22 research outputs found
Analysis of Budget Deficits and Macroeconomic Fundamentals: A VAR-VECM Approach
No full textAim/purpose - This paper examines the relationship between budget deficits and selected macroeconomic variables in Tanzania for the period spanning from 1966 to 2015. Design/methodology/approach - The paper uses Vector autoregression (VAR) - Vector Error Correction Model (VECM) and variance decomposition techniques. The Johansen's test is applied to examine the long run relationship among the variables under study. Findings - The Johansen's test of cointegration indicates that the variables are cointegrated and thus have a long run relationship. The results based on the VAR-VECM estimation show that real GDP and exchange rate have a negative and significant relationship with budget deficit whereas inflation, money supply and lending interest rate have a positive one. Variance decomposition results show that variances in the budget deficits are mostly explained by the real GDP, followed by inflation and real exchange rate. Research implications/limitations - Results are very indicative, but highlight the importance of containing inflation and money supply to check their effects on budget deficits over the short run and long-run periods. Also, policy recommendation calls for fiscal authorities in Tanzania to adopt efficient and effective methods of tax collection and public sector spending. Originality/value/contribution - Tanzania has been experiencing budget deficit since the 1970s and that this budget deficit has been blamed for high indebtedness, inflation and poor investment and growth. The paper contributes to the empirical debate on the causal relationship between budget deficits and macroeconomic variables by employing VAR-VECM and variance decomposition approaches
Tax Rates and Tax Evasion: Evidence from Missing Imports in Tanzania
Get PDFTax evasion is the basic characteristic of many developing countries. De facto tax collections are consequently far below revenue implied by published or de jure tax rates. This paper empirically examines tax rates (tariff plus VAT rates) as the determinants of customs revenue evasion across products, based on a systematic analysis of discrepancies in trade declarations for trading partners, United Republic of Tanzania, Republic of South Africa and China. The results indicate that trade gap is highly correlated with tax rates, that is, much more value is lost for products with higher tax rates. The results also show that the trade gap is correlated with tax rates on closely related products from Republic of South Africa, implying that evasion takes place through misclassification of imports from higher-taxed categories to lower-taxed ones. However, there is no evidence of misclassification of imports from China. The wide divergences between the effective and statutory tax rates in Tanzanian tax system indicate that there is a scope for raising tax revenue without increasing tax rates by reinforcing tax and customs administrations and reducing tax evasion
An Econometric Analysis of the Determinants of Foreign Direct Investment in Africa
No full textThis paper provides an empirical analysis on the determinants of FDI inflows in Africa. The dataset used for this paper spans from 1996-2016 and involves 48 African countries. For inferential analysis the paper employs random (RE) effect model. Both structural factors and the quality of institutions and governance indices are examined. The key findings of the paper is that openness of the economy, GDP per capita and population growth have a substantial positive explanatory power over FDI in Africa. Similarly, control of corruption and political stability tend to exert a positive influence on FDI inflows in Africa. These findings provide some valuable insights into policy makers, practitioners, and foreign investors’ decision making. More so, to attract foreign investment in the less trade liberalized countries, Government policy should encourage further market liberalization. In the same vein, an effective policy on FDI in all economies should focus on improving production efficiency so as to raise GDP per capita and increase the market size. African Governments should also improve the quality of institutions and governance, especially in terms of enhancement of corruption control and political stability
The Revenue Implications of Trade Liberalization in Tanzania
Get PDFThis paper examines the argument that trade liberalization depresses the import duty revenue, and consequently adversely affects the total tax revenue. The study is thought to be significant because Tanzania experiences difficulty in replacing import duty revenue loss as a consequence of trade reform by strengthening its consumption tax system. In the course of analysis, cointegration analysis and error correction modelling are employed over the 1979/80-2009/10 period. The empirical results show that import duty revenue-to-GDP ratio is positively related to tariff rates, implying that a reduction in the tariff rates results in a significant loss of import duty revenue. The results also show that the removal of protectionist policies led to an increase in import-to-GDP ratio which in turn led to rising shares of import duty revenue in GDP. Finally, the results generate some policy implications. The proper issue in tax design under trade liberalization, Tanzania needs to strengthen the domestic tax system and raise tax revenue without increasing tax rates by reinforcing tax and customs administrations so as to maintain fiscal stability
The Twin Deficits Hypothesis: An Empirical Analysis for Tanzania
No full textThis paper examines the relationship between current account and government budget deficits in Tanzania. The paper tests the validity of the twin deficits hypothesis, using annual time series data for the 1966-2015 period. The paper is thought to be significant because the concept of the twin deficit hypothesis is fraught with controversy. Some researches support the hypothesis that there is a positive relationship between current account deficits and fiscal deficits in the economy while others do not. In this paper, the empirical tests fail to reject the twin deficits hypothesis, indicating that rising budget deficits put more strain on the current account deficits in Tanzania. Specifically, the Vector Error Correction Model results support the conventional theory of a positive relationship between fiscal and external balances, with a relatively high speed of adjustment toward the equilibrium position. This evidence is consistent with a small open economy. To address the problem that may result from this kind of relationship, appropriate policy variables for reducing budget deficits such as reduction in non-development expenditure, enhancement of domestic revenue collection and actively fight corruption and tax evasion should be adopted. The government should also target export oriented firms and encourage an import substitution industry by creating favorable business environments
