The Nigerian financial sector is in turmoil as bankers and economic experts raised alarms over the proposed 70 percent foreign exchange (forex) windfall tax on banks and urged President Bola Tinubu to reject the Finance Act (Amendment) Bill 2024 recently passed by the National Assembly.
The proposed levy has sparked concerns about its potential impact on banking sector stability and ongoing recapitalisation efforts.
The bill, part of a broader supplementary budget proposal aimed at increasing the 2024 budget by N6.2 trillion, introduces a significant tax on forex revaluation gains by banks.
Originally set at 50 percent, the tax was increased to 70 percent by the National Assembly, with retroactive application from January 1, 2023. The levy is intended to fund ‘The Renewed Hope’ infrastructure projects, as well as initiatives in education and healthcare.
Banking professionals argue that the proposed tax could undermine the sector’s recapitalisation plans, which are crucial for supporting the government’s $1 trillion economic agenda.
The Chartered Institute of Bankers of Nigeria (CIBN) has voiced strong opposition, highlighting the potential negative effects on investment, liquidity, and overall economic growth.
Pius Olanrewaju, President of CIBN, emphasized that the forex windfall tax could exacerbate currency volatility and destabilize the economy.
“This proposed tax could lead to reduced market participation and might result in double taxation, as banks have already paid a 30 percent income tax on these gains,” Olanrewaju said.
He also criticized the tax as discriminatory, noting that other sectors benefiting from forex gains are not similarly taxed.
Olatunde Amolegbe, former President of CIBN, warned that the levy could adversely affect the ongoing banks’ recapitalisation efforts.
“Imposing such a levy in the midst of a recapitalisation drive sends the wrong signal to investors and could hinder banks’ ability to raise capital,” Amolegbe remarked.
He highlighted concerns about the timing of the tax and its potential impact on banks’ liquidity ratios.
Rasheed Bolarinwa, President of the Association of Corporate & Marketing Communication Professionals of Banks (ACAMB), called for further consultation on the levy.
“We believe that additional dialogue is needed to ensure that this tax does not have unintended negative consequences. Banks have been supportive of the government’s economic reforms, and imposing this new levy at this juncture could be counterproductive,” Bolarinwa said.
The proposed windfall tax has also been criticized for its potential to exacerbate inconsistencies in Nigeria’s policy environment.
A senior banker, who preferred to remain anonymous, pointed out that the tax could further complicate the fiscal and monetary policy landscape.
“The forex windfall levy appears to be another manifestation of policy inconsistencies, as it targets realised gains while banks have unrealised gains,” the banker stated.
David Adonri, Managing Director of HighCap Securities, expressed concern that the tax could be viewed as an expropriation of shareholders’ wealth.
“This tax undermines the goal of strengthening banks to support the $1 trillion economy initiative and appears to penalize banks for forex gains that are intended to be prudently managed,” Adonri argued.
The CBN had previously directed banks to set aside forex revaluation gains as a counter-cyclical buffer rather than using them for dividends or operational expenses.
However, the proposed windfall tax seems to be at odds with this directive.
In response to the controversy, KPMG has recommended that the government engage in further consultation with the CBN and the Bankers’ Committee.
“It’s crucial for the government to address the potential issues raised by the forex windfall levy before finalizing the amendment,” KPMG advised.
