Nigeria’s recent interest rate reduction could eventually increase government tax revenue if lower borrowing costs encourage businesses to expand operations, improve profitability and generate higher taxable income.
The Central Bank of Nigeria (CBN) reduced the Monetary Policy Rate (MPR) from 26.5 percent to 23 percent, representing a 350-basis-point cut and its largest single reduction since 2006.
For businesses that rely heavily on bank loans to finance operations and investments, the reduction could ease financing expenses and free up funds for expansion, increased production and other business activities.
Higher corporate earnings could subsequently expand the tax base and increase the amount of Company Income Tax (CIT) paid to the government.
Abdulrashid Yerima, regional president of the West Africa Private Sector Entrepreneurs Association, said the long-term benefits of lower interest rates should extend beyond cheaper borrowing to include increased investment and stronger government revenue.
“It will impact the tax revenue positively because companies now have increased income profits that can be taxed after deducting interest expenses. As their taxable profits increase, the amount of tax payable will also increase, and government revenue will consequently rise.”
He added that increased tax collections could provide the government with additional resources for infrastructure and public services, while business expansion could generate employment and bring more companies into the formal economy.
“That additional revenue gives government more capacity to provide infrastructure and other services, while the expansion of businesses can also create more jobs and bring more businesses into the formal net”, he said.
Omoshalewa Amoo, a tax expert, also explained that lower borrowing costs could improve corporate tax collections if businesses channel their savings into investments, operational expansion and activities that generate higher profits.
“As taxable profits increase, the government collect more corporate tax, but this would depend on how much lower interest rates actually reduce businesses’ borrowing costs and whether savings translate into stronger business operations and profitability”, she said.
How interest rate changes affect corporate taxes
The relationship between monetary policy and company tax revenue extends beyond the cost of borrowing.
Elizabeth Abiola, an assistant manager at the Nigeria Revenue Service, said changes in the MPR could also influence companies’ tax positions under Section 24 of the Company Income Tax Act (CITA).
“A lower MPR reduces the inflation adjustment, potentially increasing taxable income and, consequently, CIT liability,” Abiola said in an article examining the impact of MPR changes on Company Income Tax.
This means monetary policy adjustments can affect businesses’ tax obligations through both financing expenses and the calculation of taxable income.
Data from the CBN’s Money Market Indicators showed that commercial banks’ prime lending rate declined to 17.86 percent in August from 19.06 percent in July. Meanwhile, the average maximum lending rate stood at approximately 29.19 percent.
Businesses still need cheaper access to credit
Despite the reduction in the benchmark interest rate, Yerima urged the CBN to ensure commercial banks reflect the adjustment in their lending rates.
He argued that businesses would need access to more affordable loans before the wider economic benefits of the policy change could become noticeable.
“The interest rate that’s favourable for businesses to borrow more to invest further should be way lesser. If businesses are still borrowing at very high rates, the impact of the reduction in MPR will not be fully felt by them”, he said.
Yerima compared Nigeria’s lending environment with Cameroon, where commercial bank lending rates are close to 8 percent, arguing that lower borrowing costs would give businesses more room to secure financing and expand investments.
“At the second edition of the Ecowas Startup Awards that held in Abuja here, we similarly talked about how the lending rate should be reduced for businesses to be encouraged to seek more funds and enlarge investments”, Yerima said.
Tax revenue gains may take time
Amoo noted that the effect of lower interest rates on government revenue would not happen immediately.
Businesses must first experience reductions in financing costs, improve their operations and generate higher profits before the benefits become visible in their tax payments.
“The impact may likely take some time to reflect. Some businesses with loans that are repriced quickly may see an immediate reduction in interest costs, but the effect on investment, revenue and profitability may take several months. The impact on collections would become more visible as companies report their taxable profits and file their tax returns”, she said.
Yerima added that manufacturing companies and micro, small and medium-sized enterprises (MSMEs) could experience significant benefits from improved access to affordable financing.
He noted that MSMEs account for more than 50 percent of Nigeria’s gross domestic product (GDP), making access to cheaper credit important for business expansion, revenue generation and employment creation.
“That is where government can benefit through higher tax revenue”, he said.
Ultimately, the extent to which Nigeria benefits from the interest rate reduction will depend on how quickly commercial lending rates respond and whether businesses can translate lower financing costs into increased investment, profitability and employment.
