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NIGERIA: How FX scarcity, VAT spat point to 2023

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As the Central Bank of Nigeria (CBN) continues to clamp down on USD sales in the parallel market, the soaring demand for the greenback in that segment may be fueled by the onset of the political campaigning season. In the same vein, the controversy around the jurisdiction over Value Added Tax (VAT) collection and distribution between the states and the federal government is being stirred by political ambitions. With the February 2023 general elections approaching, the pressure is likely to keep up on both accounts.

At the end of July, the CBN had stopped selling USD to bureau-de-change operators, accusing them of “greed” by allegedly routinely exceeding the stipulated USD 5,000 limit per transaction. Ever since, the greenback's black market rate has skyrocketed to NGN 550 per 1 USD, against an official exchange rate of around NGN 410. Last week's circular admonishing commercial banks – the only remaining legal channel for ordinary Nigerians with forex needs – to investigate fraudulent fx requests suggests the hemorrhaging of USD continues. While some attribute the surge in demand to cyclical effects such as international school fees or medical costs, such transactions meet the CBN eligibility criteria and are also typically credited to the institutions directly rather than paid out in cash, i.e. unlikely to end up in the black market.

However, hotly contested internal selection processes are shaping up in both the ruling All Progressives Congress (APC) and the main opposition People's Democratic Party (PDP). Although the effect is impossible to quantify, the USD scarcity in the black market may be fueled by aspiring politicians hoarding USD needed to bribe party officials and delegates at local and state-level conventions that will determine the composition of national conventions later this year. These party conventions, in which key posts, including the chairmanships, will be determined, are very important signposts in the parties' timetables to elect their flagbearers for the February 2023 general elections.

The political timetable also informs the controversy around the jurisdiction over VAT collection and distribution. VAT, which is Nigeria's largest source of tax revenue and collected by the Federal Inland Revenue Service (FIRS), is shared between the federal government (15%), the states (50%), and local governments (35%). However, on 7 September, a federal high court confirmed the right of Rivers State authorities to collect VAT instead of the FIRS. This is a major victory for Rivers' governor and PDP strongman Nyesom Wike, who sees the VAT issue as an opportunity to give the hugely popular yet fuzzy notion of a need for'restructuring' the'broken' federal system some tangible meaning. While the verdict has been appealed and will likely go all the way up to the Supreme Court, Wike will continue to use the VAT issue to boost his reformist credentials and cement his leadership ambitions within the PDP.

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NIGERIA: How FX scarcity, VAT spat point to 2023

As the Central Bank of Nigeria (CBN) continues to clamp down on USD sales in the parallel market, the soaring demand for the greenback