The Impact of Subsidy Removal, Taxes, and Loans on the Nigerian Economy

Feranmi Olaseinde

Feranmi Olaseinde

Jul 17, 20233 min read

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The Impact of Subsidy Removal, Taxes, and Loans on the Nigerian Economy

Introduction:

The sudden removal of petroleum subsidy in Nigeria has created a ripple effect on the country's economy, resulting in both positive and negative consequences. While the government may view it as a relief from the burden of subsidy payments, the inflationary trend and economic recession that followed its previous removal in 2017 serve as cautionary tales. To prevent history from repeating itself, it is crucial to keep the subsidy mafia in check and ensure that the government implements medium and long-term policies to mitigate the negative effects.

The Connection between Subsidy Removal and Taxes:

One aspect that often arises in discussions about subsidy removal is the issue of taxes and revenue generation. Many advanced countries rely heavily on taxes to finance their budgets. However, developing countries are often criticized for collecting low taxes relative to total revenue due to their imposition of low tax rates on citizens. It is important to understand that both taxes and saving have negative impacts on the economy unless they are reinvested back into the economy as investments and subsidies, respectively.

The Relationship between Income, Saving, and Taxes:

Both saving and taxes are derived from income and are influenced by its growth. As income increases, so does saving and the amount of taxes collected. On the other hand, low-income economies naturally experience lower saving and taxes. This correlation highlights the need for policies that focus on increasing income levels to ensure the growth of saving and tax revenue.

The Canons of Taxation and Their Implications:

Adam Smith's canons of taxation provide a framework for effective tax collection. These canons include equity, certainty, convenience, and economy. Tax administrators in developing countries understand the importance of adhering to these principles. However, it is essential to strike a balance between collecting taxes and allowing citizens to meet their basic needs and consume goods and services. Excessive taxation can lead to reduced consumption, dampened production, and a negative impact on output and employment.

The Dangers of Excessive Borrowing:

In recent years, Nigeria has relied on borrowing to meet its monthly obligations, leading to concerns about the country's debt sustainability. The report cautions against further borrowing and questions the motivations behind loans being offered to the government. It is crucial for the government to resist new borrowing and explore alternative strategies to address its financial obligations.

Encouraging Diaspora Remittances:

Unifying the exchange rate for the dollar is seen as an encouragement for diaspora remittances. This policy change allows individuals to receive greater value and return on their investments in Nigeria. By creating an environment that incentivizes diaspora remittances, the government can attract more foreign investment and boost the country's economy.

Actionable Advice:

  • 1. Implement long-term policies: The government should focus on implementing comprehensive and sustainable policies to mitigate the negative effects of subsidy removal and promote economic growth.
  • 2. Strengthen tax administration: Enhancing tax collection systems and ensuring compliance with the canons of taxation can help increase revenue without unduly burdening citizens.
  • 3. Explore alternative financing options: Instead of relying solely on borrowing, the government should explore alternative sources of financing, such as attracting foreign direct investment and promoting diaspora remittances.

Conclusion:

The removal of petroleum subsidy in Nigeria has both positive and negative implications for the economy. To prevent the mistakes of the past, it is crucial for the government to keep the subsidy mafia in check, implement long-term policies, and ensure effective tax administration. Additionally, exploring alternative financing options can help reduce the country's reliance on borrowing. By taking these actions, Nigeria can navigate the challenges posed by subsidy removal, taxes, and loans and pave the way for sustainable economic growth.

Resource:

  1. "Subsidy backlash, taxes and the banks", https://punchng.com/subsidy-backlash-taxes-and-the-banks/ (Glasp)
  2. "Expert: How FG can encourage more diaspora remittances | TheCable", https://www.thecable.ng/expert-how-fg-can-encourage-more-diaspora-remittances/amp (Glasp)

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