IMF insists on removal of fuel subsidy, official exchange rate

The International Monetary Fund has insisted that the Nigerian government is left with no option than to stop subsidising fuel if it must make remarkable progress in its economic recovery efforts.

It also urged the Federal Government to remove the official exchange rate.

This is coming about two weeks after the Nigerian government had suspended its plan to remove fuel subsidy this year and opted to extend the subsidy removal implementation period by 18 months, saying it would engage the legislature for the amendment of the Petroleum Industry Act.

The position of the IMF was contained in the Executive Board’s conclusion of the Article IV consultation with Nigeria report, which was released on Monday.

The Fund’s statement on the report said, “Directors also urged the removal of untargeted fuel subsidies, with compensatory measures for the poor and transparent use of saved resources.

“They stressed the importance of further strengthening social safety nets.

“Directors called for stronger efforts to improve the transparency of COVID-19 emergency spending.”

It therefore called for significant domestic revenue mobilization, including by further increasing the value-added tax rate, improving tax compliance, and rationalizing tax incentives.

 

It also said, “Directors welcomed the removal of the official exchange rate and recommended further measures towards a unified and market-clearing exchange rate to help strengthen Nigeria’s external position, taking advantage of the current favourable conditions.

“They noted that exchange rate reforms should be accompanied by macroeconomic policies to contain inflation, structural reforms to improve transparency and governance, and clear communications regarding exchange rate policy.

“Directors considered it appropriate to maintain a supportive monetary policy in the near term, with continued vigilance against inflation and balance of payments risks.

“They encouraged the authorities to stand ready to adjust the monetary stance if inflationary pressures increase.

“Directors recommended strengthening the monetary operational framework over the medium term—focusing on the primacy of price stability—and scaling back the central bank’s quasi-fiscal operations.”

The IMF stated that its executive directors commended the Nigerian authorities’ proactive management of the COVID-19 pandemic and its economic impact.

They noted that the outlook remained subject to significant risks, including from the pandemic trajectory, oil price uncertainty, and security challenges.

Looking ahead, they emphasized the need for major reforms in the fiscal, exchange rate, trade, and governance areas to lift long-term, inclusive growth.

Directors also highlighted the urgency of fiscal consolidation to create policy space and reduce debt sustainability risks.

The board noted the Nigerian economy was recovering from a historic downturn benefitting from government policy support, rising oil prices and international financial assistance.

It said, “After registering a historic deficit in 2020, the current account improved in 2021 and gross FX reserves have improved, supported by the IMF’s SDR allocation and Eurobond placements in September 2021.

 

“Notwithstanding the authorities’ proactive approach to contain COVID-19 infection rates and fatalities and the recent growth improvement, socio-economic conditions remain a challenge. Levels of food insecurity have risen and the poverty rate is estimated to have risen during the pandemic.”