The resultant effect of regulating the value of the naira against the dollar in the official exchange market but allowing a fair market value price at the parallel market led to a significant revenue loss for the government.
The decision to uphold subsidies in the foreign exchange market, especially the dollar, was government’s effort to support importers of food and essential services. With the subsidy, importers were able to get subsidized forex which aided trade in the import market.
The World Bank, in its latest Nigeria Development Update (NDU) report, revealed that Nigeria lost N13.2tn in revenue that “benefitted certain groups at the expense of the entire country.”
The global lending body described Nigeria’s Monetary and foreign exchange (FX) policies as “increasingly opaque, distortive, and inconsistent with maintaining price stability, including multiple managed and overvalued official exchange rates“.
The global lender also acknowledge that despite the Central Bank Of Nigeria’s (CBN) announcement in July 2023, terminating the foreign exchange policy, the policy was actually terminated fully in February 2024.
“So far in 2024, Africa largest economies, including Egypt and Nigeria, experienced further, large increases in their nominal exchange rates against the US dollar as well as in domestic prices due to the high inflation. Furthermore, in Nigeria, the gap between the official and parallel market exchange rates closed in February 2024, facilitating price discovery and foreign exchange (FX) supply, which is expected to be positive for trade, investment, and growth.” the report noted
With the end of subsidy in the forex market, the exchange rate has been left for the natural regulations of the market forces of supply and demand which will potentially stabilize the FX market in the long term.
An advantage of this move is that Nigerian entrepreneurs will now look inwards and focus on local production will increase, rather than importing goods. Domestic industries will also pick up, reducing the country’s reliance on imports.
The Finance Minister, Wale Edun also re-echoed the government’s stance on FX and petrol subsidies during the presentation.
“Fuel and FX subsidies are extinguished,” he said, explaining how both policies had greatly impeded Nigeria’s financial standing. According to Edun, these subsidies had drained the country’s economy, costing over N10 trillion, a figure which accounted for five percent of Nigeria’s Gross Domestic Product (GDP).
“The government expects this approach to boost construction activities and generate significant job creation.”
“The plan will be anchored around mortgage and housing financing,” Edun stated.
