IMF advises FG to completely remove fuel and electricity subsidies in 2022

The International Monetary Fund (IMF) has advised the Federal Government of Nigeria to remove fuel and electricity subsidies completely early next year and implement revenue-based fiscal consolidation.

The international financial institution in a statement at the end of its 2021 Article IV Mission on Friday, November 19, 2021, said Nigeria’s “fiscal outlook faces significant risks” with the emergence of fuel subsidies and slow progress on revenue mobilisation.

Describing fuel and electricity subsidies as regressive, the Washington-based fund maintained that Nigeria’s continued reliance on administrative measures to address persistent foreign exchange shortages was negatively impacting confidence.

The IMF also highlighted the need for major reforms in fiscal, exchange rate, trade and governance to alter “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 IMF said.

“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.”

The IMF further urges the FG not to delay the implementation of cost-reflective electricity tariffs as of January 2022.

“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 fund said.

The IMF also warned that 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 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.”

It added that 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.