The International Monetary Fund (IMF) has urged Nigeria and other countries to replace blanket fuel subsidies with targeted financial assistance for vulnerable households, warning that keeping fuel prices artificially low is costly, regressive and potentially harmful to global energy markets.
Rodrigo Valdés of the IMF’s Fiscal Affairs Department made the recommendation while responding to journalists at the IMF/World Bank Fiscal Monitor news briefing in Bangkok on Wednesday.
Valdés said blanket fuel subsidies were not the most effective way to shield citizens from rising energy prices because they often disproportionately benefited higher-income households that consumed more fuel.
According to him, such policies also diverted scarce public resources from people who needed financial assistance the most, making them an expensive and inefficient approach to managing energy price shocks.
“It’s very, very expensive for a typical country in the world,” Valdés said.
IMF Recommends Direct Assistance for Vulnerable Households
The IMF official encouraged governments to use available fiscal resources to strengthen social safety nets and provide direct assistance to vulnerable households, particularly in countries with reliable data to identify people in need.
He argued that targeted support would allow governments to cushion the effects of rising fuel prices without committing substantial public funds to subsidies that benefit all consumers, regardless of income.
Valdés said governments with sufficient fiscal space could deploy existing social protection programmes to support households most affected by higher energy costs.
He also recommended targeted interventions to reduce transportation expenses, including subsidising public transport fares rather than maintaining artificially low prices for petrol and diesel.
“Gasoline could go up, and perhaps bus fees may be subsidised in a way. That is a much better policy at the end of the day than just a blanket subsidy,” he said.
The recommendation comes as governments continue to face pressure to protect households and businesses from rising energy costs while managing competing demands on public finances.
Fuel Subsidies Could Worsen Global Energy Market Pressures
Valdés warned that blanket fuel subsidies could have consequences beyond the countries implementing them.
He explained that artificially low domestic fuel prices could prevent demand from adjusting when global fuel supplies decline, leaving other consumers to absorb a greater share of the adjustment.
This could contribute to additional pressure on international energy prices, particularly during periods of supply disruption.
The IMF official, however, noted that government responses to recent energy price shocks had improved compared with measures introduced during the 2020 and 2022 crises.
Despite the progress, he said some countries continued to rely on fuel subsidies instead of more targeted policy measures.
IMF Urges Nigeria to Broaden Its Tax Revenue Base
Separately, Davide Furceri, division chief of the IMF’s Fiscal Affairs Department, called on governments to strengthen domestic revenue mobilisation while improving the efficiency of public spending.
Furceri identified countries with low tax revenues, including Nigeria and Ethiopia, as needing to broaden their revenue bases to meet rising debt-servicing costs and generate resources for economic development.
He said stronger revenue collection would help governments manage interest payments while providing funding for investments that support long-term economic growth.
“It is important to have sufficient revenue for tourism. One, because this revenue will help the countries to pay high interest rate costs, and second, because it will generate sufficient resources the countries can use to spend for growth,” he said.
Furceri also urged governments to improve their tax systems by removing distortions that discourage economic activity while protecting critical spending on education, healthcare and public investment.
IMF Advocates Stronger Social Protection Systems
On social protection, Furceri recommended that governments gradually develop national registries and digital payment systems to improve the delivery of assistance to eligible beneficiaries.
He acknowledged, however, that countries could not always establish these systems immediately and advised governments to rely on existing mechanisms in the short term.
These measures could include school feeding programmes, geographical targeting and assistance for vulnerable farmers.
The recommendations highlight the IMF’s emphasis on balancing fiscal discipline with measures that protect low-income households and sustain economic growth.
For Nigeria, the proposals underscore the importance of improving revenue mobilisation, strengthening social protection programmes and directing limited public resources towards households most affected by rising living costs.
The IMF’s position is that targeted assistance can provide more effective protection for vulnerable citizens than blanket fuel subsidies, while helping governments manage fiscal pressures and reducing distortions in domestic and international energy markets.
Source: News Agency of Nigeria (NAN)