The International Monetary Fund (IMF) has called on the Federal Government of Nigeria to completely remove fuel and electricity subsidies early next year.

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

In a statement at the end of the mission, the fund said the removal of “retrogressive” fuel and electricity subsidies should be considered a priority as part of the fiscal policy.

It however called for measures to cushion the negative effects of the removal of subsidies on the poor people.

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.”

According to the fund, efforts must be made towards improving the revenues to reduce the fiscal deficit.

It stated that without bold revenue mobilization efforts, “fiscal deficits are projected to stay elevated above the pre-pandemic levels with public debt increasing to 43 per cent 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 IMF also observed that the economy has been recovering from a historic downturn attributing this to “government policy support, rebounding oil prices and international financial aid”, adding that Nigeria exited the recession in 2020Q4, earlier than expected.

“Output rose by 5.4 per cent (y-o-y) in the second quarter, mainly reflecting base effects from transport and trade sectors and continued strong growth in the IT sector.

“However, manufacturing and oil sectors remain weak, reflecting continued foreign exchange shortages, and security and technical challenges.

“Headline inflation rose sharply during the pandemic reaching a peak of 18.2 per cent y-o-y in March 2021 but has since declined helped by the new harvest season and opening of the land borders.

“Reported unemployment rates are yet to come down although COVID-19 monthly surveys show the employment level to be back at its pre-pandemic level,” the report added.

‘Give more job’

The IMF mission welcomed the signing of the Petroleum Industry Act (PIA) into law and stressed its timely implementation.

It said, “The PIA aims to improve administration and governance in the petroleum sector, introduce market-based fuel pricing and attract higher investment.”

According to the mission, preliminary assessments by the IMF and the World Bank suggest that the approved fiscal terms will provide greater incentives to invest in the oil and gas industry but will reduce the fiscal take from new and converted fields.

The mission also called on the government to increase jobs and worker welfare while strengthening governance.

With agriculture accounting for almost half of current employment, any job-rich growth will need to rely considerably on this sector at least in the near term, it said.

On corruption, it said there are ongoing efforts to improve transparency and governance, but more is needed to build public trust to implement difficult but needed reforms.

“On transparency, the national oil company NNPC has published its last two annual statements to better reconcile gross and net oil revenues remitted to the Federation Account and the Corporate registry has started to publish information on persons with significant control in newly established companies.

“The government is in the process of presenting whistleblower legislation to the Parliament to facilitate untraceable declarations of corruption.

“However, perception of corruption remains high regarding the civil service, leading to low tax compliance and buy-in of reforms.

“Implementation of transparency and accountability measures committed under the RFI has been slow. Access and quality of information on the COVID-19 spending on the Ministry of Finance’s Transparency Portal has been uneven.

“The COVID-19 spending audits are just starting, and the publication of procurement contract recipients is incomplete,” the report said.

Macsjebs:
Hmmm, so at these prices, they are still subsized?

funshint:
I shiver anytime I hear IMF giving a country advise. Those people are demons!

backbencher:
On a more serious note, removing subsides on fuel and power means two things

1.Government stops spending money on subsides...which means that more money gets saved...plus due to investment flowing in, there is more taxable income from jobs and company earnings..more money for government

2.Second, since there is no subsidy, the electric and power companies now work at a profit, which means they would earn enough money to build more refineries, power stations, etc. They would also be able to afford to buy cables, wires, transformers , so that power customers can stop buying those things. And there would be foreign investment because now people can make profits in the sector...and finally more and more jobs.

Finally, a note on subsides.

Government controls the price of power and petroleum...which they set below the cost of productionmeaning that power and petrol companies run at a loss...meaning that subsides have to be paid to keep the companies from going bust.

But because the cost of production rises, and is never static, the government sometimes has to reduce the amount spent on subsidies to save money...and that manifests as a price increase.

The ideal would be for subsides to go and price to be in the hands of companies in the petrol and power sector...so that they earn profits to fix and upgrade services....and also competition would bring down prices.

The high price aspect of removing subsides...and the knock on effects (food price increase for example) is why most Nigerians oppose subsides. That shock can be mitigated by government doing as was done in some other countries..paying some money to car owners to mitigate subsidy related rises.