ALTERNATIVE PUBLIC FINANCING OPTIONS, TAX AND ECONOMIC GROWTH NEXUS IN THREE SELECTED SUBSAHARAN AFRICAN COUNTRIES, 1990-2016

Abstract

The effectiveness of tax in inducing economic growth in Sub-Saharan Africa (SSA) countries remained unclear. Countries with comparable chequered economic growth rates had varying levels of Tax-to-GDP Ratios (TGDPRs). South Africa, Nigeria, and Republic of the Congo are three prominent SSA countries with unstable growth rates. With TGDPRs of 24.8% and 9.1%, respectively, South Africa and Republic of Congo experienced growth rates that rose from -0.3% and 1.0% in 1990 to 5.3% and 6.4% in 2005 before falling to 0.4% and -2.8% in 2016. Nigeria had a TGDPR of 7.6%, and its growth rate dropped from 11.8% in 1990 to 5.3% in 2005 and further to -1.6% in 2016. These countries also used Alternative Public Financing Options (APFOs) such as Public Debt (PD), seigniorage, and Total Natural Resource Rents (TNRR), which could shape the tax-growth nexus pattern. Existing studies had focused primarily on the tax-growth nexus in SSA but paid little attention to the influence of APFOs. This study was, therefore, designed to examine the effect of APFOs on tax-growth nexus in three selected SSA countries. The Endogenous Growth Theory provided the framework. A Two-Stage Least Squares method was deployed to address potential endogeneity issues among the variables. The method allowed for the interaction of APFOs in the tax-growth nexus, such that high PD accumulation could reduce tax revenue necessary to facilitate growth, and high reliance on seigniorage and TNRR could stifle tax mobilisation efforts and lead to low growth. A simulation was used to investigate how APFOs might affect the tax-growth nexus. The data which covered 1990 to 2016 were sourced from the World Development Indicators, International Centre for Tax and Development, and the Monetary Authorities database of the three countries. All estimates were validated at α≤0.05. Tax and PD interaction had significant negative effect on growth in South Africa (- 0.004, p=0.01), Nigeria (-0.002, p=0.01) and Republic of Congo (-0.002, p=0.01), suggesting that PD reduced the effectiveness of tax in financing growth. The interaction between tax and seigniorage had no discernible impact on growth in South Africa and Republic of Congo but had a significant negative effect on growth in Nigeria (-0.02, p=0.004), suggesting that seigniorage significantly reduced the effectiveness of tax in fostering economic growth in Nigeria. Tax and TNRR interaction significantly impacted growth in South Africa (-0.03, p=0.00) and Republic of Congo (-0.005, p=0.00), while it had negligible effect in Nigeria. The simulation results showed that a higher PD resulted in higher taxes and slower growth in the three countries. A higher seigniorage increased tax and growth in the three countries. A higher TNRR increased growth but lowered taxes in Nigeria and Republic of Congo but not in South Africa. The impact of taxes on economic growth was weakened by public debt, seigniorage, and total natural resource rents in sub-Saharan African countries. In order to encourage taxdriven economic growth across all countries, these Alternative Public Financing Options should be used with caution.