There is need for caution as there could be unintended consequences
As part of an amendment bill to the 2023 Finance Act, President Bola Tinubu proposed a one-time windfall tax aimed at taking a bite at the substantial foreign exchange gains reported by banks in 2023. The idea, according to the federal government, is to generate additional revenue for crucial infrastructure, education, and health care projects. The Senate has promptly passed the amendment bill, which includes increasing the windfall levy from the initially proposed 50 per cent to 70 per cent. It also extended the tax's applicability from the end of 2023 to all profits from forex transactions through 2025.
For clarity, windfall taxes are levies on companies or individuals who receive substantial, unexpected profits due to circumstances beyond their usual control or investment. This tax is usually targeted against certain industries when economic conditions allow those industries to experience significantly above-average profits. In the current scenario, the federal government is targeting the significant profits banks made due to the devaluation of the naira in 2023.
While there are arguments to justify the windfall tax, some stakeholders, including international financial institutions, have also raised concerns on its likely adverse effects. For instance, Moody's Investors Service and other analysts have highlighted the potential negative impact on the banking sector. Part of their argument is that the levy could significantly reduce profits available to banks to cover problem loans and maintain regulatory capital. This, they argue, could pose a risk to the financial stability of banks that are already operating close to regulatory thresholds and at a time they are seeking fresh investments.
Of all the concerns raised over the tax, the just-released report by the United States-based Emerging & Frontier Capital (EFC) appears to be more unsettling. It revealed that Nigeria's banking industry is currently under high regulatory costs from Cash Reserve Ratio (CRR), deposit insurance premium and levy by the Asset Management Corporation of Nigeria (AMCON). Titled, 'More Pain for Longer', the report warned that implementing a windfall tax amid a Central Bank of Nigeria (CBN) mandated recapitalisation could "break the camel's back" for banks. According to the EFC report, the top six banks in Nigeria incurred regulatory costs to the tune of $1.8 billion in 2023, and a total of $7.6 billion over the past five years (2018-2023). It stressed that while Nigerian bank investors understand the government's need for revenue, the tax could impact the banking sector negatively.
Sign up for free AllAfrica Newsletters
Get the latest in African news delivered straight to your inbox
As poignant as these arguments may sound, the government believes that its quest to generate more revenue for the greater good of the populace is an unassailable premise to forge ahead with the tax. The Minister of Finance and Coordinating Minister of the Economy, Wale Edun captured this pointedly: "As we know, the banking system has enjoyed some of what we'll call windfall or unearned profits and in the interest of distributing wealth across the Nigerian society, the government has stepped in to take some of that wealth on behalf of Nigerians."
While the government may seek to harness every resource in sight to bolster the much-needed revenue profile, it should also remember that its primary function is that of a business enabler and not a destroyer of businesses. It is trite that the role of the banking industry is not only sensitive, but critical to the economy, and the authorities need to be reminded that caution is key. Any action capable of creating some form of distortion or turmoil in the industry at this time should be avoided. The president must learn from the crisis created by the removal of subsidy and merging of the Naira exchange rates.
To avoid another economic catastrophe, the federal government should weigh the gains of the windfall tax alongside the drawbacks before forging ahead.
