Market Exit Risk: Foreign Funds Weigh CGT Costs Against Nigeria’s 2026 Growth Story

The new 25% Capital Gains Tax (CGT) on financial instruments on the Nigerian Exchange (NGX), is leading analysts to predict a sharp rise in the risk premium for equities, particularly in the banking sector.

However with the recent World Bank upgrade to Nigeria’s 2026 and 2027 GDP growth forecast to 4.4% for both years each, and reforms momentum, some foreign investors may choose to ride out the storm.

On 26 June 2025, President Bola Ahmed Tinubu signed four tax reform bills into law, which took effect on 1 January 2026.

Among the changes introduced in the overhaul of the tax system, the increase in Capital Gains Tax (CGT) from 10% to 25% for companies has attracted particular attention from investors.

Capital importation data indicates that equity inflows as of the First Half of 2024, accounted for just 6%, as foreign investors have significantly reduced participation in the equities market over the years (66% in 2014), favouring short-term fixed-income instruments due to prior economic headwinds.

However, recent reforms by the current administration have spurred renewed interest in Nigerian equities, evidenced by Nigeria’s inclusion in the FTSE Frontier Market Index watchlist.

“We believe this positive momentum could be dampened by the CGT hike. Our market assessment suggests that foreign investors are primarily concerned about the higher CGT, which adds a risk premium to Nigerian equities and banking stocks due to potentially lower after-tax returns and heightened uncertainty around policy consistency,” Renaissance Capital Africa analyst, Olumide Sole said in a note to clients.

The Risk Premium Surge: Why Markets are Nervous

An increase in CGT fundamentally alters the “Required Rate of Return” for investors.

• The Math of Risk: Investors calculate their risk premium by comparing the expected return of a stock against a “risk-free” asset (like Treasury Bills). If the government takes 10% or more of the profit via CGT, the stock must perform significantly better to justify the same level of risk.

• Banking Sector Sensitivity: Banking stocks, which are currently the most liquid and actively traded on the NGX due to the 2026 Recapitalization, are the most vulnerable. A CGT hike would act as a “success tax” on the very capital gains investors are hoping for during this rights-issue cycle.

• Valuation Compression: Higher risk premiums lead to lower Price-to-Earnings (P/E) multiples. If investors demand a higher “tax-adjusted” return, they will pay less for shares today, potentially stalling the rally in Tier-1 names like GTCO and Zenith.

Nigeria’s 25% CGT Rate Significantly Higher Than Frontier Market Peers

Comparing like-for-like, Nigeria’s maximum CGT rate of 25% is significantly higher than that of other frontier markets, making it uncompetitive and burdensome for investors.

In markets such as Egypt and Kenya, foreign (non-resident) investors are exempt from CGT on listed equities, while Kenya reduced its CGT from 15% to 5% for transactions above KES 3 bn certified by the Nairobi International Financial Centre Authority (NIFCA).

This disparity makes the Nigerian equities market less attractive relative to its peers.

International funds, already wary of FX volatility, often view CGT as a “friction cost.” In a competitive global market, a new tax layer could push frontier market capital toward Egypt or Vietnam instead of Nigeria.

Renaissance Capital believes the CGT hike is counterintuitive, and Nigeria should take cues from other frontier markets such as Egypt, Kenya, and Pakistan on leveraging CGT to attract long-term investments.

For instance, Egypt exempted listed equity investments from CGT, which encourages patient capital inflows.

In Pakistan, CGT on securities acquired between 1 July 2022 and 30 June 2024 is linked to the holding period of securities, with longer holding periods attracting lower CGT rates compared to shorter ones.

“A similar structure in Nigeria could incentivise long-term equity investments and deepen the market,” Renaissance Capital’s Sole said.

Market liquidity and economic growth should be prioritised

With Nigeria targeting a GDP of USD 1tn by 2030, patient capital will be critical to
driving private sector growth and achieving this goal.

Accordingly, CGT should be structured to attract long-term capital through equity investments from both local and foreign investors.

Get More of our proprietary news and analysis as MoneyCentral is now on WhatsApp Channels  Follow the MoneyCentral Nigeria channel on WhatsApp: Click here!