The International Monetary Fund (IMF) has advised the Nigerian government to eliminate what it terms as implicit fuel and electricity subsidies. In a recent report by the IMF, it cautioned Nigeria that these subsidies would consume three percent of the nation’s Gross Domestic Product (GDP) in 2024, a significant increase from one percent in the previous year.
The report praised the Federal Government for taking steps to phase out what it described as “costly and regressive energy subsidies.” The IMF emphasized that removing these subsidies is crucial for creating fiscal space for development spending and strengthening social protection while ensuring debt sustainability.
President Bola Tinubu’s administration had removed fuel subsidies during his inauguration on May 29, 2023. However, the IMF noted concerns regarding the inadequate scaling up of compensatory measures for the poor, which were paused due to corruption concerns. This resulted in the reintroduction of implicit subsidies by the end of 2023 to help Nigerians cope with high inflation and exchange rate depreciation.
The IMF observed 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 contribute 40 percent of electricity usage. Amid calls from Nigerians for the reversal of the Band A tariff, the IMF suggested that adjusting the tariff would help reduce expenditure on subsidies by 0.1 percent of GDP while continuing to provide relief to the poor, especially in rural areas.
The IMF recommended that once the safety net is expanded and inflation decreases, the government should address implicit fuel and electricity subsidies. It cautioned that if left unchecked, these subsidies could increase to three percent of GDP in 2024 from one percent in 2023. The IMF reiterated that these subsidies are costly and poorly targeted, with higher-income groups benefiting more than the vulnerable.
Looking ahead, the IMF emphasized that as inflation decreases and support for the vulnerable increases, costly and untargeted fuel and electricity subsidies should be removed, while considering retaining a lifeline tariff. It projected that implicit fuel subsidies could reach as high as N8.4 trillion in 2024, while electricity subsidies for customers under Band B, C, D, and E were projected to stand at N540 billion by the end of the same year.
