The International Monetary Fund (IMF) has issued a cautionary note regarding Nigeria’s implementation of price caps on fuel and electricity tariffs, citing potential fiscal ramifications amounting to 3% of GDP in 2024.
In their latest report following a mission to Nigeria, IMF staff acknowledged the government’s recent policy measures, particularly the 400 basis points increase in the Monetary Policy Rate (MPR) to 22.75% last month, which is expected to aid in inflation containment.
While Nigeria has made strides in revenue collection and oil production improvements, the IMF report highlights persistent challenges in revenue mobilization, weakening the government’s response to macroeconomic shocks and hindering sustainable development initiatives.
The report underscores the potential fiscal consequences of maintaining fuel pump prices and electricity tariffs below cost recovery levels, estimating a significant impact equivalent to 3% of GDP in 2024.
Additionally, the IMF emphasized the importance of implementing the cash transfer program before addressing what it termed as “costly, implicit fuel and electricity subsidies.”
Food insecurity also emerged as a pressing concern, with the report estimating that nearly 8% of Nigerians face food insecurity, out of a population exceeding 200 million. The IMF urged the federal government to prioritize measures to combat rising food insecurity and commended efforts to reform the social welfare system, including the distribution of grains and seeds nationwide.
It’s noteworthy that despite the federal government’s discontinuation of subsidy payments on Premium Motor Spirit (PMS) since June 2023, concerns persist regarding implicit subsidy payments due to increased importation costs amid exchange rate fluctuations.
According to data from the Nigerian Bureau of Statistics (NBS), the average price of PMS in January stood at N130, contrasting sharply with the post-subsidy removal pump price of N600.35 in July 2023. This significant disparity comes amid a challenging exchange rate environment, with the naira depreciating against the dollar, reaching an average of N1,534.9/$1 on the official window.
Furthermore, the Nigeria Electricity Regulatory Commission revealed plans to allocate approximately 67 trillion naira towards electricity subsidies in 2024, marking a substantial 170% increase from the previous year.
As Nigeria grapples with these economic challenges, the IMF’s warnings highlight the urgency for strategic policy interventions to mitigate adverse effects on the economy and foster sustainable growth.
Credit: Nairametrics
