Studies on domestic resource mobilization in Ghana
Date
2021
Authors
Adu, Frank
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Abstract
After many years of Aid to Africa, development practitioners have realised that they need to look beyond aid to finance poverty reduction and development. Domestic resource mobilisation and private resource financing strategies have been integral in discussing policy options available to finance development in Africa because of its resilience. Developing the two strategies has become critical, particularly in implementing the Sustainable Development Goals (SDGs) of the United Nations (UN) and the Agenda 2063 of the African Union. Moreover, even though some developing countries such as Ghana's revenue and spending has increased over the years, it has not met all its developmental needs. In most cases, there has been a wide gap between revenues and expenditure, resulting in budget deficits financed with external resources. The revenue challenges stem from the drying up of development aid, which hitherto bridged the gap between spending requirements and actual spending and the high cost of borrowing in international financial markets. Given this, it stands to reason that one of the viable and prudent sources of raising revenue for development that policymakers must explore is domestic resource mobilisation (DRM). This study seeks to contribute to public and development finance discourse in four empirical essays that touch on vital issues regarding DRM in Ghana. The first objective of the study explored whether tax systems in Ghana are buoyant and or elastic. Relying on time series data from 1984 to 2018, and the Divisia index approach, and the GMM estimator. We established that taxes in Ghana are not buoyant but elastic. Thus, growth in tax revenue is primarily driven by automatism and not discretionary measures. We advocate for policy to strengthen the economy's tax base because of the strong connection between tax bases and their respective tax revenues. We also advise the minimal use of discretionary measures as their impact on revenue generation is low. Lessons for tax reforms are discussed in the chapter. In the second empirical chapter, we examined the symmetric and asymmetric response of poverty and inequality to tax systems in Ghana by employing the linear and the Non-linear ARDL models. Concerning the mediation effect of tax systems and poverty, in the long run, we found that, generally, the relationship is asymmetric when all measures of tax systems and poverty are employed. The relationship is only symmetric when indirect taxes and total taxes are employed as measures of tax systems in the poverty line model. We observed that while positive and negative shocks in direct taxes raise and reduce poverty, the negative and positive shocks in all the other tax systems produce negative results. We also establish that negative shocks generally produce more significant impacts on poverty than positive shocks. Therefore, a poverty reduction strategy that looks at tax reduction at all levels should produce the desired results in the long run. Similar findings were also discovered in the short-run dynamics. On the mediation effect of tax systems on inequality, the study revealed a symmetric relationship with a significant positive relationship between indirect taxes and inequality in the long run. Therefore, a policy that leverages tax systems to bridge income inequality with a stern focus on indirect tax systems should yield better results, especially if the focus is on reducing indirect taxes in Ghana. We deepen the DRM conversation in the third empirical chapter by employing quarterly time series data spanning 2002-2018 to examine whether the domestic financial sector in Ghana can support domestic debt mobilisation uniformly across quantiles and or models. Further, we explore the level of domestic debt that the domestic market can mobilise for fiscal authorities. Relying on the quantile-on-quantile regression technique, we established heterogeneous impact across quantiles and between models. Although the role of financial sector development in domestic debt mobilisation is established from tau= 0.5 upwards, a positive relationship ensues only at the end (tau=1.00) of the overall financial sector model and the financial markets model's distributions. A negative relationship found at tau = 0.5 and tau = 0.75 quantiles in all models, and tau=1.00 of the financial institutions model. The finding suggests that the Ghanaian financial sector is not developed enough to support an expansive domestic public debt drive. On the second objective, relying on the Hansen Sample Splitting threshold technique, we observe that significant discontinuities in the domestic debt financial development nexus exist. Indeed, in all three measures of financial development adopted, there is a threshold of domestic debt that optimises financial development. In the overall index, the threshold is 2.5% of GDP, 6.25% in the financial institutions' development index, and lastly, 9.8% of GDP in the financial market model. In all the models, we find that, below the threshold, there is enough support for the safe asset theory. Lastly, we reckon that countries are searching for revenues to improve development, and hence any policy that will support this objective ought to be projected. In the face of this, we examine whether improvements in governance holds the key to DRM (tax revenue) mobilisation. This exercise is theoretically grounded in the revenue negotiation argument by Levi (1989) called revenue bargaining. We do this by employing the standard Granger causality test, the Diks and Panchenko (2005, 2006) non-linear Granger Causality test, in both levels and scales (using the maximal Overlap Discrete wavelet transform MODWT), and the wavelet coherency and phase difference maps. We find the mixed result on the lead-lag relationship in levels, scales, and time. In some cases, various revenue levels are for good governance to emerge; in many cases, good governance is a panacea for poor revenue mobilisation. Nevertheless, the revenue implications of good governance should not be downplayed; a policy attempt to increase revenues should begin from governing well. We discuss the detailed results in the chapter
Description
A thesis submitted to the Faculty of Commerce, Law and Management, University of the Witwatersrand in fulfilment of the requirements for the degree of Doctor of Philosophy (PhD) in the field of Economics and Finance, 2021
Keywords
Domestic resource mobilisatio, Tax reform, Tax elasticity, Tax buoyancy, Sovereign debt, UCTD