The International Monetary Fund (IMF) has advised the
federal government to completely remove subsidies on fuel and electricity in
early 2022.
In the staff concluding statement of its 2021 Article IV
Mission published on Friday, the IMF said Nigeria should implement
revenue-based fiscal consolidation.
The federal government had said it would remove petrol
subsidy in July 2022.
Last week, Zainab Ahmed, minister of finance, budget and national planning, disclosed plans to pay transport allowance to Nigerians for six or 12 months to cushion the effect of fuel subsidy removal.
The Bretton Woods institution said the country needs major
reforms in fiscal, exchange rate, trade and governance to promote sustainable
growth.
“The complete removal of regressive fuel and electricity
subsidies is a near-term priority, combined with adequate compensatory measures
for the poor,” the statement reads.
“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.
“Well-targeted social assistance will be needed to cushion
any negative impacts on the poor particularly in light of still elevated
inflation.
“In addition, the implementation of cost-reflective
electricity tariffs as of January 2022 should not be delayed.
“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 projected that despite high oil prices,
Nigeria’s fiscal deficit would widen in 2021 to 6.3 percent of gross domestic
product (GDP).
It said this was a reflection of implicit fuel subsidies and
higher security spending, adding that it would remain till 2022.
The IMF also said over the medium term, without bold revenue
mobilisation efforts, fiscal deficits could 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
statement adds.
On the foreign exchange situation in the country, the IMF
observed that continued reliance on administrative measures to address
persistent foreign exchange shortages was negatively impacting confidence.
It recommended a reduction of administrative measures and
adoption of a market-clearing unified exchange rate.
“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,” the statement adds.
“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.”
The IMF also listed near-term priorities for Nigeria to
include the implementation of e-customs reforms, including efficient procedures
and controls, developing a value-added tax (VAT) compliance improvement
programme, improving compliance across large, medium, and micro/small taxpayers
and rationalising tax incentives and customs duty waivers.
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