Electricity subsidy, tax breaks detrimental to productivity – IMF

The International Monetary Fund has said electricity subsidies, tax breaks, or holidays are detrimental to productivity and welfare if not effectively implemented.

The Washington-based lender disclosed this in a new report titled ‘Industrial Policy Is Not a Magic Cure for Slow Growth’.

According to the global lender, Industrial policy, in which governments support individual sectors, can drive innovation if done right and well implemented.

It said striking the right balance was crucial, as history is full of cautionary tales of policy mistakes, high fiscal costs, and negative spillovers in other countries.

The report read in part, “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.”

IMF advice came amid Nigeria’s fuel subsidy removal in June last year and the recent removal of electricity tariffs for customers under Band A, which created uproar nationwide.