Nigeria enacted a foreign exchange (FX) unification strategy in June 2023 with the aim of combining its various exchange rate regimes into a solitary market-driven rate. The goals of the policy were to ease long-term FX shortages, lower arbitrage, and boost investor confidence. However, the policy’s effects on Tax revenues have been inconsistent one year after it was put into place. Contributions to the Foreign Corporate Income Tax (CIT) increased from ₦1.42 trillion to ₦3.41 trillion between Q3 2023 and Q2 2024, a 140.5% increase. The depreciation of the naira, which raised foreign companies’ tax obligations, was the primary driver of this expansion.
Local CIT, on the other hand, increased by just 35.1%, from ₦2.16 trillion to ₦2.92 trillion, suggesting that domestic companies have found it difficult to adjust to the new foreign exchange regime. Foreign businesses contributed 53.8% of the total, up from 39.6% in the pre-unification period, to the overall CIT collections, which rose to ₦6.33 trillion from ₦3.58 trillion. The Devaluation of the naira, which lost 68% of its value in a single year, posed serious hurdles for local firms. Because of this, businesses that depend on imported goods and raw materials now face higher expenses, which lowers profit margins and creates financial instability.
FX unification strategy aims to simplify the exchange rate system.
Leading Nigerian corporations lost a total of ₦1.7 trillion in foreign exchange in 2023, prompting some of them to undergo major restructuring. The unsteady state of the Economy is reflected in the Volatility of local CIT collections, which sharply declined following Q2 2023 before marginally recovering in Q2 2024. Nigeria had a convoluted and dispersed foreign exchange (FX) system with several currency rates in place before to June 2023. The nation kept multiple unofficial market rates in addition to the official rate set by The Central Bank of Nigeria (CBN) and a rate specifically for exporters and Investors known as the I&E window.
Although this system was designed to serve different economic sectors, it resulted in serious inefficiencies, such as a booming black market, currency arbitrage, and a mismatch in rates between the official and parallel markets. By achieving a single, market-driven exchange rate, the FX unification strategy aims to simplify the exchange rate system, enhance transparency, and draw in international investments. The objective was to enhance investor trust in Nigeria’s economy, remove arbitrage opportunities, and lessen the influence of the black market.
Immediate action is required to stabilize the local business climate.
One of the industries most negatively impacted by the FX unification strategy is manufacturing, which is highly dependent on imported raw materials. Profit margins are being squeezed as a result of the Naira losing up to 68% of its value and rising import expenses. The Aviation sector, which struggles to pay for fuel, leasing, and aircraft maintenance, requires a significant quantity of foreign currency. In an effort to offset growing costs, airlines have raised ticket rates, which has impacted customer flow.
Increasing expenses for equipment imports and overseas service payments have created difficulties for the tech sector, especially for startups and telecoms enterprises. The downstream segment (refining and distribution) has seen higher operating costs, despite the fact that the Oil and Gas Industry gains from selling crude oil in dollars. Industry insiders have pointed out that immediate action is required to stabilize the local business climate. Segun Ajayi-Kadir, the Director-General of the Manufacturers Association of Nigeria (MAN), recommended that the government give incentives to strengthen domestic production capacity and lessen dependency on imports.
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The high expense of doing business in Nigeria, combined with currency devaluation that prevents revenues from being repatriated, is turning away investors, according to Olufemi Oyinsan, General Partner of The Continent Venture Partners. The following changes, which would improve FX market liquidity, support small and medium-sized enterprises (SMEs), diversify the economy, strengthen local production, and develop infrastructure, could be taken into consideration in order to lessen these risks. Through the implementation of these reforms, Nigeria may develop an economy that is more resilient to external shocks and maintains growth over the long term.