Nigeria needs to curb fuel subsidy for it to derive fiscal gain from higher oil prices, the International Monetary Fund (IMF) has said.
The rise in oil prices was buoyed by the ongoing war between Ukraine and Russia which has also caused a surge in food prices, thereby threatening many economies.
The IMF said in a new blog: “Net commodity-importers, such as Benin, Ethiopia and Malawi, will need to find resources to protect the vulnerable by reprioritizing spending.
“Net exporters, like Nigeria, are likely to benefit from rising oil prices, but a fiscal gain is only possible if the fuel subsidies they provide are contained. It is important that windfalls are largely directed to strengthen policy buffers, supported by strong fiscal institutions such as a credible medium-term fiscal framework and a strong public financial management system.”
The Nigerian National Petroleum Company has been projected to spend about N4.05 trillion on petrol subsidy by the end of the year, more than half of the country’s 2022 recurrent budget, compared to 2021, where N1.4 trillion was spent on subsidy.
“Sub-Saharan African countries find themselves facing another severe and exogenous shock. Russia’s invasion of Ukraine has
prompted a surge in food and fuel prices that threatens the region’s economic outlook,” the IMF said.
It said higher oil prices would boost the import bill for the region’s oil importers by about $19 billion, worsening trade imbalances and raising transport and other consumer costs.
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It said oil-importing fragile states would be hit hardest, with fiscal balances expected to deteriorate by around 0.8 percent of gross domestic product compared to the October 2021 forecast – twice that of other oil-importing countries.
According to the Washington-based fund, the region’s eight petroleum exporters, however, benefit from higher crude prices.
It said, “The shock is set to make an already delicate fiscal balancing act more difficult: increasing development spending, mobilizing more tax revenues, and containing debt pressures. Fiscal authorities generally aren’t well-positioned for additional shocks after the pandemic. Half of the region’s low-income countries are already in or at high risk of distress.
“Rising oil prices also represent a direct fiscal cost for countries through fuel subsidies, while inflation will make reducing these subsidies unpopular. Spending pressures will only increase as growth slows, while rising interest rates in advanced economies may make financing more costly and harder to obtain for some governments.”
According to the IMF, countries need a careful policy response to address these daunting challenges.
It said fiscal policy would need to be targeted to avoid adding to debt vulnerabilities, adding that policymakers should as much as possible use direct transfers to protect the most vulnerable households.
Improving access to finance for farmers and small businesses would also help, it said.
The IMF said: “Countries that can’t provide targeted transfers can use temporary subsidies or targeted tax reductions, with clear end dates. If well-designed, they can protect households by providing time to adjust to international prices more gradually.
“To enhance resilience to future crises, it remains important for these countries to develop effective social safety nets. Digital technology, such as mobile money or smart cards, could be used to better target social transfers, as Togo did during the pandemic.”
