The World Bank has reported that Nigeria lost a staggering N13.2 trillion due to mismanagement of its foreign exchange policy between 2021 and 2023.
This loss, attributed to the government’s dual exchange rate system, has sparked significant discussion about how the country got to its current economic trajectory and the measures needed to correct its fiscal course.
The breakdown of the losses reveals that N2 trillion was lost in 2021, N6.2 trillion in 2022, and N5 trillion in 2023. These figures highlight the disparity between an official exchange rate—where the government controlled the price of the naira—and a parallel market rate that was governed by market forces.
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The two-tier exchange rate system was initially introduced as a stabilizing measure, designed to protect the naira and specific sectors of the economy. However, as time passed, the policy became a massive financial drain.
According to the World Bank, the difference between the official rate and the parallel market rate significantly reduced the amount of naira-denominated revenue that flowed into Nigeria’s treasury. Vital sectors such as oil and gas, import and export duties, value-added tax (VAT), and corporate taxes were deeply impacted by this practice.
In their report, the World Bank stated, “Quantifying the fiscal cost, through forgone revenue of multiple exchange rates: Prior to the full FX unification in February 2024, the presence of a parallel FX premium generated enormous fiscal costs, in the form of forgone revenues.”
The report further explained that revenues, particularly those linked to foreign exchange, were being converted into naira at the official rate, significantly lower than the parallel market rate. This resulted in the government earning far less than it could have had it unified the exchange rates earlier.
Impact on the Nigerian Economy
During the years in question, the impact of these losses was felt across key areas of the economy. Of the N13.2 trillion lost, N3.9 trillion was attributed to forgone revenues from the non-oil sector. The World Bank’s report noted that about 44.3% of Nigeria’s net VAT revenue came from imported goods paid for in foreign currency, while 40% of total company income tax was also paid in foreign currency.
“The unification of the FX rate has therefore eliminated the forgone revenues that previously benefited certain groups at the expense of the entire nation,” the report said, emphasizing the profound implications of these losses.
The report makes a direct comparison between the cost of Nigeria’s foreign exchange subsidy and its fuel subsidy. In 2022, the government spent N4.5 trillion on the Premium Motor Spirit (PMS) subsidy, which represented 2.2% of the Gross Domestic Product (GDP). Meanwhile, the losses due to the foreign exchange premium amounted to N6.2 trillion—representing 3% of the GDP.
“These forgone revenues due to the parallel FX premium were even larger than the PMS subsidy, underscoring the importance of maintaining a unified FX rate,” the World Bank explained.
The breakdown of the FX-related losses further revealed that N4.5 trillion was lost from gross oil revenues, while N1.7 trillion was lost from non-oil tax revenues, underscoring the widespread fiscal impact across multiple sectors of the economy.
The cost of maintaining FX subsidies is believed to be the major reason the present administration floated the Nigerian FX market in June 2023.
Nigeria has long subsidized fuel and foreign exchange, spending enormous amounts to keep prices artificially low. However, this has come at a high cost. In its report, the World Bank argued that the FX subsidy, which was finally eliminated in February 2024, had been a larger drain on Nigeria’s economy than even the fuel subsidy.
However, eliminating the subsidies has brought about severe economic hardship to the Nigerian people, as it has shot up the cost of living. Finance Minister Wale Edun announced last Thursday that Nigeria would no longer subsidize fuel and foreign exchange. He made this declaration during an event where the World Bank unveiled its latest report on Nigeria’s development.
“Fuel and FX subsidies are extinguished,” Edun declared, explaining that the policies were no longer sustainable for Nigeria’s economy. He explained that these subsidies had been a major strain on the country’s finances, and removing them was a necessary step to avoid further economic deterioration.
Recommendations for Economic Recovery
The World Bank’s chief economist for Nigeria, Alex Sienart, pointed to the gains Nigeria has made since removing the foreign exchange subsidy, which has significantly boosted government revenue. Sienart noted that government revenues in the first half of 2024 increased largely due to the unification of the exchange rate.
“We are seeing a fiscal consolidation underway with the fiscal deficit shrinking from 6.2 per cent of GDP in the first half of 2023 to 4.4 per cent of GDP in H1, 2024,” he said, noting that while government expenditures have remained relatively constant, the removal of the FX subsidy has contributed to the surge in revenue.
Sienart further explained that the elimination of the FX subsidy had a more significant positive impact on Nigeria’s finances than the removal of the fuel subsidy.
“This surge in revenue is largely due to the removal of the implicit subsidy which was even larger than the PMS subsidy that we talk about,” he noted.
The World Bank report also strongly advised Nigeria to maintain its unified exchange rate policy going forward. It argued that reverting to multiple exchange rates would once again result in significant losses and that the government must avoid falling back into the costly practices of the past.