Nigeria’s electricity, fuel subsidies may gulp N7tn – IMF

The International Monetary Fund has said Nigeria may incur an expenditure of around N7trn should the existing fuel pump price cap and electricity subsidy be upheld in 2024.

The fund also stated that the current administration inherited a challenging economic situation characterised by low growth, diminished revenue collection, escalating inflation, and longstanding external imbalances, stressing that the continued capping fuel pump prices and electricity tariffs below their recovery costs could lead Nigeria to incur fiscal costs of up to three per cent of its Gross Domestic Product in 2024.

“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,” IMF stated in a statement following a recent visit by an IMF team led by Axel Schimmelpfennig, the IMF Mission Chief for Nigeria.

This visit, part of the 2024 Article IV Consultations, saw the team engage in discussions with key Nigerian officials in Lagos and Abuja from February 12 to February 23, 2024.

According to data from the latest GDP report by the National Bureau of Statistics, the GDP current market price for 2023 is N234.4trn and three per cent of that amount is N7.032trn.

A breakdown showed the country grew its GDP from N51.95trn in quarter one to N52.76trn in Q2, increased to N62.05trn in Q3 GDP, and N67.67trn in Q4.

The new development came weeks after the global lender expressed concerns in its Executive Board’s Post Financing Assessment that the government had capped the prices of fuel at retail stations.

The IMF said the Tinubu administration has “capped retail fuel and electricity prices” ostensibly to “ease the impact of rapidly rising inflation on living conditions, thus partially reversing the fuel subsidy removal.”

On May 29, 2023, during his swearing-in speech, President Bola Tinubu announced an end to petrol subsidy, triggering a hike in the prices of goods and services in the country.

After the removal of the petrol subsidy in May 2023, the pump price changed from N185 per litre to N400 per litre, and then to N568 per litre at NNPC fueling stations, while others currently sell above N600. It currently sells between N650 and N700 depending on the location nationwide.

The government had said the prices would fluctuate after subsidy removal from time to time but the pump price has maintained a steady rise despite the fact that the price of crude oil in the global market keeps going up and down. According to fuel marketers, a litre of the products should be sold at N1,000 or more.

The IMF report read in part, “Nigeria’s economic outlook is challenging. Economic growth strengthened in the fourth quarter, with GDP growth reaching 2.8 per cent in 2023. This falls slightly short of population growth dynamics. Improved oil production and an expected better harvest in the second half of the year are positive for 2024 GDP growth, which is projected to reach 3.2 per cent, although high inflation, naira weakness, and policy tightening will provide headwinds.

“Recent improvements in revenue collection and oil production are encouraging. Nigeria’s low revenue mobilization constrains the government’s ability to respond to shocks and promote long-term development. 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 a result of enhanced security.”

The fund also emphasised the need for the Nigerian government to fully implement its cash transfer programme aimed at assisting vulnerable households.

IMF noted that this step is crucial before addressing the costly fuel and electricity subsidies.

According to the IMF, the established social safety net programme, designed to provide cash transfers to impoverished and vulnerable individuals, must operate at its maximum capacity. This approach ensures that economically vulnerable segments of the population remain protected while the government considers adjustments to the existing subsidy framework.

The statement added, “With about 8 per cent 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 recently approved targeted social safety net program that will provide cash transfers to vulnerable households needs to be fully implemented before the government can address costly, implicit fuel and electricity subsidies in a manner that will ensure low-income households are protected.”

The government has consistently denied it is paying fuel subsidy.

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The Executive Director, Association of Nigerian Electricity Distributors, Sunday Oduntan, said, “The IMF is only making a projection, I don’t think that is something we should be dragging. What I can say is that we need to create a database where the government can know those who are poor, those who are rich, those who are the middle-class, so that when they want to do subsidy, we should not be subsidising either fuel or electricity for millionaires or the owners of Rolls Royce who are over the country; government should be subsidising on the for the poor and the needy. The needy require help.”

