The International Monetary Fund has expressed concern over the reintroduction of fuel subsidy in Nigeria in the face of the country’s low revenue mobilisation, noting that the development is worrisome.
The IMF in a statement at the end of its staff virtual meeting with top Nigerian officials, said the views expressed in the statement were those of the IMF staff and did not represent those of the IMF’s Executive Board.
The IMF team was led by IMF’s Mission Chief for Nigeria, Ms. Jesmin Rahman, in the virtual meetings with the Nigerian authorities, held from June 1st to June 8th, 2021, to discuss recent economic, financial developments and outlook.
At the end of the visit, Rahman, in the statement, said the Nigerian economy had started to gradually recover from the negative effects of the COVID-19 global pandemic.
“The mission expressed its concern with the resurgence of fuel subsidies. It reiterated the importance of introducing market-based fuel pricing mechanism and the need to deploy well-targeted social support to cushion any impact on the poor,” the statement said.
“The mission recommended stepping up efforts to strengthen tax administration to mobilise additional revenues and help address priority spending pressures.”
The statement said tax revenue collections in Nigeria were gradually recovering but with fuel subsidies resurfacing, additional spending for COVID-19 vaccines, added to address security challenges, the fiscal deficit of the consolidated government was expected to remain elevated at 5.5 per cent of Gross Domestic Product (GDP).
It added that following sharp output contractions in the second and third quarters, GDP growth turned positive in the fourth quarter (Q4 2020) and growth reached 0.5 per cent (year-on-year) in Q1 2021, supported by agriculture and services sectors.
However, it said employment level in the country continued to fall dramatically and, together with other socio-economic indicators, remained below pre-pandemic levels.
“Inflation slightly decelerated in May but remained elevated at 17.93 per cent, owing to high food price inflation. With the recovery in oil prices and remittance flows, the strong pressures on the balance of payments have somewhat abated, although imports are rebounding faster than exports and foreign investor appetite remains subdued resulting in continued forex shortage.
“The incipient recovery in economic activity is projected to take root and broaden among sectors, with GDP growth expected to reach 2.5 per cent in 2021,” it added.
It anticipated that inflation in Nigeria would remain elevated in 2021, but likely to decelerate in the second half of the year to reach about 15.5 per cent, following the removal of border controls and the elimination of base effects from elevated food price levels.
Downside risks to the near-term arise from further deterioration of security conditions, and the still uncertain course of the pandemic both globally and in Nigeria, it added.
“The mission commended the authorities’ measures to contain the transmission of COVID-19 in Nigeria, including the ongoing vaccination programme under the COVAX initiative, and strongly supported the authorities’ efforts to acquire additional doses from countries with surplus stocks.
“The mission urged the authorities to keep reliance on CBN overdrafts for deficit financing within legal limits, while the government continues to make efforts to strengthen budget planning and public finance management practices to allow for flexible financing from domestic markets and better integration of cash and debt management.
“The recent removal of the official exchange rate from the CBN website and measures to enhance transparency in the setting of the NAFEX exchange rate are encouraging,” it stated.
The mission recommended maintaining the momentum toward fully unifying all exchange rate windows and establishing a market-clearing exchange rate.
On the monetary policy to strengthen the monetary targeting regime, the mission recommended integrating the interbank and debt markets and using the central bank or government bills of short-maturity as the main liquidity management tool, instead of the cash reserve requirements.
“The banking sector remains liquid and well-capitalised while non-performing loans (NPLs) are contained. The extension of the moratorium on principal payments of qualifying credit facilities on a case-by-case basis through March 2022 should be limited to viable debtors with strong pre-crisis fundamentals.
“CBN stress tests purport that the banking system would remain adequately capitalised except in case of a severe deterioration of credit quality.
“Nevertheless, it remains to be seen what share of forborne loans may turn non-performing as the impact of the pandemic abates. Since NPLs often rise at the later part of economic crisis, CBN’s strong oversight remains critical to safeguarding financial sector stability,” it said.