(Bloomberg) -- Nigerian lawmakers approved plans to slap banks with a 70% tax on foreign-exchange gains from an initial 50% proposed by President Bola Tinubu to boost the nation’s coffers.
The Senate agreed on Wednesday to amend the 2023 Finance Act to allow for the tax, according to proceedings streamed on its YouTube page.
“The levy shall be 70% on all realized profits from foreign-exchange rate transactions of banks,” Mohammed Sani Musa, chairman of the Senate Committee on Finance, said. Banks enjoyed windfall profits “as a result of the exchange rate unification policy of the federal government and the windfall was as a result of forex allocation to selected commercial banks,” he said.
The Nigerian central bank relaxed exchange controls in June 2023 and again in January, leading to a more than 70% decline in the naira against the dollar, handing some lenders significant profits.
Credit Negative
Moody’s Ratings said Thursday that the increase in the levy to 70% from the previously announced 50% will have negative credit implications for banks due to its potential impact on their profits.
“This could further constrain retained earnings and banks’ ability to bolster capital buffers,” the agency said. At the initial 50% levy, Moody’s estimated that the tax will consume as much as 6% of the aggregate equity of the banks it tracks.
The lawmakers also agreed to make the tax effective from the “commencement of the new foreign-exchange rate policy” until the end of 2025. This makes “it no longer a one-off tax,” Moody’s said.
“The terms of the windfall tax have been clarified to specify that the tax shall be on the realized profits of all foreign exchange transactions from banks, which would include revaluation and trading gains” the agency said.
Hefty Gains
The profit of Guaranty Trust Bank, the country’s biggest lender by market value, more than tripled in 2023 to 539.7 billion naira ($339 million), 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.
The West African nation’s central bank last year told lenders to hold on to the hefty gains they booked after the rules were loosened as a buffer against losses.
The amended Finance Act will allow banks to enter into a deferred payment agreement with the tax authority before Dec. 31. Banks that fail to pay the levy will be charged penalties.
The government intends to use the funds for infrastructure and an increased minimum wage agreed with labor unions.
The lawmakers separately approved a request to raise this year’s spending plan by 6.2 trillion naira, taking total planned expenditure to 35 trillion naira.
Since the plans were detailed on July 17 the NGX Banking Index has declined 4%, compared with the NGX All Share Index 0.3% gain.
(Updates with Moody’s comments in fifth paragraph)
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