The Nigerian government’s has proposed 50% windfall tax on foreign exchange revaluation profits of banks has been met with criticism from Moody’s Ratings, citing it as credit negative for the sector.

The new tax was announced on July 17, as part of a NGN6.2 trillion ($4 billion) budget addition for 2024, aimed at funding infrastructure and critical spending.

The tax is expected to significantly reduce banks’ profits available for problem-loan provisioning and transfers to retained earnings, a crucial component of regulatory capital, thereby posing a challenge to banks’ financial stability.

The tax follows record profits declared by banks in 2023, largely due to foreign-currency revaluation gains related to the naira’s 37% devaluation in June 2023.

However, the severity of the negative effect on banks’ foreign-currency-related profits is unclear, given the lack of details on how the tax would be applied.

Moody’s estimated that the tax could yield revenue of up to 0.3% of 2024 GDP for the government’s small tax intake of around 9% of GDP in 2023, but noted that it remained a marginal and temporary revenue measure.

The central bank has yet to comment on the tax, but approval is expected before the end of July.

Banks would need to comply with the windfall tax directive by December 31, 2024, or face penalties of 10% per year on the tax amount due, plus interest at the monetary policy rate currently 26.25%. Principal Officers of noncompliant banks may also face up to three years in prison.

The move has raised concerns among investors and analysts, who fear it could negatively impact the banking sector’s ability to absorb potential losses and maintain regulatory capital requirements. (AriseNews TV)

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