IMF cautions FG against budget passage delays, fiscal overlap

…Authorities rule out return to fuel subsidies

The International Monetary Fund (IMF) has cautioned Nigeria against delays in budget approval and the practice of overlapping fiscal cycles, warning that both could undermine budget implementation and fiscal transparency as the government embarks on a more expansionary spending plan for 2026.

In its latest Article IV consultation report on Nigeria, the Fund said timely passage of budgets and a gradual phase-out of overlapping budgets would strengthen fiscal management, improve expenditure execution and enhance the government’s ability to use fiscal policy as an effective macroeconomic tool.

The warning comes as President Bola Tinubu’s administration implements a 2026 federal budget that the Fund estimates will widen the federal government’s fiscal deficit to 4.4 percent of gross domestic product, from 3.5 percent in 2025.

The IMF noted that the 2026 budget was signed only in mid-April, while implementation of the 2025 budget has been extended until the end of September 2026, creating an overlap between fiscal cycles.

“Timely passage of the budget and phasing out the practice of overlapping budgets would strengthen budget implementation,” the IMF said.

The Fund said the 2026 spending plan reflects an expansionary fiscal stance, driven by higher capital expenditure and efforts to bring previously off-budget national priority projects onto the government’s books.

It also noted that budget revenue projections are based on expectations of stronger oil receipts, including gains from reforms that limit deductions by the Nigerian National Petroleum Company Ltd (NNPCL) before revenues are remitted to the Federation Account.

However, IMF staff cautioned that some recent tax law changes could reduce anticipated revenue in the near term and that administrative reforms aimed at boosting collections may take time to yield their full benefits.

The Fund also raised concerns about the government’s financing strategy, which is expected to rely more heavily on external sources than domestic borrowing.

The draft budget doubles nominal borrowing limits relative to 2025 and includes a proposed $5 billion total return swap arrangement with an First Abu Dhabi Bank.

According to the IMF, the transaction carries risks because it requires significant collateral in domestic government securities and could expose the government to margin calls if the value of the naira-denominated assets declines.

The Fund warned that such arrangements could create constraints for monetary and exchange-rate policy while adding complexity to public debt management.

Despite those concerns, the IMF welcomed recent reforms aimed at improving fiscal transparency, including the requirement that hydrocarbon revenues be remitted directly to the Federation Account and efforts to bring previously off-budget expenditures within the formal budget framework.

The Washington-based lender said further improvements are needed in fiscal governance, including stronger monitoring of risks arising from state-owned enterprises and oil-backed borrowing arrangements.

The IMF also reiterated the importance of sustained revenue mobilisation to create fiscal space for development spending and social protection programmes.

While recent tax reforms should gradually improve collections, the Fund said additional measures may eventually be needed to broaden the tax base, raise Value Added Tax (VAT) and strengthen government revenues.

Authorities, however, pushed back against some of the Fund’s assumptions, arguing that projected revenue gains from ongoing reforms are likely to be higher than IMF estimates.

They also defended the government’s fiscal strategy, saying counter-cyclical policies are needed to cushion the economy against global uncertainty and other external shocks.

Importantly, Nigerian officials sought to dispel concerns about a possible reversal of fuel subsidy reforms, assuring IMF staff that the government would maintain its current policy stance.

“The authorities assured staff that all public expenditure would remain strictly within the budget framework and they would not reintroduce fuel subsidies,” the Fund said.

The IMF assessed Nigeria’s risk of sovereign stress as moderate, noting that public debt declined to 36.1 percent of GDP in 2025 from 39.3 percent a year earlier, supported by improved macroeconomic stability, a stronger external position and naira appreciation.