By YANGE IKYAA
The International Monetary Fund (IMF) at the weekend asked Nigeria to consider total removal of all energy subsidies by January 2022. This demand was part of a concluding statement describing the preliminary findings made by IMF staff at the end of an official staff visit to Nigeria.
Such missions are undertaken as part of regular, and usually annual, consultations under Article IV of the IMF’s Articles of Agreement, and in the context of a request to use IMF resources by way of borrowing. The visits also include discussions of staff monitored programs or other staff monitoring of economic developments.
The Articles of Agreement of the International Monetary Fund were adopted at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire on July 22, 1944. They were originally accepted by 29 countries and since then have been signed and ratified by a total of 190 Member countries.
As the charter of the organization, the Articles lay out the Fund’s purposes, which include the promotion of “international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems”. They also establish the mandate of the Organization and its members’ rights and obligations, its governance structure and roles of its organs, and lays out various rules of operations including those related to the conduct of its operations and transactions regarding the Special Drawing Rights.
Key functions of the IMF are the surveillance of the international monetary system and the monitoring of members’ economic and financial policies, the provision of Fund resources to member countries in need, and the delivery of technical assistance and financial services. Since their adoption in 1944, the Articles of Agreement have been amended seven times, with the latest amendment adopted on December 15, 2010, and effective from January 26, 2016.
The Articles are complemented by the By-laws of the Fund adopted by the Board of Governors, themselves being supplemented by the Rules and Regulations adopted by the Executive Board.
IMF also welcomed the recent passage of the Petroleum Industry Act (PIA) and stressed its timely implementation. The PIA aims to improve administration and governance in the petroleum sector, introduce market-based fuel pricing and attract higher investment.
Preliminary assessments by the IMF and the World Bank suggest that the approved fiscal terms will provide greater incentives to invest in the oil and gas industry but will reduce the fiscal take from new and converted fields.
According to their report, “the complete removal of regressive fuel and electricity subsidies is a near-term priority, combined with adequate compensatory measures for the poor.”
While stressing the need to fully remove fuel subsidies and move to a market-based pricing mechanism in early 2022 as stipulated in the 2021 Petroleum Industry Act, the mission, in addition, called for the implementation of cost-reflective electricity tariffs as of January 2022, saying such measures “should not be delayed.”
It further observed that well-targeted social assistance will be needed to cushion any negative impacts on the poor, particularly in light of the still elevated inflation. Nigeria’s past experiences with fuel subsidy removal, which have all been short-lived and reversed, it said underscore the importance of building a consensus and improving public trust regarding the protection of the poor and efficient and transparent use of the saved resources.
On account of this, the headline fiscal deficit is projected to worsen in the near term and remain elevated over the medium term. Despite much higher oil prices, the general government fiscal deficit is projected to widen in 2021 to 6.3 percent of GDP, reflecting implicit fuel subsidies and higher security spending, and remain at that level in 2022.
Furthermore, there are significant downside risks to the near-term fiscal outlook from the ongoing pandemic, weak security situation and spending pressures associated with the electoral cycle. Over the medium term, without bold revenue mobilization efforts, fiscal deficits are projected to stay elevated above the pre-pandemic levels with public debt increasing to 43 percent in 2026.
Also, general government interest payments are expected to remain high as a share of revenues, making the fiscal position highly vulnerable to real interest rate shocks and dependent on central bank financing.
According to the IMF, “significant additional domestic revenue mobilization is critical to put the public debt and debt-servicing capacity on a sustainable path. The near-term priorities are to implement e-customs reforms including efficient procedures and controls, developing a VAT Compliance Improvement Program, improving compliance across large, medium, and micro/small taxpayers and rationalizing tax incentives and customs duty waivers.
“As the recovery gains strength and compliance improves, Nigeria will have to adopt tax rates comparable to its peers in the Economic Community of West African States (ECOWAS) to raise revenues to levels targeted in the 2021-25 National Development Plan. The cumulative net savings from the recommended measures, after making room for additional social assistance to cushion impacts of reforms, could amount to 5.1 percent of GDP over 2022-26. Such a consolidation would keep public debt below 40 percent of GDP and reduce dependence on central bank financing of the deficit.”