Are foreign loans cheaper + Is increasing taxes always desirable

Just two quick thoughts that have been in my head recently.

First, one of the reasons touted by the finance minister for the attempt to switch to external debt is that it is cheaper. On the surface it does seem cheaper. Domestic bonds had yields of between 14 and 16 percent as at last week while Nigeria’s 2023 Eurobonds are currently trading at around 5.5 percent. Comparing the two, external financing does look cheaper.

The big question mark is currency risk, or to be specific, the odds that that Naira will lose value between now and whenever the bonds are due. If the naira loses just 12 percent per year relative to the US dollar then domestic bonds will actually be cheaper, at least based on current yields. What are the odds the currency will move at approximately 12% per year relative to the dollar over the next ten years?

There are other issues too of course but it appears we are ignoring the currency risk.

The second thing. There seems to be the idea that government collecting more taxes is always a good thing, specifically in the Nigerian context where the government (maybe) collects little taxes. But is that always the case?

Every extra naira collected in taxes is a naira that will not be spent by whoever the taxes were collected from. So, the question on whether collecting more taxes leads to better outcomes depends first on who taxes are collected from and what they would have used that lost income to do. It also depends on what the government spends that tax money on.

For instance, if the government collects taxes from a business that was going to use the money to expand their production and spends that extra tax revenue on salaries, then it will probably lead to a worse outcome than if the taxes had not been collected. In general, if the government taxes income that could have been re-invested and uses that to increase government consumption, then the outcomes will probably be worse.

Bottom-line, it’s not always the case that increased taxes are good, even in the Nigerian context. It depends a lot on what the increased tax revenue is used for. Given the Nigerian governments spending habits, I am not so sure….