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IMF Tells Nigerian Govt to Remove Fuel, Electricity Subsidies Early 2022

The organisation said slow FX reforms and uncertainties regarding the ability to repatriate foreign funds have discouraged new capital inflows.

The International Monetary Fund (IMF) has advised the Nigerian government to completely remove fuel and electricity subsidies in early 2022.

The Washington-based organisation noted that the removal of "retrogressive" fuel and electricity subsidies should be considered a priority as part of the government's fiscal policy.

In its preliminary findings at the end of its official staff visit to the country under the Article IV Mission, IMF also called for reforms in the fiscal, exchange rate, trade and governance aspects of Nigeria.

This, it said, was necessary "to alter the long-running lacklustre growth path."

The organisation noted that 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 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, it said.

"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," IMF said.

"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 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. Well-targeted social assistance will be needed to cushion any negative impacts on the poor particularly in light of still elevated inflation."

The IMF noted that 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. Significant additional domestic revenue mobilization is critical to put the public debt and debt-servicing capacity on a sustainable path, it suggested.




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