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.

Keywords:

• exchange rate volatility
• GARCH
• tax revenue
• trade openness
• foreign aid
• Ghana

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Correction

PUBLIC INTEREST STATEMENT

The need for developing countries to mobilize adequate revenues is becoming increasingly crucial amid systemic and macroeconomic constraints. For Ghana, one of such pressing challenges is the frequent volatility in its real exchange rate. This study therefore explored the effect of real exchange rate volatility on tax revenue generation. The results of the study suggest that real 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 steps-up its exchange rate stabilization efforts to reduce the exchange rate risk imposed on international trade players.

Correction

This article was originally published with errors, which have now been corrected in the online version. Please see Correction (https://doi.org/10.1080/23322039.2018.1552821)

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Isaac Kwesi Ofori

Isaac Kwesi Ofori holds MPhil. in Economics from UCC, Ghana. Mr. Ofori is a Research Assistant at the Directorate of research, Innovation and Consultancy, UCC. His research interests are public sector economics, international economics, economic growth and development, and monetary economics. He is an active member of the African Economic Research Consortium (AERC), Kenya.

Camara Kwasi Obeng

Camara Kwasi Obeng obtained his PhD in Economics from UCC, Ghana. He is an active member of the AERC, Kenya; the African Econometrics Society, South Africa; the Poverty and Economic Policy (PEP) Network, Canada; the Global Economic Modeling (ECOMOD) Network, USA; and the International Input–Output Association, Austria.

Mark Kojo Armah

Mark Kojo Armah received his PhD at the University of Hull Business School’s Centre of Economic Policy (CEP) in the U.K. He has consulting experiences with the AERC based in Nairobi, Kenya. His research interests include exchange rate economics, applied general equilibrium and poverty analysis in developing countries.