The inflation confronting many nations today is partly explained by a mismatch between supply and demand. The disruption of supply chains have made many commodities available only at higher prices. Addressing this challenge, therefore, would require us to consider the supply side of both the global and the national economies. Policies should be devised at all levels to strengthen supply channels and ease the movement of people, capital and commodities. Appropriate incentives can be offered to relevant sectors to stimulate the revival of supply of the commodities needed to restart growth. When we do that, we would be on track to a faster recovery.

Unfortunately, the reaction of some nations to the emergence of the Omicron variant of the coronavirus is unhelpful. Shutting borders against some nations as a result of this variant will only throw spanner in the works of the global economy. Those nations raising up barriers at their borders are inadvertently blocking the arteries of the world economy. The supply channels that we should open up would remain closed. The alternative supply sources that should result in lower prices would remain unexplored. The result is that relief from inflation is kept farther off. To help global recovery, those borders would have to be reopened.

The pandemic slowed the global economy and many nations witnessed a recession. The challenges faced by developing nations were especially tough and many of these nations had to resort to massive borrowing just to be able to stay afloat. In Nigeria, for example, the debt portfolio has expanded by more than 200% in the last six years. The challenges of servicing debts have put pressure on the governments of the affected nations. They are desperately in search of more sources of revenue and some have considered taxation as a means of plugging their fiscal holes. Some governments have contemplated taxing phone calls or the use of social media or increasing the percentage of VAT and other taxes. But this could be a big mistake, if not carefully handled.

Taxes can increase government revenue, but they are not without adverse effects. Taxes take financial resources away from the pockets of tax payers and can depress demand for goods and services. This can cause a further slowdown of an already sluggish economy. Tax-paying businesses naturally would seek to transfer as much of the incidence of their taxes onto consumers of their products, and the result would be higher prices. The combination of slow or negative growth and inflation could push an economy into stagflation and make a bad situation worse.

At a time when the economies of nations are fragile, increasing taxes or introducing new taxes would have more unpleasant consequences than benefits. Higher taxes are contractionary in nature and would not help in restarting the economic growth that nations need to rise above the fiscal troubles they face. Those taxes may even end up raising less revenue for governments than expected. Any tax that would end up diminishing the livelihood of people should be avoided, but additional taxes may be levied where there would be zero or minimal impact on people’s livelihood.

Luxury items and lifestyles, for example, could be taxed at a higher rate. These items can only be purchased and enjoyed by those whose basic needs are not under any threat by the pandemic, and taking a little more money from them in the form of taxes would not imperil their livelihood. Similarly, sectors of the economy that have flourished under the pandemic may be made to pay more taxes. The telecoms industry has done unusually well during this pandemic. Because of lockdowns imposed to curb person-to-person transmission of the coronavirus, people adopted alternative means of keeping in touch with loved ones, doing work or maintaining link with business partners. Telecoms companies providing platforms for these new forms of communication have made exceptionally high profits. Fintech companies have also fared well. Tax policies can be formulated to make such businesses pay a little more tax. Such taxes would be fair and just, and would contribute in equipping governments with the means to finance services essential to the livelihood of their citizens.

On the other side of the coin is subsidies, which exist in one form or the other to encourage the production or consumption of some commodities. Subsidies cost governments a lot, which make it tempting to seek ways of reducing them or even removing them entirely. In Nigeria, for example, subsidy for premium motor spirit (PMS) alone takes more than a quarter of the government’s tax revenue. Clearly, this is unsustainable. But, despite plans by successive administrations to remove it, this subsidy has remained. And that is because removing it would raise the cost of energy to levels unaffordable for many as well as unleash a deadly inflationary spiral. When the cost of PMS was increased in 2016 as part of steps towards subsidy removal, the ensuing cost-push inflation led to stagflation. The scars are still there. Yet, because of fiscal pressures, plans are afoot to remove this subsidy in the Q1 of 2022, and this has triggered off a firestorm of debates once again. The foreseeable effect of this subsidy withdrawal is a 100% increase in the cost of PMS. That seems to be a recipe for a meltdown.

