EXCLUSIVE: ‘We stand by our advice’ to Nigeria on petrol subsidy, FX – IMF

The International Monetary Fund (IMF) on Wednesday cleared the air on reports making the rounds that it has distanced itself from an earlier advisory provided to the Nigerian government on petrol subsidy removal and reform of the foreign exchange market.

The Washington-based institution said that it stands by its advice to Nigeria to remove petrol subsidy and float the exchange rate, which it has consistently provided for a while, even though individual pieces of that advice cannot be viewed in isolation.

“We stand by our advice, though it’s important to underscore that individual pieces of that advice cannot be viewed in isolation. Our advice is a comprehensive policy package where all elements are linked to each other. That package seeks to ensure macroeconomic stability and raise living standards in a sustainable fashion.

“Importantly, our advice on petrol subsidies and the exchange rate, is set in a larger, comprehensive policy mix that also includes scaling up social transfers to provide relief to Nigerians who are already suffering from a cost-of-living crisis or who are impacted by policy reforms,” an IMF spokesperson told PREMIUM TIMES in response to this newspaper’s email enquiry on Wednesday.

The spokesperson also referenced the IMF’s 2024 report on Nigeria, published in May, in which the global institution’s executive directors “welcomed the bold reforms implemented by the new administration and commended the authorities’ focus on revenue mobilization, governance, social safety nets, and upgrading policy frameworks in the face of Nigeria’s significant economic and social challenges.”

Last week, reports emerged in the media that the IMF denied playing a role in the removal of petrol subsidy by the President Bola Tinubu-led Nigerian government. The reports quoted IMF’s African Region Director, Abebe Selassie, who said the IMF didn’t make the decision on fuel subsidy removal because the decision reached by the Nigerian government was a domestic one.

Bola Tinubu

“The decision was a domestic one. We don’t have programmes in Nigeria. Our role is limited to regular dialogue, as we have with other nations like Japan or the UK,” Mr Selassie said.

Backlash

Against the background of the reported denial, in multiple reports in the local media, the Nigeria Labour Congress criticised the IMF and described “the denial as cynical and emblematic of the IMF and World Bank’s longstanding pattern of imposing harsh economic policies on developing nations.”

The labour union also insisted that the Bretton Wood institution is “behind the country’s economic woes”, adding that the IMF’s recent statement is “a display of subterfuge” and evasion.

“IMF and its cousin in economic mischief – the World Bank remains the twin forces that have longstanding pattern of recommending harsh and unworkable Economic policies to developing nations. In their usual subterfuge, they have continued to present these advisories as growth strategies but which have unfortunately often led to increased socioeconomic hardship and stagnation in Nigeria and other nations that have had the misfortune of drinking their poisoned chalice,” the NLC said.

World Bank

“At a press conference during the IMF and World Bank Annual Meetings in Washington DC, United States, Abebe Selassie, IMF’s African Region Director, described the decision to remove fuel subsidy by Nigeria’s government as a domestic one,” the NLC said.

“IMF’s recent statement is a display of subterfuge and evasion. This denial of involvement in Nigeria’s subsidy removal, coupled with the assertion that it was a “domestic decision,” disregards the extensive influence that the IMF wields in policy formation within many developing countries. Despite this assertion, the IMF’s policy dialogues often suggest subsidy cuts as necessary steps toward fiscal sustainability.”

Since he was sworn into office in May 2023, President Bola Tinubu has introduced a set of reforms his government said were designed to restructure the Nigerian economy and set it on the path of growth. The government removed petrol subsidies and unified the various windows of the foreign exchange market.

However, these reforms have had a devastating impact on Nigerians, amid elevated inflation levels and reduced purchasing power. There have also been #HungerProtests in different parts of the country, as citizens grappled with a cost-of-living crisis amid multidimensional poverty.

The NLC in its response to the IMF on Sunday noted that for Nigeria, where successive governments have frequently yielded to IMF recommendations, the institution’s disavowal rings hollow, as it underplays the fund’s direct impact on the nation’s economic policies.

