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IMF Recommends Full Removal Of Fuel Subsidy

The International Monetary Fund (IMF) has said that full removal of oil subsidy would help fiscal adjustment for economic growth in Nigeria.

It also warned that continuous fall in the price of oil in the international market could wipe out the savings in the country’s Excess Crude Account (ECA) within one year.

The warning came from Mr W. Scott Rogers, IMF’s senior resident representative in Nigeria, at a press briefing to present the highlights of the Staff Report on the 2012 Article IV Consultation, which will soon be published by the Fund.

“Macroeconomic performance and policies in 2012 were broadly positive. Fiscal targets for 2013 and medium term are consistent with macroeconomic stability but additional measures are needed.

“Planned savings in recurrent spending will require public sector reforms and elimination of subsidy would help fiscal adjustment,’’ he said.

The report recommended the need to mobilise non-oil revenues and strengthen oil price rule and oil savings mechanism.

Rogers said that government must embark on urgent structural reforms to enhance productivity and global competitiveness.

Power reform is a quick win for growth and competitiveness. PetroleumIndustry Bill will transform oil and gas sector to increase investment.

Trade protection for infant industries should be strictly time-bound and focus on measures to improve competitiveness.

“Export diversification is key to long-term growth and improved macroeconomic statistics, especially in national income accounts,’’ he said

According to Rogers, “a decline in international oil prices to US$97 per barrel (annual average) would begin to erode ECA balances, while a fall to US$80-85 would wipe out ECA balances within a year”.

Declining world oil prices, he said, means lower oil revenue and even with expenditure restraint on the part of the government “fiscal deficits are projected to re-emerge”.

He emphasised that lower world oil price means shrinking current account surpluses. “A combination of stagnant oil exports and continued growth in imports means smaller current account surpluses.”

World oil prices, he stated, “are projected to decline, but to remain high by historical standards”.

However, he painted a bright future for the country when he predicted thatNigeria’s external reserve will swell to $80 billion in four years’ time”.

He said, “International reserves will continue to rise, buoyed by relatively high interest rates, at least in the short-term.”

Scott Rogers also commended the government for rebuilding the country’s external reserves: “International reserves have been rebuilt and now stand at just over US$50 billion.”

On the banking sector, he said IMF commended the efforts of the AssetsManagement Corporation of Nigeria (AMCON) in buying off bad loans ofbanks.

He said AMCON should minimise fiscal risk and moral hazard and work toward winding down as the sector witnessed stability.

On Nigeria’s development outlook, he said strong growth would continue in non-oil sectors and tighter fiscal/monetary policy would help ease inflationary pressures.

Government’s medium-term expenditure framework calls for substantial fiscal adjustment but success depends on use of Excess Crude Account and Sovereign Wealth Fund’s ability to contain recurrent expenditures. International reserves will continue to rise, buoyed by relatively high interest rates, at least in the short term,’’ he said.

 

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