reforms and an elimination of the gap between the official and parallel exchange rate, the reforms would not work.