Petrol Subsidy Removal: KPMG Report Predicts 30% Inflation Rate, Seeks Cushioning Measures

KPMG, a multinational audit, tax and advisory services firm, on Tuesday, predicted that the current withdrawal of petrol subsidy in Nigeria could see the inflation rate climb to 30 per cent from June. It recommended that measures be put in place to mitigate the effect of the new policy. 

However the organisation projected that inflation rate would decline from 2024. It also noted that from experience, the general rise in prices of goods and services would not markedly impact food and transportation costs.

 Whether one-off or gradual, the 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 in the report, “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.”

However, as inflation was already high and sure to increase, the report forecasted that more Nigerians would be pushed into poverty, unless compensating measures to shield them, at least partially, from the price shock were put in place.

KPMG hinged the length of the inflationary trend on a number of factors, including the extent to which some of the inflationary impacts of increases in petrol prices had already been incorporated since the effective market price was already above the officially regulated price in many parts of the country.

Besides, it explained that the “pass-through” from increases in petrol prices to transport and food prices, from previous experiences, when fuel prices were increased, significantly suggested it was likely to be limited.

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 the world-over, was struggling to contain runaway inflation while there were legitimate questions regarding the efficacy of interest rate hikes to contain inflation given the significant supply-side and geopolitical drivers.

These drivers, it said, ranged from China’s erratic recovery from COVID-19 to the multifaceted impact of the Russia-Ukraine war.

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.”

In addition, KPMG noted that communicating the removal of fuel subsidies to the Nigerian public would be an important aspect of the process. It maintained that it was important to provide clear and transparent information to Nigerians about the rationale for the removal of subsidies.

The expected benefits as well as the compensatory measures that will be put in place to cushion the effect on the poor and vulnerable, KPMG advised, should be properly communicated.

The global financial services provider stressed, “Adequate communication with stakeholders is crucial to ensure that the rationale for subsidy removal is well understood and to manage public expectations. In the past, inadequate communication has led to widespread public protests and unrest.

“To effectively communicate the subsidy removal, the government can use a range of communication channels, including social media, print and electronic media, town hall meetings, and community outreach programmes.”

The organisation said reducing the cost of governance, increasing public trust and strengthening the social contract between citizens and state will go a long way in engaging Nigerians to support the subsidy removal reforms of the President Bola Tinubu government.

It said a critical lesson to learn from Nigeria’s past experiences with fuel subsidy removal related to the presence or absence of political will. In the past, it said implementation had been hindered by corruption, inefficiencies, disinformation, as well as opposition from interests and lobbyist groups.

KPMG cautioned that the removal of subsidies on petrol in Nigeria remained a complex issue that required careful consideration in terms of its potential economic, social, and political impacts.

While subsidies provided some benefits, it argued that they had also been a significant drain on the country’s resources and had contributed to inefficiencies and corruption.

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

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

“To minimise the negative impacts of subsidy removal, there is a need for a set of coordinated actions that consider the inflationary impact, potential social unrest, and the need for compensating measures to cushion the poor,” the firm said.

It suggested that one of the ways could be to increase the minimum wage to lessen the effect of the subsidy removal on the purchasing power of consumers.

However, KPMG said while some of the measures could further worsen inflation that it was intended to resolve by stimulating money supply further, the use of alternatives to money supply boosting actions, such as transport vouchers for the rural and urban poor, and tax cuts for the middle class, could be effective.

“The benefit of this is that it has limiting effects on money supply while at the same time cushioning the negative impact on purchasing power,” it said.

In addition to demonstrating very clear and unambiguous transparency in the process, the government, the organisation said, will also have to demonstrate that as much as it is rightly asking the public to tighten its belt and expect temporal inconveniences, it also must be seen to be cutting wasteful expenditure and reducing the rising costs of running government.

KPMG also insisted that the government must have the courage and political will needed to fully implement the Orosanye report, which was estimated to save the government N1.3 trillion.

Onyebuchi Ezigbo, Emmanuel Addeh in Abuja and Dike Onwuamaeze in Lagos 

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