May 30, 2024

Remove petrol, electricity subsidies after subduing aming inflation, IMF advises FG

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Adewale Akintaro

The International Monetary Fund (IMF) has called on the Federal Government to remove the fuel and electricity subsidies when the rising inflation has been tackled.

The IMF in a report titled ‘Nigeria: 2024 Article IV Consultation’ said the social transfer scheme that would curb the country’s inflation has been initiated.

Nigeria’s inflation rate escalated to 33.20 percent in March 2024 — up from 31.70 percent in February, as Nigerians have continually battled hardship.

According to the Bretton Woods Institution, about 15 million households or 60 million Nigerians will potentially benefit from an enhanced social intervention scheme the federal government developed with World Bank aid.

“The authorities have recently approved an enhanced social transfer mechanism developed with World Bank support, and some initial payments have been made.”

“In response to governance concerns, the authorities automated and digitalized the system to build a robust mechanism that delivers swift and targeted support to vulnerable households—some 15 million households or 60 million Nigerians potentially benefit from the scheme.

“Once the safety net has been scaled up and inflation subsides, the government should tackle implicit fuel and electricity subsidies,” it said.

The IMF said the subsidies are expensive and poorly targeted, with higher-income groups benefiting more than the vulnerable.

IMF also said with pump prices and tariffs below cost-recovery, subsidy costs could increase to three percent of gross domestic product (GDP) in 2024, compared to one percent of GDP in 2023.

It should be noted that this is coming as Nigerians are still suffering from the removal of fuel subsidy since the inauguration of President Bola Tinubu in May 2023.

Also, the Nigerian Electricity Regulatory Commission (NERC) in April, approved a rise in electricity tariff for customers under the Band A category to N225 per kilowatt-hour (kwh), from N66 — to reduce electricity subsidy.

However, a month later, the electricity distribution companies (DisCos) said the tariff of Band A customers has been reduced to N206.80 per kwh.

Amid this, the IMF criticised the subsidies in fuel and electricity, stressing they drive the budget deficit up, as the federal government had projected a N9 trillion budget deficit for this year.

Aside from the subsidies, IMF said other factors for rising budget deficit are lower oil and gas revenue projections, continued suspension of excise measures included in the medium-term expenditure framework (MTEF), and higher interest costs.

“Staff factors in an under-execution of capital expenditure in line with past outcomes and estimates an FGN deficit of 4.5 percent of GDP relative to the 2024 budget target of 3.4 percent of GDP,” IMF said.

“For the consolidated government, this implies a projected deficit of 4.7 percent of GDP in 2024 —compared to 4.8 percent of GDP in 2023 measured from the financing side — which is appropriate given the large social needs and factoring in a realistic pace of revenue mobilization.

“Over the medium-term, staff projects consolidation in the non-oil primary deficit. With rising interest costs, government debt stabilizes towards the end of the projection period.”

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