Fiscal policy: Nigeria need to remove all subsidies, implement revenue-based fiscal consolidation for local economic growth, IMF says

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With Nigeria’s headline fiscal deficit is projected to worsen in the near term and remain elevated over the medium term.

Despite much higher oil prices, the general government fiscal deficit is projected to widen in 2021 to 6.3 percent of GDP, reflecting implicit fuel subsidies and higher security spending, and remain at that level in 2022.

There are significant downside risks to the near-term fiscal outlook from the ongoing pandemic, weak security situation and spending pressures associated with the electoral cycle.

Over the medium term, without bold revenue mobilization efforts, fiscal deficits are projected to stay elevated above the pre-pandemic levels with public debt increasing to 43 percent in 2026.

General government interest payments are expected to remain high as a share of revenues making the fiscal position highly vulnerable to real interest rate shocks and dependent on central bank financing.

  1. The complete removal of regressive fuel and electricity subsidies is a near-term priority, combined with adequate compensatory measures for the poor .

The mission stressed the need to fully remove fuel subsidies and move to a market-based pricing mechanism in early 2022 as stipulated in the 2021 Petroleum Industry Act.

In addition, the implementation of cost-reflective electricity tariffs as of January 2022 should not be delayed. Well-targeted social assistance will be needed to cushion any negative impacts on the poor particularly in light of still elevated inflation.

Nigeria’s past experiences with fuel subsidy removal, which have all been short-lived and reversed, underscore the importance of building a consensus and improving public trust regarding the protection of the poor and efficient and transparent use of the saved resources.

Significant additional domestic revenue mobilization is critical to put the public debt and debt-servicing capacity on a sustainable path .

The near-term priorities are to implement e-customs reforms including efficient procedures and controls, developing a VAT Compliance Improvement Program, improving compliance across large, medium, and micro/small taxpayers and rationalizing tax incentives and customs duty waivers.

As the recovery gains strength and compliance improves, Nigeria will have to adopt tax rates comparable to its peers in the Economic Community of West African States (ECOWAS) to raise revenues to levels targeted in the 2021-25 National Development Plan.

The cumulative net savings from the recommended measures, after making room for additional social assistance to cushion impacts of reforms, could amount to 5.1 percent of GDP over 2022-26.

Such a consolidation would keep public debt below 40 percent of GDP and reduce dependence on central bank financing of the deficit.