The International Monetary Fund (IMF) has called on Nigeria’s federal government to completely end fuel and electricity subsidies early next year.
In its preliminary conclusions at the end of the official visit of its staff to the country as part of the Artile IV mission, the IMF also called for reforms in taxation, exchange rate, trade and governance ” to change the long-term lackluster growth path ”.
The Washington-based organization made the suggestions in a report posted on its official website on Friday, November 19.
According to the IMF, the removal of “backward” subsidies on fuels and electricity should be considered a priority within the framework of fiscal policy.
“The overall budget deficit is expected to worsen in the short term and remain high in the medium term. Despite much higher oil prices, the general government budget deficit is expected to widen in 2021 to 6.3% of GDP, reflecting implicit fuel subsidies and increased security spending, and remain at this level in 2022. There are significant short-term downside risks. fiscal outlook for the ongoing pandemic, the precarious security situation and spending pressures associated with the electoral cycle.
“In the medium term, without bold revenue mobilization efforts, budget deficits are expected to remain high above pre-pandemic levels, with public debt rising to 43% in 2026. General government interest payments are expected to remain high. high as a share of revenue the fiscal position highly vulnerable to real interest rate shocks and dependent on central bank funding.
“The complete removal of regressive fuel and electricity subsidies is a short-term priority, combined with adequate compensatory measures for the poor. The mission stressed the need to completely remove fuel subsidies and switch to a market-based pricing mechanism in early 2022, as stipulated in the 2021 Petroleum Industry Law. In addition, the implementation of electricity tariffs reflecting costs from January 2022 should not be delayed. Well-targeted social assistance will be needed to cushion any negative impact on the poor, especially in light of continued high inflation.
“Nigeria’s past experiences with removing fuel subsidies, all of which have been short-lived and reversed, underscore the importance of building consensus and improving public confidence in protecting the poor and efficient and transparent use of saved resources ”, the report partly read.
The IMF further noted that a significant mobilization of additional domestic revenue is essential to put public debt and debt servicing capacity on a sustainable path.
In the view of the international financial institution, the short-term priorities are to implement reforms of electronic customs, including effective procedures and controls, development of a program to improve compliance with VAT, improving the compliance of large, medium and micro / small taxpayers and streamlining tax and customs incentives. duty exemptions.
“As the recovery strengthens and compliance improves, Nigeria will need to adopt tax rates comparable to those of its peers in the Economic Community of West African States (ECOWAS) to increase tax rates. income at the levels targeted in the 2021-25 National Development Plan.
“The cumulative net savings of the recommended measures, after making room for additional social assistance to cushion the impacts of the reforms, could amount to 5.1% of GDP over 2022-2026. Such consolidation would keep public debt below 40% of GDP and reduce reliance on central bank deficit financing.
“A further move towards a market-balanced exchange rate will also help build up foreign exchange reserves through larger capital inflows. Despite the recent allocation of SDRs and the successful issuance of Eurobonds, gross reserves remain well below the adequacy levels recommended by the IMF.
“The slow pace of exchange rate reforms and uncertainties about the ability to repatriate foreign funds have discouraged further inflows of capital. With an external position deemed weaker than suggested by Nigeria’s economic fundamentals and desired policies, a narrow export base and limited capital inflows, the mission recommended preserving foreign exchange reserves through sustainable policies. The mission found Nigeria’s ability to repay the outstanding loan from the Rapid Finance Instrument (RFI) 2020 to be adequate, ”the report said.
Giving more inferences to aid development in Nigeria, the IMF said a more open trade regime is needed to unleash the growth potential brought by the African Continental Free Trade Agreement (AfCFTA).
“The authorities are committed to implementing the AfCFTA and are working to improve trade facilitation through increased use of technology. However, the overall trade regime continues to be protectionist and restrictive with many products prohibited from accessing foreign exchange for imports, including basic necessities and food items, high tariff and non-tariff barriers and trade logistics. hard.
“Building on current efforts to improve port infrastructure and reduce the burden on customs administration, the mission recommended decisive actions to reduce barriers to trade and the use of import substitution. “
Regarding corruption, the IMF asserted that efforts are underway to improve transparency and governance, however, the organization stressed that more is needed to build public confidence in order to implement reforms. difficult but necessary.