The International Monetary Fund (IMF) has urged the Federal Government of Nigeria to deliver on its commitment to remove fuel subsidies by mid-2023. The organization stated in its report titled “IMF Executive Board Concludes 2022 Article IV Consultation with Nigeria,” which it released on Wednesday, February 8, 2023, that Nigeria’s economy has recouped the output losses sustained during the COVID-19 pandemic supported by favorable oil prices and buoyant consumption activities. The directors highlighted the need for bold fiscal reforms to create needed policy space, put public debt on sound footing, and reduce vulnerabilities.
This is coming more than a decade after the administration of Goodluck Jonathan’s removal of fuel subsidy was met with massive protests known as Occupy Nigeria across the major cities of the country. On January 1, 2012, President Goodluck Jonathan announced the removal of fuel subsidy and adjusted the pump price of petrol from N65 per liter to N141. The price was later adjusted to N97 after more than a week of protests. It was further reduced to N87 in 2015.
Economists and stakeholders say subsidy removal necessary.
Despite fears that there may be revolts, some economists and stakeholders agree that the removal of subsidy is a necessary step towards a long-needed reform for the country. This step is inevitable since the government cannot make oil refineries operate. The government of Jonathan faced serious backlash from the adjustment in fuel price, but that of President Muhammadu Buhari-led administration adjusted the pump price from N87 to N145 without any protest. Even subsequent adjustments were equally accepted until fiscal policies and pandemic-induced inflation pushed the populace to the edge.
However, the IMF is now calling on Nigerian authorities to deliver on their fuel subsidy removal commitment by mid-2023 in order to increase the country’s well-targeted social spending. Despite rising oil prices, the IMF said that 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. In other words, Nigeria is making more money because of the rising oil prices, but there has been a reduction in savings because of expenditures such as the servicing of debts.
The oil sector risks downside due to price volatility.
IMF’s 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. The organization also said that 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,” the IMF is quoted to have said.
Directors at the IMF welcomed the idea of broadening Nigeria’s economic recovery, but they noted that Nigeria missed the opportunity to reap the benefits from higher global oil prices. These occurrences, the IMF said, underscored near-term downside risks, which arise from elevated inflation, high cost of servicing debt, external sector pressures, and oil sector volatility. In preparation for what is to come in the future, 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.
Nigeria urgently needs policy reforms to reduce vulnerabilities.
Summarily, the organization’s emphasis has been on creating reforms in Nigeria. It highlighted the need for bold fiscal reforms to create the needed policy space, put public debt on sound footing, and reduce vulnerabilities. In addition, strengthening revenue mobilization, including through tax administration reforms, expanding the tax automation system and strengthening taxpayer segmentation, and improving tax compliance is also a priority. This may be a bit hard for the common Nigerians to navigate because the price of Premium Motor Spirit (PMS) and other fuels will increase before stabilizing without government intervention.