Subsidy robs Nigeria of fiscal gain from oil recovery – IMF

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Nigeria needs to reduce fuel subsidies if it is to derive fiscal benefit from higher oil prices, the International Monetary Fund (IMF) has said.

Rising oil prices have been spurred by the ongoing war between Ukraine and Russia, which has also caused food prices to spike, threatening many economies.

The IMF said in a new blog: “Net importers of commodities, such as Benin, Ethiopia and Malawi, will need to find resources to protect the vulnerable by reorganizing spending.

“Net exporters, like Nigeria, are likely to benefit from higher oil prices, but a fiscal gain is only possible if the fuel subsidies they provide are contained. It is important that windfall gains are largely intended to strengthen political buffers, backed by strong fiscal institutions such as a credible medium-term fiscal framework and a strong public financial management system.

The Nigerian National Petroleum Company is expected to spend around N4.05 trillion on gasoline subsidies by the end of the year, more than half of the country’s recurrent budget in 2022, compared to 2021, when 1 .4 trillion naira was spent on grants.

“Countries in sub-Saharan Africa are facing another serious and exogenous shock. Russia’s invasion of Ukraine
has caused a spike in food and fuel prices that threatens the region’s economic prospects,” the IMF said.

He said rising oil prices would increase the import bill of oil importers in the region by about $19 billion, worsening trade imbalances and raising transportation and other consumption costs.

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He said oil-importing fragile states would be hardest hit, with fiscal balances expected to deteriorate by around 0.8% of gross domestic product from the October 2021 forecast, double that of other countries. oil importers.

However, according to the Washington-based fund, all eight oil exporters in the region are benefiting from higher crude prices.

He said: “The shock is poised to make an already delicate fiscal balance exercise more difficult: increasing development spending, mobilizing more tax revenue and containing debt pressures. Fiscal authorities are generally not well placed to deal with additional shocks after the pandemic. Half of the low-income countries in the region are already in distress or at high risk.

“Rising oil prices also represent a direct fiscal cost to countries through fuel subsidies, while inflation will make cutting these subsidies unpopular. Spending pressures will only increase as growth slows, while rising interest rates in advanced economies may make financing more expensive and harder to obtain for some governments.

According to the IMF, countries need a prudent policy response to address these daunting challenges.

He said fiscal policy should be targeted to avoid deepening debt vulnerabilities, adding that policymakers should use direct transfers as much as possible to protect the most vulnerable households.

Improving access to finance for farmers and small businesses would also help, he said.

The IMF said: “Countries that cannot provide targeted transfers can use temporary grants or targeted tax cuts, with clear end dates. If well designed, they can protect households by giving them time to adjust more gradually to international prices.

“To build resilience to future crises, it remains important for these countries to develop effective social safety nets. Digital technology, such as mobile money or smart cards, could be used to better target social transfers, as Togo has done during the pandemic.

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