Taxing Dollar Hoarding
Given the present budget crisis in Nigeria the federal government initiated a number of capital controls as well as measures designed to increase government revenue independent of oil. One revenue-generating measure implemented by the Central Bank of Nigeria was the stamp tax on all deposits over 1000 naira (5 dollars) in Nigerian accounts. They also suspended deposits of dollars in dollar-denominated Nigerian accounts called domiciliary accounts.
These measures have helped increase government revenue while increasing the supply of dollars on the open market. However despite this, massive hoarding of dollars has been reported and it is widely known that a select few in the country are in possession of over 20 billion USD of foreign currency in just a few domiciliary accounts. These accounts hold the equivalent to the amount of foreign reserves held in the entire Nigerian national treasury, that is dwindling daily.
The stamp tax that the CBN initiated on all deposits over 1000 naira is a regressive policy that takes money out of the hands of ordinary Nigerians like bread sellers and market traders when they deposit their meager days earnings. In essence it’s taking the same 50 naira from average Nigerians as is being taken from those holding billions of foreign currency and making deposits of substantially more than 1000 naira.
Since the hoarders of dollars are the real problem it would make more sense if the CBN initiated a stamp tax that was targeted at Nigerian individuals that currently hold over 1 million USD of foreign currency in their domiciliary accounts. The tax should be taken in dollars, of up to 7 percent of their total account size annually. Alternatively, those who seek to avoid this tax can reduce their accounts to under the taxable limit by exchanging their dollars with the CBN for naira.
A policy like this would go a long way to target hoarders as well bring the official price of naira (200-1) equivalent to the price of naira on the black market now (330-1). It would also increase the governments foreign reserves almost overnight. Not only would this policy work, it would be the fair thing to do, targeting those who are causing the problem and who can afford to pay.
Recently, a prominent Nigerian businessman announced that he had a strategy to bring the value of naira on the black market to the same level of the official naira value of 200 to 1 dollar. While he refused to disclose what his strategy was, perhaps it was something along these lines.
The CBN knows the identities of individuals who own accounts that are holding millions and even billions of USD in foreign currency, the BVN even allows for those accounts to be linked to their owners if they are spread across multiple banks. They have the authority to tax these accounts as they showed with their regressive stamp tax measures leveled against common Nigerians (as if they are the problem). The only thing that is missing is the political will to do the right thing and stop allowing political and economic elites in Nigeria to hoard billions of dollars in foreign currency, thus ruining the growth trajectory of the whole nation.
Given the disposition of the CBN, who favors attacking the pockets of average Nigerians, and the disposition of the Buhari administration that has shown it favors regressive electricity taxes that is further financially crushing the common people in basic living costs, the deficit of political will in Nigeria to implement progressive growth-oriented policy like this is the real barrier holding the nation back. The election of a party that even parades around with “progressive” in their name yet does the precise opposite in terms of policy (APC), exposes this moral political deficit even more.
Dollar hoarding in Nigeria can be brought to an end if President Buhari and his government had the desire to end it. It continues because they allow it and because they tacitly support those (Nigerian elites) who are doing it. If they did not they would and could have easily done something to end it by now.
Kuranga and Associates Limited is an investment management advisory firm and an asset manager with a principle practice area of Africa. To learn more about Kuranga and Associates go to www.kaglobal.net . © Copyright 2015 David Kuranga. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.