Thread by @Nairametrics

In 2023, Nigeria’s President Bola Tinubu introduced significant economic reforms, including the removal of fuel subsidies and the liberalization of the forex market. While these moves aimed to strengthen Nigeria’s economy, their impact varied across sectors.

The banking industry, benefiting from forex market liberalization, saw a surge in foreign exchange asset values, boosting profits. In contrast, sectors like agriculture and manufacturing faced rising inflation and borrowing costs.

Given the banking sector’s windfall gains, a windfall tax on banks is seen as a justified measure to restore economic balance. This allows the government to capture profits driven by policy changes rather than innovation or productivity.

What’s a Windfall tax? Why Target Banks?

A windfall tax is applied when sectors or companies profit disproportionately from external factors, like policy changes or global market shifts. It’s a reasonable way for them to contribute more to public funds.

In Nigeria’s case, banks’ windfall profits primarily stem from the government’s liberalization of the exchange rate, resulting in significant revaluation gains on their forex holdings. Nigeria’s windfall tax on banks is neither unprecedented nor unique.

Globally, governments have imposed similar taxes on sectors that reaped extraordinary profits due to external shocks or policy changes, like European nations taxing energy companies during the Ukraine war.

Windfall taxes, such as those on inheritance or lottery winnings, are tools to balance fiscal responsibility with social equity, ensuring those benefiting from market or policy shifts contribute back to society.

In these instances, windfall taxes address market distortions and redistribute gains that weren’t driven by sector-wide improvements but by external shifts. Nigeria’s banks benefited similarly from forex market liberalization.

The tax will only apply to realised gains, which are actual profits rather than paper profits. For example, if a bank gave out a loan in FX when Naira was at N435/$, and it's now repaid at N1600/$, the realised gains are the difference in repayment rates.

The focus on banks is not random. There's a direct link between bank profits, exchange rate devaluation, and real sector challenges. For every loan asset appreciating for banks, a corresponding liability grows for private sector players, particularly in agriculture.

Addressing Fiscal Gaps Responsibly Nigeria is facing a substantial fiscal deficit, worsened by stagnating oil revenues and rising debt. The removal of fuel subsidies and forex liberalization was meant to address these challenges but has also increased social pressures.

The windfall tax offers a fair solution by targeting the sector most benefiting from policy changes, redirecting gains to fund government efforts to ease the burden on vulnerable sectors and relieve fiscal pressure.

It’s not about penalizing banks for profits but ensuring a more equitable distribution of policy benefits. Windfall taxes on banks provide critical revenue without burdening ordinary Nigerians like taxes on goods and services do.

The banking sector has always played a central role, benefiting as a financial intermediary. Forex liberalization amplified these advantages, creating extraordinary gains, widening the gap between the financial and real sectors.

A windfall tax ensures that the sector benefiting most from reforms contributes to addressing broader social and economic impacts, promoting fairness, responsibility, and equitable policy benefits.

The tax is not punitive but a pragmatic response to economic imbalance caused by forex market liberalization. While banks reaped extraordinary profits from this policy shift, the broader economy, especially vulnerable sectors, struggled.

By taxing windfall profits, the government can address fiscal challenges and inequality. This tax allows for critical public investments and social programs to alleviate the impact of reforms on ordinary citizens.

Globally, Nigeria follows the practice of using windfall taxes to ensure that those benefiting from policy shifts contribute proportionately. This tax promotes fairness, fiscal responsibility, and social equity during economic transitions.