IMF forecasts $8bn fall in Nigeria’s 2024 foreign reserves
Oduntan, however, said it was in the place of government to take a decision on whether or not to pay subsidy,

“It is the government that will decide whether to pay subsidy or not. that’s not for me to say. Government knows its purse. Government should find a way to identify those who really needs subsidy, either electricity or fuel. But the problem is that we don’t have a database and the majority of people who have money don’t even pay income tax. Government should ensure everybody gets the National Identification Number, with that we will start creating a database to know who is poor or not. Subsidy should be for the poor. That is my personal opinion.”

Also speaking, National Vice President, IPMAN, Hammed Fashola, said since NNPCL is the sole important of fuel, operators had not choice but to accept what it said.

He said, “As we all know, the NNPC is the sole importer of petroleum products, especially PMS. And they have come out to tell us that they are not paying subsidy. We regard whatever the NNPCL says as the government talking. They are the importer of petrol, if they had come out to say they are not paying subsidy, what do we do? We have to believe them. So, I believe the NNPCL, If they say they are not paying subsidy, it means they are not paying.

“On electricity, the Power Minister said we are paying subsidy. So, my take on that is that anything that will make power stable or make energy available, I will support it, but the only thing is that people want to enjoy power, but they don’t want to pay. But I can bet you that an average Nigerian is ready to pay if the energy is available. We all need energy, both the small- and large-scale industries including households. If the removal of subsidy will make power stable, available and affordable, no problem.”

Spokespersons of NNPCL and the Ministry of Petroleum Resurces, Olufemi Soneye and Lydia Ogunmakinwa, respectively, did not pick calls when contacted.

They also did not respond to messages sent to them on the matter up till when this report was filed.

Also, spokesperson for the Federal Ministry of Finance, Stephen Kilebi, could not be reached as of press time. His phone lines are not connecting and he has not responded to messages sent to him.

When reached for its response, the Presidency declined to comment on the report. Also, attempts to reach the Federal Government were unsuccessful as the Ministers of Finance, Mr Wale Edun and Budget & Economic Planning, Mr Abubakar Bagudu, did not pick calls made to their mobile lines.

Experts speak

Reacting, the Managing Director of the Centre for the Promotion of Private Enterprise, Muda Yusuf, in his expert opinion, said the government had only taken into account the social consequences of its reforms and provided solutions to address them in the face of the current economic hardship.

He criticised the IMF for focusing only on the financial aspect of the economy without taking account of the social costs.

He said, “The issue is not about transparency but taking into account the social consequences of the reforms and addressing them. The withdrawal of subsidy in the first instance has caused hardship and we are witnesses to it and we have not recovered from it.

“Now if we have to leave the pump price purely to the market and continue to say that there is no subsidy at all, the PMS price would have gotten to N1,000. Now those who are managing the country, need to balance all aspects of key indicators in the economy and they also have to look at social costs.

“The IMF doesn’t reckon with the social cost of policies and they don’t seem to care as long as you follow their template but somebody who is managing human beings has to take into consideration the impact of the policy on the lives of the people. I don’t think the government has done anything wrong by taking into account the social effects of its policies.

“Economics is a social science and whatever the IMF is saying is just a narrow focus on economic management. They don’t reckon with social costs, political costs or even the economic costs and developmental implications. Even in their own country, is there no subsidy there?”

Another economist at Lotus Beta Analytics, Shedrach Israel said, the fund uses available data which might not reflect realities in the country for their predictions.

Shedrach called on the government to introduce progressive taxing in order to redistribute wealth.

“IMF uses figures for their economic outlook. However, because of the dearth of economic data in Nigeria, it becomes unrealistic for the fund to make predictions on nominal data. There are several inequalities in Nigeria and the IMF only uses data available to them to make economic policies and recommendations.

“The IMF may be right based on the data they got but, it does not fit into the reality on ground in the country. Of course, the government would be earning more money if it phases off subsidy however, there is already a very high inflation in the country so, If the government should go ahead and implement the fund’s recommendations, it would do more economic damage to the country.

“The government should rather do part subsidy and introduce progressive taxing. The rich should be taxed more while, the low-income households be made pay less in order to redistribute wealth. Why should the IMF dictate policies to Nigeria if they cannot help the country,” he said.