The International Monetary Fund (IMF) has stated that eliminating the fuel subsidy and reallocating those funds would require some time before the effects are felt by the general population.
Era Dabla-Norris, who serves as Deputy Director in the IMF’s Fiscal Affairs Department, made these comments on Wednesday during the Fiscal Monitor session at the ongoing IMF/World Bank Annual Meetings in Washington DC.
Dabla-Norris indicated that eliminating fuel subsidies affects individuals’ incomes right away; however, this action also brings about clear advantages such as improved energy efficiency. Nonetheless, the capacity to redirect financial resources effectively requires considerable time before these effects become noticeable.
The IMF Deputy Director urged the Federal Government to develop a thorough plan aimed at ensuring that eliminating the petrol subsidy would have beneficial effects on citizens.
Dabla-Norris stated that Nigeria has the potential to generate additional revenue via taxation, with these funds acting as a cushion to help maintain economic stability.
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She stated, “In countries lacking public trust in the government, implementing compensation measures such as cash transfers or focused assistance for those most in need can make a significant impact. This approach helps to visibly strengthen social programs for the general populace.”
Additionally, Vitor Gasper, who directs the Fiscal Affairs Department at the IMF, stated that the worldwide fiscal perspective has worsened since the release of the October 2024 Fiscal Monitor.
He explained that major tariffs announcements, heightened uncertainty, financial market volatility, and diminishing foreign aid are adversely affecting public debts and deficits.
As he states, the worldwide public debt is anticipated to climb to almost 100 percent of GDP by the end of the decade, exceeding the highest point during the pandemic, with substantial increases expected in gross financing requirements.
“Sudden and disruptive tightening of financing conditions present a clear and present danger. Consequently, fiscal policy now faces a more pronounced trade-off among four key objectives: reducing debt, building and expanding buffers to address future shocks, meeting urgent spending needs, and enhancing growth prospects,” he said.
The IMF said, countries with limited fiscal space should prioritize public spending within their planned budgets and allow automatic stabilizers to operate fully.
The Fund said higher tariffs generally lead to a reduction in imports, with the extent of this decline depending on the price elasticity of demand at the bilateral product-country level.
The Fund said, “In addition, rising future debt could add further pressure on long-term interest rates and government financing costs. New analysis confirms that higher expected future debt and deficits could lead to higher long-term interest rates.”
It explained that emerging market and developing economies should reduce spending and increase revenues by reforming tax systems, broadening tax bases, and improving revenue administration.
The Fund stated, “It is necessary for them to streamline public wage bills while protecting public investments and improving social safety nets. It is crucial to reform state-owned entities to improve resource distribution, stimulate industry expansion, and reduce fiscal hazards.”
Nations with minimal tax-to-GDP ratios should reconsider their current tax rates and brackets, focusing specifically on value-added tax (VAT) and individual income taxes. Some could explore raising VAT rates, reinstating levies on goods and services, and streamlining tax expenditures.
This emphasized that during periods of considerable financial instability, fiscal policy can be essential in aiding central banks and financial regulators via mechanisms like direct loans, guarantees, and capital infusions.
“Enhancing fiscal and debt governance, along with debt transparency, is essential to improve efficiency and mitigate debt risks. Countries must proactively identify and manage contingent liabilities, particularly those related to state-owned enterprises,” the Fund said.
The IMF stated that governments ought to offer transparent, comprehensive, and up-to-date data regarding their debts. This includes detailing who the creditors are and identifying potential vulnerabilities such as those tied to fluctuations in interest rates and currency exchanges.
It was observed that this transparency, bolstered by robust legal foundations, encourages oversight and accountability, thereby decreasing reliance on unconventional debt instruments.
The IMF indicated that “Focused tax benefits may encourage private investment and enhance productivity via research and development activities. Enhancing the effectiveness of expenditures—particularly in sectors such as healthcare, education, and infrastructure investments—can boost an economy’s output potential.”
“Timely and orderly debt restructuring alongside fiscal adjustments is essential for countries facing debt distress. Recent initiatives by the international community have streamlined sovereign debt restructuring and reduced timelines”.
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