“The NLC has become more worried over this denial at this time which is another signpost of the already disturbing policies by the Nigerian government at the behest of the IMF and World Bank and which IMF is now trying to distance itself.

“It shows that the institution is working very hard to stay away from the blame or the backlash that its policy directions will bring in the future. IMF must know that Nigerians are not fools and we are always aware of the destructive influences its awful policy paths for Nigeria and indeed Africa has been.

“It is pretentious and truly too late to begin to deny complicity because we warned the government about the consequences of implementing IMF and World Bank-driven policies.”

Background: What truly happened?

Last Friday, while speaking at the regional economic outlook for sub-Saharan Africa press conference, on the sidelines of the World Bank/IMF meetings in Washington, DC, Mr Selassie, the head of the IMF’s African Department, explained the role of the IMF in regional and global economic policy direction.

Reacting to questions on the role of the IMF in domestic policy choices across Africa, Mr Selassie explained that the institution’s role is largely advisory, as the ultimate decisions are taken by domestic authorities in various countries.

Mr Selassie’s intervention echoes the core responsibility of the IMF, which is “monitoring the economic and financial policies of member countries and providing them with policy advice, an activity known as surveillance”. The process takes place at the global and regional levels, and the IMF identifies potential risks and recommends appropriate policy adjustments to sustain economic growth and promote financial stability.

That point about the advisory role of IMF in domestic policy choices had been made earlier on Wednesday by Nigeria’s Minister of Finance and Coordinating Minister of the Economy, Olawale Edun, who noted that countries of the world do not necessarily need to take advice from the IMF and other global institutions all the time.

Wale Edun [PHOTO CREDIT@Nairametrics]

Speaking at a Global Investors’ Forum organised by the Nigerian delegation to the IMF meetings, Mr Edun said the Bretton Wood institutions support countries with concessional financing and advisory, helping to shape domestic policies and plans, but countries don’t necessarily need to take IMF advice all the time.

Mr Edun’s intervention explains that while the IMF support viable policies with funding and advice, member countries are responsible for their own reform programmes.

“You don’t always have to take their advice. The IMF said to us that we shouldn’t do domestic issues of dollar bonds, but we did it, and we were 100 per cent oversubscribed. But we still value their viewpoint and take it into account,” Mr Edun told a gathering of fund managers and investors in Washington.

Interestingly, at the same sub-Saharan Africa press conference on Friday, Mr Selassie had argued that Nigeria’s economic policy trajectory before the recent reforms took effect were not sustainable, underscoring the point that the statement purportedly denying IMF policy advisory was made specifically in the context of IMF’s role in domestic policy choices, and not necessarily as a denial of its earlier stance on petrol subsidy and FX reforms.

“So you know, just to be very clear, it wasn’t the case that when, you know, subsidies were significant when the exchange rate was being kept at an artificial level. There were other imbalances that were present in the economy, including very, very high levels of inflation,” Mr Selassie said.

“Reserves were, you know, being run out. Government’s ability to borrow from markets was of course, heavily compromised. And — this was the really difficult trade off that governments in Nigeria over recent years have faced. This inability to have a healthy macroeconomic situation, one that will foster growth, diversification, resources to invest in health and education that were needed because so much resources were being used by fuel subsidies.

“So that is the first point I want to make that it’s not – I’m not sure, kind of the situation predating the recent changes was a sustainable one. It wasn’t sustainable. You know, and the pressures that were being felt were even if there was not outright macroeconomic default, you know, or there was less investment in health, less investment in education, so there was pain being felt elsewhere.”

To consolidate his position on the policy advisory, the IMF official also called on the Nigerian authorities to direct savings realised from subsidy removal to the poor and vulnerable population in the society.

“Some of the savings from the fuel subsidy reforms and fx subsidy being removed should now be directed to help cushion the effects on the most vulnerable households,” Mr Selassie said Friday.

IMF Clarifies

In its response to PREMIUM TIMES’ enquiry on whether it indeed advised the Nigerian government to initiate petrol subsidy and forex reforms, the IMF said it assessed Nigeria’s petrol subsidy and Nigeria’s managed exchange rate policies prior to the recent reforms but did not consider it “cost-effective”.

