- The International Monetary Fund (IMF) has sent a crucial message to the Nigerian government on the subsidy regime
- The IMF said that it is advisable for President Muhammadu Buhari-led government to remove subsidies on fuel and electricity completely
- According to the IMF, reliance on administrative measures to address persistent foreign exchange shortages was negatively impacting confidence
Berlin – Despite the hardship facing Nigerians on daily basis, the International Monetary Fund (IMF) has advised the federal government to remove fuel and electricity subsidies completely early next year.
The Punch reports that the IMF, which made this known on Friday, November 19, however, asked the Nigerian government to implement revenue-based fiscal consolidation.
Legit.ng gathered that the IMF, in a statement at the end of its 2021 Article IV Mission, said with the emergence of fuel subsidies and slow progress on revenue mobilisation, the country’s “fiscal outlook faces significant risks.”
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It said the continued reliance on administrative measures to address persistent foreign exchange shortages was negatively impacting confidence.
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According to the Washington-based fund, without urgent fiscal and exchange rate reforms, the medium-term outlook faces sub-par growth.
It highlighted the need for major reforms in fiscal, exchange rate, trade and governance to alter what it described as “the long-running lackluster growth path”.
“On the immediate front, fiscal and external imbalances require removal of regressive fuel and electricity subsidies, tax administration reforms and installing a fully unified market-clearing exchange rate.
“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.”
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The IMF said 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.”
According to the IMF, the headline fiscal deficit is projected to worsen in the near term and remain elevated over the medium term.
It said, “Despite much higher oil prices, the general government fiscal deficit is projected to widen in 2021 to 6.3% 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.”
The fund said over the medium term, without bold revenue mobilisation efforts, fiscal deficits could stay elevated above the pre-pandemic levels with public debt increasing to 43% 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,” it added.
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It was reported that the IMF said any country that adopts crypto assets as the national currency would have economic challenges.
The IMF stated that the decision will cut government-generated revenue and have an adverse effect on macroeconomic, while domestic prices could become unstable due to widespread adoption.