The reforms implemented by the federal government in the second quarter of 2023 have made the year a tougher one for consumers and businesses compared to previous years.
The liberalisation of the foreign exchange regime as part of measures to revive the economy led to a large devaluation of the naira.
The Central Bank of Nigeria in June merged all segments of the FX market into the Investors and Exporters window, and reintroduced the willing buyer, willing seller model.
The naira has continued to depreciate against the dollar and other major foreign currencies since then.
The official exchange rate fell from N463.38/$ to N889.86/$ as of December 15. At the parallel market, the naira depreciated to 1,186/$ from 762/$.
“The devaluation has increased government revenue in terms of the Federation Account Allocation Committee (FAAC) allocation. It has also been able to reduce the gap in government revenue in the budget,” Ayodeji Ebo, managing director/chief business officer at Optimus by Afrinvest Limited, said.
He added that if the funds are rightly used, it will impact the economy, especially for the states.
“The devaluation has brought in more revenue which has enhanced the capacity of the government to do their commitment in terms of interventions, infrastructures and reducing the amount that state governments owe in salaries,” Adeola Adenikinju, a professor of economics and president of the Nigerian Economic Society, said.
Tax revenue from corporates more than doubled in one year
Tax payments from foreign companies more than doubled the company income tax revenue for the Federal Government. Data from the National Bureau of Statistics (NBS) shows that the total revenue grew by 115.9 percent to N1.75 trillion in the third quarter from N810.2 billion in the same period of last year.
It also rose on a quarter-on-quarter basis by 14.3 percent from N1.53 trillion.
Payments from foreign companies increased by 116.9 percent to N1.10 trillion in Q3, the highest since 2015, from N505.9 in Q2. But those from local companies declined by 36.4 percent to N651.6 billion from N1.02 trillion, mirroring the country’s tough business environment.
During the public presentation of the country’s proposed 2024 budget last month, Abubakar Bagudu, minister of budget and economic planning, revealed that the federal government achieved N8.65 trillion in revenue in the first nine months of this year compared to the pro-rata target of N8.28 trillion.
Out of the N8.65 trillion revenue, N1.42 trillion was generated from oil revenues, while non-oil revenues totalled N2.50 trillion.
“The impact of foreign exchange unification has continued to have a positive impact on the overall tax revenue of the government,” Yomi Olugbenro, partner and West Africa Tax Leader at Deloitte, said.
Weaker naira boosts foreign demand for local products
While the naira has continued to depreciate, the West African CFA franc, a legal tender in Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo, has appreciated.
This made some goods produced in Nigeria to be cheaper than other African countries. At the official market, the naira depreciated from 463.38/$ on June 9 to 888.35/$ as of December 18. The naira has depreciated against the West African CFA franc, from N0.76 to CFA1 on June 9 to N1.31 to CFA1 as at December 18.
Paul Odunaiya, managing director/chief executive officer at Wemy Industries Limited, told BusinessDay that the currency depreciation is helping his business in terms of exports.
“When your currency is weak, your goods become cheaper which will make a country with a stronger currency easily buy your products. It helped us to enter the market because of the CFA,” he said.
The increase in the demand for goods from other African countries creates more naira for manufacturers to source for inputs for their production.
“The devaluation is helping exporters to bring FX back into the country which means more naira for them. But you have to remember that their cost of production is increasing,” Odiri Erewa-Meggison, chairman of the Manufacturers Association of Nigeria Export Promotion Group, said.
Trade surplus rises to highest in five years
Trade surplus in Africa’s biggest economy rose to the highest in five years and three months in Q3. A trade surplus occurs when a country’s exports exceed its imports.
According to the NBS, the country recorded a positive trade balance of N1.89 trillion for the fourth straight time in Q3, a 166.2 percent increase from N708.9 billion in the previous quarter. It improved from a trade deficit of N409.4 billion on a year-on-year basis.
In essence, the increased trade surplus can be linked to the devaluation effect, with the country getting more naira from export proceeds per dollar, Israel Odubola, a Lagos-based research economist, said.
“Having a positive trade surplus is favourable to the current account as it helps to reduce external pressure. A trade surplus is quite significant in current account composition.”
Bumper profits for banks
Since the devaluation, Nigerian banks with foreign assets have recorded a surge in their profits.
In the first half of the year, the combined profit after tax of eight banks rose by 237.8 percent to N1.31 trillion, the highest in at least four years, from N388.8 billion in the same period of last year, according to their latest unaudited financial statements.
The banks analysed were Zenith Bank, United Bank for Africa (UBA), FCMB Group, Wema, Stanbic IBTC, FBN Holdings, Fidelity and Guaranty Trust Holding Company (GTCO).
Gbolahan Ologunro, portfolio manager at FBNQuest, noted that banks gained from the adjustment of the currency by the current administration.
“We have not seen the magnitude of adjustment before. The higher profits is good for the banks as it would increase their dividend per share which they will deliver to shareholders.”
UBA declared an interim dividend of 50 kobo per share in H1 2023, up from 20 kobo per share in the same period of 2022.
GTCO increased its interim dividend to 50 kobo per share from 30 kobo per share, while that of Fidelity Bank surged to 25 kobo per share from 10 kobo per share.
Zenith Bank declared an interim dividend of 50 kobo per share in H1 2023, up from 30 kobo per share in the same period of 2022.
In the first nine months, the banks’ after-tax profit also rose by 179.4 percent to N1.76 trillion from N633.26 billion in the same period of last year.
FAAC allocation up 38% in seven months
Following the FX reform, FAAC disbursement to the three tiers of government such as federal, state and local rose by 37.9 percent to N1.08 trillion in November from N786.2 billion in May.
The percentage increase is higher than the 32.5 percent recorded within the same period of last year.
In August, the allocation crossed the one trillion mark.
Moody and S&P upgrade Nigeria’s outlook rating
Global rating agencies upgraded Nigeria’s outlook on the back of the government reforms.
Earlier in the month, Moody revised the country’s outlook to positive from stable, citing a possible reversal of the deterioration in the country’s fiscal and external position due to authorities’ reform efforts.
The agency also affirmed its “Caa1” long-term foreign currency and local currency issuer ratings.
S&P in August revised its outlook to stable from negative on the government’s reforms. It believes the reforms could benefit the country’s growth and fiscal outcomes if delivered.
The agency also affirmed its rating for Africa’s largest economy at ‘B-/B’.
