I always wonder if increasing local taxes could help countries in paying off the foreign debts?

I think taxes generate income in local currency. While foreign debts (from IMF, World Bank etc.) are to be paid in USD. How could this help out?


If you actually raise local tax it would help you can just convert the money raised with local tax into the currency in which the debt is. For example, if UK has some debt in Euros they can raise taxes in pounds and just exchange them at an exchange rate for euros and pay down their euro denominated debt.

However, it would not be possible to pay the foreign debt by just printing the local currency as that would lead to depreciation of local currency and hence its exchange rate.

  • $\begingroup$ Would the government be buying the currency from local FE market? Wouldn't that decrease the FE reserve on the other hand? $\endgroup$
    – Khadim Ali
    Jan 22 '20 at 13:16
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    $\begingroup$ @KhadimAli I am not sure what you mean by local FE... the currencies are being traded globally, sure there might be some local shop exchanging currency but it’s not that they get the currency from some kind of local stock. Paying down debt using up reserves is also possible but that’s unrelated to taxing reserves are build up in advance for example country can decide to build up 1000USD reserve by buying 1000USD on forex market in 2000 and then used in year 2010 to pay down some debt but then this is not necessary related to taxation $\endgroup$
    – 1muflon1
    Jan 22 '20 at 13:28
  • $\begingroup$ Yeah, by local FE market I meant local foreign exchange market (shops exchanging currency). So the government would not buy foreign currency from local market to pay back foreign debt, right? So then it would buy from international Forex market? I don't know if international Forex market exist or not, I am just guessing. $\endgroup$
    – Khadim Ali
    Jan 22 '20 at 13:39
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    $\begingroup$ @KhadimAli well they would probably do not select mom and pops small local exchange shop. But they could select local bank and the local bank or most likely just the gov. own central bank would just make a demand for the currency in the international markets (at least under standard floating exchange rate - I can certainly imagine situation where government can’t get foreign currency from local bank because they run some mismanaged fixed exchange rate system but those are scarce since they are unsustainable) $\endgroup$
    – 1muflon1
    Jan 22 '20 at 13:51
  • $\begingroup$ @1muflon1 in fact if the fixed exchange rate means the government can't get foreign currency then that means their fixed exchange rate has just collapsed, AFAIK. $\endgroup$
    – user253751
    Jan 23 '20 at 15:25

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