World Bank: Drop fuel subsidies, increase taxes for economic recovery

The World Bank has urged Nigeria to increase its revenue streams by removing subsidies on petroleum products and increasing taxes on “sinful goods” such as cigarette, alcohol, and sugary drinks.

“These reforms include improving tax administration, especially for VAT, while also undertaking some significant policy reforms, such as implementing a levy on electronic money transfers, and additional excise taxes on alcohol and tobacco,” it said.

“While these reform efforts are expected to generate additional revenues of over ₦3 trillion ($7.2 billion) a year, they may be challenging to politically implement in the run-up to the national elections, planned for 2023.”

In its Nigeria Development Update released on November 22, 2021, the World Bank said increasingly high inflation in the country has caused eight million Nigerians to fall into deep poverty in less than two years.

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According to the report, Nigeria no longer reaps the benefits of a hike in prices of crude oil. As a result, the country has been recording low revenues even as it strives to maintain high and unsustainable petrol subsidies.

Nigeria, the update noted, is the only country in the world “granting universal price petrol subsidies” and as such has the worst revenue-to-GDP ratio among 115 countries.

The bank argued that the poorest Nigerians do not benefit much from the subsidy regime.

“Nigeria is the only country in the world with a universal price subsidy that applies exclusively to PMS. Universal price subsidies for liquid fuels are almost always regressive, as the rich consume far more fuel than the poor,” the report read.

“PMS subsidies are especially regressive because PMS is used primarily in light- and medium-duty motor vehicles, which are rarely owned by the poor.”

Since raising PMS prices tends to have minimal adverse effects on poor households, governments worldwide have typically prioritized eliminating PMS subsidies over those that apply to other fuels.

“However, Nigeria has done the opposite—eliminating all subsidies for liquid fuels other than PMS. Moreover, the Nigerian PMS subsidy is exceptionally generous, and in October 2021 the PMS pump price was the seventh-lowest among 168 economies surveyed at just ₦495 ($4.40) per litre.”

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