The International Monetary Fund (IMF) has issued a warning to the Nigerian government, urging them to eliminate what the IMF refers to as implicit subsidies on fuel and electricity.
In a recent report, the IMF highlighted that these subsidies would consume three percent of Nigeria’s Gross Domestic Product (GDP) in 2024, compared to one percent in the previous year.
The IMF praised the Nigerian government for taking steps to phase out what it called “costly and regressive energy subsidies.” According to the IMF, this move is crucial for creating fiscal space for development spending and strengthening social protection while maintaining debt sustainability.
The fuel subsidies were removed by President Bola Tinubu’s administration during his inauguration on May 29, 2023.
However, the IMF noted that adequate compensatory measures for the poor were not promptly scaled up and were later paused due to corruption concerns.
As a result, pump prices were capped below cost, reintroducing implicit subsidies by the end of 2023 to help Nigerians cope with high inflation and exchange rate depreciation.
The IMF also acknowledged that the price of electricity had tripled for high-use premium consumers on Band A feeders, affecting 15 percent of the 12 million customers who account for 40 percent of electricity usage.
While Nigerians are calling for the reversal of the Band A tariff from N206.80 per kilowatt-hour to N68, the IMF suggested that “the tariff adjustment will help reduce expenditure on subsidies by 0.1 percent of GDP, while continuing to provide relief to the poor, particularly in rural areas.”
The IMF advocated for the removal of implicit fuel and electricity subsidies once the safety net has been scaled up and inflation subsides.
It warned that with pump prices and tariffs below cost-recovery, implicit subsidy costs could increase to 3 percent of GDP in 2024 from 1 percent in 2023.
These subsidies, according to the IMF, are costly and poorly targeted, with higher income groups benefiting more than the vulnerable.
The IMF projected that the implicit fuel subsidy could reach as high as N8.4 trillion in 2024.
Meanwhile, the electricity subsidy being paid to customers under Band B, C, D, and E was projected to stand at N540 billion by the end of 2024.
The Nigerian National Petroleum Company Limited and the Minister of State for Petroleum (Oil), Heineken Lokpobiri, have repeatedly denied claims that the Federal Government is paying fuel subsidies through the back door.
Despite protests from Nigerians calling for the return of the Band A tariff to the previous status quo, the IMF’s call for the removal of electricity subsidies comes at a time when the Minister of Power, Adebayo Adelabu, is facing pressure from organized labor. They have threatened to stage a protest on Monday if Adelabu fails to heed their calls.