Fuel, electricity tariff cap costly, IMF warns Nigeria

Bisola David
Bisola David
Fuel, electricity tariff cap costly, IMF warns Nigeria

By Melvin Onwubuke

The International Monetary Fund IMF has revealed that price caps on fuel and electricity tariffs below the cost recovery could result in a fiscal cost amounting to 3% of GDP in 2024.

In their report on the end of their mission to Nigeria, the staff of the Fund welcomed the recent policy decisions taken by the government, in particular the increase in the MPR by 400 basis points to 22.75% last month, which they said would help to moderate inflation, according to Nairametrics.

In the report, Nigeria has increased revenue collection and oil production, although the government’s response to certain macroeconomic shocks as well as its promotion of long term development have been hampered by an ongoing weak mobilization of revenues.

It stated Non-oil revenue collection improved by 0.8 per cent of GDP in 2023, helped by naira depreciation. Oil production reached 1.65 million barrels per day in January as the result of enhanced security. The capping of fuel pump prices and electricity tariffs below cost recovery could have a fiscal cost of up to 3 per cent of GDP in 2024.

“Although it noted that the cash transfer program should be implemented before the government addresses the ‘’costly, implicit fuel and electricity subsidies.”

The report also called on the federal government to prioritize addressing food insecurity estimating the number of food insecure Nigerians to be almost 1 in 10 at 8% of Nigeria’s over 200 million population. It also welcomed the federal government’s efforts to reform the social security system and the release of grain throughout the country.

The report reads, “With about 8 percent of Nigerians deemed food insecure, addressing rising food insecurity is the immediate policy priority. In this regard, staff welcomed the authorities’ approval of an effective and well-targeted social protection system. The team also welcomed the government’s release of grains, seeds, and fertilizers, as well as Nigeria’s introduction of dry-season farming.”

Although the Federal Government has stopped paying subsidies to fuel since June 2023, there are those who feel that, given that the exchange rate for imports has increased significantly without a commensurate increase in the price of the petrol pump, there is tacit payment of subsidies.

According to the NBS Petrol price watch for January, the average price of PMS stood at 30. However, the PMS pump price for July 2023 after the subsidy payment stopped stood at N600.35. While the July, the naira was exchanging to the USD at an average of N750/$, today it averages around N1500/$. According to Nairametrics daily FX monitor, the naira exchanged for N1,534.9/$1 on the official window.

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