Nigeria’s government lost N13.2 trillion between 2021 and 2023 due to its handling of foreign exchange rates, according to a new report from the World Bank. The losses were divided across three years: N2 trillion in 2021, N6.2 trillion in 2022, and N5 trillion in 2023. These financial setbacks were caused by the government maintaining two separate exchange rates: an official rate controlled by the government and a parallel market rate determined by supply and demand. The gap between these rates led to significant revenue losses.
The foreign exchange policy was intended to stabilise the naira and benefit certain sectors of the economy, but it ended up being a costly expense for the government. Last Thursday, Finance Minister Wale Edun announced that Nigeria would no longer subsidise fuel or foreign exchange, stating that these policies had negatively impacted the economy. His remarks came during an event where the World Bank released its latest report on Nigeria’s development.
For years, Nigeria subsidised petrol and foreign exchange, spending substantial amounts to keep prices artificially low. However, the World Bank’s findings suggest that this N13.2 trillion loss, which could have been used for national development, mainly benefited select groups. Of this, N3.9 trillion was lost in taxes from the non-oil sector.
The report also revealed that while the Central Bank had planned to stop the FX subsidy by July 2023, it was only fully terminated in February 2024. Prior to this, the government’s dual exchange rate system significantly reduced the naira-denominated revenues received from FX-linked income sources such as oil and customs.
The unified exchange rate has since curbed these losses, which had previously enriched certain groups at the expense of the nation. The World Bank pointed out that key revenue streams affected by this policy included oil and gas income, import/export duties, VAT, company taxes, and income from state-owned enterprises like NNPC and FAAN.
Between 2021 and 2023, 44.3% of VAT revenue came from imported goods paid for in foreign currency, while 40% of corporate tax was also paid in foreign currency. The report stressed that the losses from the FX premium were greater than the cost of the PMS fuel subsidy.
In 2022, while the PMS subsidy cost N4.5 trillion, or 2.2% of GDP, the FX premium losses amounted to N6.2 trillion, or 3% of GDP. This included N4.5 trillion in forgone oil revenue and N1.7 trillion in non-oil tax losses. The World Bank urged Nigeria to maintain a unified exchange rate to support its economy.
At the report’s launch, Alex Sienart, the World Bank’s lead economist for Nigeria, noted that the government’s revenue increased significantly in the first half of 2024 following the removal of the foreign exchange (FX) subsidy. He explained that the FX subsidy was more expensive than the fuel subsidy, which was removed in June 2023. This high cost of the FX subsidy had greatly contributed to Nigeria’s fiscal deficit—the gap between the government’s income and its expenditures. By eliminating the FX subsidy, the government not only boosted its revenue but also helped reduce this deficit
Credit: Businessday (Text Excluding Headline)