Nigeria’s inflation rate has been predicted by the World Bank to reach 25% this year as a result of the removal of fuel subsidy.
Nigeria may have one of the highest inflation rates in the world and the eighth highest in Sub-Saharan Africa, according to a January 2016 World Bank prediction.
The Bretton Woods institution predicted that the rise in commodity prices in reaction to the rise in gasoline costs would be the primary cause of inflation in its June 2023 edition of the Nigeria Development Update.
The Federal Government ended the fuel subsidy in June, which caused fuel prices nationwide to rise from N189 to nearly N500 per litre.
This pushed up the prices of goods, but the World Bank said this was temporary as the sharp impact of subsidy removal on prices would cool off in the first quarter of 2024.
The report read: “The removal of the petrol subsidy is anticipated to cause a temporary increase in inflation in the upcoming months before contributing to disinflation in the medium term.
“The price increases resulting from the subsidy removal will have a one-time impact on prices, primarily affecting petrol purchases for transportation, power generation, and certain services.
“Headline inflation is expected to rise from 18.8 percent in 2022 to 25 percent in 2023. However, by Q1 of 2024, the subsidy removal will start to have a disinflationary effect, meaning that it will alleviate inflationary pressures despite higher petrol prices.”
The Bank stressed that the removal of the fuel subsidy would reduce the government’s dependence on funding from the Central Bank of Nigeria (CBN) and limit money supply growth.
“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.
“To limit the risk of so-called second-round effects, where one-off price increases trigger more generalized inflation including through wage-price spirals, it will be important to adopt macro-fiscal policy settings that are conducive to price stability,” it added.