IMF Wants Subsidies, Tax Breaks Properly Targeted to Avoid Economic Slowdown

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IMF Wants Subsidies, Tax Breaks Properly Targeted to Avoid Economic Slowdown

CHIGOZIE AMADI

The International Monetary Fund (IMF) has argued that costly subsidies or tax breaks could be detrimental to productivity and welfare if not effectively targeted by countries globally.

In a report titled: “Industrial Policy is Not a Magic Cure for Slow Growth,” it stressed that industrial policy, in which governments support individual sectors, can only drive innovation if done right.

IMF maintained that striking the right balance was a crucial consideration, as history is full of cautionary tales of policy mistakes, high fiscal costs, and negative spill-overs in other countries.

In Nigeria, the global lender has for years argued against the payment of subsidies on petrol and electricity in the country and has urged the government to ensure full withdrawal of the inefficiently deployed underpayments.

According to the report, many countries continue to ramp up industrial policy to boost innovation in specific sectors in the hope of reigniting productivity and long-term growth amid security concerns, but stressed that it is not a magic bullet.

“Most industrial policy relies heavily on costly subsidies or tax breaks, which can be detrimental for productivity and welfare if not effectively targeted.

“This is frequently the case, for example, when subsidies are misdirected toward politically connected sectors. In addition, discriminating against foreign firms can prove self-defeating, as such policies can trigger costly retaliation and most countries—even major advanced economies—rely on innovation done elsewhere,” it said.

It added: “However, well-designed fiscal policies that support innovation and technology diffusion more broadly, with an emphasis on fundamental research that forms the basis of applied innovation, can lead to higher growth across countries and accelerate the transition to a greener and more digital economy.”

The IMF advised governments deploying industrial policies to invest in technical capacity, recalibrate support as conditions change, and act in line with open and competitive markets.

Aside partly discontinuing fuel subsidies, the current Nigerian government has floated the local currency to allow it to find its true value, two moves that have been met with mixed reactions.