Nigeria’s foreign exchange (FX) unification policy, implemented by the Central Bank of Nigeria (CBN) in June 2023, aimed to simplify the country’s multiple exchange rate system by consolidating it into a single market-driven rate.
The policy was designed to boost investor confidence, eliminate arbitrage opportunities, and address chronic FX shortages that plagued the economy.
However, one year after the policy’s implementation, the impact on tax revenues reveals an unexpected consequence.
While foreign companies have seen their tax contributions skyrocket, local firms have struggled to keep pace, revealing the deeper challenges facing Nigeria’s domestic economy.
According to data from the National Bureau of Statistics (NBS), the one-year period following FX unification (Q3 2023 to Q2 2024) saw a rise in foreign Corporate Income Tax (CIT) contributions.
Foreign CIT increased by 140.5%, rising from N1.42 trillion in the pre-unification year (Q3 2022 to Q2 2023) to N3.41 trillion in the year post-unification.
In contrast, local CIT only grew by 35.1%, moving from N2.16 trillion to N2.92 trillion over the same period.
This disparity in growth suggests that naira devaluation has contributed significantly to taxes the Federal Inland Revenue Service (FIRS) gets from foreign firms.
The total CIT collected in the year following FX unification reached N6.33 trillion, a significant increase from the N3.58 trillion collected in the year before the policy change.
However, foreign CIT accounted for 53.8% of this total, up from 39.6% in the pre-unification period.
This indicates that foreign firms are increasingly driving Nigeria’s tax revenue, masking the sluggish growth in local firm contributions.
While foreign companies have benefited from FX unification, local businesses have faced more challenges.
In February, TheWitness reported that the naira had lost about 68% of its value, marking a profound downturn since the implementation of the foreign exchange unification policy.
In the first six months of this year, Nigerians and businesses faced prolonged periods of exchange rate volatility, as the naira crashed by 40% between the end of December 2023 and June-ending.
This volatility emphasizes the uncertain economic conditions facing local firms, who continue to grapple with inflation, supply chain disruptions, and the increased cost of doing business post-unification.
The Director-General of the Manufacturers Association of Nigeria (MAN), Mr. Segun Ajayi-Kadir, recently noted that the challenges facing the manufacturing sector, particularly due to the current macroeconomic conditions, are exacerbated by the ongoing foreign exchange volatility and high electricity tariffs.
Also, speaking to TheWitness on the challenges of firms operating in Nigeria face, Olufemi Oyinsan, General Partner at The Continent Venture Partners (TCVP), said: “Companies in Nigeria struggle with dropping consumer purchasing power and the high cost of doing business, especially with energy and logistics. On top of that, they face challenges in repatriating profits due to currency devaluation. This makes it unsustainable for them to operate.”
He further stressed the need for businesses to be creative and more capital-efficient, cutting unnecessary costs and focusing on optimizing resources.
Ike Ibeabuchi, Chief Executive Officer, MD Services, earlier told TheWitness that foreign exchange stability could steer firms’ rebound and boost their capacity to create value.
The standard CIT rate in Nigeria is 30% of a company’s taxable profits for large companies (those with annual gross turnover of more than N100 million).
