Nigeria: IMF Tells Nigerian Govt to Remove Fuel, Electricity Subsidies Early 2022

Fuel pump.
21 November 2021

The organisation said slow FX reforms and uncertainties regarding the ability to repatriate foreign funds have discouraged new capital inflows.

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

The Washington-based organisation noted that the removal of "retrogressive" fuel and electricity subsidies should be considered a priority as part of the government's fiscal policy.

In its preliminary findings at the end of its official staff visit to the country under the Article IV Mission, IMF also called for reforms in the fiscal, exchange rate, trade and governance aspects of Nigeria.

This, it said, was necessary "to alter the long-running lacklustre growth path."

The organisation noted that 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 government fiscal deficit is projected 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, it said.

"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.

The organisation argued further that the near-term priorities are to implement e-customs reforms including efficient procedures and controls, develop a VAT Compliance Improvement Program, improve compliance across large, medium, and micro/small taxpayers, and as well rationalise 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 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.

The organisation said 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 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 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."

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