<p>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.</p>

<p>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.</p>

CC BY-SA 4.0
2020-01-22T13:16:50.780Z
Would the government be buying the currency from local FE market? Wouldn't that decrease the FE reserve on the other hand?
Khadim Ali
CC BY-SA 4.0
2020-01-22T13:28:34.713Z
@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
1muflon1
CC BY-SA 4.0
2020-01-22T13:39:51.770Z
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.
Khadim Ali
CC BY-SA 4.0
2020-01-22T13:51:37.663Z
@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)
1muflon1
CC BY-SA 4.0
2020-01-23T15:25:16.033Z
@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.
Criticize SE actions means ban
CC BY-SA 4.0
2020-01-22T12:55:07.760Z
2020-01-22T13:00:28.380Z
2020-01-22T13:00:28.380Z
1muflon1
<p>I always wonder if increasing local taxes could help countries in paying off the foreign debts?</p>

<p>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?</p>

<taxation><debt><foreign-exchange>
Do local taxes help in paying back foreign debts?
Khadim Ali
# Do local taxes help in paying back foreign debts?

(Asked by: username_0 on 2020-01-22)

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?

**Tags:** taxation, debt, foreign-exchange

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## 1 answers

### Answer by username_1 on 2020-01-22. Score: 2 | Accepted answer

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.

> **Comments:**
> **username_0**: Would the government be buying the currency from local FE market? Wouldn't that decrease the FE reserve on the other hand?  
> **username_1**: @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  
> **username_0**: 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.  
> **username_1**: @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)  
> **username_2**: @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.  

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