Response of Stock Market Development to Monetary Policy: A Tanzanian Stock Market Perspective
Get PDFThis paper examines the response of stock market development to monetary policy in Tanzania using monthly time-series data for the period spanning from 2011 to 2020. The paper employs the autoregressive distributed lag (ARDL) to determine the response of stock market to monetary variables namely; money supply, inflation, exchange rate and interest rate. All the variables in the model are statistically different from zero. Based on these results, the paper showsthat there is a negative response of stock market development to interest rate and inflation suggesting that an increase in interest rate or inflation will result in a decrease in domestic market development. Conversely, empirical results show that there is a positive response of domestic market development to changes in money supply or real exchange rate suggesting that an increase in money supply or the exchange rate will lead to an increase in domestic market capitalization. The implication of this paper is that investors and policymakers should take into account the changes of monetary variables before making stock investment or policy to stabilize the stock market performance, which implicitly has an impact on the overall economy
Corruption, governance and tax revenues in Africa
No full textIn this paper we analyze the effects of institutional variables (corruption and governance), structural variables (per capita income, trade openness, inflation and share of agriculture in GDP), and policy variables (tax rate and tariff rate) on total tax revenues, direct taxes, indirect taxes and trade taxes using panel data set for 30 African countries over the 1996-2016 period. All estimates are based on fixed effects (FE) and random effects (RE) models. Using Hausman test, RE is earmarked to be the more preferred model in this paper. The RE regression results show that corruption and governance are two main determinants of tax revenues in Africa. While corruption has a significant negative effect on tax revenues, good governance measured in terms of government effectiveness, regulatory quality, rule of law and voice and accountability tends to raise tax revenue generation and in particular, indirect taxes. In the same vein, governance in form of political stability tends to have a very significant effect on direct taxes and international trade taxes. The basic intuition behind these results is that higher institutional capacity and lower corruption enhance tax revenue generation in the economy. Intriguingly, empirical results show that tariff rates tend to have a strong negative effect on total tax revenue but at the same time they have a strong positive effect on trade tax revenue. Moreover, trade openness tends to have a strong positive relationship with tax revenue. Overall, results suggest that to raise more tax revenue, governments should reduce corruption, improve tax and customs administration and raise revenues from tax categories that are less susceptible to corruption. They should as well enhance trade openness
Corruption, governance and tax revenues in Africa
Get PDFIn this paper we analyze the effects of institutional variables (corruption and governance), structural variables (per capita income, trade openness, inflation and share of agriculture in GDP), and policy variables (tax rate and tariff rate) on total tax revenues, direct taxes, indirect taxes and trade taxes using panel data set for 30 African countries over the 1996-2016 period. All estimates are based on fixed effects (FE) and random effects (RE) models. Using Hausman test, RE is earmarked to be the more preferred model in this paper. The RE regression results show that corruption and governance are two main determinants of tax revenues in Africa. While corruption has a significant negative effect on tax revenues, good governance measured in terms of government effectiveness, regulatory quality, rule of law and voice and accountability tends to raise tax revenue generation and in particular, indirect taxes. In the same vein, governance in form of political stability tends to have a very significant effect on direct taxes and international trade taxes. The basic intuition behind these results is that higher institutional capacity and lower corruption enhance tax revenue generation in the economy. Intriguingly, empirical results show that tariff rates tend to have a strong negative effect on total tax revenue but at the same time they have a strong positive effect on trade tax revenue. Moreover, trade openness tends to have a strong positive relationship with tax revenue. Overall, results suggest that to raise more tax revenue, governments should reduce corruption, improve tax and customs administration and raise revenues from tax categories that are less susceptible to corruption. They should as well enhance trade openness
The relationship between Trade Liberalization, Growth and Balance of Payments in Sub-Saharan Africa: Insights from Dynamic Panel Data Analysis
Get PDFThe general objective of this paper is to analyze the relationship between trade liberalization, growth, and the balance of payment in Sub-Saharan Africa. The paper covers a total of 37 sub-Saharan African countries for a period of 24 years, spanning from 1996 to 2019. The formal regression analysis makes use of generalized moment methods (GMM). We also allow control variables in sets of regressions, such as terms of trade, gross fixed capital formation, inflation, labor force, government debt, foreign direct investment, and real effect exchange rate. First, we examine the impact of trade liberalization, measured by trade-to-GDP ratio and tariffs, on economic growth (real GDP). Next, we analyze the impact of growth on trade balance and current account balance to examine whether higher economic growth due to trade liberalization leads to an effect on the balance of trade. Results in the growth model suggest that the trade-to-GDP ratio has a positive and significant effect on economic growth while tariffs exert no effect on growth. Empirical results show that in the balance of trade and current account balance models, economic growth, trade-to-GDP ratio, and tariffs exert a positive and significant impact on both the balance of trade and current account. The results imply that sub-Saharan governments and policymakers should pursue policies that will promote trade openness
