The World Bank announced that the Nigerian government lost NOK 13.2 trillion due to the way foreign exchange was managed from 2021 to 2023.
The breakdown of the losses was 2 trillion naira in 2021, 6.2 trillion naira in 2022 and 5 trillion naira in 2023.
This huge loss occurred because the government maintained two different exchange rates: the official rate (where the government controls prices) and the parallel market rate (where prices are determined by supply and demand). These interest rate differences cost the government a lot of money.
The policy was intended to stabilize the naira and support parts of the economy, but it came at a huge cost.
Last Thursday, Finance Minister Wale Edun announced that Nigeria would suspend subsidies on both fuel and foreign exchange. He said this at an event where the World Bank launched a new report on Nigeria’s development.
“Fuel subsidies and foreign exchange subsidies will be abolished,” Edun said, explaining that these policies are having a negative impact on Nigeria’s economy and will not continue.
Nigeria has spent years subsidizing gasoline and foreign currency and spending millions to keep prices low, but the full extent of their effectiveness was unclear.
The World Bank said in a new report that Nigeria lost NOK 13.2 trillion and could have helped everyone in the country, but only helped certain groups. Of this, N3.9 trillion was lost from non-oil sector taxes.
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The World Bank also noted that despite the central bank’s announcement that it would end foreign exchange subsidies in July 2023, the government ultimately ended foreign exchange subsidies in February 2024.
“Quantifying the fiscal costs of lost revenue for multiple exchange rates: Prior to full currency integration in February 2024, the existence of parallel exchange premiums resulted in significant fiscal costs in the form of lost revenue.”
“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 been significantly reduced.”
“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.”
According to the report, this is based on five main ways in which the government makes money: oil and gas revenues, import and export duties, VAT, corporate tax, and funds from government-owned enterprises such as NNPC, FAAN, NPA, NIMASA, etc. is said to have had an impact.
The World Bank explains that between 2021 and 2023, 44.3% of net value-added tax revenues were derived from imports in foreign currencies, and 40% of total corporate taxes were paid in foreign currencies.
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“The estimated implied lost revenue from the exchange premium was even higher than the PMS subsidy, highlighting the importance of maintaining a uniform exchange rate.”
“In 2022, when the cost of PMS subsidy reaches N4.5 trillion, equivalent to 2.2 per cent of gross domestic product, the lost revenue caused by the large concurrent tariff premium is estimated at N6.2 trillion, which is 3% 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.”
The World Bank advised Nigeria to continue using the single exchange rate to support the economy.
The World Bank’s lead economist for Nigeria, Alex Seenert, said at the report’s release that the government was making more money in the first half of the year mainly because it stopped foreign exchange subsidies.
He explained that in 2022, the foreign exchange subsidy was more costly than the fuel subsidy, which was abolished in June 2023.
“Fiscal consolidation is progressing, and the fiscal deficit will shrink from 6.2% of GDP in the first half of 2023 to 4.4% of GDP in the first half of 2024. This is mainly due to the fact that spending remains almost constant.”
“So this jump in revenue is primarily due to the removal of the implicit subsidy, which was even bigger than the PMS subsidy we are talking about.”
