IMF raises concern over return of fuel subsidy in Nigeria

The International Monetary Fund has expressed concern over the resurfacing of fuel subsidies in Nigeria.

The Nigerian government had in March 2020 removed petrol subsidy after reducing the pump price of the product to N125 per litre from N145 on the back of the sharp drop in crude oil prices.

“The recent introduction and implementation of an automatic fuel price formula will ensure fuel subsidies, which we have eliminated, do not reemerge,” the government told the IMF in the letter of intent dated April 21, 2020 with respect to its request for emergency financial assistance of $3.4bn.

In February this year, the IMF said in a report after its Article IV consultation with Nigeria that the Nigerian authorities expressed strong commitment to prevent fuel subsidies from resurfacing and to fully eliminate electricity tariff shortfalls by mid-2021.

But petrol subsidy re-emerged earlier this year following the significant rise in oil prices.

“The resurfacing of fuel subsidies is concerning, particularly in the context of low revenue mobilisation,” the IMF said on Thursday.

The fund said its team, led by Ms Jesmin Rahman, held virtual meetings with the Nigerian authorities from June 1-8, 2021 to discuss recent economic, financial developments and outlook.

Rahman, in a statement at the end of the visit, said the Nigerian economy had started to gradually recover from the negative effects of the COVID-19 global pandemic.

She noted that following sharp output contractions in the second and third quarters, GDP growth turned positive in Q4 2020 and growth reached 0.5 percent (year-on-year) in Q1 2021, supported by agriculture and services sectors.

She said, “Nevertheless, the employment level continues to fall dramatically and, together with other socio-economic indicators, is far below pre-pandemic levels. Inflation slightly decelerated in May but remained elevated at 17.9 percent, owing to high food price inflation.

“With the recovery in oil prices and remittance flows, the strong pressures on the balance of payments have somewhat abated, although imports are rebounding faster than exports and foreign investor appetite remains subdued resulting in continued FX shortage.”

According to the IMF, the incipient recovery in economic activity is projected to take root and broaden among sectors, with GDP growth expected to reach 2.5 percent in 2021.

It said, “Inflation is expected to remain elevated in 2021, but likely to decelerate in the second half of the year to reach about 15.5 percent, following the removal of border controls and the elimination of base effects from elevated food price levels.

“Tax revenue collections are gradually recovering but, with fuel subsidies resurfacing, additional spending for Covid-19 vaccines, and to address security challenges, the fiscal deficit of the Consolidated Government is expected to remain elevated at 5.5 percent of GDP.”

According to the statement, downside risks to the near-term arise from further deterioration of security conditions, and the still uncertain course of the pandemic both globally and in Nigeria.

It said, “The mission expressed its concern with the resurgence of fuel subsidies. It reiterated the importance of introducing market-based fuel pricing mechanism and the need to deploy well-targeted social support to cushion any impact on the poor.

“The mission recommended stepping up efforts to strengthen tax administration to mobilise additional revenues and help address priority spending pressures.”

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