"Navigating Economic Challenges: Addressing Exchange Rates, Subsidies, Taxes, and Loans in Nigeria"

Feranmi Olaseinde

Feranmi Olaseinde

Jul 13, 20234 min read

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"Navigating Economic Challenges: Addressing Exchange Rates, Subsidies, Taxes, and Loans in Nigeria"

Introduction:

The Nigerian economy has been facing several challenges that have raised concerns among analysts. One of the key issues is the growing gap between official and black market exchange rates. Additionally, the sudden removal of petroleum subsidies has had both positive and negative impacts on the economy. Moreover, there have been discussions about the need to improve tax collection and reduce reliance on borrowing. In this article, we will delve into these issues and explore potential solutions to navigate these economic challenges.

Addressing Exchange Rates:

The Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) and the Investors' and Exporters' (I&E) FX Window Spot Rates have recently shifted their calculation methods. Instead of relying on indicative quotes from market participants, these rates will now be determined using actual FX market transaction data. This change aims to bridge the gap between official and black market rates, which has been a cause for concern among analysts. By utilizing real transaction data, it is hoped that more accurate exchange rates will be established, providing a more stable and reliable framework for foreign exchange transactions.

Managing Subsidies and Inflation:

The removal of petroleum subsidies has been met with mixed reactions. While the government sees it as a relief from the burden of funding the subsidies, it also brings about inflationary trends. An example of this can be observed when former President Muhammadu Buhari removed the subsidy in 2017, leading to a significant increase in inflation and a subsequent economic recession. To prevent a similar scenario, it is crucial to learn from past experiences and ensure that the current subsidy removal policy is not reversed. The government must communicate its medium and long-term policies to the public to maintain their support and prevent any deceptive actions by subsidy mafias. By gradually introducing new social and economic policies, the government can mitigate the impact of inflation and ensure positive effects in the coming weeks.

Enhancing Tax Collection:

There have been discussions about the need for developing countries to increase their tax rates to improve revenue generation. However, it is important to consider the relationship between taxes, income, and the overall economy. Tax collection, when not returned to the economy as investments or subsidies, can have negative impacts on economic growth. It is crucial to follow Adam Smith's canons of taxation, which emphasize principles such as equity, certainty, convenience, and economy. Additionally, the canons of productivity, elasticity, simplicity, and diversity should be considered for effective tax administration. By focusing on growing income and implementing fair and efficient tax collection systems, developing countries can ensure that taxes contribute positively to the economy without burdening citizens.

Managing Loans and Borrowing:

Nigeria has been relying on borrowing to meet monthly obligations, which has raised concerns about the sustainability of the country's debt. It is crucial for the government to resist new borrowing and carefully evaluate loan offers. While external financial institutions may dangle loans before the government, it is essential to critically assess the implications of taking on additional debt. The country must avoid excessive borrowing, especially when it is already struggling to meet its obligations. This cautious approach will help prevent further economic strain and ensure that the country's financial stability is not compromised.

Actionable Advice:

  • 1. Strengthen transparency in exchange rate determination: To bridge the gap between official and black market rates, it is vital to prioritize transparency in determining exchange rates. By using actual transaction data and minimizing reliance on quotes submitted by traders, the exchange rate system can become more accurate and trustworthy.
  • 2. Implement comprehensive economic policies: To mitigate the inflationary effects of subsidy removal, the government should communicate clear medium and long-term policies to the public. This will help build trust and prevent deceptive actions by subsidy mafias. Gradual implementation of new social and economic policies can minimize the negative impact on the economy and ensure positive outcomes in the near future.
  • 3. Improve tax collection systems and efficiency: Instead of solely focusing on increasing tax rates, developing countries should prioritize enhancing tax collection systems. By implementing fair and efficient tax administration that adheres to the principles of equity, certainty, convenience, and economy, countries can generate revenue without burdening citizens. Additionally, investing tax collections back into the economy as subsidies or investments can further stimulate economic growth.

Conclusion:

Addressing economic challenges in Nigeria requires a multi-faceted approach. By prioritizing transparency in exchange rate determination, carefully managing subsidy removal, improving tax collection systems, and resisting excessive borrowing, the country can navigate these challenges and work towards sustainable economic growth. It is essential for the government to communicate its policies effectively to the public, ensuring their support and preventing deceptive actions by vested interests. By implementing these actionable advice, Nigeria can build a resilient economy that benefits its citizens and fosters long-term development.

Resource:

  1. "Analysts worry as the gap between official and black market rates grows", https://nairametrics.com/2023/07/06/jitters-as-forex-divergence-between-official-and-parallel-market-rates-widens/ (Glasp)
  2. "Subsidy backlash, taxes and the banks", https://punchng.com/subsidy-backlash-taxes-and-the-banks/ (Glasp)

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