The government has brought clarity now on the banks’ FX-induced profits: “[Nigerian government] has petitioned the Senate for a substantial budget increase of N6.2 trillion. This request, if approved, will elevate the 2024 appropriation act from N28.7 trillion to a staggering N34.9 trillion….To fund the budget expansion, Tinubu’s administration is targeting the financial sector with proposed amendments to the Finance Act of 2023. The president seeks to implement a one-time windfall tax on the substantial foreign exchange gains reported by banks.

“It could be recalled that the Central Bank of Nigeria (CBN) prohibited banks from using the proceeds of the FX windfall for their recapitalization. The CBN has outlined various avenues for banks to raise fresh equity capital, including private placements, rights issues, offers for subscriptions, and strategic mergers and acquisitions.”

On Wednesday, Senate President Godswill Akpabio read Tinubu’s letter to the upper legislative chamber. According to the president’s request, N3.2 trillion is earmarked for infrastructure projects, while N3 trillion is intended for recurrent expenses. These funds, it said, are crucial for the “Renewed Hope Infrastructure Projects” and the seamless functioning of the federal government.

“Pursuant to section 58 (2) of the constitution of the federal republic of Nigeria as amended, I forward herewith the above-named bills for consideration and passage by the senate. The appropriation act amendment bill seeks to amend the principal act to provide the sum of N3,200,000,000,000 for Renewed Hope Infrastructure Projects and other critical infrastructure projects to be undertaken across the country and the sum of N3,000,000,000,000 to meet further recurrent expenditure requirements necessary for the proper operation of the federal government. They shall be funded by accruing to the federal government of Nigeria,” Tinubu said in his letter.

Many months ago, I argued that not allowing banks to use their profits for recapitalisation, was not unfair for existing bank shareholders, as hitting the market was simply going to dilute them. But that is a stale matter as the issue now for banking sector investors is clear: how much would Nigeria go for this special one-time windfall tax? 40%, 50%, 60? We do not know. (Update: it seems the amount is 50%)

President Bola Tinubu has proposed a N6.2 trillion increase to the 2024 budget, raising it from N28.7 trillion to N34.9 trillion. This request was made in a letter to the National Assembly, which has passed the amendment for a second reading. The proposed increase is intended to fund various projects and address economic challenges. Additionally, there is a proposal to tax banks 50% of their realized profits on foreign exchange (FX) gains. This move has sparked discussions and concerns about the country’s debt servicing and revenue resources.

To the banks, you may need to work with the government to clear the air very fast as under this veil, you may struggle to meet the capitalisation target. If Nigeria can impose a special windfall profit, it can become a constant going forward. New disclosures needed.

The FX matter is a poison pill; Nigeria created vapour profits for banks even as Nigeria put itself at a disadvantage where it has to use Naira-based tax revenue to service US dollar-based loans. But because many manufacturing companies went under or are struggling, those banks have to bail out the government.  Just hope those profits are actually there in the virtual and physical vaults!

Tinubu Asks National Assembly for N6.2trn Budget Increase, to Be Funded by Tax on Banks’ FX Windfall Profits

Question: What happens to current bank IPOs and Share Prices?

My Response: The banks may re-price things since that “profit” does not belong to them 100%. So, if you bought for a balance sheet of xx with cash at hand x, that cash number has changed, as Nigeria is asking for a part of that cash.

President Bola Tinubu has petitioned the Senate for a substantial budget increase of N6.2 trillion. This request, if approved, will elevate the 2024 appropriation act from N28.7 trillion to a staggering N34.9 trillion.

This move, which seemingly underlines the administration’s urgent need to address the nation’s critical infrastructure gaps and mounting recurrent expenditures, has come under criticism.

On Wednesday, Senate President Godswill Akpabio read Tinubu’s letter to the upper legislative chamber. According to the president’s request, N3.2 trillion is earmarked for infrastructure projects, while N3 trillion is intended for recurrent expenses. These funds, it said, are crucial for the “Renewed Hope Infrastructure Projects” and the seamless functioning of the federal government.

“Pursuant to section 58 (2) of the constitution of the federal republic of Nigeria as amended, I forward herewith the above-named bills for consideration and passage by the senate. The appropriation act amendment bill seeks to amend the principal act to provide the sum of N3,200,000,000,000 for Renewed Hope Infrastructure Projects and other critical infrastructure projects to be undertaken across the country and the sum of N3,000,000,000,000 to meet further recurrent expenditure requirements necessary for the proper operation of the federal government. They shall be funded by accruing to the federal government of Nigeria,” Tinubu said in his letter.

Taxing Times: The Finance Act Amendment

To fund the budget expansion, Tinubu’s administration is targeting the financial sector with proposed amendments to the Finance Act of 2023. The president seeks to implement a one-time windfall tax on the substantial foreign exchange gains reported by banks.

It could be recalled that the Central Bank of Nigeria (CBN) prohibited banks from using the proceeds of the FX windfall for their recapitalization. The CBN has outlined various avenues for banks to raise fresh equity capital, including private placements, rights issues, offers for subscriptions, and strategic mergers and acquisitions.

The federal government said it intends to use the tax fund to bankroll essential capital infrastructure, education, healthcare, and public welfare initiatives—key elements of the “Renewed Hope Agenda.”

“Furthermore, the proposed amendments to the Finance Acts 2023 are required to implement a one-time windfall tax on the foreign exchange gains realized by banks in their 2023 financial statements to fund capital infrastructure development, education, and healthcare as well as welfare initiatives, all of which are components of the Renewed Hope Agenda,” Tinubu said.

The FX Windfall

Nigerian banks have enjoyed remarkable profits driven by foreign exchange revaluation gains. In 2023, the top seven local banks reported combined profits of N2.48 trillion, with an additional N882.9 billion in the first quarter of 2024, according to Nairalytics.

With oil revenue dwindling, the federal government is understood to have shifted attention to the banks’ FX gains. The government’s earlier move to borrow from the pension was met with stiff opposition.

Tinubu Contrasting His Tax Reform Initiative

Tinubu’s approach, however, reveals a paradox. The administration is simultaneously attempting to tax its way out of the economic crisis while introducing tax reforms designed to alleviate multiple taxation burdens on businesses. This dual strategy raises questions about the coherence and efficacy of the government’s economic policies.

Economic experts say the push to boost tax revenues, particularly through windfall taxes on banks, seems at odds with ongoing tax reform efforts aimed at reducing the tax burden on businesses. The tax reforms are expected to foster a conducive business environment and stimulate economic growth.