This revenue shortfall resulted from the government's decision to regulate the naira's value against the dollar in the official exchange market while permitting a market-driven price in the parallel market.
Although the subsidy aimed to stabilize the currency and assist specific sectors, it ultimately caused a significant decline in government revenue during this timeframe.
Last Thursday, Finance Minister Wale Edun announced the discontinuation of fuel and foreign exchange subsidies at the launch of the World Bank's Nigeria Development Update document, signaling the conclusion of a long-standing policy.
Edun indicated that these subsidies had adversely affected the nation's economy and would no longer be part of government policy.
“Fuel and FX subsidies are extinguished,” Edun said, as he emphasised the financial strain these policies had imposed on the nation.
Nigeria has upheld a subsidy system for petrol and foreign exchange expenditures for many years, consistently dedicating a substantial portion of its revenue to mitigate economic impacts that were largely unquantified.
However, the recent NDU report from the World Bank revealed that the nation incurred a revenue loss of N13.2 trillion, benefiting specific groups at the detriment of the broader population. Of this total, N3.9 trillion was lost in tax revenue from the non-oil sector.
The report also noted that the government ended the foreign exchange subsidy in February 2024, which was in contrast to the policy declaration made by the Central Bank in July 2023.
The report read, “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.
“This situation emerged because FX revenue inflows—such as oil and customs revenues, as well as a portion of domestic VAT and CIT which are paid in FX—were transferred to the treasury at the official exchange rate.
“However, due to the significant difference between the official and parallel market rates, the amount of naira-denominated revenue received by the Federation from FX-linked revenues was significantly reduced.
“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 further elucidated that the implicit revenue loss from the premium adversely affected five primary revenue streams for the government. These streams encompass oil and gas revenue, import and excise duties, value-added tax revenue, corporate income tax, and revenue generated from government-owned enterprises.
The specified Government-Owned Enterprises comprise the Nigerian National Petroleum Corporation, the Federal Airports Authority of Nigeria, the Nigerian Ports Authority, and the Nigerian Maritime Administration and Safety Agency..
To elaborate, Value Added Tax (VAT) on imported goods, which constitutes 44.3% of net VAT revenue, was levied in foreign currency from 2021 to 2023. Furthermore, 40% of the total Corporate Income Tax (CIT) revenue collected by the federation was remitted in foreign exchange during the same period.
The Bretton Woods institution further noted that the estimated implicit revenue losses from the foreign exchange premium were even greater than the public money subsidy, emphasizing the significance of maintaining a unified foreign exchange rate.
“In 2022, when the cost of the PMS subsidy reached N4.5tn, representing 2.2 per cent of the Gross Domestic Product, the revenues forgone that emerged due to the large parallel rate premium are estimated to have been N6.2tn, representing 3 per cent of GDP.
“N4.5tn of FX revenue was forgone from gross oil revenues and N1.7tn from the FX revenue forgone from non-oil tax revenues.
“These findings demonstrate that the FX unification reform not only addresses distortions in the FX market and the real economy but also has a substantial impact on restoring fiscal space.”
The government was consequently encouraged to uphold a consistent foreign exchange rate to enhance the economy by eliminating the significant distortions created by the previous administration.
“Therefore, maintaining the unified FX rate that Nigeria has achieved since February 2024 is essential from a fiscal perspective.
“It should be noted that in addition to the large estimated fiscal benefits, the FX reform is also expected to benefit the economy by removing the large distortions the previous regime imposed, such as skewing the competitive landscape in favour of importers with preferential access to FX, making it more difficult and less profitable to export, and fueling rent-seeking and illicit activity,” It concluded.
At the launch event, Alex Sienart, the Chief Economist of the bank in Nigeria, stated that the recent rise in federal government revenue during the first half of the year can be primarily attributed to the elimination of the implicit foreign exchange subsidy.
He noted that the implicit FX subsidy in 2022 exceeded the widely discussed fuel subsidy, which was abolished in June 2023.
He said, “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 and that is largely due to expenditure being roughly constant.”
“So 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 also explained that with the official exchange rate in 2022 being around N460 and the parallel being around N700, the federal government was losing around N250 for every dollar-denominated revenue.