The proposal to end petroleum subsidies, according to Dr. Muda Yusuf, Director of the Centre for the Promotion of Private Enterprise (CPPE), will bring at least N6 trillion in income into the Federation Account each year.
This information was contained in a CPPE paper titled “Tweaking the 2023 Finance Bill and Options for Unlocking Revenues in 2023.”
Yusuf pointed out that two significant subsidy regimes—the gasoline subsidy regime and the foreign currency subsidy regime—heavily burden and encumber the Nigerian economy. He said that, if the right reforms are put in place, enormous quantities of money may be liberated from both subsidy regimes.
He stated that the subsidy regime’s long history of robbing the country of its riches will come to an end.
The incoming administration and labour unions have the following task:
He said that in order to halt this predatory conduct, the next government will need to show political resolve.
As for the oil and gas industry changes, he added, “CPPE firmly calls to the labour unions and the civic society to give them a chance to avoid the Nigerian economy from plunging into deeper disaster.”
Foreign currency policy regime: According to Yusuf, this is the second big subsidy regime from which enormous sums of money may be extracted in the near future.
According to him, the appropriation acts’ exchange rate assumptions have consistently and knowingly been undervalued, causing the federal account to lose billions of naira over the years.
For example, the Central Bank sold around $18 billion USD in 2021 as part of market interventions in the foreign currency market at a massively subsidized average cost of N400 per USD. At the time, the N560/$ exchange rate was the actual one in use.
This amounted to an estimated N160/$ subsidy, translating to a conservative N2.9 trillion loss in income.
In the same manner, an estimated $18 billion in 2022 was sold as a currency market intervention at an average of of N447/$.
For the time period, a conservative estimate of the average effective exchange rate was N650.
Once again, this amounted to a N203/$ subsidy. This amounts to an expected loss of N3.64 trillion in income.
Foreign currency subsidies cause enormous revenue losses that are just as bad for the economy as fuel subsidies.
But oddly, in the recent spending bills, both the National Assembly and the CBN have repeatedly, egregiously, and for no apparent reason undervalued the exchange rate benchmark.
This should not be permitted to continue in 2023 for an economy that is saddled by a massive budget deficit and unmanageable debt commitments.
In actuality, end users of forex spend much in excess of N700/$ for their commercial operations.
It’s unacceptable to sell government currency for less than N500 to the dollar, Yusuf remarked.
Realistic exchange rates will increase revenue to the federation account, he noted, and this could be accomplished within the parameters of the Finance Act, which is, fortunately, being reviewed. He also recommended that the budget’s exchange rate assumption be immediately reviewed to reflect exchange rate realities and increase revenue to the federation account.
According to Yusuf, a realistic benchmark exchange rate will increase federation account income by nearly N4 trillion in 2023.
He claims that not only the federal government but also the state and municipal governments would gain from this.
“A realistic exchange rate will help bolster the naira, the country’s foreign reserves, forex inflows into the economy, and investor confidence.
The main beneficiaries of the tremendous arbitrage possibilities, the enormous rent economy, and the gigantic round-tripping activity that the forex subsidy regime has produced are currency brokers, intermediaries, and certain operatives in the financial system.
Unlocking the currency subsidy’s income potential would be a crucial step in achieving the government’s goal of fiscal reduction. Additionally, this would lessen the present propensity to tax corporations more heavily and would help to mitigate macroeconomic headwinds.
It is important to emphasize that this is not a proposal for a devaluation. In addition to increasing government income, reducing corruption in foreign exchange transactions, and improving market liquidity, this technique aims to eliminate imbalances in the forex ecosystem.
Additionally, it would increase transparency in the forex market, increase the efficiency of currency allocation, and boost investor confidence in the Nigerian economy, the official said.
