The International Monetary Fund has urged the federal government of Nigeria to retire fuel and electricity subsidies in the country and move to a market-based pricing system in early 2022.

In its 2021 Article IV Mission statement, the Fund highlighted this remark as requiring unwavering attention and action. It noted that “the implementation of cost-reflective electricity tariffs as of January 2022 should not be delayed.”

“The complete removal of regressive fuel and electricity subsidies is a near-term priority, combined with adequate compensatory measures for the poor.

“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.”
2021 Article IV Mission

Between 2018 and 2019 about 3 trillion Naira ($7 billion) was spent on subsidies. The number is expected to rise further this year and the next. In cumulative terms, Nigeria has spent over $30 billion on fuel subsidies over the past 16 years. This translates into monthly spending of about $294 million of taxpayers’ money, according to Bloomberg.

Alternatively, the heavy burden related to keeping these subsidies could have helped solve the country’s growing health and education financing costs in the country.

According to the Fund, in the event that sections of the public are negatively affected from the removal of the subsidies, “well-targeted social assistance will be needed to cushion any negative impacts on the poor particularly in light of still elevated inflation.”

Along these lines, Achim Steiner, the Executive Director of the United Nations Environment Programme is cited to have said that globally, countries spend $423 billion on subsidizing fuel annually, “which is often justified to ensure energy is cheaper for poorer people, [but this] is not an effective use of taxpayers’ money.”

“So, if you’re interested in helping poorer people to have access to energy, to fuel, there are much more efficient ways of doing that and you don’t need to distort an entire economy in terms of the way we currently make fossil fuels artificially cheaper to use.”
Achim Steiner, Exec. Director, UNEP

Nigeria’s Fiscal Deficit to widen

The Fund highlighted that despite the high rise in oil prices this year, fiscal deficit is projected to widen in 2021 to 6.3 percent of GDP, reflecting implicit fuel subsidies and higher security spending, and will remain at that level in 2022.

Also, the IMF flagged significant downside risks to the near-term fiscal outlook as a result of the ongoing pandemic, weak security situation and spending pressures associated with the electoral cycle.

Over the medium term, without strong revenue mobilization efforts, fiscal deficits will remain elevated above pre-pandemic levels with public debt increasing to 43 percent in 2026, the Fund said.

“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.”
2021 Article IV Mission

While the removal of regressive fuel and electricity subsidies remain a major weak-link hampering the improvement of the fiscal structures of the Nigerian economy, tax administration reforms and installing a fully unified market-clearing exchange rate are also crucial.

Going forward, the Fund advised that moving away from inward-looking policies through trade, accelerating monetary and foreign exchange reforms, ensuring governance and fiscal transparency reforms, and improving welfare through job creation and agricultural reforms must be prioritized.