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Nigeria needs more taxes in order to benefit from fuel subsidy removal— IMF

Published

7 months ago

October 14, 2023

The International Monetary Fund (IMF) says Nigeria must collect more taxes to fund the national budget and pay public debts if its fuel subsidy removal policy and foreign exchange unification initiative are to be optimally beneficial.

The IMF Africa Department Director, Abebe Selassie, said this at a news briefing on Friday, while speaking against the backdrop of the harsh economic conditions in Nigeria on the back of the removal of fuel subsidy and foreign exchange unification by President Bola Tinubu. He said the new subsidy regime would not translate to economic growth and stability under Nigeria’s current tax administration.

The multilateral body maintained that Nigerian policymakers must urgently complement the fuel subsidy removal with a set of policies that could ease the economic challenges facing the country.

Selassie said, “The exchange rate reforms that the government did were very, very welcome, trying to unify the rate, similarly the fuel subsidy. But that will not help and will not stick unless you also are tightening monetary policy; unless you’re also doing something to mobilise more tax revenues. So, a holistic package of reforms is what’s needed.

“So, you have a medley of things mainly rooted in the fiscal challenges that Nigeria has faced, not having tax revenues. At the same time, this is a country with incredible potential and we have seen reforms moving in the right direction in recent months. What is needed, we feel, is making the reforms holistic and help reinforce each other. Just as things were not reinforcing each other in the past, I think there is scope to make the reforms reinforce each other.”

He said, “Why are there not enough tax revenues? In the past, over-reliance on oil was when prices were high. Second, of course, is the subsidy regime, which also entails quite a lot of loss of government resources being directed where they perhaps should not be. So, I think these are all interlinked issues, including causing some of the inflation that you’re seeing, because, given the difficulty to tap international capital markets, the government has had to rely more on domestic financing, which has either crowded out the private sector or of course caused the monetary injection, which again has weakened the exchange rate.”

Petrol prices have increased from roughly N185 per litre to about N600 per litre as a result of the deregulation of the downstream oil sector, which has hurt and caused immense misery for many Nigerians.

In addition, the government’s measures intended to harmonise the official and black market exchange rates of the naira, which were made public in early June, have made the sudden increase in the cost of goods and services that followed the increase in the price of petrol at the pump even worse.

The IMF and World Bank are currently having their annual meetings in Marrakech, Morocco where some critical takes on the macroeconomy of some African countries like Zambia, Morocco, Tunisia, and Zimbabwe have already emerged from the summit.

Related Topics:Featured Fuel subsidy IMF Nigeria

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Nigeria: Manufacturers’ market access key to success of AfCFTA agreement

Published

8 mins ago

May 6, 2024

Ifeoluwa Dada

According to the Manufacturers Association of Nigeria (MAN), the ability of local manufacturers to compete on the continent is crucial for obtaining market access under the terms of the African Continental Free Trade Area (AfCFTA) agreement.

The Guided Trade Initiative (GTI) under the AfCFTA has begun with a few countries’ participation, except Nigeria, which is about to sign off for the guided trade, even though the trade deal has not yet fully taken off.

To match businesses and products for import and export between interested state parties who have complied with the minimal requirements for trade under the AfCFTA, GTI was introduced in September 2022.

Nigerian manufacturers have frequently expressed their regret over the different issues limiting the industry’s competitiveness and warned that if these issues are not resolved, their nation will suffer due to the continental trade agreement.

Mr. Segun Ajayi-Kadir, Director-General of MAN, stated that the manufacturing sector lacks the infrastructure and microeconomic support necessary for growth and competitiveness.

He stated: “The manufacturing sector is already beset with multidimensional challenges.

“We now have AfCFTA that allows us to compete around the African continent. But if we are not competitive, and we cannot grow the sector within the country, your guess is as good as mine as to the millage in terms of market access that we should be able to enjoy.

“So, I believe the manufacturing sector has good growth prospects, but it needs supportive policies that would aid its growth in all ramifications.

“What local manufacturers are yearning for are supportive policies that will aid the growth and competitive capacity of the country’s industrial sector in all ramifications,” he added.

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FX bank swaps account for 30% of Nigeria’s external reserves— Fitch

Published

1 day ago

May 5, 2024

Ifeoluwa Dada

Global credit ratings firm, Fitch, has claimed that approximately 30% of Nigeria’s external reserves is comprised of foreign exchange (FX) bank swaps.

This disclosure underscores ongoing uncertainties regarding the country’s net FX reserves, exacerbated by opaque entries amounting to nearly $32 billion in FX forwards, over-the-counter futures, and currency swaps listed as off-balance sheet commitments in the Central Bank of Nigeria’s (CBN) consolidated financial statement for 2022.

The Central Bank of Nigeria’s (CBN) consolidated financial statement for 2022 lists approximately $32 billion in FX forwards, over-the-counter futures, and currency swaps as off-balance sheet commitments.

These opaque entries, combined with this disclosure, highlight the continued uncertainty surrounding the nation’s net foreign exchange reserves.

“Uncertainty continues over the net FX reserve position, with a particular lack of clarity on near USD32 billion of ‘FX forwards, OTC futures, and currency swaps’ recorded as an off-balance sheet “commitment” in CBN’s last consolidated financial statement for 2022.

“Fitch estimates around 30% of Nigeria’s reserves are made up of FX bank swaps, although we expect most of these to continue to be rolled over.”

Uncertainty in Nigeria’s FX Reserves.

In its latest credit outlook for the country, Fitch noted that the lack of clarity over the precise size and composition of Nigeria’s FX reserves remains a significant constraint on the nation’s sovereign credit profile.

Fitch believes that the majority of FX bank swaps will be rolled over in spite of these worries, which might offer some brief stability in the reserves management. Additional report insights point to a recent increase in non-resident inflows into Nigeria, which are being driven by more stringent monetary policy measures and a greater formalization of FX activities.

The report also showed that by the end of April, Nigeria’s gross foreign exchange reserves had dropped from $34.4 billion in mid-March to $32.2 billion. Fitch stated that in order to support the currency, FX sales to Bureau de Change operators and debt repayments account for a portion of the decline.

By the end of 2024, the FX reserves are expected to fall to just 4.2 months’ worth of current external payments, which is in line with the “B” median.

“Gross FX reserves fell to USD32.2 billion at end-April, from a peak of USD34.4 billion in mid-March, partly reflecting repayment of existing debt obligations, and FX sales to BDCs to support the currency.

“Fitch projects a broadly flat current account surplus, averaging 0.5% of GDP in 2024-2025, supported by a modest rise in oil production and remittances.

“We forecast FX reserves to fall to 4.2 months of current external payments at end-2024 (‘B’ median 4.2), from 4.4 months at end-2023.”