CBN Explains How Fuel Subsidy, Forex Distortion Hurt Nigeria’s Economy Before Reforms
- The Central Bank of Nigeria said the country’s economy faced a severe crisis before recent reforms
- Fuel subsidies and foreign exchange distortions were estimated to have cost Nigeria about 6% of its GDP
- Macroeconomic reforms since October 2023 have helped increase reserves to over $32 billion
Oluwatobi Odeyinka is a business editor at Legit.ng, covering energy, the money market, technology and macroeconomic trends in Nigeria.
The Central Bank of Nigeria (CBN) has said Nigeria’s economy was close to a crisis before recent reforms, citing the impact of long-standing petroleum subsidies and distortions in the foreign exchange market, The Sun reported.
Source: UGC
Speaking at a policy forum organised by Agora Policy in Abuja on Thursday, the Deputy Governor for Economic Policy at the apex bank, Muhammad Abdullahi, said the combined effects of the subsidy regime and exchange rate distortions drained resources equivalent to about six per cent of the country’s Gross Domestic Product.
Nigeria’s net reserves dropped to critical low
Abdullahi explained that before the recent reforms began, Nigeria’s net foreign reserves had dropped to around $800 million, a situation he described as a critical point for a country with a population of over 200 million.
According to him, the economic conditions at the time weakened investor confidence and significantly reduced foreign capital inflows.
The CBN official disclosed that Nigeria also faced a backlog of about $7 billion in foreign exchange obligations owed to businesses and investors, which further strained the economy.
He said the situation, combined with declining foreign exchange inflows, posed serious challenges for government operations across different levels.
Reforms have stabilised Nigeria’s economy
However, Abdullahi noted that macroeconomic reforms introduced since October 2023 had helped stabilise the economy and restore confidence among investors.
He added that the country’s net foreign reserves have now increased to more than $32 billion following the policy changes.
Non-oil exports have improved
The CBN deputy governor also pointed to improvements in non-oil exports, which generated about $6 billion in revenue last year, with authorities targeting $12 billion in the near future.
According to him, inflation has been trending downward for about 19 months, while food inflation has fallen to its lowest level in roughly 13 years.
Abdullahi said the previous system of multiple exchange rates, alongside the petrol subsidy regime, created opportunities for rent-seeking and discouraged productive investment.
Source: Getty Images
He noted that some individuals benefited from privileged access to foreign exchange under the earlier system, allowing them to exploit price differences across multiple exchange windows.
The policy environment, he said, also contributed to declining foreign direct investment and a drop in non-oil export earnings.
He cited the example of cocoa exports, which reportedly fell from about $2 billion in 2015 to less than $300 million by 2018.
Despite the difficult transition, Abdullahi said the reforms had begun to place Nigeria on a more stable economic path.
According to him, renewed investor confidence and improving macroeconomic indicators suggest that the country is gradually moving toward a more sustainable growth trajectory.
Poverty rate in Nigeria rose after fuel subsidy
Legit.ng earlier reported that Nigeria’s poverty rate rose after petrol subsidy removal by President Bola Tinubu, according to a study presented at the Agora Policy dialogue.
The study found that about 63% of Nigerians fell below the poverty line following the removal of petrol subsidy, highlighting the welfare impact of recent economic reforms in the country.
The study added that electricity tariff reforms slightly increased consumer prices but also produced a modest boost in economic output. Economists and business leaders called for stronger social safety nets and policies to support small businesses.
Source: Legit.ng
