Forex Windfall Levy May Be Counterproductive – Experts

Bankers, experts and other critical stakeholders in the Nigerian financial sector yesterday urged the federal government to reconsider the imposition of a 70 per cent foreign exchange (forex) windfall levy on Banks.

Also, international ratings agency, Moody’s Investor has said the windfall tax on banks in Nigeria as proposed by the federal government is expected to yield 0.3 per cent of the government’s tax revenue to GDP, adding that it will negatively impact banks and their ability to lend.

They called on President Bola Tinubu to withhold assent to the Finance Act (Amendment) Bill 2024 as passed by the National Assembly, calling for a reconsideration of the forex windfall levy by the legislature and the executive.

President Tinubu recently submitted a supplementary budget proposal to the National Assembly. The Bill seeks to increase the 2024 budget by N6.2 trillion from N28.7 trillion to N34.9 trillion.

As part of the funding plan for the N6.2 trillion supplementary budget, the government sought amendment to the 2023 Finance Act to include a 50 per cent, one-off tax on forex revaluation gains by banks during the 2023 business year. The levy on forex revaluation gains, otherwise known as windfall, will be used to finance ‘Renewed Hope’ infrastructure projects, education and healthcare among others.

The National Assembly, on Tuesday, in passing the Bill, increased the forex windfall levy to 70 per cent, with retroactive application from January 1, 2023.

Stakeholders were unanimous that the forex windfall levy might be counterproductive in the light of the critical contributions of the banks to the ongoing economic reforms and the current banking recapitalisation exercise.

They called on President Tinubu to again demonstrate his listening ear by withholding assent to the Bill to allow for further consultation and dialogue on the issues.

Latest data from the Central Bank of Nigeria (CBN) had indicated that banks’ credit to the private sector (CPS) rose by 65.9 per cent or N29.52 trillion to N74.31 trillion in May 2024 compared with N44.79 trillion recorded in comparable period of 2023.

The growth in lending and supports to the private sector underlined the resilient balance sheet of banks and banks’ response to the apex bank’s push for increased lending to bolster economic activities.

The Chartered Institute of Bankers of Nigeria (CIBN), the umbrella body for bankers, stated that the implementation of the levy could lead to reduced investment, decreased liquidity, and increased costs and negatively impact Nigeria’s economic growth and development.

In a statement signed by its president, CIBN, Professor Pius Olanrewaju noted that the forex windfall tax could exacerbate currency volatility due to reduced market participation, with a potential to destabilise the economy.

President, Association of Corporate & Marketing Communication Professionals of Banks (ACAMB), Rasheed Bolarinwa, said banks have shown enormous supports for government’s economic agenda and should not be burdened with a new levy that obviously would be counterproductive at this time.

He underlined the need for further extensive consultation on the levy, urging the president to withhold assent to the bill.

He noted that, with the ongoing recapitalisation, which is also aimed at supporting the government’s $1 trillion economic agenda, banks need more monetary and fiscal incentives now.

CIBN stated that the forex windfall tax could amount to double taxation as banks have paid 30 per cent income tax when they filed 2024 tax returns.

Bankers cautioned that imposing taxes on forex gains may deter foreign investors and negatively impact Nigeria’s investment landscape especially at a time when banks are required to raise capital and they may be looking towards foreign investors.

A former president of Chartered Institute of Stockbrokers (CIBN), Mr. Olatunde Amolegbe, said the forex windfall levy could be counterproductive and have negative effect on the ongoing banking recapitalisation, which was intended to boost government’s $1 trillion economic agenda.

According to him, imposing such levy in the middle of ongoing banking recapitalisation may send wrong signals to investors and impinge on the ability of banks to raise much-needed capital.

Managing director, HighCap Securities, Mr. David Adonri, said the forex windfall levy amounts to expropriation of shareholders’ wealth.

“It defeats the purpose of making banks strong enough to support the envisaged $1 trillion economy, an objective that is compelling banks to recapitalize,” Adonri said.

According to him, it was unfair to deny shareholders, who would have borne the brunt in the event of losses, of direct benefits from forex gains on one hand, and for government to seek to appropriate such on the other hand.

The Central Bank of Nigeria (CBN) had directed banks not to utilise their forex revaluation gains to pay dividends or for other operational expenses, but rather to save the funds as hedge against any future volatility.

Meanwhile, according to Moody’s, the tax is expected to significantly reduce banks’ profits available for problem-loan provisioning and transfers to retained earnings, a crucial component of regulatory capital, thereby posing a challenge to banks’ financial stability.

The tax follows record profits declared by banks in 2023, largely due to foreign-currency revaluation gains related to the naira’s 37 per cent devaluation in June 2023. However, the severity of the negative effect on banks’ foreign-currency-related profits is unclear, given the lack of details on how the tax would be applied.

Moody’s estimated that the tax could yield revenue of up to 0.3 per cent of 2024 GDP for the government’s small tax intake of around nine per cent of GDP in 2023, but noted that it remained a marginal and temporary revenue measure.

Banks would need to comply with the windfall tax directive by December 31, 2024, or face penalties of 10 per cent per year on the tax amount due, plus interest at the monetary policy rate currently 26.25 per cent. Principal officers of noncompliant banks may also face up to three years in prison.

The move has raised concerns among investors and analysts, who fear it could negatively impact the banking sector’s ability to absorb potential losses and maintain regulatory capital requirements.