The World Bank has reported that the recent rise in the federal government’s revenue in Nigeria during the first half of the year is largely attributed to the elimination of an implicit foreign exchange subsidy.
Alex Sienart, the bank’s Chief Economist in Nigeria, shared this insight during the launch of the latest Nigeria Development Update, titled “Staying the course; Progress amid pressing Challenges.”
Sienart emphasized that the implicit FX subsidy in 2022 exceeded the much-discussed fuel subsidy that was removed in June 2023. He noted that there is currently a trend of fiscal consolidation, with the fiscal deficit decreasing from 6.2% of GDP in the first half of 2023 to 4.4% in the same period of 2024. This improvement is primarily due to relatively stable expenditure levels.
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He elaborated that the surge in revenue is primarily a result of removing the implicit subsidy, which amounted to more than the PMS subsidy commonly referenced. In 2022, while the PMS subsidy reached approximately N5 trillion, the federal government could have generated around N6 trillion from dollar-related revenues, including oil revenues, taxes, and customs. The total cost of these subsidies was about N10.7 trillion, or 5% of GDP, significantly contributing to the accumulation of Ways and Means financing.
Sienart explained that with the official exchange rate in 2022 being around N460 and the parallel market rate around N700, the federal government was losing about N250 for every dollar of revenue it should have collected.
In the first half of 2024, Nigeria’s revenue has increased by over 100% to N9.1 trillion, driven by savings from subsidy payments. This boost in revenue positions the government to meet its revenue target of N18.32 trillion for the 2024 budget, helping to maintain a stable fiscal deficit.
Over the past year, revenue from the Nigeria Customs Service has significantly increased due to the adjustment of the exchange rate for duty collections to align with the market-reflective official CBN exchange rate, in contrast to previous years. In the first half of the year, the Nigeria Customs Service reported a 127% increase in revenues, totaling N2.7 trillion, surpassing its half-year target of N2.54 trillion.
Additionally, there has been a notable surge in Company Income Tax (CIT) payments from foreign companies following the unification of the multiple segments of the forex market. In the year after implementing this unification policy, foreign companies paid N3.41 trillion in company tax, compared to N1.42 trillion in the preceding year. This marks a 140% increase in CIT payments from foreign firms, contrasted with a 35% increase from indigenous companies, which typically pay in Naira.
