According to the World Bank, the federal government suffered significant lost revenue of N13.2 trillion over three years as a direct result of implementing foreign exchange (FX) subsidy policies.
On October 17, Finance Minister and Economic Coordination Minister Wale Edun said the era of exchange rate subsidies is over.
Mr Edun said the subsidies were causing a loss of more than 5% of gross domestic product (GDP), creating a fiscal burden.
In its latest Nigeria Development Update (NDU) report, the World Bank said Nigeria lost N13.2 trillion in total foreign exchange subsidies between 2021 and 2023.
According to the report, the total foreign exchange subsidy in 2021 was 2 trillion naira, in 2022 it was 6.2 trillion naira and in 2023 it was 5 trillion naira.
The World Bank said the foregone revenue “only benefited certain groups at the expense of the country as a whole.”
The Washington-based agency also said foreign exchange rates will be closed in February 2024, which is expected to ease price discovery and exchange supply and be positive for trade, investment and growth. Ta.
“Quantifying the fiscal costs of lost revenue for multiple exchange rates: Prior to the complete exchange rate integration in February 2024, the existence of parallel foreign exchange premiums caused huge fiscal costs in the form of lost revenue.” the bank said.
“This situation arose because inflows of foreign exchange revenues, such as oil revenues and customs revenues, as well as domestic value-added tax and a portion of value-added taxes paid in foreign exchange, were remitted to the national treasury at the official exchange rate.
“However, due to the large discrepancy between the official market rate and the parallel market rate, the naira-denominated income received by the federation from exchange-related income has significantly decreased.
“The unification of exchange rates has therefore eliminated the lost revenue that previously benefited certain groups at the expense of the country as a whole.”
“Exempted revenues impact revenues from oil, value added tax and taxes.”
The World Bank estimates that the implicit foregone revenue from exchange rate premiums is derived from oil and gas revenues, import duties and excise duties, value-added tax (VAT) revenues, corporate income taxes (CIT), and government-owned enterprises (GEOA). Revenue earned from.
According to the report, the GOEs include the Nigerian National Petroleum Corporation (NNPC), the Federal Airports Authority of Nigeria, the Nigerian Ports Authority (FAAN) and the Nigerian Maritime Authority Safety Agency (NIMASA).
Revealing further details, the World Bank said that VAT on imported goods, which accounts for 44.3% of net VAT revenue, will be charged in foreign currency from 2021 to 2023, while 40% of the total CIT revenue collected by the Federation % was paid in domestic exchange. Same period.
“The implied lost revenue estimated from the exchange premium is even greater than the PMS subsidy, highlighting the importance of maintaining a uniform exchange rate,” the World Bank said.
“In 2022, when the cost of PMS subsidy reached 4.5 trillion naira (equivalent to 2.2% of gross domestic product), the lost revenue generated by the large parallel interest premium amounted to 6.2 trillion naira, equivalent to 3%. Estimated” of GDP.
“4.5 trillion naira of foreign exchange revenue is lost from gross oil revenue and 1.7 trillion naira of foreign exchange revenue is lost from non-oil tax revenue.
“These findings show that currency centralization reform not only addresses distortions in the currency market and the real economy, but also has a significant impact on restoring fiscal space.”
“Maintaining a unified exchange rate”
The World Bank called on the government to maintain a uniform exchange rate to eliminate major distortions imposed by the previous government and benefit the economy.
“It is essential from a fiscal perspective that Nigeria maintains the harmonized exchange rate that it has achieved since February 2024,” the Bretton Woods institution said.
“In addition to expected huge fiscal benefits, exchange rate reform will help the economy by removing major distortions imposed by the previous government, including distorting the competitive environment in favor of importers with preferential access to foreign exchange. It should be noted that exports are also expected to bring benefits, making exports more difficult and less profitable and encouraging rent-seeking and illegal activities.
“Focused on transparently supporting market liquidity and price discovery.”
The World Bank also urged governments to concentrate foreign exchange trading on official markets and ease remaining restrictions to channel oil-related inflows into the market.
