The Nigerian government has been cautioned by the International Monetary Fund to eliminate what it termed implicit fuel and electricity subsidies.
In a recent report by the IMF, Nigeria was informed that subsidies would consume three percent of the nation's GDP in 2024, compared to one percent the previous year.
In the report, the IMF lauded the Federal Government for, among other things, discontinuing "expensive and regressive energy subsidies", emphasizing the importance of this action in creating fiscal space for development spending and bolstering social protection while upholding debt sustainability.
President Bola Tinubu's administration made the decision to remove fuel subsidies during his inauguration on May 29, 2023.
The IMF pointed out that compensatory measures for the poor were not increased promptly and was later stopped due to corruption concerns by the end of 2023. This led to the reintroduction of implicit subsidies by capping fuel prices below cost, aiming to help Nigerians deal with high inflation and exchange rate depreciation.
The body noted that the price of electricity had tripled for high-use premium consumers on Band A feeders, a group that makes up 15% of the 12 million customers and is responsible for 40% of electricity usage.
The reversal of the Band A tariff from N206.80 per kilowatt-hour to N68 is being demanded by Nigerians, as the IMF suggests that this adjustment could decrease subsidies expenditure by 0.1% of GDP, while ensuring relief for the poor, especially in rural regions.
The IMF recommended that after scaling up the safety net and reducing inflation, the government should address implicit fuel and electricity subsidies.
It was cautioned that implicit subsidy costs could escalate to 3% of GDP in 2024 from 1% in 2023, due to pump prices and tariffs below cost-recovery. These costly subsidies are poorly targeted, with higher income groups benefiting more than the vulnerable.
The IMF reiterated the importance of removing costly and untargeted fuel and electricity subsidies as inflation subsides and support for the vulnerable is increased, while still maintaining a lifeline tariff.
