The International Monetary Fund has warned the Federal Government that it may not be able to maintain its fiscal sustainability if lacks the courage to remove fuel subsidy, official foreign exchange and increase Value Added Tax.
The Nigerian government had announced the suspension of the removal of fuel subsidy after it had planned to exit the regime by June, 2022 but the IMF said the FG should have carried out the stipulation of the 2021 Petroleum Industry Act by moving to to a market-based pricing mechanism.
The IMF, in a statement on Monday at the end of its Article IV consultation with Nigeria, said despite the recovery in oil prices, the general government fiscal deficit was projected to widen in 2021 to 5.9 per cent of GDP, reflecting implicit fuel subsidies and higher security spending.
According to the Washington-based fund, higher debt service to government revenues (through higher US interest rates and/or increased borrowing) pose risks for fiscal sustainability.
Its executive directors noted that the country’s outlook remained subject to significant risks, including from the pandemic trajectory, oil price uncertainty, and security challenges.
They emphasised the need for major reforms in the fiscal, exchange rate, trade, and governance areas to lift long-term, inclusive growth.
The statement said, “Directors highlighted the urgency of fiscal consolidation to create policy space and reduce debt sustainability risks. In this regard, they called for significant domestic revenue mobilisation, including by further increasing the value-added tax rate, improving tax compliance, and rationalizing tax incentives.
“Directors also urged the removal of untargeted fuel subsidies, with compensatory measures for the poor and transparent use of saved resources. They stressed the importance of further strengthening social safety nets.”
The IMF welcomed the removal of the official exchange rate and recommended further measures towards a unified and market-clearing exchange rate to help strengthen Nigeria’s external position, taking advantage of the current favourable conditions.
They noted that exchange rate reforms should be accompanied by macroeconomic policies to contain inflation, structural reforms to improve transparency and governance, and clear communications regarding exchange rate policy.
The statement said, “Directors considered it appropriate to maintain a supportive monetary policy in the near term, with continued vigilance against inflation and balance of payments risks. They encouraged the authorities to stand ready to adjust the monetary stance if inflationary pressures increase.
“Directors recommended strengthening the monetary operational framework over the medium term – focusing on the primacy of price stability – and scaling back the central bank’s quasi-fiscal operations.”
