Nigeria’s government lost a staggering N13.2 trillion due to mismanagement of foreign exchange between 2021 and 2023, according to a recent World Bank report.
The losses, which stemmed from maintaining dual exchange rates—an official and a parallel market rate amounted to N2 trillion in 2021, N6.2 trillion in 2022, and N5 trillion in 2023.
The report revealed that the difference between these rates, where the official rate was controlled and the parallel market was dictated by supply and demand, resulted in significant revenue loss for the government.
This dual-rate policy, intended to stabilise the naira and support specific sectors of the economy, ultimately became an unsustainable financial burden.
Speaking last Thursday, Nigeria’s Minister of Finance, Wale Edun, announced that the government would discontinue fuel and foreign exchange subsidies.
“Fuel and FX subsidies are extinguished,” Edun stated during the launch of the World Bank’s development report on Nigeria, explaining that these policies had been detrimental to the economy.
For years, Nigeria has subsidised both petrol and foreign exchange to keep prices low, spending vast sums with little transparency on the overall economic impact. The World Bank report estimates that of the N13.2 trillion lost, N3.9 trillion came from forgone non-oil sector taxes, which could have significantly benefited the broader population but instead served the interests of certain groups.
Despite the Central Bank of Nigeria’s initial plan to unify the exchange rate in July 2023, the government only fully implemented the measure in February 2024. The World Bank notes that this delay caused further financial strain.
“Prior to the full FX unification in February 2024, the presence of a parallel FX premium generated enormous fiscal costs in the form of forgone revenues,” the report highlighted. A large portion of foreign exchange-linked revenues, such as oil, customs, VAT, and corporate income taxes, were transferred to the government at the official exchange rate, resulting in significantly reduced naira revenue due to the disparity between the official and parallel rates.
The report underscores that the unification of exchange rates has eradicated these revenue losses, benefiting the entire nation by removing a system that had favoured a select few. It also highlighted that FX mismanagement affected five key revenue streams: oil and gas revenue, import and export duties, VAT, company tax, and income from government-owned entities like NNPC, FAAN, NPA, and NIMASA.
Between 2021 and 2023, the report found that 44.3% of net VAT revenue came from imported goods, paid in foreign currency, while 40% of company tax was settled in foreign currency. The estimated forgone revenues from the FX premium surpassed those from the petrol subsidy, further underscoring the importance of a unified FX rate.
In 2022, the PMS (petrol) subsidy cost Nigeria N4.5 trillion—representing 2.2% of GDP—while the revenue losses from the parallel FX rate premium were estimated at N6.2 trillion, or 3% of GDP. Gross oil revenues alone accounted for N4.5 trillion of FX revenue forgone, while N1.7 trillion was lost from non-oil tax revenues.
The World Bank report advocates for maintaining a unified exchange rate, stating that this will enhance government revenue and promote fiscal stability. At the report’s launch, Alex Sienart, the World Bank’s lead economist for Nigeria, noted that the government’s revenue improved in the first half of 2024 due to the removal of the FX subsidy.
“We are seeing a fiscal consolidation underway, with the fiscal deficit shrinking from 6.2% of GDP in the first half of 2023 to 4.4% in the first half of 2024,” Sienart said.
He added that this surge in revenue is primarily due to the end of the implicit FX subsidy, which had been more costly than the PMS subsidy.