Nations may face the temptation to knock off subsidies, but it is important to evaluate the roles they play in lubricating the economy and the consequences the economy would face without them. Adjustments may be made but they should be carefully primed to deal with the effects of the pandemic as well as prevent avoidable economic distress.

Sourcing for fund to finance public services has pushed many nations to take on loans at a faster clip than in more stable times. This has led to a build up of debts, and debtor nations are feeling the weight of the burden. Debt in itself is not a bad thing. Countries can borrow to finance important government services. But when an economy does not generate enough revenue to be able to service the debt and meet obligations owed creditors, the debt becomes unsustainable. When this happens the debt becomes too high for the economy.

The IMF says up to 60% of low-income countries are facing unsustainable debt situations. There is high risk that they would default on their debt. In some developing countries, up to a quarter of public revenue goes into debt servicing, leaving a balance that is insufficient to cater for public services. These nations are largely unable to provide anything close to sufficient for financing essential services like education, public health and security. The quality of life can hardly improve under this condition. This level of debt is not sustainable. If these nations have to make any meaningful progress, they must get free from the shackles of debt and be able to deploy available resources towards fulfilling their promise to their people. If nothing is done, the pandemic would take these nations further down the dark alley of debt distress and, eventually, default.

The international community has been helpful to these low-income countries. The Debt Service Suspension Initiative pioneered by the World Bank and the IMF helped participating nations to put off payment of their debt obligations for a period of about 19 months starting from May 2020. This has been a period of relief for the participating countries and it has afforded them the opportunity to deploy their resources towards keeping their citizens away from the worst consequences of the pandemic. But this period of relief is about to come to an end and the pandemic is not yet over. So these countries still need help.

One trend, especially on the African continent, is the increasing role of China as a creditor nation. Over the last two decades many African countries have become indebted to China and the level of indebtedness is on the rise. These loans have sparked a debate on China’s intentions. Some have referred to seizure of assets of nations defaulting on their loan repayment terms. These allegations may be fictitious. The reality, however, is that these loans have resulted in a negative trade balance for the African nations. If this imbalance continues and widens, the disadvantage of these nations would also deepen and make the trade relationship with China unfair. This situation should not continue. The trade should be mutually beneficial.

One way of making the international capital market more competitive is for traditional sources of lending to not only be available but to also offer more liberal loan terms. The World Bank, IMF, Paris Club and other traditional multilateral lending institutions can do this by offering lower interest rates and more attractive repayment plans. They must acknowledge that the world of international financing has changed, and they must respond to this change. That is the only way they can stay true to their mandate, especially in Africa.

Heavily indebted countries can also take steps to help themselves. If they adopt economic policies that boost growth, the resulting wider tax base could provide more revenues that make loans less attractive.

In normal times, taxes could be used as a means of increasing government revenues. But with the pandemic most economies are fragile and increasing taxes would be harmful. In a country like Nigeria with very high poverty rate, more taxes would only deepen poverty. Moreover, tax-paying firms would want to pass onto the consumers of their products as much of the incidence of their taxes as possible, and that would cause even higher levels of inflation. This should be avoided. Rather, international lending institutions would need to give further support to developing countries and help them regain balance by liberalising their loan terms as well as ensuring the implementation of the purpose for which the loans are granted.

Taxes might also be used to curb the emission of the greenhouse gases that cause climate change. And we can do this by levying higher taxes on companies emitting more of these gases and granting tax incentives to companies that are reducing their emission levels. In this regard it would be relevant to mention the massive pollution that occurred early in November in the Niger Delta region of Nigeria. A wellhead broke and a steady volley of pollutants was pumped into the air, into the waterways and onto the land, and this continued for a period of 30 days before it was stopped. The volume of pollution and its hazard to the environment can only be imagined! If the operator of this wellhead is made to pay heavily for the pollution, it would be compelled to adopt measures for preventing a reoccurrence. Also, because the biggest emission comes from motor vehicles, tax incentives could be used to encourage car manufacturers to produce more fuel-efficient vehicles. Such measures would be a part of what is needed to avoid a climate catastrophe.

So, a combination of tax hikes, tax incentives and subsidies would help in reining in inflation, put a brake on ballooning debt and check climate change. All we need to do is to deploy policies that are carefully crafted for achieving these goals.