When Donald Trump introduced tax reforms in 2017, the effects rippled across the globe, with emerging economies like Nigeria taking a direct hit. As Trump pushes for similar changes again, Nigeria’s banking sector may face heightened risks, potentially curbing foreign direct investment (FDI) and disrupting key industries that banks depend on.
The proposed U.S. tax cuts and tariffs, including reducing the corporate tax rate from 21 percent to 15 percent, are intended to strengthen the U.S. economy. However, they may have unintended consequences for emerging markets, a phenomenon often referred to as the ‘beggar-thy-neighbour’ policy.
By incentivising U.S. firms to repatriate capital, these reforms could reduce investment flows into countries like Nigeria. In 2017, the Tax Cuts and Jobs Act, which lowered the corporate tax rate from 35 percent to 21 percent, prompted U.S. companies to bring back over $777 billion in foreign earnings, according to the U.S. Federal Reserve. This led to a dramatic drop in FDI into Nigeria – from $4.65 billion in 2017 to just $2.23 billion in 2018, as reported by the United Nations Conference on Trade and Development (UNCTAD).
Along with tax cuts, Trump’s tariffs could further strangulate trade between the U.S. and Nigeria, particularly in sectors like oil and agriculture. With tariffs raising costs for Nigerian exporters, banks that finance these industries could see reduced profits and liquidity pressures.
For Nigerian banks heavily reliant on foreign direct investment (FDI), these reforms present both threats and opportunities. As U.S. firms prioritise bringing offshore earnings back to the country, fewer investments may flow into Nigeria’s key sectors, including oil, agriculture, and manufacturing. This would result in less capital available for Nigerian banks, undermining their ability to sustain liquidity and growth.
These shifts in global investment and trade present both risks and opportunities for Nigerian banks. By offering specialised services to U.S. firms looking to diversify into Africa, Nigerian banks could capitalise on new growth avenues. However, to stay competitive, they must adapt quickly, enhancing risk management and leveraging the region’s strategic position to attract foreign capital amidst global uncertainties.
Trump’s tariffs, in addition to tax cuts, could disrupt trade with Nigeria, particularly in vital industries like oil and agriculture. Nigerian businesses would face higher costs due to increased tariffs, leading to squeezed profit margins. The impact on businesses directly affects Nigerian banks, as financial institutions serving these industries may experience a drop in liquidity, further pressuring their bottom lines.
Despite these challenges, Nigerian banks have opportunities to diversify their portfolios and attract new investments, especially by capitalising on Africa’s strategic importance. To succeed, they must offer tailored financial products, strengthen relationships with investors, and enhance their risk management strategies. In doing so, they can remain resilient amidst global shifts in economic policy.
As Nigeria faces the consequences of global economic trends, including those tied to U.S. policies, the country’s financial institutions need to adapt quickly.
Abayomi Fashina, a finance and tax expert, noted that Nigerian banks could still thrive by offering tax-efficient financial products and taking proactive steps to diversify their portfolios. However, the key to success lies in agility, strong risk management, and leveraging opportunities arising from these policy changes.
The potential ripple effects of U.S. policy changes, particularly Trump’s tax reforms and trade tariffs, pose significant risks to Nigeria’s banking sector and its economy at large. However, with strategic adaptation, robust risk management, and a focus on diversifying their financial offerings, Nigerian banks can mitigate these risks and seize emerging opportunities in Africa’s growing financial landscape. By positioning themselves to meet the needs of U.S. firms seeking diversification, Nigerian banks could play a critical role in the evolving global economic environment.
Business Day