The International Monetary Fund (IMF) has urged the Nigerian government to deliver on its commitment to remove fuel subsidies by mid-2023.
The Washington-based lender in a report titled ‘IMF Executive Board Concludes 2022 Article IV Consultation with Nigeria’ released on Wednesday said Nigeria’s economy has recouped the output losses sustained during the COVID-19 pandemic supported by favourable oil prices and buoyant consumption activities.
The fund said the directors highlighted the need for bold fiscal reforms to create needed policy space, put public debt on sound footing, and reduce vulnerabilities.
“They urged the authorities to deliver on their commitment to remove fuel subsidies by mid-2023, and to increase well-targeted social spending.”
Despite rising oil prices, the IMF said, the government’s fiscal deficit is estimated to have widened further in 2022, mainly due to high fuel subsidy costs.
It explained that while the current account is estimated to have improved in 2022, foreign currency reserves declined amidst capital outflow pressures.
The report noted that the country’s Gross domestic product (GDP) adjusted for inflation has already reached its pre-crisis level and the third quarter of 2022 marked the eighth consecutive quarter of positive growth despite continued challenges in the oil sector.
It said the oil sector faces downside risks from possible production and price volatility, while climate-related natural disasters like floods pose the same risks to agricultural production.
“In the medium term, there are upside risks from a potentially stronger reform momentum and a larger-than-expected rebound in oil and gas production,” it said.
The IMF said its directors welcomed the broadening of Nigeria’s economic recovery but noted that the opportunity to reap the benefits from higher global oil prices was missed.
“They underscored near-term downside risks arising from elevated inflation, high debt-servicing costs, external sector pressures, and oil sector volatility,” the IMF said.
Looking ahead, the IMF recommended decisive fiscal and monetary tightening to secure macroeconomic stability, combined with structural reforms to improve governance, strengthen the agricultural sector, and boost inclusive, sustainable growth.
It further highlighted the need for bold fiscal reforms to create needed policy space, put public debt on sound footing, and reduce vulnerabilities.
“They urged the authorities to deliver on their commitment to remove fuel subsidies by mid-2023 and to increase well-targeted social spending.
“Strengthening revenue mobilisation, including through tax administration reforms, expanding the tax automation system and strengthening taxpayer segmentation, and improving tax compliance is also a priority,” it said.
In the medium term, IMF recommended modernising customs administration, rationalising tax incentives, and raising tax rates to the levels of the Economic Community of West African States (ECOWAS).
According to the report, the spillover effects of the war in Ukraine, which have been transmitted mainly through higher domestic food prices, worsened the scarring effects of the pandemic, particularly on the most vulnerable with Nigeria being among the countries with the lowest food security.
“The near-term outlook faces downside risks, while there are upside risks in the medium term. Higher international food and fertilizer prices and the continued widening of the parallel market premium could culminate in the de-anchoring of inflation expectations.
“Directors urged decisive and effective monetary policy tightening to avoid a de-anchoring of inflation expectations. Noting recent increases in the policy rate, they encouraged the Central Bank of Nigeria (CBN) to stand ready to further increase the policy rate if needed, and to implement additional actions, including fully sterilizing central bank financing of fiscal deficits and phasing out credit intervention programs.
“Strengthening the CBN’s independence and establishing price stability as its primary objective is critical. Directors also urged the authorities to finalise the securitisation of the CBN’s existing stock of overdrafts and emphasised that the CBN’s budget financing should strictly adhere to the statutory limits,” it added.
The IMF, however, highlighted the importance of improving the performance of the agricultural sector for job creation and food security.
“They urged the authorities to implement governance reforms, including delivering on commitments from the 2020 Rapid Financing Instrument. Improving transparency and accountability in the oil sector is also key to strengthening governance,” it said.
Last month, Nigeria’s Minister of Finance, Zainab Ahmed, said that it will be more appropriate for the government to begin the implementation of its fuel subsidy policy in the second quarter of the year.
The minister noted that the country needs to exit the fuel subsidy regime because it is a very significant contributory factor to revenue loss.
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