The federal, state, and local governments collectively gained approximately N2.74 trillion in revenue from exchange gains during the first six months of 2024.
This information is based on data from the Federation Account Allocation Committee (FAAC) reports, published by the National Bureau of Statistics (NBS).
The total revenue from exchange gains in the first half of 2024 increased by approximately 1,494% compared to the N171.91 billion recorded during the same period last year.
This significant surge indicates that the unification of the country’s exchange rates and the devaluation of the naira have substantially boosted government revenue from exchange gains.
Exchange gains represent the difference between the exchange rate projected in the budget and the actual rate at which applicable revenue streams are converted at FAAC.
The impact of the exchange rate depreciation has become a major source of revenue growth for the Federation in Naira terms, accounting for 22% of the total revenue during this period, which amounted to N12.45 trillion.
Despite the increase in revenue, the government is also likely to face a significant rise in governance costs. Nigeria is facing one of its most challenging periods of galloping inflation and purchasing power weakness.
Due to the impact of inflation, labour unions reached an agreement with the government to increase the minimum wage from N30,000 to N70,000 monthly.
This revenue boost, captured as “Exchange Gain,” was shared among the Federal Government, State Governments, Local Government Councils (LGCs), and the 13% Derivation Fund based on an existing sharing formula approved by the Revenue Mobilization Allocation and Fiscal Commission (RMAFC).
Before an amount is shared between the three tiers of government, there are usually statutory deductions, such as 13% derivation and other charges and costs.
After the deductions, the Federal Government gets 52.68%, the State Government gets 26.72%, and the Local Government gets 20.60% based on the current vertical allocation formula on the net federation account revenue distributable.
However, out of the 52.68% of the Federal Government’s share, general ecological problems get 1%, Federal Capital Territory (FCT) gets 1%, Development of natural resources gets 1.68%, and statutory stabilization gets 0.5%. The balance of 48.5% is for the Federal Government.
About two weeks after President Bola Tinubu promised to unify the nation’s multiple exchange rates, the Central Bank of Nigeria (CBN) decided to float the naira at the Investors and Exporters (I&E) forex window, now referred to as Nigerian Autonomous Foreign Exchange Market (NAFEM).
Since then, the naira has been rising and falling, currently hovering around N1,560/$1 to N1,600/$1.
Nigerians continue to face prolonged periods of exchange rate volatility, as the naira crashed by 40% between the end of December 2023 and June-ending.
The exchange rate closed in 2023 at N907.11 and immediately experienced several volatilities along the way, closing the first half of the year at N1,503/$1.
The first half of 2024 saw significant fluctuations in Nigeria’s exchange rate, reflecting the country’s economic challenges and the impact of policy measures.
The N2.74 trillion boost from exchange rate differences has provided much-needed relief to the government’s finances, enabling the continued funding of critical expenditures despite broader economic challenges.
This 22% contribution to the total revenue illustrates the significant role that currency fluctuations have played in boosting government revenue this year.
However, it also raises concerns about the sustainability of relying on such gains in the long term, especially as they are contingent on external shocks rather than robust economic fundamentals.
The Institute of Chartered Accountants of Nigeria (ICAN) said last year that the unification of the country’s exchange rate would stimulate the growth of the securities market and attract foreign investments into the country.
It also noted that the unification of the exchange rate would increase the government’s revenue in naira terms, which would result in a higher tax/revenue to Gross Domestic Product (GDP) ratio.
However, while the struggling currency has been beneficial to the government and some banks, it has been detrimental to many manufacturing companies in the country that have recorded significant FX losses in their financial statements.
