IMF: Petrol, electricity subsidies to gulp 3% of Nigeria’s GDP

The International Monetary Fund (IMF) has raised concerns over Nigeria's decision to cap fuel pump prices and electricity tariffs below cost recovery, estimating that these subsidies could consume up to 3 per cent of the country's GDP by 2024. The IMF praised Nigeria's efforts to boost oil production and expected improvements in harvest to drive positive economic indicators. Abdulazeez Kuranga, Regional Economist at the Standard Bank Group, shared insights on these developments and their implications. Kuranga acknowledged the anticipated growth in the oil sector, projected at 11.6% in 2024, driven by increased crude oil production. The collaboration between the government and the African Development Bank on dry season harvests is expected to bolster agricultural outputs. However, challenges such as high food prices, PMS costs, and FX depreciation may hinder the growth of the non-oil sector. The impact of the government's decision to maintain fuel pump prices and electricity tariffs below market rates was a focal point of discussion. Kuranga recognized the political sensitivity of adjusting these prices during a period of high inflation and economic hardships but highlighted the strain these subsidies impose on government finances. The economist noted that the depreciation of the Naira and the high landing cost of petroleum products contribute to significant costs for the government. While the IMF supported the Monetary Policy Committee's decision to raise interest rates to 22.75%, aiming to curb inflation and strengthen the Naira, Kuranga emphasized the potential trade-offs. The tightening policy could attract foreign investment due to competitive interest rates in Nigeria, enhancing the country's credibility. Foreign inflows, particularly into the investors and exporters window, surged in February, signaling improved investor confidence. Kuranga noted the positive impact of the carry trade, with Nigeria offering more attractive yields compared to countries like Kenya, Ghana, and Egypt. Despite acknowledging the burden of high-interest rates on businesses and loans, the economist believed that the gains from increased foreign investment outweigh the short-term losses. He highlighted the importance of coordinated efforts between monetary and fiscal authorities to navigate the current economic challenges. Looking ahead, Kuranga suggested that as inflationary pressures ease, the Central Bank may adjust its monetary policies. He emphasized the need for a balanced approach to address short-term issues while laying the groundwork for sustainable economic growth. The conversation underscored the delicate balance between immediate financial burdens and long-term economic stability. In conclusion, while acknowledging the complexities of Nigeria's current economic landscape, experts like Kuranga remain cautiously optimistic about the country's prospects. By addressing challenges such as subsidy management, interest rate adjustments, and foreign investment, Nigeria aims to chart a path towards resilience and sustainable growth.