Between 2021 and 2023, the Nigerian Federal Government faced an immense fiscal challenge, incurring a foregone revenue loss of N13.2 trillion due to its foreign exchange subsidy policy, as indicated by a recent World Bank report. This staggering financial toll included N2 trillion in 2021, N6.2 trillion in 2022, and N5 trillion in 2023. The government’s approach involved regulating the naira’s value against the dollar in the official exchange market while permitting a more market-driven price in the parallel market. This dual exchange rate system, originally designed to stabilize the currency and support specific sectors, inadvertently led to significant revenue shortfalls that constrained the government’s economic capacity. The discontinuation of this subsidy policy, announced by Finance Minister Wale Edun at the World Bank’s Nigeria Development Update launch, signifies a crucial pivot in the government’s economic strategy.
Minister Edun’s announcement of ending both fuel and foreign exchange subsidies highlights the strain these policies have imposed on Nigeria’s economy. For decades, the country maintained these subsidy regimes to buffer the adverse economic effects, often allocating substantial revenue portions to sustain them. The World Bank’s report outlines that these subsidies preferentially benefited specific groups, while the broader population did not receive commensurate advantages. It reports an alarming N3.9 trillion loss in non-oil sector tax revenue, underscoring the equity issues arising from targeted subsidies. The dissonance between official and parallel market rates created a scenario where the government forfeited substantial foreign exchange earnings, necessitating the urgent need for policy reform.
The report further elaborates on the fiscal implications prior to the planned unification of exchange rates in February 2024, which purportedly aimed to eliminate revenue loss stemming from parallel exchange rate premiums. This duality led to considerable distortions in revenue streams, as government revenue from sources such as oil and customs were trapped at the official exchange rate, resulting in a significant under-collection of revenue in naira terms. The previous subsidy frameworks meant that crucial revenue streams, including oil and gas revenue and various taxes, diminished because they were recorded at artificially low official rates, thus curtailing potential inflows into the treasury.
Moreover, the World Bank underscores that the implicit revenue losses from the foreign exchange premium outweighed those from the petroleum subsidy, emphasizing the need for a unified exchange rate to enhance transparency and financial stability. For instance, the PMS subsidy in 2022 amounted to N4.5 trillion while the estimated revenue losses due to the FX premium were around N6.2 trillion, which equated to significant losses in terms of GDP. The analysis illustrates the pressing fiscal reforms necessary to restore fiscal space and enhance Nigeria’s economic resilience—stressing that maintaining a unified FX rate is pivotal for removing distortions that have long hampered Nigeria’s competitiveness.
In the wake of these revelations, the World Bank advocates for sustained adherence to the newly established unified exchange rate regime. This shift is expected to yield considerable fiscal benefits while promoting a more favorable economic environment devoid of the previous regime’s distortive consequences. The change is anticipated to level the playing field, helping exporters who faced unfavorable competitive dynamics due to subsidized foreign exchange access for importers and curbing opportunities for rent-seeking behaviors that proliferate in such the previous dual exchange rate system.
Finally, the positive fiscal trends observed in early 2024 reflect the impact of the removal of the implicit foreign exchange subsidy. The World Bank’s Nigeria Chief Economist, Alex Sienart, noted that government revenue surged in the first half of the fiscal year, largely due to this policy change. As the fiscal deficit narrowed from 6.2% of GDP in 2023 to 4.4% in early 2024, the implications of ending both the implicit and explicit subsidies began to materialize. This shift is pivotal for Nigeria’s economic recovery, as it not only addresses immediate financial challenges but establishes a foundation for long-term fiscal stability, thereby bolstering public confidence in the government’s economic management capabilities.
