In a recent report titled “Nigeria: 2024 Article IV Consultation,” the International Monetary Fund (IMF) has advised the Nigerian government to terminate all forms of fuel and electricity subsidies, arguing that they predominantly benefit the wealthy rather than the intended vulnerable population.
The IMF’s recommendation comes amidst Nigeria’s struggle with record-high inflation and economic challenges exacerbated by the COVID-19 pandemic.
The report highlights the inefficiency and ineffectiveness of subsidies, noting that they are costly and poorly targeted.
According to the IMF, higher-income groups tend to benefit more from these subsidies, resulting in a misallocation of resources. With pump prices and electricity tariffs currently below cost-recovery levels, subsidy costs are projected to increase significantly, reaching up to three percent of the gross domestic product (GDP) in 2024.
The IMF suggests that once Nigeria’s social protection schemes are enhanced and inflation is brought under control, subsidies should be phased out.
The government’s social intervention scheme, developed with support from the World Bank, aims to provide targeted support to vulnerable households, potentially benefiting around 15 million households or 60 million Nigerians.
However, concerns persist regarding the removal of subsidies, particularly in light of the recent announcement of an increase in electricity tariffs by the Nigerian Electricity Regulatory Commission (NERC).
While the government has taken steps to reduce subsidies, including the removal of the costly petrol subsidy, there are lingering challenges in fully implementing these reforms.
Nigeria’s fiscal deficit is projected to be higher than anticipated, according to the IMF staff’s analysis.
The persistence of fuel and electricity subsidies is expected to contribute to this fiscal imbalance, along with lower oil and gas revenue projections and higher interest costs.