Nigeria’s foreign exchange system is a labyrinth of multiple exchange rates. It’s like navigating a maze with different paths, each leading you to a different endpoint. The official exchange rate has failed to keep up with market demands. It has also led to the rise of multiple parallel markets such as the black market, further complicating the foreign exchange market.
Nigeria’s government is considering the alternative of imposing excise tax penalties on foreign exchange transactions done outside the official market window to stop the confusion of having multiple exchange rates in the country.
This recommendation was shared by Taiwo Oyedele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, created in July by President Tinubu to assess and offer advice on reforming Nigeria’s fiscal policy and tax system.
It is one of the “Quick Win” recommendations provided to address pressing economic issues like managing exchange rates, the fallout from eliminating fuel subsidies, keeping inflation under control, and fostering economic expansion.
Oyedele while sharing the recommendations on X (formerly known as Twitter), also highlighted more changes that could be implemented in the foreign exchange market to make business transactions easy, and use a single exchange rate system. “Permit the payment of taxes on foreign currency-denominated transactions in Naira for Nigerian businesses. Digitalise Nigeria’s FX regime and discourage speculative demands and hoarding of FX in cash. Discontinue the FX verification portal and requirement for Certificate of Capital Importation and export proceeds restriction.”
Tinubu’s presidency has led to a shift in exchange rate policies. The most significant is the change from a fixed exchange rate which the country initially maintained to a managed float system, that allows the Naira to adjust in response to market forces. However, it has resulted in a critical shortage of foreign exchange and deprecation of the naira.
One of the major reasons behind taxing parallel foreign exchange transactions is to control exchange rate fluctuations. However, imposing taxes will further widen the gap between the official and parallel rates, leading to increased volatility and loss of exchange rate stability.
Olumide Adesina, a financial analyst believes that the recommendation to impose tax on the parallel foreign exchange transactions sends mixed signals to the country’s troubled FX market. “This is partly because the Federal government is encouraging unofficial FX inflows into the official system while taxing inflows that might have originated from the black market.”
The government’s move could be seen as a step toward formalizing and regulating the previously informal and unregulated space. By taxing these transactions, the government may hope to bring them into the official foreign exchange system, thereby increasing transparency and oversight. However, it implies that the government doesn’t mind unofficial FX inflows into the country. Also, it does little to tackle the main issues that have led to the growth of the parallel market.
The FX market’s woes stem from a combination of different factors, including limited access to foreign currency, inflation, and a volatile global oil market that has impacted Nigeria’s foreign exchange reserves. Taxing parallel market transactions alone does not address these underlying problems.
The decision has spawned a lot of reactions, mostly negative, with many people perturbed about the additional tax burden. The cost of doing business will undoubtedly rise, and businesses that rely on foreign exchange to import goods, pay for international services, or repay foreign debts may face higher costs. This would consequently fuel inflation and lead to price increases for consumers. “This could likely add a premium charge on FX transactions and amplifies inflationary concerns since such levy will be passed to the end user,” said Adesina.
Taxing parallel foreign exchange transactions can also disproportionately affect low-income earners who rely on the parallel market for remittances from family members abroad. Increased transaction costs may strain their already limited financial resources.
This move is also counterproductive considering that Nigeria has been striving to diversify its economy from depending on oil. Imposing taxes on parallel forex transactions can affect efforts to attract foreign investors, as they may perceive it as an unfavourable business environment.
