Nigeria has experienced a remarkable surge in tax revenue from foreign firms, nearly doubling in just one year, according to recent data from the National Bureau of Statistics (NBS). This surge is attributed to increased earnings from Foreign Company Income Tax (CIT) and Value Added Tax (VAT) payments, driven by the weakening of the naira.
The NBS data reveals a significant uptick in revenue from foreign-related VAT, rising by 61% to reach N824.6 billion in 2023, compared to N510.8 billion in the previous year. Even more striking is the surge in Corporate Income Tax (CIT) from foreign entities, skyrocketing by 107% from N1.14 trillion in 2022 to N2.38 trillion in 2023.
In total, tax revenue from these streams surged by 93% year-on-year, totaling N3.21 trillion in 2023, up from N1.66 trillion in 2022. While this increase is positive for Nigeria’s finances, it underscores the country’s vulnerability to exchange rate risks.
Foreign firms played a substantial role in Nigeria’s tax revenue in 2023, contributing 49% to the total CIT collections, amounting to N4.9 trillion. Foreign entities also contributed significantly to VAT collections, accounting for 23% of the total VAT revenue, which stood at N3.64 trillion for the year.
This data emphasizes the crucial role of international businesses in bolstering Nigeria’s tax revenue, particularly in the CIT sector. However, it also highlights the country’s exposure to exchange rate fluctuations and the potential risks associated with a weakening currency.
The depreciation of the naira has had widespread economic implications, including increased import costs, rising inflation rates, reduced purchasing power, and a dampening effect on investment inflows. Despite these challenges, the Central Bank of Nigeria (CBN) remains committed to addressing the foreign exchange (FX) market issues.
CBN Governor, Mr. Yemi Cardoso, acknowledged the undervaluation of the naira and pledged to work towards real price discovery in the FX market in 2024. Additionally, Goldman Sachs analysts projected a significant appreciation of the exchange rate to N1,200/$ in 12 months, signaling potential recovery.
However, challenges persist, with the CBN facing liquidity constraints in supporting the naira, as a significant portion of foreign reserves is tied up in derivative deals. Nevertheless, the central bank has implemented various reforms to address FX challenges, including clearing forex obligations backlog and establishing a singular foreign currency gateway bank.
Despite the uncertainties, Nigeria remains focused on tackling FX market distortions, enhancing liquidity, and fostering a conducive environment for economic stability and growth.
