IMF Mission asks FG to remove fuel, electricity subsidies

The International Monetary Fund (IMF) Article IV Staff Mission has advised the President Muhammadu Buhari administration to completely discard with fuel and electricity subsidies in Nigeria.

This formed the highlight of the concluding statement of the Article IV staff Mission to Nigeria, released yesterday.

It 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.

“In addition, the implementation of cost-reflective electricity tariffs as of January 2022 should not be delayed.”

The staff, however, called for a “Well-targeted social assistance” to cushion negative impacts on the poor particularly in light of still elevated inflation.

While projecting a fiscal deficit of as wide as 6.3 per cent of the Gross Domestic Product (GDP), the mission also advised the federal government to implement revenue-based fiscal consolidation.

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“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 percent 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.

“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 mission warned.

On the foreign exchange situation in the country, the staff observed that continued reliance on administrative measures to address persistent foreign exchange shortages was negatively impacting confidence. “The mission welcomed steps taken toward unification of the exchange rate and stressed the need for further actions. The discontinuation of the official exchange rate is a step in the right direction but continued dependence on administrative measures to address FX shortages sustains uncertainties and increases the risks of a sudden and large adjustment in the exchange rate.

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“Taking advantage of the favorable global conditions, improving current account and robust oil prices, the mission advised a move to a unified and market-clearing exchange rate without further delays. To preserve competitiveness, any exchange rate adjustment should be accompanied by clear communications regarding exchange rate policy going forward, macroeconomic policies to contain inflation and structural policies to facilitate new investment”

According to the mission “manufacturing and oil sectors remain weak, reflecting continued foreign exchange shortages, and security and technical challenges.”

The mission warned of significant downside risks to the near-term outlook arising from the uncertain course of the pandemic and the domestic security situation.

It added, “In the medium term, there are upside risks from faster-than-expected reaching of the Dangote refinery’s production capacity along with effective implementation of the 2021 Petroleum Industry Act in terms of higher manufacturing production and investment in the oil sector.”

On debt, the staff said that significant additional domestic revenue mobilization was critical to put the public debt and debt-servicing capacity on a sustainable path.

The mission advised, “The near-term priorities are to implement e-customs reforms including efficient procedures and controls, developing a VAT Compliance Improvement Program, improving compliance across large, medium, and micro/small taxpayers and rationalizing 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.

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“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.”

The team welcomed the recent passage of the Petroleum Industry Act (PIA) and stressed its timely implementation, while expressing optimism that it would boost investment in the sector.

The Staff Mission Statement position requires management approval which would be presented to the Executive Board and approved before it becomes the position of the IMF.

Vanguard