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

Feranmi Olaseinde

Hatched by Feranmi Olaseinde

Aug 05, 2023

4 min read

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

The sudden removal of petroleum subsidy in Nigeria has sent shockwaves throughout the economy, with both positive and negative impacts being felt. While the government may see it as a relief from the burden of paying for subsidies, the inflationary trend that follows such a policy change is expected. In the past, when former President Muhammadu Buhari removed the subsidy in 2017, the inflation rate skyrocketed, pushing the economy into recession. This experience serves as a lesson that must be learned from to ensure the present policy is not reversed. It is crucial to keep the subsidy mafia in check and gradually introduce new social and economic policies to mitigate the effects of inflation.

One aspect that requires attention is public information dissemination regarding medium and long-term policies. When people are well-informed about these policies, they are less likely to be deceived or swayed from their support for the government. Transparency and clear communication are essential in building trust and ensuring the success of economic reforms.

Another significant issue that needs to be addressed is taxation and revenue generation. It is often argued that developing countries collect low taxes relative to their total revenue because of low tax rates imposed on citizens. However, this perspective fails to consider the negative impact of high taxes on the economy. Both taxes and savings are withdrawals from the economy, and unless they are returned as investments and subsidies, they can have detrimental effects. Moreover, both taxes and savings are directly linked to income, meaning that increasing income will result in higher taxes and savings. Therefore, instead of focusing solely on increasing tax rates, efforts should be made to stimulate income growth, which will naturally lead to higher tax collection.

Adam Smith's canons of taxation provide valuable insights into effective tax administration. These canons emphasize principles such as equity, certainty, convenience, and economy. Tax administrators must understand and adhere to these principles to ensure the efficiency and effectiveness of tax collection. It is important to strike a balance between tax collection and the impact on the economy. Higher taxes may generate more revenue initially, but they can also lead to reduced consumption, lower production, and negative effects on output and employment. Ultimately, this can result in a decrease in personal and company income taxes, further impacting government revenue. Therefore, it is crucial to carefully consider the consequences of increasing tax burdens on individuals and businesses.

Additionally, the issue of borrowing and external loans must be addressed. Nigeria has been relying on borrowing to meet its monthly obligations, but this approach is unsustainable in the long run. The country must exercise caution and resist the temptation to contract more loans. The World Bank's unexplained position and the visit from the American Bank, both seemingly offering loans, raise concerns about the motives behind these financial offers. It is imperative for the government to prioritize sustainable financial practices and explore alternative solutions to meet its obligations without relying heavily on borrowing.

In conclusion, navigating the economic challenges in Nigeria requires a comprehensive approach that considers the impact of subsidy removal, taxation, and borrowing. Transparency and clear communication regarding policies are essential in building public trust and support. Rather than solely focusing on increasing tax rates, efforts should be made to stimulate income growth, which will naturally lead to higher tax collection. Additionally, caution must be exercised when considering external loans to ensure the long-term financial stability of the country.

Actionable advice:

  • 1. Focus on income growth: Implement policies that stimulate economic growth and increase income levels. This will naturally result in higher tax collection and savings without burdening individuals and businesses.
  • 2. Prioritize transparency and communication: Ensure that the public is well-informed about medium and long-term policies. Transparent communication builds trust and reduces the likelihood of misinformation or deception.
  • 3. Explore alternative financial solutions: Instead of relying heavily on borrowing, explore alternative solutions to meet financial obligations. This could include cost-cutting measures, exploring new revenue streams, and promoting domestic investment.

By adopting these actionable strategies, Nigeria can effectively navigate the challenges posed by subsidy removal, taxation, and borrowing, ultimately leading to a more stable and prosperous economy.

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