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IMF to FG: Take Out Explicit Fuel and Power Subsidies

May 14, 2024 | International | 0 comments

The International Monetary Fund (IMF) has issued a warning to the Nigerian government, urging the removal of what it termed “implicit fuel and electricity subsidies.”

In a recently published report, the IMF cautioned Nigeria that these subsidies could consume three percent of the nation’s Gross Domestic Product (GDP) in 2024, compared to one percent in the preceding year.

The report acknowledged the Federal Government’s commendable efforts in phasing out “costly and regressive energy subsidies,” recognizing their importance in creating fiscal room for development spending and strengthening social protection while ensuring debt sustainability.

The removal of fuel subsidies took place during President Bola Tinubu’s administration inauguration on May 29, 2023. However, the IMF noted concerns over the lack of timely scaling up of compensatory measures for the poor, citing corruption issues. This resulted in the reintroduction of implicit subsidies by the end of 2023, as pump prices were capped below cost to help Nigerians cope with high inflation and currency depreciation.

The IMF also highlighted a significant increase in electricity prices for high-use premium consumers on Band A feeders, affecting 15 percent of the 12 million customers who contribute to 40 percent of electricity usage.

As calls for the reversal of the Band A tariff mount, the IMF suggested that adjusting the tariff could reduce subsidy expenditures by 0.1 percent of GDP while still providing relief to the poor, particularly in rural areas.

The IMF stressed the importance of scaling up safety nets and addressing inflation concerns before tackling implicit fuel and electricity subsidies. It cautioned against the rising costs and poor targeting of these subsidies, noting that higher-income groups benefit more than the vulnerable.

Looking ahead, the IMF urged the removal of costly and untargeted fuel and electricity subsidies once inflation eases and support for vulnerable groups is strengthened, proposing the retention of a lifeline tariff.

The projected implicit fuel subsidy costs could soar to as high as N8.4 trillion in 2024, representing a significant increase from previous years. Similarly, the electricity subsidy for customers under Bands B, C, D, and E was forecasted to reach N540 billion by the end of 2024.

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