Determinants of Tax Revenue in Sierra Leone: Application of the ARDL Framework

Abstract

The aim of this paper is to investigate the determinants of tax revenue in Sierra Leone, over the period 1990Q1 to 2020Q1, within the context of the ARDL estimation procedure. The result from the ARDL Bound test for cointegration suggests that a long-run relationship exists among the variables. The long run analysis indicates that real GDP (Y), openness (Op) and official development assistance (ODA) are the main determinants of tax revenue (TR) in Sierra Leone, with positive coefficients. This result is in tandem with the short run findings, which establishes a positive relationship between tax revenue and its regressors- real GDP and openness. However, the short run result also suggests that inflation has a negative impact on tax revenue. The findings confirm that any short-run disequilibrium to the long-run can be corrected at the 11 percent speed of adjustment quarterly, albeit at a low speed of adjustment. The diagnostic result shows that approximately 75 percent of the variation in the dependent variable is explained by the regressors based on the value of the R-squared. It also confirms that the model is free of serial correlation and heteroscedasticity, whilst the CUSUM test indicates stability of the model coefficients. The policy implication is for government to pursue policies that will enhance economic growth, through investment in growth enhancing sectors including agriculture, health, education, energy and infrastructure development; and ensure a politically stable environment as a recipe for private sector investment.