The World Bank has recently released its June 2023 edition of the Nigeria Development Update, projecting a significant rise in Nigeria’s inflation rate due to the removal of fuel subsidies. According to the Washington-based institution, the country’s inflation is expected to hit 25% in the coming months as a consequence of this policy change.

This projection follows the recent increase in petrol prices, which rose from N197 per litre to over N500 per litre after the removal of subsidies in June. Currently, Nigeria’s inflation figure stands at 21.41%, as reported by the National Bureau of Statistics. However, the World Bank predicts that this number will surge to 25% in 2023.

The World Bank further emphasized that this inflationary trend is temporary, as it anticipates a decrease in headline inflation by the first quarter of 2024. The removal of subsidies, despite resulting in higher petrol prices in the short term, is expected to have a disinflationary effect in the future.

In explaining this effect, the World Bank stated, “This is because the subsidy removal creates additional fiscal space and reduces reliance on financing from the CBN, curbing the growth of the money supply.” It believes that this reduction in reliance on the Central Bank of Nigeria for financing will alleviate inflationary pressures.

To mitigate the impact of the fuel subsidy removal, the World Bank urged the Nigerian government to adopt macro-fiscal policy settings that promote price stability and provide palliatives to cushion its effects. The bank also stressed the importance of avoiding second-round effects, where initial price increases trigger broader inflation, including through wage-price spirals.

As Nigeria navigates the challenges associated with fuel subsidy removal, it remains crucial for the government to strike a balance between economic reforms and the well-being of its citizens. The World Bank’s projections provide valuable insights for policymakers to consider as they formulate strategies to manage inflation and ensure the long-term stability of the economy.