(Bloomberg) -- Nigerian President Bola Tinubu plans to slap a one-time 50% tax on windfall profits booked by banks on massive currency gains after the naira was devalued last year.
The move, detailed in a letter to lawmakers on Wednesday, comes as Nigeria tries to prop up public finances amid a cost-of-living crisis and follows similar efforts in Europe to tap bank earnings padded by high interest rates. Nigerian bank stocks fell.
The West African nation’s central bank had already told lenders to hang on to hefty gains they booked after Tinubu loosened foreign exchange rules, triggering the naira’s slump. It cautioned they should be held as a buffer against losses.
The naira is currently trading around 70% lower against the dollar prior to its level before the rules were relaxed in June 2023.
The 50% tax will be applied to the 2023 financial year and banks who fail to comply face fines.
The move hit the NGX Banking Index, which was down 1.3% as of 12:26 p.m. in Lagos. The move was the biggest decline since July 9 and was paced by FBN Holdings Plc and Zenith Bank Plc, which retreated 3.2% and 2.5% respectively. In comparison, the NGX All Share Index fell 0.2%.
Lawmakers are expected to support the measure, alongside a request to increase spending by 6.2 trillion naira ($3.8 billion), and could vote on Thursday or when they reconvene next week.
Nigeria isn’t the only nation eying its lenders to support the public purse.
Several European countries including Italy, Hungary and Slovakia have announced special taxes on banks to skim what they consider unfair income on the back of rapid inflation and rising interest rates, which boosted bank profitability while hurting consumers. Banks there have decried the move, saying it will hit economic growth as it constrains their ability to lend.
Nigeria stopped policing an artificially strong official naira exchange rate against the dollar after Tinubu took office in May 2023, as part of his measures to boost economic growth and attract overseas investment.
The move hoisted the income of banks holding dollar assets as they converted the proceeds to a weaker naira, while customers — mainly manufacturers holding dollar loans — reported huge losses from converting a weak naira to make interest payments.
The profit of Guaranty Trust Bank, the country’s biggest lender by market value, more than tripled in 2023 to 539.7 billion naira from 169.2 billion naira, driven by the revaluation gains. Net income for Access Holdings Plc, the top bank by assets quadrupled to 612.49 billion naira from 153.09 billion naira.
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--With assistance from Steven Arons.
(Updates with stocks in sixth paragraph)
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