The introduction of a one-time windfall tax on foreign exchange (FX) gains has led to a sharp drop in the value of Nigerian bank stocks, resulting in a N1.3 trillion decrease in market value for investors on the Nigerian Exchange Limited (NGX).
Approved by the National Assembly, this new tax raises the rate on FX gains from 50% to 70%, with the goal of increasing national revenue. The Senate has also proposed changes to the 2023 Finance Act to enforce this tax, causing a significant impact on the stock market. Since the announcement, market capitalization has decreased from N56.929 trillion to N55.605 trillion, and the All Share Index (ASI) has fallen below 100,000 points, closing at 98,202.49.
The banking sector has been particularly affected, with the NGX banking index dropping by 2.94% over the past week and month-to-date losses reaching 1.32%. This decline has undone the 14.8% gain achieved in the first quarter of 2024.
Despite a total turnover of 3.557 billion shares valued at N47.220 billion across 42,871 transactions, investor confidence in banking stocks remains low. The announcement has also hindered banks’ attempts to raise new capital to meet the Central Bank of Nigeria’s (CBN) updated minimum requirements, with reports indicating a low level of subscription.
Economic analysts have pointed out the broader consequences of the windfall tax. Johnson Chukwu, Group CEO of Cowry Asset Management, highlighted that the increased tax burden might lead to a rise in non-performing loans (NPLs) as businesses face FX losses, affecting banks’ financial health. He cautioned that the combined effects of the windfall tax, high Cash Reserve Ratio (CRR), and escalating Monetary Policy Rate (MPR) could impair banks’ lending capabilities, potentially slowing down economic growth.
Additionally, the naira’s minor depreciation to N1609.29/$1 at the Nigerian Autonomous Foreign Exchange Market (NAFEM) and the increase in the country’s FX reserves to $36.44 billion were observed amid these financial difficulties.
The federal government may collect over N400 billion from seven banks as tax on their 2023 FX revaluation gains. However, this approach has raised concerns about the sustainability of imposing such high tax rates without accounting for potential losses from non-performing loans.
Chukwu underscored the importance of a balanced approach to regulation and taxation to ensure that banks can continue to support economic growth without being excessively burdened by fiscal policies.