"Navigating Economic Challenges: Currency, Subsidies, Taxes, and Borrowing"

Feranmi Olaseinde

Feranmi Olaseinde

Oct 04, 20233 min read

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"Navigating Economic Challenges: Currency, Subsidies, Taxes, and Borrowing"

Introduction:

In the ever-changing global economy, various factors impact a country's financial stability. This article explores the connection between weak currencies, subsidy backlash, taxes, and borrowing. By understanding these interdependencies, individuals and governments can make informed decisions to navigate economic challenges effectively.

The Impact of Exchange Rates on Currency Strength:

Foreign currency trading involves the exchange of one currency for another, and the value of currencies is determined by their exchange rates. While most currencies fluctuate based on demand and supply, some are pegged to a fixed rate against another currency. These exchange rates influence the cost of goods and services in foreign currencies. For instance, when a currency strengthens against another, it reduces the cost of traveling or purchasing imported goods in terms of the stronger currency.

Subsidy Removal and Inflationary Trends:

The sudden removal of subsidies, such as the petroleum subsidy in Nigeria, can have both positive and negative effects on the economy. While it may relieve the government from the burden of funding subsidies, it can lead to inflationary pressures. This was evident when former President Muhammadu Buhari removed the subsidy in 2017, causing a double-digit inflation rate and a subsequent recession. To avoid such consequences, it is essential to learn from past experiences and prevent the reversal of policies. Curbing the influence of subsidy mafias and implementing transparent social and economic policies can help mitigate inflationary impacts.

Taxes, Saving, and Revenue Generation:

Developing countries often face criticism for collecting low taxes relative to their total revenue. However, it is crucial to understand that tax rates alone do not determine revenue generation. Tax collection and saving are both withdrawals from an economy, and their negative impacts can be mitigated by reinvesting them as subsidies and investments, respectively. Moreover, both taxes and saving are derivatives of income, meaning that increasing income levels lead to higher tax collection and saving. By implementing tax administration systems that adhere to principles of equity, certainty, convenience, and economy, governments can optimize revenue generation without burdening citizens excessively.

Balancing Borrowing and Economic Obligations:

Borrowing can be a viable solution to meet monthly obligations, but excessive borrowing can have detrimental effects on a country's economy. When governments rely heavily on loans to cover expenses, it indicates a larger issue in revenue generation. Continuously contracting loans to meet obligations can lead to a cycle of debt and financial instability. Therefore, it is crucial for governments to resist the temptation of excessive borrowing and carefully evaluate the implications of new loans. The World Bank's position and potential influence on loan offers should be scrutinized to ensure sustainable economic practices.

Actionable Advice:

  • 1. Diversify Revenue Streams: Governments should explore alternative sources of revenue generation, such as promoting entrepreneurship, attracting foreign investments, and encouraging innovation. This diversification reduces reliance on borrowing and taxes, fostering a more stable economic environment.
  • 2. Enhance Tax Administration: Improving tax collection processes based on the principles of equity, certainty, convenience, and economy can optimize revenue collection without burdening citizens. Implementing efficient tax administration systems ensures transparency and accountability, fostering public trust in the government.
  • 3. Prioritize Domestic Saving: Encouraging a culture of saving among citizens can boost domestic savings, which can be channeled toward investments and economic development. Government initiatives to educate and incentivize saving can contribute to long-term economic stability.

Conclusion:

Understanding the interconnectedness of weak currencies, subsidy removal, taxes, and borrowing is crucial for navigating economic challenges effectively. By implementing prudent financial strategies, diversifying revenue streams, improving tax administration, and promoting domestic saving, governments can foster sustainable economic growth. It is essential to learn from past experiences, resist excessive borrowing, and prioritize the long-term stability of the economy.

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