Two weeks after the Federal Government announced the suspension of the plan to remove fuel subsidy, the International Monetary Fund (IMF) has insisted on the removal of all subsidies in Nigeria as a condition for sustained economic development in the country.

The IMF also advised the Federal Government to further increase Value Added Tax (VAT) in the country.

Many Nigerians are worried that the removal of subsidy would worsen soaring inflation and there is likely to be increased level of hardship in the country if the Federal Government adopts the IMF’s advise by removing subsidies and increasing taxes.

The recent spike in the inflation rate – which rose to 15.63 per cent in December 2021 after eight months of consecutive decline, according to the latest consumer price index report, released by the National Bureau of Statistics (NBS) – was the key reason given by the government for shelving the plan to remove fuel subsidy.

The IMF advised the Federal Government to remove subsidy and raise the VAT rate in the report of its Executive Board’s latest Article IV consultation with Nigeria.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year.

A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to the IMF headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

At the conclusion of the discussion, the IMF Managing Director, as Chairman of the Board, summarises the views of Executive Directors, and the summary is transmitted to the country’s authorities.

The IMF Executive Board concluded its latest Article IV consultation with Nigeria on January 31.

Minister of Finance, Budget and National Planning Zainab Ahmed announced the suspension of the planned removal of fuel subsidy on January 24 at a meeting with members of the National Assembly.

The summary of the Executive Board’s assessment on Nigeria was posted on the IMF website on February 7.

In the report, the IMF said the Nigerian government should do away with untargeted fuel subsidies.

The IMF stressed that funds saved from subsidy removal should be utilised in a transparent manner.

“Directors also urged the removal of untargeted fuel subsidies, with compensatory measures for the poor and transparent use of saved resources. They stressed the importance of further strengthening social safety nets.”

Expressing concern at Nigeria’s revenue challenges, the IMF’s directors highlighted the urgency of fiscal consolidation to create policy space and reduce debt sustainability risks.

In this regard, the IMF called for significant domestic revenue mobilisation, “including by further increasing the value-added tax (VAT)rate, improving tax compliance, and rationalising tax incentives”.

The IMF Executive Board noted that Nigeria’s growth outlook remains subject to significant risks, including from the trajectory of the COVID-19 pandemic, oil price uncertainty and security challenges.

Looking ahead, the Executive Board emphasised the need for major reforms in fiscal, exchange rate, trade and governance areas to lift long-term, inclusive growth.

While welcoming the removal of the official exchange rate, the IMF noted that exchange rate reforms should be accompanied by macroeconomic policies to contain inflation, structural reforms to improve transparency and governance, and clear communications regarding exchange rate policy.

The IMF in the same vein urged the Nigerian government to adjust the monetary stance if inflationary pressures increase.

Insisting on the need to improve transparency and governance as a means of strengthening business confidence and public trust, the IMF Executive Board equally advised the Nigerian authorities to make stronger efforts to improve transparency of COVID-19 emergency spending.

The IMF, in the assessment report, observed that although the Nigerian economy is recovering from a historic downturn, the country’s consolidated government revenue-to-GDP ratio at 7.5 per cent remains among the lowest in the world.

It  also observed that high debt service to government revenues poses risks for fiscal sustainability in the country.

The IMF further observed that levels of food insecurity have risen and the poverty rate was estimated to have risen as a result of the COVID-19 pandemic.

A worsening of level of insecurity could derail the recovery being recorded in Nigeria, the IMF warned.