IMF urges FG to remove fuel, electricity subsidies

IMF urges FG to remove fuel, electricity subsidies

The International Monetary Fund (IMF) has urged Nigeria’s federal government to eliminate all fuel and electricity subsidies by the beginning of next year.

The IMF also called for fiscal, exchange rate, trade, and governance reforms in its preliminary findings at the end of its official staff visit to the country under the Artile IV Mission, in order to “alter the long-running lacklustre growth path.”

In a statement issued at the conclusion of the mission, the fund stated that the elimination of “retrogressive” fuel and electricity subsidies should be prioritized as part of fiscal policy.

It did, however, call for measures to mitigate the negative effects of the loss of subsidies on the poor.

The IMF said, “The headline fiscal deficit is projected to worsen in the near term and remain elevated over the medium term. Despite much higher oil prices, the general government fiscal deficit is projected to widen in 2021 to 6.3 per cent 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.”

“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.

“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,” the report partly read.

The IMF also stated that substantial additional domestic revenue mobilization is required to put the public debt and debt-servicing capacity on a sustainable path.

Near-term priorities, according to the international financial institution, are to implement e-customs reforms, including efficient procedures and controls, to develop a VAT Compliance Improvement Program, to improve compliance among large, medium, and micro/small taxpayers, and to rationalize tax incentives and customs duty waivers.

“As the recovery gains strength and compliance improves, Nigeria will have to adopt tax rates comparable to its peers in the Economic Community of West African States (ECOWAS) to raise revenues to levels targeted in the 2021-25 National Development Plan.

“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.

“Slow FX reforms and uncertainties regarding the ability to repatriate foreign funds have discouraged new capital inflows. 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 mission assessed Nigeria’s capacity to repay the outstanding credit from the 2020 Rapid Financing Instrument (RFI) to be adequate.

“The authorities are committed to implementing the AfCFTA and are working to enhance trade facilitation through increased use of technology. However, overall trade regime continues to be protectionist and restrictive with numerous products prohibited from FX access for imports, including basic necessities and food items, high tariff and non-tariff barriers, and difficult trade logistics.

“Building on current efforts to improve port infrastructure and reduce the burden of customs administration, the mission recommended decisive actions to reduce barriers to trade and reliance on import substitution,” the report further read.

The IMF confirmed that efforts to improve transparency and governance are ongoing; however, the organization stressed that more needs to be done to build public trust in order to implement difficult but necessary reforms.

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