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IMF: Fuel Subsidy Causing Deterioration in Fiscal Balance in Nigeria

The International Monetary Fund (IMF) yesterday maintained that prolonged payment of petrol subsidy in Nigeria was affecting the country’s fiscal balance despite revenue increase from rise in global oil price.
The Washington-based institution stated this in its latest Regional Economic Outlook for Sub-Saharan Africa titled: “A New Shock and Little Room to Maneuver,” released yesterday.
It stated: “Net commodity exporters can receive fiscal windfalls only if they contain subsidy expenditures. For example, some oil exporters provide expensive and generalised energy subsidies to the domestic population which could lead to a deterioration in fiscal balances despite the revenue increase associated with higher export prices in Nigeria.
“Therefore, removing generalised subsidies is crucial to ensure that the rise in commodity prices generates fiscal savings. It is then essential that these savings are directed largely to strengthening fiscal sustainability supported by strong governance frameworks, given the precarious conditions faced by many countries.”
The fund reiterated that the country’s foreign exchange policy was weighing on its growth, distorting investment, encouraging rent seeking. It also noted uncertainties in the Nigerian economy.
The multilateral institution also pointed out that Nigeria’s growth was stronger than anticipated due to increase in manufacturing and agriculture.
“For countries with limited reserves, authorities have sometimes offered favorable rates, including to specific sectors. But the resulting parallel market for foreign exchange in Nigeria and Zimbabwe can weigh on growth distorting investment, encouraging rent seeking, and adding to uncertainty.
“The decision to return to a more unified framework is often difficult, but experience suggests that the shift to a market-clearing official rate is not in itself likely to lead to a sharp increase in inflation, as prices in the real economy tend to reflect the less-favorable parallel exchange rate; and removing exchange-market distortions can give a substantial boost to development, by reducing uncertainty and strengthening competitiveness.
“In this regard, the exchange reform implemented in South Sudan last year prompted a significant appreciation of the parallel market rate, helping to reduce inflation and insulating the country from rising global food prices,” it added.
The report further reiterated that Nigeria’s economic growth was expected to reach 3.4 percent in 2022, falling back to 2.9 per cent from 2024 onwards.
It added: “Nigeria’s growth outlook has improved through higher oil prices and a stronger-than-anticipated recovery of manufacturing and agriculture. Growth is expected to reach 3.4 percent in 2022, falling back to 2.9 percent from 2024 onwards.
“The outlook is subject to high uncertainty associated with oil prices and financial conditions. Moreover, low vaccination rates, rising security risks, and elevated price pressures weigh negatively on the medium-term growth outlook. Diversification away from oil will be critical to raise growth potential sustainably and reduce volatility.”
On his part, the Director of the IMF’s African Department Abebe Aemro Selassie, while speaking on the report during a virtual media briefing at the ongoing IMF/World Bank spring meeting yesterday, noted that the recovery in sub-Saharan Africa picked up in the third quarter of 2021 and held up despite the onset of a fourth COVID-19 wave at the end of the year.
He said Sub-Saharan Africa’s estimated growth in 2021 had been revised upward from 3.7 per cent to 4.5 per cent.
He said: “Higher oil prices may generate a windfall gain for the region’s 8 oil exporters. But for the other 37 countries, they will worsen trade imbalances and increase living costs.
“Indeed, over the past couple of months we have increased our inflation projections significantly lifting the regional average for 2022 by a full four percentage points, and representing the worst outcome since 2008.
“This year, eleven countries will face double digit inflation; almost all of these have flexible exchange rates, and almost half of these are fragile.
“For most countries, the new crisis comes at an extremely difficult time as the COVID-19 pandemic enters its third year, fiscal and international buffers are already under strain, and policy space is limited.
“Looking beyond the pandemic and current geopolitical tensions, creating jobs and meeting the Sustainable Development Goals will require strong, inclusive, and sustainable growth in sub-Saharan Africa.”

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