Amid Nigeria’s deepening economic crisis, the government’s recent decision to impose a 70 percent “windfall tax” on banks’ foreign exchange earnings has sparked widespread concern. Experts warn the move could stifle investment, destabilise the financial sector, and exacerbate the nation’s economic challenges.
A windfall tax is a government-imposed levy on businesses that gain large profits due to favourable market conditions. Banking professionals fear the levy could greatly impact the recapitalisation of the companies, making it difficult for the financial institutions to raise money through investment.
Professor Pius Olanrewaju, the chairman of the Chartered Institute of Bankers of Nigeria (CIBN), said the tax would increase the cost of services in the banking sector, discourage foreign investors and ultimately reduce investment.
“Its negative impacts on Nigeria’s economic growth and development could lead to reduced market participation, exacerbating currency fluctuations and potentially destabilising the economy,” said Professor Olanrewaju. The policy is especially uncalled for when banks are required to raise money for recapitalisation, because they may look towards foreign investors, which may be difficult to achieve with the new levy.
Available data on Nigeria’s foreign investment is not encouraging as the country’s foreign investment inflows have been on the decline. In 2023, the inflow fell by 26.7 percent—from $5.3 billion recorded in 2022 to $3.9 billion. Over the past decade, foreign investments have declined to $19 billion, from $22.7 billion in 2014 to $3.7 billion in 2023.
According to the report, investors’ lack of confidence, particularly in the businesses’ ability to access foreign exchange, is a key factor in the plummeting level of foreign investments in Nigeria.
The Windfall Tax
As part of President Tinubu’s economic reform plans, the federal government requested the national assembly to amend the 2023 Finance Act to impose a one-time windfall tax of 50 percent on banks’ foreign exchange gains. The presidency said the levy would finance infrastructure projects, the healthcare system, and education among others.
As the national assembly passed the bill into law, the lawmakers increased the tax rate to a staggering 70 percent from the proposed 50 percent in the 2024 Amended Finance Act, with retroactive application from January 1, 2023.
According to the Act, any bank that refuses to pay the windfall tax would be deemed to have committed an offence and will be liable to pay the tax withheld with a penalty of 10 percent more. In addition, the law prescribed three months jail time for the banks’ principal officers.
Mustafa Chike-Obi, the chairman of the Bank Directors Association of Nigeria (BDAN), in a statement, said the tax is excessively burdensome, could cripple growth within the banking industry, and ultimately affect the quality of services the banks provide.
A report by Agusto & Co, a Pan-African credit rating agency and research think-tank in Sub-Saharan Africa, shows the 70 percent windfall tax is likely to have a credit-negative impact on Nigerian banks, substantially eroding profits. It reveals institutions with capital adequacy close to regulatory thresholds will be particularly vulnerable to the system, and could further negatively influence bank share prices in the short term, compounding the challenges faced by the industry.
“To offset the tax burden, banks may tighten lending standards, resulting in higher borrowing costs for individuals and businesses. This could ultimately stifle economic activity and hinder growth prospects,” it reads in part. “The timing could also prove to be counter-productive. With banks currently grappling with a significant recapitalisation exercise mandated by the Central Bank of Nigeria (CBN).”
Nigeria’s banking sector has significantly contributed to economic growth. Between 2017 and 2020, the industry contributed about N168.4 trillion to the country’s Gross Domestic Product (GDP)—N34.6 trillion in 2017, N37.8 trillion in 2018, N42.7 trillion in 2019, and N53.3 trillion in 2020.
Unfortunately, the windfall tax is not the only levy shrinking the neck of Nigerian banks. There are Company Income tax, Tertiary Education Tax, and National Information Development Levy (NITDL) among others.
“In view of these concerns, we respectfully urge the national assembly to revisit this amendment and engage in constructive discussions with stakeholders in the banking sector,” said Mustafa Chike-Obi.
