IMF Urges Nigeria to Depose Fuel and Electricity Subsidies

The International Monetary Fund (IMF) has strongly advised the Nigerian government to completely eliminate fuel and electricity subsidies in early 2022.

The global monetary corporation stated that the removal of retrogressive fuel and electricity subsidies should be a high priority as part of the government’s next fiscal policy. The IMF’s research disclosed this at the end of its official staff visit to the country under the Article IV Mission.

The IMF also warned that headline fiscal deficit has shown signs of negative trends in the near term  and remain elevated over the medium term. Irrespective of higher oil prices, the government fiscal deficit is estimated to widen in 2021 to 6.3 percent of GDP, reflecting implicit fuel subsidies and higher security spending, and remain at that level in 2022.

“There are significant downside risks to the near-term fiscal outlook from the ongoing pandemic, weak security situation and spending pressures associated with the electoral cycle,” IMF said.

“Over the medium term, without bold revenue mobilization efforts, fiscal deficits are projected to stay elevated above the pre-pandemic levels with public debt increasing to 43 percent in 2026. General government interest payments are expected to remain high as a share of revenues making the fiscal position highly vulnerable to real interest rate shocks and dependent on central bank financing.

“The complete removal of regressive fuel and electricity subsidies is a near-term priority, combined with adequate compensatory measures for the poor. The mission stressed the need to fully remove fuel subsidies and move to a market-based pricing mechanism in early 2022 as stipulated in the 2021 Petroleum Industry Act. In addition, the implementation of cost-reflective electricity tariffs as of January 2022 should not be delayed. Well-targeted social assistance will be needed to cushion any negative impacts on the poor, particularly in light of still elevated inflation.”

The IMF noted that Nigeria’s past experiences with fuel subsidy removal, which have all been short-lived and reversed, underscore the importance of building a consensus and improving public trust regarding the protection of the poor and efficient and transparent use of the saved resources. Significant additional domestic revenue mobilization is critical to put the public debt and debt-servicing capacity on a sustainable path, it suggested.

Peers in the Economic Community of West African States (ECOWAS) to raise revenues to levels targeted in the 2021-25 National Development Plan,” the IMF noted.

“The cumulative net savings from the recommended measures, after making room for additional social assistance to cushion impacts of reforms, could amount to 5.1 percent of GDP over 2022-26.

“Such a consolidation would keep public debt below 40 percent of GDP and reduce dependence on central bank financing of the deficit.

“A further move toward a market-clearing exchange rate will also help build foreign exchange buffers through higher capital inflows. Despite the recent SDR allocation and a successful Eurobond issuance, gross reserves remain significantly below the IMF’s recommended adequacy levels.

IMF said sluggish foreign exchange reforms and  market uncertainties regarding the ability to repatriate foreign funds has lead to a decline in foreign inflow.

Word from IMF “With an external position that is assessed to be weaker than implied by Nigeria’s economic fundamentals and desired policies, a narrow export base, and limited capital inflows, the mission recommended preserving foreign exchange reserves through sustainable policies.”

“The authorities are committed to implementing the AfCFTA and are working to enhance trade facilitation through increased use of technology,” it said of the regional initiative.

“However, overall trade regime continues to be protectionist and restrictive with numerous products prohibited from FX access for imports, including necessities and food items, high tariff and non-tariff barriers, and difficult trade logistics.