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Nigeria loses N6.54trn to forex subsidy in 2 years – New Telegraph

The Nigerian economy lost about N6.54trillion in revenue to foreign exchange subsidy in the last two years, a report by the Centre for the Promotion of Private Enterprise (CPPE) has said.

According to the report, exchange rate assumptions in the appropriation acts in recent years were “deliberately” underestimated thus leading to the loss of trillions of naira to the Federation account.

Specifically, the report stated: “In 2021, for instance, the Central Bank of Nigeria sold an estimated $18 billion US dollars as interventions in the foreign exchange market at a hugely subsidized average rate of N400 per dollar. Effective exchange rate in the economy at the time was N560/$. This meant an estimated subsidy of N160/$ which translated to a conservative estimated revenue loss of N2.9 trillion.

“Similarly in 2022, an estimated $18 billion was sold as intervention in the forex market at an average rate of N447/$. The average effective exchange rate for the period was conservatively about N650. Again, this meant a subsidy of N203/$. This translates to an estimated revenue loss of about N3.64 trillion.”

This means that the country lost an estimated total of N6.54trillion in revenue to foreign exchange subsidy between   021 and 2022.

Contending that the damage done to the economy by the forex subsidy is as serious as that of the fuel subsidy regime, Dr Muda Yusuf, who authored the report, called for an urgent review of the Central Bank of Nigeria’s (CBN) current forex policy.

He stated: “For an economy that is burdened by huge fiscal deficit and unsustainable debt obligations, this should not be allowed to continue in 2023.

The reality is that forex end users are paying well over N700/$ for their business transactions. Selling government forex at less than N500/$ is inexcusable.”

He added: “The exchange rate assumption in the budget should be immediately reviewed to reflect exchange rate realities and boost revenue to the federation account. This could be done within the framework of the Finance Act which is fortunately being reviewed. A realistic exchange rate benchmark would boost the federation account revenues by about N4 trillion in 2023.”

He pointed out that apart from a realistic exchange rate benefitting the Federal, States and Local Governments, it would also “improve forex inflows into the economy, enhance the country’s foreign reserves, strengthen the naira and elevate investors’ confidence.”

He further stated: “Unlocking revenues from the forex subsidy would be a significant major step towards realization of fiscal consolidation objective of government. This would also reduce the current tendencies to impose additional burden of taxation on businesses and moderate macroeconomic headwinds.”

The CPPE Director opined that “currency brokers, middlemen and some operatives in the financial system are the major beneficiaries of the huge arbitrage opportunities, massive rent economy and the vast round-tripping enterprise that the forex subsidy regime has created.”

He, however, stressed that his call for a review of the forex subsidy regime should not be taken to mean that he is proposing a devaluation of the naira.

According to him, his call for the Executive and the National Assembly to adopt realistic exchange rate assumptions in appropriation acts is a strategy that would, “correct distortions in the forex ecosystem, boost government revenues, curb corruption in forex transactions and enhance liquidity in the forex market.”

“It will also improve efficiency in forex allocation, promote transparency in the forex environment and raise investors’ confidence in the Nigerian economy,” he added.

In a report released last week, analysts at FBNQuest Research faulted the exchange rate benchmark of N435.6/$1 used in the 2023 budget recently signed into law by  marPresident

Muhammadu Buhari.

The analysts said the exchange rate benchmark was unrealistic given that the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) rate-also known as the Investors and Exporters’ (I&E) forex window rate- is N461.7 per dollar.

According to a Bloomberg report last Friday, the CBN, in “secondary market intervention sales auctions” sold the dollar to importers at N500/$1, which is about eight per cent lower than its official exchange rate.

The naira has been falling for 12 weeks at the official market, its longest losing streak on record, according to the report.

The report said that 11 investors and economists out of 13 polled by Bloomberg in December, predicted that the CBN will devalue the naira after the election in February with median estimate forecasting it to weaken the currency to as low as N533/$1.

The local currency traded at about N744 per dollar last Friday, according to traders.

New Telegraph reports that in its latest “Nigeria Development Update” released in December, the World Bank advised the CBN to adopt single market-reflective exchange rate in order to address exchange rate distortions.

The bank said that the rate distortions are deterring investments due to the uncertainties firms face in accessing FX and related costs of doing business.

 

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