New Telegraph

IMF to Nigeria: Phase Out Fuel, Electricity Subsidies Completely

Although it believes that “ t e m p o r a r y and targeted support to the most vulnerable in the form of social transfers is needed, given the ongoing cost-of-living crisis,” the International Monetary Fund (IMF) has recommended that the Federal Government should completely phase out fuel and electricity subsidies in order to effectively tackle the country’s fiscal crisis. The Fund stated this in a press release issued late Friday, which focused on the conclusion of its post financing assessment with Nigeria. According to the IMF: “Fuel and electricity subsidies are costly, do not reach those that most need government support and should be phased out completely.”

It noted that although since he assumed office on May 29, President Bola Tinubu has moved ahead with significant structural reforms, such as scrapping fuel subsidies and unifying the various official foreign exchange windows, the government’s decision to cap retail fuel and electricity prices means that it has partially reversed the fuel subsidy removal. The Bretton Woods institution said given that Nigeria, like many other countries, faces a difficult external environment and wide-ranging domestic challenges, which have resulted in low reserves and very limited fiscal space that are constraining the authorities’ option space, “the authorities’ focus on restoring macroeconomic stability and creating conditions for sustained, high and inclusive growth is appropriate.”

As the IMF put it: “The new administration has made a strong start, tackling deep-rooted structural issues in challenging circumstances. 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 Central Bank of Nigeria (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.”

On the CBN, the IMF said that the apex bank, “has set out on a welcome path of monetary tightening,” not- ing that the CBN Governor has committed to making price stability the core objective of monetary policy and that the regulator 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 Fund stated. However, assessing Nigeria’s external situation, the IMF said: “The authorities are exploring options to strengthen Nigeria’s re- serve 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.” Backing the Federal Government’s focus on revenue mobilization and digitalization, the IMF said that this would improve public service delivery and safeguard fiscal sustainability, adding: “The envisaged reduction in the overall deficit in 2024 would help contain debt vulnerabilities and eliminate the need for CBN financing.” On the country’s capacity to repay IMF, the statement said: “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.”

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