The International Monetary Fund has called on President Bola Tinubu’s government to ensure a complete phase-out of fuel and electricity subsidies despite the rising inflation and high cost of living in the country.
It noted that Tinubu adopted two policy reforms that its predecessors had shied away from: fuel subsidy removal and the unification of the official exchange rates.
Former President Goodluck Jonathan tried to remove fuel subsidy during his administration but Nigerians kicked against it through Occupy Nigeria protests. His successor, Muhammadu Buhari also tried to do so but pushed it till he left office.
Tinubu in his inaugural address as President announced the removal of fuel subsidy and that his administration would unify exchange rates.
However, these policies have pushed up inflation rate and brought hardship on Nigerians.
The international financial institution highlighted that Nigeria is grappling with a compounding cost-of-living crisis, worsened by stagnant per-capita growth, poverty, and heightened food insecurity, it, however, said subsidies on fuel and electricity are costly and don’t benefit those that mostly need government support.
“Fuel and electricity subsidies are costly, do not reach those that most need government support and should be phased out completely,” the global lending institution recommended in a report released on Sunday, February 9, titled ‘IMF Executive Board Concludes Post Financing Assessment with Nigeria.’
Although the organisation underscored the escalating challenges occasioned by mounting inflation, currency devaluation, sluggish economic expansion, and closures of businesses, it expressed optimism that the government’s focus on revenue mobilisation and digitalisation would improve public service delivery and safeguard fiscal sustainability.
It said, “The envisaged reduction in the overall deficit in 2024 would help contain debt vulnerabilities and eliminate the need for CBN financing. Temporary and targeted support to the most vulnerable in the form of social transfers is needed, given the ongoing cost-of-living crisis.”
The report emphasised that deficient revenue collection has impeded the delivery of essential services and public investment. It noted that headline inflation surged to 27 percent year-on-year in October, with food inflation peaking at 32 percent.
These figures are attributed to the repercussions of fuel subsidy removal, depreciation of the exchange rate, and inadequate agricultural output in the nation, which the report also observed was a result of insecurity.
The report partly read: “President Tinubu has moved ahead with important structural reforms: removing fuel subsidies and unifying the various official foreign exchange windows. He appointed a Presidential Fiscal Policy and Tax Reforms Committee to make proposals for raising domestic revenue to support investments in infrastructure, health, and education.
“To ease the impact of rapidly rising inflation on living conditions, the government has released cereals from the grain reserve, provided subsidized fertilizer to farmers, capped retail fuel and electricity prices—thus partially reversing the fuel subsidy removal—implemented a civil service wage award, and suspended the VAT on diesel.
“Nigeria exited the Covid-19 recession quickly, but growth, held back by the hydrocarbon economy, is barely keeping up with population dynamics. Low revenue collection hampers the provision of services and public investment. Security concerns persist in the northern part of the country, adversely affecting agriculture and food security. Latest estimates show 25 million (13 percent of the population) as food insecure. The poverty rate was 37 percent in 2022.
“Growth is projected at 2.9 percent for 2023, and 3 percent in 2024, as hydrocarbon performance revives, including from better control of theft. If the authorities succeed in developing and implementing a comprehensive reform agenda, the medium-term outlook would be much improved. Headline inflation reached 27 percent year-on-year in October (food inflation 32 percent), reflecting fuel subsidy removal, exchange rate depreciation, and poor agricultural production. While the current account registered a surplus in the first half of 2023, the 30-day average of gross international reserves (GIR) reported by the Central Bank of Nigeria (CBN) declined to $33 billion in October, covering 6 months of imports.”
In its executive board assessment, it said, “The new administration has made a strong start, tackling deep-rooted structural issues in challenging circumstances.”
The report continued, “Immediately, it adopted two policy reforms that its predecessors had shied away from: fuel subsidy removal and the unification of the official exchange rates. Since then, the new CBN team has made price stability its core mandate and demonstrated this resolve by dropping its previous role in development finance. On the fiscal side, the authorities are developing an ambitious domestic revenue mobilization agenda.
“Like many other countries, Nigeria faces a difficult external environment and wide-ranging domestic challenges. External financing (market and official) is scarce, and global food prices have surged, reflecting the repercussions of conflict and geo-economic fragmentation.
“Per-capita growth in Nigeria has stalled, poverty and food insecurity are high, exacerbating the cost-of-living crisis. Low reserves and very limited fiscal space constrain the authorities’ option space. Against this backdrop, the authorities’ focus on restoring macroeconomic stability and creating conditions for sustained, high and inclusive growth is appropriate.
“The CBN has set out on a welcome path of monetary tightening. The Governor has committed to making price stability the core objective of monetary policy, and the CBN has taken actions to mop up excess liquidity. Continuing to raise the monetary policy rate until it is positive in real terms would be an important signal of the direction of monetary policy.
“The authorities are exploring options to strengthen Nigeria’s reserve position, though a careful assessment of unintended consequences is needed in some cases. Settling the CBN’s overdue dollar obligations will help rebuild confidence in the central bank and the naira. Sharing comprehensive information on Nigeria’s reserves position would facilitate a more complete assessment of the external situation.
“The government’s focus on revenue mobilization and digitalization would improve public service delivery and safeguard fiscal sustainability. The envisaged reduction in the overall deficit in 2024 would help contain debt vulnerabilities and eliminate the need for CBN financing. Temporary and targeted support to the most vulnerable in the form of social transfers is needed, given the ongoing cost-of-living crisis. Fuel and electricity subsidies are costly, do not reach those that most need government support and should be phased out completely.
“Staff assesses that Nigeria’s capacity to repay the Fund is adequate under the baseline. The authorities’ policy intentions are well placed to address risks of a downside scenario where difficult trade-offs may arise between urgent humanitarian needs and debt service, including to the Fund. In such circumstances aggressive monetary tightening and fiscal adjustment combined with support from development partners would be needed to restore macroeconomic stability.”