The President Bola Tinubu-led federal government maybe struggling to navigate the International Monetary Fund (IMF) prescription removal of subsidies on petrol and power, and moved the economy towards a path of sustainable growth.
While financial experts have commended the government’s efforts in halting the slide of the Naira without resorting to international creditors, they believe the government is adopting policies recommended by the IMF, which could prove politically difficult to fully implement.
So far, the government has only succeeded in implementing partial removals of the subsidies in both the oil and power sectors, a far cry from the recommendations of international creditors.
At least one analyst is of the view that the government is failing to adopt simple solutions that could help the country save billions in foreign currency by cutting down on the importation of petroleum products.
Founder and chief executive officer of the Centre for the Promotion of Private Enterprise (CPPE), Muda Yusuf, believes the IMF approach to economic policy formulation does not take into account the social consequences of an economic policy in a country like Nigeria.
According to Yusuf, on the face of it, it may look good to be talking about subsidy removal on electricity, but we need to put these policy choices within the context of the social and political conditions.
“Already, there is a lot of pressure on the citizens. There is a lot of pressure on businesses. The poverty situation is getting worse. The cost of production is already extremely high. So, if we are dealing with that kind of situation, this is not an appropriate time to be talking about withdrawal of any form of subsidy for now,” he said.
On subsidy removal in the petroleum sector, he said, evidently, the currency depreciation has partially eroded the subsidy savings.
This is because the cost of fuel importation has increased, when converted to naira.
Besides, the mounting inflationary pressures has inherently increased the subsidy because the pump price had remained fixed while the landing cost has been on the rise.
This is understandable in the light of the current hardships being experienced by the citizens.
Though, he said, government is unlikely to go back to full subsidy because doing so would amount to a complete reversal of a major pillar of the current reforms. Beside, he said, government does not have the fiscal space to ensure full restoration of subsidy.
“The objective of the reform is actually to exit completely from fuel subsidy regime but this will take some time as the economic fundamentals are still weak.
“One of the biggest burdens on the Nigerian economy is the importation of petroleum products. Over $10 billion is spent annually on fuel importation. This is in addition to the numerous missed opportunities in quality jobs and other multiplier effects inherent in domestic refining of petroleum products.
“As an oil producing country, committing billions of hard currency to fuel importation is our biggest economic tragedy. One can only hope that we get it right with the present administration,” Yusuf added.
Yusuf said there is a major funding and liquidity crisis which is posing significant risk to investments in the electricity value chain and that costs across the chain have been rising as a result of the multiple macroeconomic headwinds.
As of December 31, 2023, Nigeria’s total debt stood at N97.34 trillion or $108.229 billion of which N59.12 trillion, or $62.73 billion, is domestic obligation.
Total external debt stood at N38.22 trillion, or $42.49 billion. Of this figure, Nigeria’s exposure to the IMF stands at $2.469 billion as of December 31, 2023 according to data from the Debt Management Office (DMO).
The IMF, thus, urged the federal government to fully eliminate subsidies for petrol and electricity, stating that these financial supports were not only expensive but also ineffective in benefiting the populations most in need of assistance.
By phasing out these subsidies, it said, the government would allow fuel and electricity prices to align more closely with their true market value, potentially leading to increased costs for consumers.
The Bank also acknowledged the reforms currently embarked on by the current administration such as the unification of the exchange rate.
Eyeing more structural reforms, President Tinubu had also appointed a Presidential Fiscal Policy and Tax Reforms Committee to make proposals for raising domestic revenue to support investments in infrastructure, health, and education.
On fuel and electricity subsidies, the IMF stated that the government had decided to partially reverse fuel subsidy removal by capping retail prices and electricity prices respectively, as a way to slow down inflation. It also cited the government’s decision to suspend VAT on diesel as another inflation reduction move.
However, in its assessment, the IMF opined that the fuel and electricity subsidies need to be removed to allow market forces to determine the prices. Instead, it recommended that the government focus on revenue generation and digitisation of public service delivery as a strategy for reducing fiscal deficits.
The IMF further asserted that the government’s focus on revenue mobilisation and digitisation would improve public service delivery and safeguard fiscal sustainability, even as the envisaged reduction in the overall deficit in 2024 would help contain debt vulnerabilities and eliminate the need for CBN financing.
Based on these recommendations, the IMF suggested that electricity and fuel subsidies be phased out completely.
Despite these recommendations from the IMF, experts said implementing such reforms demands a considerable degree of political determination from the government to persuade the Nigerian populace that these adjustments are implemented with a degree of compassion and consideration for the economic challenges many are currently enduring.
Recall, recently, the government slammed a 240 per cent increase in electricity tariff for a certain category of consumers amidst poor supply which has drawn the ire of the public.
Since the onset of the Tinubu administration, the economic landscape has witnessed significant shifts, exemplified by petrol prices tripling and the exchange rate depreciating by over 50 per cent.
These stark realities underline the necessity for the government to ensure that the proposed reforms, particularly, those involving subsidy removals, are perceived as having a “human face” to mitigate the impact on citizens already grappling with economic difficulties.
However, there had been public outcry and reactions condemning the IMF economic restructuring position in Nigeria.
