The Impact of Macroeconomic Dynamics on Domestic Tax Revenue Mobilisation in Zambia
DOI:
https://doi.org/10.47672/aje.2956Keywords:
Tax Revenue, Economic Growth, Foreign Direct Investment, Industrialization, Fiscal Policy, Trade Openness, Unemployment, Vector Error Correction Model (VECM)Abstract
Purpose: This paper seeks to evaluate the impact of selected macroeconomic and structural factors on tax revenue performance in Zambia from 1990 to 2023, specifically analysing how economic growth, unemployment, foreign direct investment, industrialisation, and trade openness influence domestic revenue mobilisation in a developing economy context.
Methodology: The study employed the Vector Error Correction Model (VECM) framework, supported by the Autoregressive Distributed Lag (ARDL) model as a robustness check, to examine both short-run and long-run relationships among the study variables. Pre-estimation tests included unit root (ADF and PP), lag length selection, and Johansen cointegration tests, while post-estimation diagnostics verified model stability and reliability.
Findings: The empirical results reveal a stable long-run relationship between tax revenue and the selected macroeconomic variables. In the long run, economic growth and trade openness exert positive and statistically significant effects on tax revenue, whereas foreign direct investment (FDI) has a negative and significant long-run impact. In the short run, FDI positively influences tax revenue, while industrial output, trade openness, and economic growth (at the second lag) exhibit negative effects. The error correction mechanism confirms gradual adjustment towards long-run equilibrium, correcting approximately 26.6% of short-run disequilibrium annually. Unemployment remains statistically insignificant in both time horizons, and industrialisation shows no significant long-run effect, reflecting structural rigidities and the dominance of the informal sector. Granger causality tests indicate that FDI, industrialisation, and trade openness cause tax revenue, while variance decomposition shows FDI and industrialisation as major long-run contributors.
Recommendations: These results underscore the need for Zambia to adopt balanced fiscal and structural policies to enhance domestic revenue mobilisation. Key policy recommendations include: promoting inclusive and formal-sector-led economic growth to broaden the tax base; reforming foreign direct investment incentive frameworks to reduce excessive tax exemptions, profit shifting, and revenue leakages; strengthening industrial value chains and domestic linkages to convert industrial expansion into sustained fiscal gains; deepening trade and domestic tax reforms, including strengthened customs administration and VAT compliance, to mitigate short-run revenue losses; and broadening the direct tax base by formalising informal employment and improving labour market compliance. By pursuing these measures, Zambia can enhance fiscal resilience, reduce dependence on external borrowing, and achieve sustainable domestic resource mobilisation.
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