MON. 16 JANUARY, 2023-theGBJournal| The second major subsidy regime from which huge revenues can be unlocked in the short term is the foreign exchange policy regime.
Over the years the exchange rate assumptions in the appropriation acts were grossly and deliberately understated, leading to loss of trillions of naira to the federation account.
In 2021, for instance, the Central Bank 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/$. This translates to an estimated revenue loss of about N3.64 trillion.
These are huge loses of revenue to foreign exchange subsidy which are as damaging to the economy as the fuel subsidy. But curiously, the National Assembly and the CBN had serially, grossly and inexplicably underestimated the exchange rate benchmark in the appropriation bills of the past few years .
For an economy that is burdened by huge fiscal deficit and unsustainable debt obligations, this should not be allowed to continue in 2023.
The reality is that forex end users are paying well over N700/$ for their business transactions. Selling government forex at less than N500/$ in inexcusable.
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.
This will not only benefit the federal government, but the states and local governments as well.
A realistic exchange rate would also improve forex inflows into the economy, enhance the country’s foreign reserves, strengthen the naira and elevate investors’ confidence.
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.
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.
It should be stressed that this is not a devaluation proposition. It is a strategy meant to 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.
Insight by Muda Yusuf, Director General, Centre for the promotion of private Enterprise (CPPE)
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