Exchange Rate Volatility and Tax Revenue: Evidence from Ghana

Ofori, Isaac Kwesi and Obeng, Camara Kwasi and Armah, Mark Kojo (2018): Exchange Rate Volatility and Tax Revenue: Evidence from Ghana.

Abstract

The need for the Ghanaian government to generate enough revenue for development is becoming increasingly crucial in this era of slow growth, growing unemployment and high debt. However, tax revenue performance over the years reveals an unstable pattern. One key factor that has been overlooked in the literature in terms of the determinants of tax revenue is exchange rate volatility. Coming from the background of volatility in Ghana’s exchange rate, could it be the reason for the instability in the trend of tax revenue? This question is the subject matter of this study. To estimate the effect of exchange rate volatility on tax revenue, the study employed the Auto Regressive Distributed Lag (ARDL) technique after the yearly exchange rate volatilities had been generated using the GARCH(1,1) method. The results of the study suggest that exchange rate volatility has a deleterious effect on tax revenue both in the short-run and long-run but the effect is more pronounced in the long-run than the short-run. The study recommends that the Bank of Ghana step-up its exchange rate stabilization efforts to reduce exchange rate risk imposed on international trade players.

• Item Type: MPRA Paper
• Language: English
• Keywords: Exchange rate volatility; GARCH; tax revenue; trade openness; foreign aid; Ghana
• Subjects: A - General Economics and Teaching > A1 - General Economics; F - International Economics > F1 - Trade; F - International Economics > F3 - International Finance > F35 - Foreign Aid; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration; H - Public Economics > H0 - General; H - Public Economics > H2 - Taxation, Subsidies, and Revenue

References

Adam, C. S., Bevan, D. L., & Chambas, G. (2001). Exchange rate regimes and revenue performance in Sub-Saharan Africa. Journal of Development Economics, 64(1), 173-213.

Ahmed, Q. M., & Muhammad, S. D. (2010). Determinants of tax buoyancy: empirical evidence from developing countries.

Agbeyegbe, T. D., Stotsky, J., & WoldeMariam, A. (2006). Trade liberalization, exchange rate changes, and tax revenue in Sub-Saharan Africa. Journal of Asian Economics, 17(2), 261-284.

Aggrey, J. (unpublished). Determinants of tax revenue: Evidence from Ghana. Thesis Submitted to the Department of Economics, University of Cape Coast

Ahmed, Q. M., & Muhammad, S. D. (2010). Determinant of tax buoyancy: Empirical evidence from developing countries. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1583943

Aizenman, J., Jinjarak, Y., Kim, J., & Park, D. (2015). Tax revenue trends in Asia and Latin America: A comparative analysis (No. w21755). National Bureau of Economic Research.

Alagidede, P., & Ibrahim, M. (2017). On the causes and effects of exchange rate volatility on economic growth: Evidence from Ghana. Journal of African Business, 18(2), 169–193.

Bahl, R. W. (1972). A representative tax system approach to measuring tax effort in developing countries. Staff Papers, 19(1), 87-124.

Benedek, D., Crivelli, E., Gupta, S., & Muthoora, P. (2014). Foreign aid and revenue: Still a crowding-out effect? FinanzArchiv: Public Finance Analysis, 70(1), 67–96.

Bollerslev, T. (1990). Modelling the coherence in short-run nominal exchange rates: a multivariate generalized ARCH model. The review of economics and statistics, 498-505.

Brafu-Insaidoo, W. G., Obeng, C. K. (2008). Effect of import liberalization on tariff revenue in Ghana (Vol. 180). African Economic Research Consortium Nairobi. Retrieved from http://dspace.africaportal.org/jspui/bitstream/123456789/32108/1/RP180.pdf

Chelliah, R. J. (1992). Tax reforms committee. Government of India, Ministry of Finance, Department of Revenue.

Chelliah, R. J. (1971). Trends in taxation in developing countries. Staff Papers, 18(2), 254- 331.

Clist, P. (2010). Aid allocation, composition and effects. University of Nottingham. Retrieved from http://eprints.nottingham.ac.uk/11642/

Calderón, C. (2004). Trade openness and real exchange rate volatility: panel data evidence. Documentos de Trabajo, Banco Central de Chile, (294), 1.

Côté, A. (1994). Exchange rate volatility and trade. Bank of Canada. Retrieved from http://www.banqueducanada.ca/wp-content/uploads/2010/04/wp94-5.pdf

Cummings, R. G., Martinez-Vazquez, J., McKee, M., & Torgler, B. (2006). Effects of tax morale on tax compliance: Experimental and survey evidence.

Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American statistical association, 74(366a), 427- 431.

De Vita, G., & Abbott, A. (2004). Real exchange rate volatility and US exports: an ARDL bounds testing approach. Economic Issues, 9(1), 69–78.

Fierro, V. and H. Reisen (1990), "Tax Revenue Implications of the Real Exchange Rate: Econometric Evidence from Korea and Mexico", OECD Development Centre Working Papers, No. 12, OECD Publishing, Paris, https://doi.org/10.1787/171303142365.

Gaalya, M. S. (2015). Trade liberalization and tax revenue performance in Uganda. Modern Economy, 6(02), 228.

Granger, C. W. (1988). Some recent development in a concept of causality. Journal of econometrics, 39(1-2), 199-211.

Hau, H. (2002). Real exchange rate volatility and economic openness: theory and evidence. Journal of Money, Credit, and Banking, 34(3), 611–630.

Ghura, M. D. (1998). Tax revenue in Sub-Saharan Africa: Effects of economic policies and corruption (No. 98-135). International Monetary Fund.

Gupta, A. S. (2007). Determinants of tax revenue efforts in developing countries (No. 7-184). International Monetary Fund.

Gupta, S., Clements, B., Bhattacharya, R., & Chakravarti, S. (2004). Fiscal consequences of armed conflict and terrorism in low-and middle-income countries. European Journal of Political Economy, 20(2), 403-421.

Keen, M., & Simone, A. (2004). Tax policy in developing countries: some lessons from the 1990s and some challenges ahead. Helping countries develop: The role of fiscal policy, 302.

Keen, M. M., & Baunsgaard, M. T. (2005). Tax revenue and (or?) trade liberalization 5(112). International Monetary Fund.

Khattry, B., & Rao, J. M. (2002). Fiscal faux pas?: an analysis of the revenue implications of trade liberalization. World Development, 30(8), 1431-1444.

Lee, Y., & Gordon, R. H. (2005). Tax structure and economic growth. Journal of public economics, 89(5-6), 1027-1043.

Le, T. M., Moreno-Dodson, B. & Rojchaichaninthorn, J.(2008). Expanding taxable capacity and reaching revenue potential: Cross-country analysis. World Bank. Retrieved from https://elibrary.worldbank.org/doi/pdf/10.1596/1813-9450-4559

Lotz, J. R., & Morss, E. R. (1970). A theory of tax level determinants for developing countries. Economic Development and cultural change, 18(3), 328-341.

MacKinnon, J. G. (1996). Numerical distribution functions for unit root and cointegration tests. Journal of Applied Econometrics, 11(6), 601–618.

Obeng, C. K. (2018) Is the effect of exchange rate volatility on export diversification symmetric or asymmetric? Evidence from Ghana, Cogent Economics & Finance, 6(1), 1460027

Obstfeld, M., & Rogoff, K. (1998). Risk and exchange rates. National bureau of economic research. Retrieved from http://www.nber.org/papers/w6694

Ozturk, Ilhan (2006). Exchange Rate Volatility and Trade: A Literature Survey. International Journal of Applied Econometrics and Quantitative Studies, 3(1), Available at SSRN: https://ssrn.com/abstract=1127299

Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326.

Phillips, P. C., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335-346.

Pivovarsky, M. A., Clements, M. B. J., Gupta, M. S., & Tiongson, M. E. (2003). Foreign aid and revenue response: does the composition of aid matter? International Monetary Fund. Retrievedhttps://books.google.com/books?hl=en&lr=&id=8kWNUdTCBpYC&oi=fnd&pg=PP2&dq=Gupta,+Clements,+Pivovarsky+and+Tiongson+(2003)+&ots=sIoNBcxN2l&sig=LlnFWnT8WPlTw9d6cQ2XyUa1jY4

Rad, A. A. (2003). The effect of inflation on government revenue and expenditure: the case of the Islamic Republic of Iran. Retrievedfrom:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=513813

Tanzi, V. (1992). 12 Structural Factors and Tax Revenue in Developing Countries: A Decade of Evidence. Open economies: Structural adjustment and agriculture, 267-84.

Tanzi, V. (1989). The impact of macroeconomic policies on the level of taxation and the fiscal balance in developing countries. Staff Papers, 36(3), 633-656.

Tatliyer, M., & Yigit, F. (2016). Does Exchange Rate Volatility Really Influence Foreign Trade? Evidence from Turkey. International Journal of Economics and Finance, 8(2), 33.

Teera, J. M., & Hudson, J. (2004). Tax performance: a comparative study. Journal of International Development, 16(6), 785–802.