The Federal Government lost N13.2 trillion in missed income as a direct result of implementing its foreign currency subsidy policy between 2021 and 2023, according to the World Bank.
It said that the government lost N2 trillion in 2021, N6.2 trillion in 2022, and N5 trillion in 2023. The amount of income lost was due to its insistence on controlling the value of the naira against the dollar in the official exchange market while permitting a fair market value price in the parallel market.
This subsidy, intended to stabilize the currency and boost specific industries, resulted in considerable decreases in the government’s income sources during this time.
Last Thursday, during the unveiling of the World Bank Nigeria Development Update paper, Finance Minister Wale Edun announced the termination of gasoline and foreign exchange subsidies, bringing an end to a long-debated policy. Edun stated that these subsidies have depleted the country’s economy and would no longer be applied by the government.
“Fuel and FX subsidies have been eliminated,” Edun stated, emphasizing the financial pressure these policies have placed on the country.
For decades, Nigeria had maintained a subsidy scheme for fuel and foreign exchange spending, giving a considerable percentage of its earnings to cushion the mostly unknown economic repercussions.
But in the latest NDU report, the World Bank stressed that the country lost N13.2tn in revenue that benefitted certain groups at the expense of the entire country. From the amount, N3.9tn was lost from the non-oil sector as tax revenue.
The institution also highlighted that the government terminated the foreign exchange subsidy in February 2024, contrary to the policy announcement made by the Central Bank in July 2023.
The report read, “Quantifying the fiscal cost through forgone revenue of multiple exchange rates: 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.
“This situation emerged because FX revenue inflows—such as oil and customs revenues, as well as a portion of domestic VAT and CIT, which are paid in FX—were transferred to the Treasury at the official exchange rate.
“However, due to the significant difference between the official and parallel market rates, the amount of naira-denominated revenue received by the Federation from FX-linked revenues was significantly reduced.
“The unification of the FX rate has therefore eliminated the forgone revenues that previously benefited certain groups at the expense of the entire nation.”
According to the report, the implicit forgone revenue from the premium is the rate’s impact on five major revenue streams for the government: oil and gas revenue, import and excise duties, value-added tax revenue, corporate income tax, and revenue accrued from government-owned enterprises.
The list of GOEs includes the Nigerian National Petroleum Corporation, the Federal Airports Authority of Nigeria, the Nigerian Ports Authority, and the Nigerian Maritime Administration and Safety Agency.
More specifically, it stated that VAT on imported items, which amounts to 44.3% of net VAT income, was levied in foreign currency between 2021 and 2023, while 40% of total CIT revenue received by the federation was paid in FX during the same time.
The Bretton Woods institution added, “The estimated implicit forgone revenues from the FX premium were even larger than the PMS subsidy, underscoring the importance of maintaining a unified FX rate.
“In 2022, when the cost of the PMS subsidy reached N4.5tn, representing 2.2 per cent of the Gross Domestic Product, the revenues forgone that emerged due to the large parallel rate premium are estimated to have been N6.2tn, representing 3 per cent of GDP.
“N4.5tn of FX revenue was forgone from gross oil revenues and N1.7tn from the FX revenue forgone from non-oil tax revenues.
“These findings demonstrate that the FX unification reform not only addresses distortions in the FX market and the real economy but also has a substantial impact on restoring fiscal space.”
It, therefore, urged the government to maintain a unified FX rate to benefit the economy by removing the large distortions the previous regime imposed.
“Therefore, maintaining the unified FX rate that Nigeria has achieved since February 2024 is essential from a fiscal perspective.
“It should be noted that in addition to the large estimated fiscal benefits, the FX reform is also expected to benefit the economy by removing the large distortions the previous regime imposed, such as skewing the competitive landscape in favour of importers with preferential access to FX, making it more difficult and less profitable to export, and fueling rent-seeking and illicit activity,” it concluded.
Speaking at the launch, the bank’s Chief Economist in Nigeria, Alex Sienart, said the recent increase in the federal government’s revenue in the first half of the year is largely due to the removal of implicit FX subsidies.
According to him, the implicit FX subsidy in 2022 was larger than the much-talked-about fuel subsidy, which was removed in June 2023.
He said, “We are seeing a fiscal consolidation underway with the fiscal deficit shrinking from 6.2 percent of GDP in the first half of 2023 to 4.4 percent of GDP in H1, 2024, and that is largely due to expenditure being roughly constant.”
“So this surge in revenue is largely due to the removal of the implicit subsidy, which was even larger than the PMS subsidy that we talk about.”
He also explained that with the official exchange rate in 2022 being around N460 and the parallel being around N700, the federal government was losing around N250 for every dollar-denominated revenue.