“Regarding the petrol subsidy, based on our research and international experience, we do not see this as the most cost-effective way of providing relief to Nigerian citizens. This is mainly because the petrol subsidy benefits not just low-income households that need government support, but also high-income and wealthy Nigerians who do not need this financial support from the government.

“Moreover, there is evidence that a share of the subsidised petrol was smuggled to neighbouring countries, where petrol prices were much higher. This means that the petrol subsidy benefitted not only Nigerians but also the citizens of neighbouring countries.

“Thus, removing the petrol subsidy should free resources that the government can allocate to other priority spending items, including social protection, health and education spending, and infrastructure investments,” the IMF spokesperson said.

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Speaking further on the fixed exchange rate policy in operations before the recent reforms, the global institution argued that it was equally not sustainable.

“We have also assessed the viability of the fixed exchange rate regime that Nigeria pursued until mid-2023. At the time, not all dollar demand from Nigerians was being met at the official exchange rate. Instead, many Nigerians had to turn to the parallel market and pay a premium of around 60 percent to acquire dollars.

“This means that until mid-2023 some Nigerians were able to purchase dollars at the official rate of around 460 naira to the US dollar. But many others, at the same time, could only purchase dollars at the parallel market rate of around 750 naira to the US dollar.

“While some people were able to transact at a subsidized rate, many others had to pay a much higher price. This also put pressures on the CBN’s reserves and was not sustainable. By allowing the naira to be determined by market conditions, everyone now has access to US dollars at the same price,” it said.

Reacting specifically to PREMIUM TIMES’ follow-up question on whether Mr Selassie’s statement on Friday suggests that the IMF has recanted its advice and has distanced itself from the policy advisory, the fund said that on the contrary, the IMF provides macroeconomic policy advice to all its member countries, as summarised in its annual report on each country.

“This advice is based on cross-country experience and in-depth research. The IMF is a peer-learning organization where each member country can look at the experience of other members and draw lessons for their own situation. Governments listen to advice from many corners and then decide on the best course forward.

“We stand by our advice, though it’s important to underscore that individual pieces of that advice cannot be viewed in isolation. Our advice is a comprehensive policy package where all elements are linked to each other. That package seeks to ensure macroeconomic stability and raise living standards in a sustainable fashion.”

Long-held Position

The IMF has been consistent in its advocacy for subsidy removal.

In April 2019, the then Managing Director of IMF, Christine Lagarde, called on the Nigerian government to remove fuel subsidy, saying it is the right thing to do. Addressing a press conference at the annual spring meetings with the World Bank in Washington DC, the IMF boss said with the low revenue mobilisation that existed in Nigeria in terms of tax to Gross Domestic Product, it was important for the country to remove fuel subsidy.

IMF Managing Director (MD), Christine Lagarde

At the spring meetings in April this year, Mr Selassie also reiterated the IMF’s position on subsidy removal and how the poor could benefit from the policy in the provision of social safety nets.

“Subsidies are about resource allocation internally within Nigeria. So Nigerians, the people of Nigeria pay for these subsidies. And what’s the reason why we counsel against such generalised subsidies is very simple. It tends to be highly regressive, meaning the benefits of such you know, fuel subsidies tend to accrue to the rich and segments to reach out to people and the poor people.

“So it’s people that are driving these large cars, with big houses are wanting to see subsidised fuel. They’re the ones benefiting relative to the poor and vulnerable in Nigeria. So you know, not only people paying for the subsidies Nigeria, it’s the poorest segments of society that actually are losing out and resources could instead, of course, be used to improve conditions for poorer people instead of accruing to rich people.

“That’s why subsidy reform is important. We applaud the government for the steps government took to reduce the extent of subsidies. I think as oil prices have become volatile, the level of subsidy has also moved up and down. But I think you know, the direction of travel, I think, to remove the subsidies and use the resources to provide social protection for the most vulnerable households,” he said.