Following the Federal Government’s plan to extend the fuel subsidy regime by 18 months, the International Monetary Fund has said Nigeria will likely depend on overdrafts from the Central Bank of Nigeria to fund its proposed N2.55tn petrol subsidy bill.
The IMF said this in its ‘Nigeria: Selected Issues Paper’ report, which was prepared by a staff team of the Fund as background documentation for its periodic consultation with Nigeria.
According to the report, fuel subsidy negatively affects the country’s fiscal position, increasing fiscal deficit.
The Washington-based lender said, “Implicit fuel subsidies have a significant negative impact on Nigeria’s fiscal position, which is estimated to increase the overall fiscal deficit by around one percentage point of the Gross Domestic Product in 2021.
“Despite much higher oil prices, the general government fiscal deficit is projected to be significantly worse at 6.3 per cent of the GDP, compared to 4.7 per cent of GDP in the 2020 Article IV staff report, mainly reflecting the reemergence of implicit fuel subsidies and higher spending in the supplementary budget for security and vaccine costs.”
It further stressed that the government would likely depend hugely on domestic financing sources, which include borrowing from the CBN, adding fuel subsidy has been a substantial burden on the country.
“Even though we assume that implicit fuel subsidies exist only until mid-2022, as stipulated in the Petroleum Industry Act and assumed in the draft 2022 budget, fiscal vulnerabilities remain elevated with public debt continuously increasing from 35 per cent of the GDP in 2020 to over 42 per cent in 2026.
“With limited IFI funding, fiscal financing for large implicit subsidy costs is likely to depend heavily on domestic sources, including overdrafts from the Central Bank of Nigeria. Thus, the recent re-emergence of implicit fuel subsidies has levied a considerable burden on the Nigeria’s fiscal position, that could have been spent more effectively on pro-poor interventions,” the report read.
Meanwhile, the World Bank had warned the Federal Government against financing its deficits by borrowing from the CBN through the Ways and Means Advances, stressing that it puts fiscal pressures on the country’s expenditures.
According to the bank, central bank financing and fuel subsidy regime tend to adversely affect investments in human and physical capital.
The Federal Government’s total borrowing from the CBN through Ways and Means Advances had ballooned by 2,286 per cent to N15.51tn in six years, according to the central bank data.
The N15.51tn owed by the Federal Government to the central bank is not part of the country’s total public debt stock, which stood at N38tn as of September 2021.
However, the DMO said that it was working out a process of restructuring the overdrafts of the CBN for government financing to a long-term tenored debt.
Meanwhile, interest payments on Federal Government’s borrowing from the CBN through Ways and Means Advances had reportedly gulped N2.03tn in two years.
Also, in the monetary policy category of the CBN’s Frequently Asked Questions page on its website, it was disclosed that the Federal Government’s borrowing from the apex bank through its Means and Ways Advances could have adverse effects on the bank’s monetary policy to the detriment of domestic prices and exchange rates.
Removing fuel subsidy’ll reduce income inequality
Meanwhile, the IMF further encouraged the government to remove fuel subsidy, stating that it would reduce income inequality.
The report further read in part, “Analysis shows that removing fuel subsidies would reduce income inequality. A fuel price increase to cost-recovery level would reduce households’ purchasing power, which calls for a distributional analysis of the impact by income groups, especially for poor households. Richer households tend to spend a larger share of their income on PMS than poorer households, while the share of kerosene expenditure is lower in richer households (above 80th income percentile). The price of kerosene—a cooking/heating fuel used mainly by poorer households—is higher than the subsidised price of PMS, which implies that the existing implicit fuel subsidy is ‘regressive’.
“Empirical studies have also supported that fuel subsidy is inequitable, finding that it is an extremely costly approach to helping the poor, with the top income quintile typically capturing six times more in subsidies than the bottom. Not surprisingly, the removal of fuel subsidies is therefore progressive.”
The Fund pointed out that there would be adverse impact on the poor if fuel subsidy was removed, but noted that the impact could be mitigated with a fraction of the fiscal resources used spent on the fuel subsidy.
Borrowing from CBN dangerous for economy, Tella cautions
A professor of Economics at the Olabisi Onabanjo University, Ago-Iwoye, Ogun State, Prof Sheriffdeen Tella, has cautioned the Federal Government against borrowing from the CBN.
According to him, such borrowing contributes to inflation and disrupts monetary policies in the country.
“The central bank has been borrowing money from the government for some time, and that is part of what is fuelling inflation in the country. The Nigerian Bureau of Statistics is not telling the truth because those of us who go to the market know what the market prices are saying but they are saying prices are coming down. Prices are not coming down. Maybe there is the need for some independent statistical review.
“What the IMF is saying is correct. It is dangerous for the economy when the government continues to borrow from the central bank. Two things are likely going to happen. One is that the monetary policy cannot be effective when the central bank becomes lender to the Federal Government. So far, the CBN has not been able to achieve single-digit inflation, which the inflation targeting is supposed to achieve, because the Federal Government is borrowing from them.
“The second thing is that the borrowing from the central bank will make it difficult for the central bank to intervene appropriately in the economy. The amount of money they are to use to intervene is part of what the Federal Government is borrowing. Therefore, it would be difficult to achieve the objective of that intervention. It is not proper.”
Tella further said that it appears that the Federal Government was bent on borrowing regardless of how it affects the economy.
He said, “It seems the Federal Government is just bent on borrowing. They don’t care whether money is coming from anywhere. They have made up their minds that they are going to borrow.”
NLC, TUC kick, say Nigeria must be independent
Meanwhile, the Nigerian Labour Congress and the Trade Union Congress have reacted to the IMF warning to Nigeria on fuel subsidy, saying the international organisation had misled Nigeria in the past.
According to the Deputy National President, NLC, Joe Ajaero, the IMF does not mean well for the masses and workers.