The Federal Government of Nigeria lost N13.2 trillion in potential revenue due to its foreign exchange subsidy policy between 2021 and 2023, according to the World Bank. This loss resulted from the government’s regulation of the naira’s value in the official exchange market while allowing a fair market value in the parallel market. Specifically, N2 trillion was lost in 2021, N6.2 trillion in 2022, and N5 trillion in 2023.
The subsidy, aimed at stabilizing the currency and supporting specific sectors, significantly reduced government revenue during this period. Last Thursday, the Minister of Finance, Wale Edun, announced the end of fuel and foreign exchange subsidies at the launch of the World Bank’s Nigeria Development Update. He noted that these subsidies had drained the economy and would no longer be continued.
Nigeria had long maintained subsidy regimes on both petrol and foreign exchange, consistently diverting substantial revenue to ease economic pressures. However, the latest World Bank report stressed that the N13.2 trillion in lost revenue benefited certain groups at the expense of the broader population. Of this amount, N3.9 trillion came from the non-oil sector as lost tax revenue.
The report also clarified that the government officially ended the foreign exchange subsidy in February 2024, despite an earlier announcement by the Central Bank in July 2023. It highlighted that the significant difference between the official and parallel market rates substantially reduced naira-denominated revenue from foreign exchange-linked earnings, such as oil revenues, customs duties, and a portion of domestic VAT and corporate income taxes.
The World Bank emphasized that the unification of the exchange rate had removed these lost revenues, which had previously benefited select groups at the nation’s expense. The report further detailed that the forgone revenue impacted five main revenue streams, including oil and gas, import and excise duties, VAT, corporate income tax, and revenue from government-owned enterprises such as the Nigerian National Petroleum Corporation (NNPC) and the Nigerian Ports Authority.
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Additionally, the report noted that VAT on imported goods, accounting for 44.3% of net VAT revenue, was charged in foreign currency between 2021 and 2023, while 40% of total corporate income tax revenue was paid in foreign currency during the same period. The implicit forgone revenue from the foreign exchange premium exceeded the cost of the PMS (petrol) subsidy, highlighting the importance of maintaining a unified exchange rate.
In 2022, when the PMS subsidy cost N4.5 trillion, or 2.2% of GDP, the revenue forgone due to the parallel market premium was estimated at N6.2 trillion, representing 3% of GDP. The report stressed that the FX unification reform not only corrected distortions in the foreign exchange market but also significantly improved fiscal stability.
The World Bank urged the government to sustain the unified exchange rate to eliminate the distortions of the previous regime, which skewed competition, hindered exports, and encouraged rent-seeking and illicit activities. The bank’s Chief Economist for Nigeria, Alex Sienart, emphasized that the recent increase in government revenue during the first half of 2024 was largely due to the removal of the implicit foreign exchange subsidy, which had a larger fiscal impact than the fuel subsidy removed in June 2023.
Sienart noted that in 2022, when the official exchange rate was around N460 per dollar, and the parallel market rate was N700, the government was losing approximately N250 for every dollar-denominated revenue.
