Raising budget revenue with tax: Banks’ perspective

With the issue of low revenue to fund 2015 fiscal plan overhanging, CHIJIOKE NELSON x-rays what prospects and challenges are there for increased tax rates in the banking sector.

The country, no doubt needs revenue to fund the 2015 budget, which is already in deficit to over N1 trillion mark. But the possibility of increasing taxes, as well as widening the tax net, has been played up too, especially with the coming of the new administration that has its major players as pro-tax campaigners.

The deposit money banks, already in the tax net, will surely have a fair share of the new development if it actually becomes an alternative for the government. However, the questions are: how will they fare given the tight monetary stance and exposures occasioned by uncertain foreign exchange developments? What impact would that have on the revenue base of government and the banks’ ability to further fund government’s projects?

Of course, the country’s low revenue level occasioned by the 48 per cent plunge in the price of crude oil in the international market since the last one year, has raised the speculations and heightened the possible risk of higher effective tax rates for corporate entities, including the Nigerian banks.

Historically, the Central Bank of Nigeria (CBN), in an effort to defend the exchange rate, has overtime, significantly tightened monetary and exchange rate policies, which has also impacted banks’ profitability. There has been a phase strategy in removing Commission on Turnover in the last few years, as well as reduction in other banking sector charges, aimed at minimising cost of banking transactions. These are avenues of banking sector profitability.

But the Vice President/Sub-Saharan African Banks Lead Analyst at Renaissance Capital, Solanke Adesoji, in a note to The Guardian, said looking at Nigeria’s budgeted revenues for 2015, a worst case scenario of 30 per cent increased tax rate for banks would only increase budgeted revenues by three per cent. So, the increased rate would only “add up with revenues sourced from other sectors to make up a meaningful number at the top.”

However, he pointed out that such tax hike would dent the profitability and investment thesis for the sector as a whole in the already tight monetary policy environment.

“We further explored the capacity of Nigerian banks to finance incremental government borrowings. Considering that: Banks hold 50 per cent of domestic debt and pension funds 37 per cent; the pension funds’ easier access to long term funding and faster asset growth rate in recent years; and high Cash Reserve Requirement for the banks, we conclude that we expect pension funds to be the marginal financier of incremental domestic government borrowings going forward,” he said.

According to him, asset growth would be key should this happen, as the immediate opportunity cost will be interbank assets, while crowding out private sector credit.

“We see further upside risk to funding costs for the banks as interbank rates would remain elevated and move higher. It will be a big negative for banks’ tax rates and returns, in our view, as the sector’s investment case would be so weakened that almost no bank would be able to match its cost of equity in an already tight monetary policy environment,” he said.

Already, the interbank rates are currently at their highest level over the past five years, with five percentage points higher than in 2014 on average- 17.5 per cent against 12.5 per cent.

“There is room to improve the banks’ capacity to fund the fiscal deficit by easing the CRR, but this will have to be a carefully considered monetary policy decision, in our view,” the analyst said.

One of the areas the Federal Government could explore to help cover its weaker fiscal position is amending/removing the tax exemptions on interests earned on government and corporate securities, which are relatively attainable targets.

These tax exemptions on government and corporate bonds/treasuries were gazetted by former President Goodluck Jonathan, in December 2011, for a period of 10 years, with the exception of Federal Government bonds, which were given an infinite exemption.

“It is our understanding that since this exemption was granted under the executive powers of the President, it can similarly be reversed or amended by the same powers,” Adesoji noted.

But this has already been considered as capable of turning the table against banks with a big negative for banks’ tax rates and returns, as well as weakening of the sector’s investment case.

However, one other option, according to the analyst, is by borrowing. But the case against borrowing at the moment is stemmed on the question of “what to borrow for- funding of recurrent or capital expenditure?

The SSA Economist at Renaissance Captal, Yvonne Mhango, had earlier said she expects debt to play a much bigger role in financing the budget than in recent years.

This view may have been unwittingly corroborated by the recent claims of the head of President Muhammadu Buhari’s Transition Committee, Ahmed Joda, who said that the country has outstanding liabilities- fiscal deficit and arrears, to the tune of N7 trillion ($36 billion). He even recommended borrowing to sort out the country’s immediate economic issues.

Indeed, Nigerian banks have been the largest domestic lenders to government over the past five years, and since 2014, they have represented an average 56 per cent of holders of government domestic debt stock.

Since its peak of 72 per cent in the third quarter of 2011, Nigerian banks’ share of government’s domestic debt has declined to 50 per cent as at end of 2014.

Analysts have attributed the decline to acceleration in credit growth since 2011/2012; a pick-up in domestic debt investments by pension fund administrators at 37 per cent of domestic debt from 21 per cent in 2011; and foreign investments in domestic debt.

This means that banks still have great roles to play in mobilizing needed funds for government, hence would require further ease to ensure sustainability and strength through profitability for economic activities in future.RENCAP-1-CopyRENCAP-2-CopyRENCAP-3-Copy

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