Subsidy Backlash, Taxes, and the Banks: Navigating Economic Challenges in Nigeria

Subsidy Backlash, Taxes, and the Banks: Navigating Economic Challenges in Nigeria

The sudden removal of petroleum subsidy in Nigeria has caused ripples throughout the economy, both positive and negative. While the government sees it as a relief from the burden of paying for the subsidy, the inflationary trend that follows such a move is not unexpected. We can learn from past experiences and ensure that the present policy is not reversed, keeping the subsidy mafia in check.

One of the key factors in managing the impact of subsidy removal is effective communication of medium and long-term policies. When the public is aware of these policies through public information, it becomes difficult for anyone to deceive and derail their support for the government. This brings us to the issue of taxes and revenue generation.

There is a common misconception that developing countries impose low tax rates on citizens, leading to accusations of low tax collection relative to total revenue. However, it is important to understand that both saving and tax are withdrawals from an economy and can have negative impacts unless they are returned to the economy as investments and subsidies respectively. Additionally, both saving and tax are derived from income. Therefore, increasing income will result in an increase in saving and taxes collected.

Tax administration in developing countries should adhere to the principles laid out by Adam Smith, such as equity, certainty, convenience, and economy. These principles ensure that tax collection is fair, efficient, and does not burden the economy. Increasing taxes without considering these principles can have detrimental effects on consumption, production, output, and employment.

It is crucial for the government to resist new borrowing in order to meet monthly obligations. The country has already been borrowing to fulfill these obligations, and it is important to caution against contracting more loans. The World Bank's unexplained position and the visit from the American Bank may be tempting, but the government should prioritize finding alternative solutions that do not involve further borrowing.

In light of these challenges, here are three actionable pieces of advice:

• 1. Prioritize transparency and public communication: The government should actively inform the public about its medium and long-term policies, ensuring that people are aware of the steps being taken to manage the impact of subsidy removal and stabilize the economy.

• 2. Focus on income growth and investment: Instead of solely relying on increasing tax rates, the government should prioritize policies that stimulate income growth and encourage investment. This will lead to an increase in saving and tax revenue without burdening the economy.

• 3. Explore alternative solutions to borrowing: Rather than resorting to more borrowing, the government should actively seek alternative solutions to meet its financial obligations. This could involve exploring partnerships, implementing cost-saving measures, and encouraging domestic investment.

In conclusion, navigating the challenges posed by subsidy removal, taxes, and borrowing requires a comprehensive and strategic approach. By prioritizing transparency, income growth, and alternative solutions to borrowing, the Nigerian government can mitigate the negative impacts and foster a more stable and sustainable economy.