Taxes on parallel market transactions seen fueling FX crisis

…Businesses will suffer, says LCCI

A proposal to introduce excise taxes on parallel foreign exchange market transactions in Nigeria has been met with strong criticism, with some economists warning it could fuel the country’s FX crisis.

The Presidential Fiscal Policy and Tax Reforms Committee, chaired by Taiwo Oyedele, has recommended “the imposition of excise tax on foreign exchange transactions outside the official market”.

Some economists have warned that the tax could have unintended consequences, such as driving more FX transactions to the black market and making it even more difficult for businesses and individuals to access foreign currencies.

“Anything that seems restrictive of people accessing dollars will paradoxically cause fewer dollars to come in through official channels, promote the use of unofficial channels more, and ultimately cause more pressure on the naira,” a senior investment banker who pleaded anonymity told BusinessDay.

“The same will likely happen if any restrictions are put on domestic accounts. Some people are already talking about a Lebanon-type situation,” he added.

Read also:FX transactions outside official window to attract excise taxes soon

Yemi Kale, partner and chief economist of KPMG Nigeria, wondered if the decision to introduce an excise tax would not lead to more FX being held in cash and outside the banking system.

“For those that still choose to continue to use the financial system, won’t it further widen the FX gap since they now have to add those taxes into the exchange price to compensate for them?” Kale said on social media platform X.

He added: “Isn’t it also a bit contradictory since you are on the one hand, trying to allow $ denominated bonds, etc., partly so as to encourage unofficial flows into the official system but at the same time penalising inflows that may have come in from parallel market/non-official sources?”

Africa’s biggest economy has been grappling with a dollar shortage since 2016 when it slipped into its first recession in over two decades induced by the oil price collapse that started in mid-2014 and the sharp decline in its production of the commodity.

It took five months for the Central Bank of Nigeria (CBN) to take what markets had expected to be the logical next step since devaluing the currency in June: lifting the ban on dollar sales to importers of some 43 items from rice to milk.

The ban had pushed demand to the black market, complicating the CBN’s goal to have a single FX market.

Experts said rather than introducing taxes, the next step towards achieving a single FX market and fostering transparency should be to allow oil companies to sell dollars at the official market again instead of the current practice of selling to the CBN.

“It is okay to have conversations about not going to the parallel market but what options do you have? So, it’s either you don’t go to the parallel market or you don’t do businesses that do not involve FX,” Gabriel Idahosa, deputy president of the Lagos Chamber of Commerce and Industry, said.

“Businesses that will be affected are those that rely on the black market. That is 99.9 percent of them,” he added.

Femi Egbesola, national president of the Association of Small Business Owners of Nigeria, said the federal government should pay attention to clearing the backlog of unattended letters of credit.

According to him, a number of importers including manufacturers are surviving through the parallel market.

The committee also recommended the expansion of the official FX market to incorporate Bureaux de Change, FX apps and retail FX dealers and outlaw transactions in the black market.

“Before you ban the market, you must make provision for the liquidity to be there in the forex market. If the liquidity is not there and you introduce excise duty, the implications will be negative,” Egbesola said.

Muda Yusuf, chief executive officer at the Centre for the Promotion of Private Enterprise, said the government should focus on creating an enabling environment to increase liquidity in the forex market.

“Fixing FX supply will reduce the demand for the services of black-market operators,” he said.

The naira has continued to decline against the dollar after a brief convergence of the official and parallel market rates following the start of reforms that led to a sharp devaluation of the naira in June as well as the collapse of all segments of the FX market into the Investors and Exporters window.

The gap between the official and parallel market rates has significantly widened.

Several measures including the removal of an eight-year FX ban on 43 items have been implemented to stabilise the market.

The Oyedele-led committee has recommended the payment by Nigerian businesses of taxes on foreign currency-denominated transactions in naira.

Also, there are considerations to “digitalise Nigeria’s FX regime and discourage speculative demands and hoarding of fx in cash, and discontinue the FX verification portal and requirement for Certificate of Capital Importation and export proceeds restriction.”

Additionally, the federal government is aiming to minimise the number of taxes collected at the federal, state, and local government levels.

This initiative, as explained by Oyedele, would eliminate obstacles for small and medium-sized enterprises and foster economic growth and development in the country.

Earlier in the month, he announced the Federal Government’s plan to reduce the current number of taxes, which stands at about 62, to less than 10, stressing that the existing taxes imposed across various government levels place a heavy burden on businesses and taxpayers.