The International Monetary Fund (IMF) has called on the Nigerian government to fulfill its commitment to end fuel subsidies by mid-2023.
The Washington-based lender said in a report titled “IMF Executive Committee Ends 2022 Article IV Consultation with Nigeria” released on Wednesday that the Nigerian economy has recovered from losses suffered during the COVID-19 pandemic supported by good oil prices and consumer activities.
The fund said directors highlighted the need for bold fiscal reforms to create the necessary policy space to put public debt in order and reduce vulnerabilities.
“They have called on the authorities to fulfill their commitment to end fuel subsidies by mid-2023 and increase well-targeted social spending.”
Despite rising oil prices, the IMF said, the government’s fiscal deficit is expected to widen further in 2022, mainly due to high fuel subsidy costs.
He explained that although the current account is estimated to have improved in 2022, foreign exchange reserves have decreased amid capital outflow pressures.
The report noted that the country’s inflation-adjusted gross domestic product (GDP) has already reached pre-crisis levels and the third quarter of 2022 was the eighth consecutive quarter of positive growth, despite continued challenges in the oil sector.
He said the oil sector faces adverse risks due to production and price volatility, while climate-related natural disasters such as floods pose the same risks to agricultural production.
“In the medium term, there are risks from a potentially stronger reform push and a larger-than-expected rebound in oil and gas production,” he said.
The IMF said its directors welcomed the expansion of Nigeria’s economic recovery, but noted that an opportunity to benefit from high global oil prices had been missed.
“High inflation, high debt servicing costs, external sector pressures and oil sector volatility underscored the near-term risks,” the IMF said.
Looking ahead, the IMF recommended decisive fiscal and monetary tightening to ensure macroeconomic stability, along with structural reforms to improve governance, strengthen the agricultural sector and promote inclusive and sustainable growth.
He also highlighted the need for bold fiscal reforms to create the necessary policy space, put the public debt in order and reduce vulnerabilities.
“The authorities have been called on to deliver on their commitment to end fuel subsidies by mid-2023 and increase well-targeted social spending.
“Strengthening revenue mobilization, among other things, through tax administration reforms, expanding the tax automation system and strengthening the segmentation of taxpayers and improving tax compliance is also a priority,” he said.
In the medium term, the IMF recommended modernizing customs administration, rationalizing tax incentives and raising tax rates to the level of the Economic Community of West African States (ECOWAS).
According to the report, the spillover effects of the war in Ukraine, mainly transmitted through rising domestic food prices, worsened the scarring effects of the pandemic, especially in the most vulnerable, with Nigeria among the least food insecure countries.
“The near-term forecast has downside risks, and there are medium-term upside risks. Higher international food and fertilizer prices and continued expansion of the parallel market premium may put an end to the anchoring of inflation expectations.
“Directors called for a decisive and effective tightening of monetary policy to avoid the anchoring of inflation expectations. Given the recent policy rate hikes, the Central Bank of Nigeria (CBN) should be prepared to further increase the policy rate if necessary and implement additional actions, including central bank fully sterilize the financing of fiscal deficits and phase out credit intervention programs.
“Strengthening the independence of the CBN and establishing price stability as a key objective is crucial. The directors also urged the authorities to end the securitization of the CBN’s existing overdrafts and stressed that the CBN’s budget funding should strictly adhere to the statutory limits,” he added.
The IMF, however, highlighted the importance of improving the performance of the agricultural sector for job creation and food security.
“They asked the authorities to implement governance reforms, including fulfilling the commitments of the 2020 Rapid Financing Instrument. Improving transparency and accountability in the oil sector is also key to strengthening governance,” he said.
Last month, Nigeria’s Finance Minister Zainab Ahmed said it would be more appropriate for the government to start implementing the fuel subsidy policy in the second quarter of the year.
The minister stated that the country should get out of the fuel subsidy regime because it is a very important factor in the loss of revenue.
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