IMF advises Nigeria to reduce fuel subsidy amid falling global oil prices

NIGERIA – The International Monetary Fund (IMF) has said Nigeria needs to reduce fuel subsidy at a time when oil prices are low in order to bring about more productive government spending.

The multilateral financial institution said subsidies and other transfers from the government averaged more than five per cent of Gross Domestic Product (or 25 per cent of expenses) as of 2017 for sub-Saharan African countries with available data.

It further noted that, “Fuel subsidies tend to be poorly targeted, foster over-consumption, curtail investment and maintenance in related sectors, and crowd out more productive government spending.

The bank noted that it was time for Nigeria, Senegal and Cameroon to take the example of Mozambique and South Sudan and exploit the opportunity of low fuel prices to reduce the amount set aside for fuel subsidies.

The IMF argues that reducing fuel subsidies will enable Nigeria and other African countries to free up more funds for other development and social programs.“

The Federal Government had on May 11, 2016 announced a new petrol price band of N135 to N145 per litre, a move that signalled the end to fuel subsidy payment to private marketers.

But the government later resorted to subsidy regime following the increase in the landing cost of petrol on the back of rising crude oil prices, with the Nigerian National Petroleum Corporation, the sole importer of the product, bearing the burden of the subsidy.

IMF in its 2019 Article IV Consultation on Nigeria noted that phasing out implicit fuel subsidies while strengthening social safety nets to mitigate the impact on the most vulnerable would help reduce the poverty gap and free up additional fiscal space.

The multilateral lender added that there was also an opportunity for Nigeria to re-examine how to improve the effectiveness of other types of subsidies, citing Malawi’s farm input subsidy programme as an example.

Nigeria’s fuel subsidy regime has been criticized for a long time because it encourages uncontrolled usage of petroleum which pollutes the atmosphere locally and while at the same time denying an already cash trapped government funds which it could have invested elsewhere.

A recent BudgIT report 10 trillion Naira (about $27.4 billion) that has been spend in fuel subsidies in Nigeria could have been used to develop 27000 megawatt (MW) of solar-powered electricity for stable power supply.

The Federal Government has not heeded to previous calls to abandon the fuel subsidy scheme and Analysts are skeptical of any chances from that stance anytime soon.

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