Nigeria’s revenue from exchange rate gains plummeted by 73% in the first half of 2025, falling to N589.45 billion from N2.199 trillion in the same period last year, underscoring a fundamental reset in the country’s fiscal operations as market-based reforms choke off the arbitrage-driven windfalls that previously boosted government finances.
The figures, obtained from the Federation Account Allocation Committee (FAAC), show a steep reversal in a revenue stream that just a year ago contributed nearly a third of all FAAC allocations. By the first half of 2025, that share had dwindled to just 6.06%, marking the end of an era where exchange rate mismatches served as a backdoor revenue generator for the government.
The decline follows the federal government’s move to adjust the official budget benchmark for the naira to N1,500/$, in line with prevailing market rates, effectively closing the gap that once allowed massive naira surpluses when dollar inflows were converted at more favorable market rates compared to a lower budget assumption.
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In 2024, when the official benchmark was still pegged at N800/$ while the naira traded around N1,455/$, this disparity created hefty profits on paper. But as the government aligned its assumptions with market conditions beginning in January 2025, those fiscal surpluses evaporated.
January Spike, Then Silence
The last major FX revenue boost came in January 2025, when N402.71 billion was distributed, largely reflecting earnings from December 2024, before the new benchmark took effect. Since then, with the naira averaging N1,475/$ in January and reaching N1,500/$ in February, the exchange rate convergence meant zero gains were recorded in February and March.
A comparison of June figures from both years reveals how dramatic the shift has been. In June 2024, exchange rate gains made up N507.46 billion—roughly 44% of the N1.143 trillion shared that month. One year later, that contribution dropped to just N76.61 billion, accounting for a mere 4.6% of the N1.659 trillion FAAC allocation.
Despite the collapse in this revenue line, total FAAC allocations rose to N9.723 trillion in H1 2025, up 35.6% from N7.171 trillion in the same period of 2024. The figures suggest that while arbitrage revenues have dried up, the overall revenue base has expanded, hinting at stronger inflows from oil, taxes, and other non-FX sources.
Federal Government Still Claims the Lion’s Share
Even as the gains shrank, the Federal Government maintained its dominant grip on FX-derived allocations. Of the N589.45 billion distributed from exchange rate gains between January and June 2025, the Federal Government took N280.93 billion. State governments received N140.26 billion, Local Governments N113.14 billion, and oil-producing states got N64.52 billion under the 13% derivation principle.
That distribution model remains largely unchanged from 2024, but with all categories suffering steep declines. The Federal Government’s FX windfall fell by 68.4% from N889.93 billion in H1 2024, while States and LGs saw 68.8% and 68.7% drops, respectively. Derivation revenue to oil-producing states dipped by 67.9%.
The figures once again highlight the heavily centralised nature of Nigeria’s fiscal system, where the Federal Government enjoys relative insulation from external shocks, while subnational entities face acute exposure to fluctuations in shared revenue.
Policy Reform Resets the Game
What Nigeria is witnessing is the natural consequence of a policy shift long advocated by market economists: a transparent, market-driven exchange rate system that minimizes distortions. The downside is the disappearance of “paper profits” created by exchange differentials, which had for years masked the country’s underlying revenue challenges.
Analysts note that with the budget benchmark now virtually mirroring the market rate, future gains from FX arbitrage are unlikely unless new volatility is introduced. While this deprives government coffers of one-time windfalls, it also forces a more sustainable fiscal structure, anchored in genuine revenue sources rather than exchange mismatches.
But it also means Nigeria must now lean more heavily on oil revenues, tax reform, and non-oil diversification to shore up finances, especially as global conditions remain uncertain. For states and LGs, already squeezed by inflation and rising wage demands, the pressure is intensifying.
Ultimately, the end of the arbitrage era signals a leaner but more disciplined fiscal architecture, though not without short-term pain, especially at the subnational level.