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As the Central Bank continues to initiate various economic policies to reduce the volatility plaguing the exchange rate market, economists have explained why commercial banks in Nigeria appear to be making profits while manufacturers count losses amid the prevailing forex crisis.
Against the backdrop of foreign exchange revaluation gains arising from the depreciation of the naira, the profits before tax of nine commercial banks in the country rose sharply by 156.4 per cent to N2.3tn in just nine months of 2023.
According to the financial reports of the nine banks released by the Nigerian Exchange Limited last year, about 63.6 per cent amounting to N1.457tn of the profit came from foreign exchange-related transactions.
In the corresponding period of 2022, the banks made just N225.416bn, indicating a forex profit growth rate of 546.5 per cent.
Meanwhile, eight manufacturers, including Dangote, BUA, and Lafarge, saw their foreign exchange-related losses rise to N627.7bn in the first quarter of this year, according to the financial statements of the firms published by the Nigerian Exchange Limited in May.
The Nigerian government, however, recently introduced a windfall tax on the commercial banks’ foreign currency revaluation gains, hoping to use the proceeds to part-finance its spending plans.
In a letter recently sent to the Senate, President Bola Tinubu asked the Red Chamber to back legislation that will tax the bumper income derived by banks last year from the revaluation of their foreign currency-denominated assets.
As the windfall tax continues to generate reactions from the banking community, economists have explained why the banks appear to be recording increased profits amid the forex crisis that is causing significant losses for manufacturers.
Speaking to Saturday PUNCH, Prof Taiwo Owoeye of Ekiti State University, Ado Ekiti, said the recent windfall tax by the Federal Government was informed by the obvious profits commercial banks are making on the foreign currencies deposited in their forex accounts, which is caused by the consistent depreciation of the naira against the dollar.
He explained, “Banks earn extra money through forex tax. What that simply means is that if banks have some income in their dollar-denominated accounts and the exchange rate depreciates, they can make more money from it. And that is what the government is trying to discourage. But for manufacturing firms, if they produce and the naira depreciates, they make losses. That is why banks are making more money now than the manufacturers. So what the government is trying to do is to tax those advantages of the banks.
In his contribution, Prof Sheriffdeen Tella, a Professor of Monetary Economics at Babcock University, Ilisan Remo, Ogun State, said the government needs to exercise caution in its efforts to raise revenue through taxes.
He emphasised that the government should not try to tax the profits being recorded by commercial banks, as these financial companies are already paying their income taxes into government coffers.
Tella said, “The banks pay their normal income tax. If the windfall gain is part of the payable taxes, that will be understandable, but if the government is just inventing it, it will discourage the banks from going into some businesses that can give them extra money. So it is not good for the government to just wake up and decide to tax this anyhow.
“Come to think of it, if the banks are making gains, is it not part of their normal business? And if the government is getting profit taxes from them, that should have taken care of this new extra tax. So, I don’t think the government should just be taxing anyhow.
“If it is not a constitutional tax, I don’t see any need for the government to introduce it. They just want to discourage the banks from making profits. So the government should be careful with the way it taxes things, so as not to be creating problems for local investment and the expansion of businesses.”
