No more subsidy, increased tax… what FG promised IMF to secure $3.4bn loan

The federal government assured the International Monetary Fund (IMF) that it would not return to the era of fuel subsidy after the COVID-19 pandemic is over.

In a letter of intent requesting for the $3.4 financial assistance under IMF’s rapid financing instrument, the federal government assured the IMF that it would remain “engaged with the IMF to benefit from its policy advice and its technical assistance”.

The letter was signed by Zainab Ahmed, the minister of finance, budget and national planning, and Godwin Emefiele, governor of the Central Bank of Nigeria (CBN).

At a meeting on March 18, the federal executive council agreed that it would begin moves to deregulate the downstream oil sector by adjusting petrol retail price to any development in the global oil market.

Read the full text of policy assurances that the Nigerian government provided to the IMF below:

Going beyond this year, the government of Nigeria is fully committed to pursuing policies consistent with macroeconomic stability and good governance:

First and foremost, we will revert to our government’s planned medium-term fiscal consolidation path—which includes increasing revenue to 15 percent of GDP through further VAT reforms, rise in excises, and removal of tax exemptions— once the crisis passes. The recent introduction and implementation of an automatic fuel price formula will ensure fuel subsidies, which we have eliminated, do not reemerge. In line with the Fiscal Responsibility Act, this will allow us to reduce the Federal Government deficit to under 3 percent of GDP and eliminate recourse to central bank financing by 2025.

We are also advancing in our power sector reforms—with technical assistance and financial support from the World Bank—including through capping electricity tariff shortfalls this year to N380 billion and moving to full cost-reflective tariffs in 2021.

Monetary and exchange rate Policy. As outlined in our home-grown Economic Recovery and Growth Plan, we are also strengthening monetary and exchange rate policies with a view to moving towards full exchange rate unification and greater exchange rate flexibility, which would help preserve foreign exchange reserves and avoid economic dislocation.

In addition to the external borrowing sought, we are also increasing our domestic borrowing limits in the supplementary budget so that we can make use of our favourable low domestic yields, particularly since the results of the last domestic bond auction show strong demand. The existing stock of overdrafts held at the CBN will also be securitized.

We fully recognize the importance of ensuring that financial assistance received is used for intended purposes. To that end, we will (i) create specific budget lines to facilitate the tracking and reporting of emergency response expenditures and report funds released and expenditures incurred monthly on the transparency portal (http://opentreasury.gov.ng/); (ii) publish procurement plans, procurement notices for all the emergency response activities—including the name of awarded companies and of beneficial owners—on the Bureau of Public procurement website; and (iii) publish no later than three to six months after the end of the fiscal year the report of an independent audit into the emergency response expenditures and related procurement process, which will be conducted by the Auditor General of the Federation—who will be provided the resources necessary and will consult with external/third party auditors.

In line with IMF safeguards policy, we commit to undergoing a new safeguards assessment conducted by the Fund. To this end, we have authorized IMF staff to hold discussions with external auditors and provide IMF staff access to the CBN’s most recently completed external audit reports.
We do not intend to introduce measures or policies that would exacerbate the current balance-of-payments difficulties. We do not intend to impose new or intensify existing restrictions on the making of payments and transfers for current international transactions, trade restrictions for balance-of-payments purposes, or multiple currency practices, or to enter into bilateral payments agreements which are inconsistent with Article VIII of the IMF’s Articles of Agreement.

We are determined to meet the immense challenge the Covid-19 pandemic is facing us with. Support from the international community will be critical, and we look forward to early approval of financial assistance by the IMF—which will help our effort to keep the Nigerian economy on a strong path and sustain our fight against poverty. Beyond this much needed immediate financial assistance, we reaffirm our willingness to remain engaged with the IMF, to benefit from its policy advice and its technical assistance.