July 24, 2024 — Moody’s has reported that Nigeria’s new windfall tax on foreign exchange revaluation gains is expected to have a significantly negative impact on banks’ credit and profitability. The global rating agency stated that the tax will reduce the profits banks use for loan provisioning and regulatory capital, which is detrimental to the sector’s financial health.
Thank you for reading this post, don't forget to subscribe!The report highlights that the tax, imposed following a surge in banks’ profits due to the naira’s 37% devaluation in June 2023, could adversely affect banks nearing regulatory capital thresholds. This tax aligns with the Central Bank of Nigeria’s September 2023 policy, which restricts the use of foreign-currency gains for operational expenses and dividends.
Moody’s noted that eight of nine rated Nigerian banks reported over N3.5 trillion in pretax profits for 2023, up from N1.1 trillion in 2022, with a significant portion derived from foreign-currency revaluation and trading gains. However, there is uncertainty regarding the proportion of these gains subject to the new tax and how unrealized gains will be treated.
President Bola Tinubu had proposed a one-time windfall tax on 2023 foreign exchange revaluation profits, but the Senate has since amended the bill to impose a 70% tax, arguing that the windfall was a result of government policy rather than bank efforts.
Moody’s indicated that the full impact of the tax remains uncertain due to unclear implementation details. The firm estimated that the additional windfall tax could represent up to 6% of the aggregate equity of the banks it rates. The tax is expected to generate approximately 0.3% of Nigeria’s 2024 GDP, a modest figure given the government’s overall tax intake.
The proposal’s legality and timing have sparked debate, with tax and advisory firms like KPMG Nigeria criticizing the retroactive nature of the tax and PwC Nigeria warning that the tax’s unpredictability might deter investment.
