Business a.m.
The federal government incurred a significant loss of N13.2trn in foregone revenue as a direct consequence of the implementation of its foreign exchange subsidy policy between 2021 and 2023, the World Bank has stated.
It said the government lost N2trn in 2021, N6.2trn in 2022, and N5trn in 2023.
The amount forgone in revenue was due to its insistence on regulating the value of the naira against the dollar in the official exchange market but allowing a fair market value price at the parallel market.
This subsidy, designed to stabilise the currency and support certain sectors ultimately led to significant reductions in the government’s revenue streams during this period.
Last week Thursday, the Minister of Finance, Wale Edun, at the launch of the World Bank Nigeria Development Update document, announced the termination of fuel and foreign exchange subsidies, marking the end of a long-debated policy.
Edun revealed that these subsidies had drained the country’s economy and will no longer be implemented by the government.
“Fuel and FX subsidies are extinguished,” Edun said, as he emphasised the financial strain these policies had imposed on the nation.
Nigeria had maintained a subsidy regime on petrol and foreign exchange spending for decades, consistently allocating a significant portion of its revenue to cushion the economic effects, which were largely unknown.
But in the latest NDU report, the World Bank stressed that the country lost N13.2trn in revenue that benefitted certain groups at the expense of the entire country.
From the amount, N3.9trn 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.”
The report further explained that the implicit forgone revenue from the premium is the rate impacted five main revenue streams to the government, including Oil and gas revenue, import and excise duties, value-added Tax revenue, Company Income Tax, and revenue accrued from government-owned enterprises.
The listed GOEs include the Nigerian National Petroleum Corporation, the Federal Airports Authority of Nigeria, the Nigerian Ports Authority, and the Nigerian Maritime Administration and Safety Agency.
Giving further details, It said VAT on imported goods, which accounts for 44.3 per cent of net VAT revenue, was charged in foreign currency between 2021 and 2023, while 40 per cent of total CIT revenue collected by the federation was paid in FX within the same period.
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 N4.5trn, 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 N6.2trn, representing 3 per cent of GDP.
“N4.5trn of FX revenue was forgone from gross oil revenues and N1.7trn 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 subsidy.
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 per cent of GDP in the first half of 2023 to 4.4 per cent 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.
