Inflation, external debt, and fiscal mobilization in Morocco: The transmission channels of devaluation and the inflationary past

Abstract

This work seeks to empirically assess the effects of inflation and external debt on Morocco's tax revenue mobilization. The study also discusses the moderating effect of devaluation and the inflationary past in the relationship between debt and tax mobilization. The study covers the period from1985- to 2019. The results of the modeling, using the generalized method of moments (GMM), show that inflation has a negative impact on the tax structure. This impact is due to low inflation, which hampers economic activity and leads to a loss of revenue for the government. Similarly, external debt has been shown to negatively impact domestic tax revenues and has a positive impact on trade taxes. Also, the estimation results assert that external indebtedness in interaction with inflation reduces the amount of tax revenue. The low level of inflation does not allow for debt repayment and the generation of tax revenues from it. Finally, the study reveals that external debt, in interaction with devaluation periods, positively impacts tax revenues. The study concludes that good inflation and productive debt allow for a revival of economic activity, and consequently, increased mobilization of tax revenues. The fight against devaluation periods is also an important transmission channel in the relationship between external debt and tax collection.