The Complexities of Inflation, Subsidies, Taxes, and Borrowing in Nigeria

Feranmi Olaseinde

Feranmi Olaseinde

Jul 30, 20233 min read

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The Complexities of Inflation, Subsidies, Taxes, and Borrowing in Nigeria

Introduction:

The Nigerian economy is currently grappling with various challenges, including a growing inflation rate, the removal of petroleum subsidies, tax collection issues, and the temptation to acquire new loans. These interconnected issues have significant implications for consumers and the overall economy. In this article, we will explore the factors contributing to these challenges and discuss potential solutions and policies for a sustainable economic future.

The Impact of Inflation and Subsidy Backlash:

The recent inflationary pressure in Nigeria, with a year-on-year growth of 1.13% for May, has been primarily driven by the continuous rise in food prices. This increase in inflation, coupled with contractionary monetary policies, poses substantial challenges for consumers and the economy at large. However, it is crucial to acknowledge the potential positive aspects of removing petroleum subsidies.

When former President Muhammadu Buhari removed the subsidy around 2017, the inflation rate skyrocketed, leading to a recession. This demonstrated the need to carefully manage the consequences of such a policy shift. To prevent history from repeating itself, it is crucial to learn from past lessons and ensure that the present policy is not reversed. The government must effectively communicate the medium and long-term policies aimed at mitigating the inflationary effects and addressing the concerns of the public.

Understanding Taxes and Revenue Generation:

In many advanced countries, tax collection plays a significant role in financing government budgets. However, developing countries like Nigeria have faced criticism for their supposedly low tax rates. It is essential to debunk the misconception that low tax rates are solely responsible for low tax collection in developing economies.

Both saving and tax collection have negative impacts on the economy unless they are reinvested as investments and subsidies, respectively. Moreover, both saving and taxes are derived from income. Therefore, increasing income levels will naturally lead to higher saving and tax revenues. It is crucial to note that the process of tax administration in developing countries abides by the principles of equity, certainty, convenience, and economy, as outlined by Adam Smith. These principles ensure effective tax collection and economic stability.

The Dangers of Excessive Borrowing:

The Nigerian government has been heavily reliant on borrowing to meet monthly obligations, as reflected in the increasing debt burden. The report cautions against contracting further loans, as it further strains the economy. The World Bank's position and the visit from the American Bank raise concerns about the temptation to acquire new loans. It is vital for the government to resist new borrowing and explore alternative strategies to address financial obligations.

Actionable Advice:

  • 1. Implement Effective Mitigation Strategies: The government should communicate and implement medium and long-term policies to mitigate the inflationary effects of subsidy removal. This will help build public trust and prevent a reversal of the current policies.
  • 2. Focus on Income Growth: Prioritize policies that foster income growth, as higher income levels naturally lead to increased saving and tax revenues. This will create a more stable economic environment and reduce the need for excessive borrowing.
  • 3. Explore Alternative Financing Options: Instead of relying solely on loans, the government should explore alternative financing options, such as public-private partnerships and foreign direct investment. This will help reduce the debt burden and promote sustainable economic growth.

Conclusion:

The challenges posed by inflation, subsidy removal, tax collection, and borrowing in Nigeria require careful consideration and strategic solutions. By implementing effective mitigation strategies, focusing on income growth, and exploring alternative financing options, the country can navigate these challenges and work towards a more stable and prosperous future. It is crucial for the government to prioritize the interests of its citizens and adopt policies that promote sustainable economic development.

Resource:

  1. "Inflation rate grows by 1.13% year-on-year for May, as food prices continues to rise ", https://nairametrics.com/2023/07/04/inflation-rate-grows-by-1-13-year-on-year-for-may-as-food-prices-continues-to-rise/ (Glasp)
  2. "Subsidy backlash, taxes and the banks", https://punchng.com/subsidy-backlash-taxes-and-the-banks/ (Glasp)

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