Exchange rate volatility and tax revenue: empirical evidence from east African countries

This study examines the impact of exchange rate volatility on total tax revenue in six East African countries from 1996 to 2020, using pooled mean group (PMG) and dynamic ordinary least squares (DOLS) estimators. The findings reveal a significant negative long-run relationship between exchange rate volatility and tax revenue performance, while the short-run effect is statistically insignificant. In addition to exchange rate volatility, GDP per capita, trade openness, and external debt show positive effects on tax revenue, whereas inflation and foreign direct investment exert negative impacts. By focusing on a region with high fiscal vulnerability, shallow financial markets, and recent transitions to flexible exchange regimes, this study contributes new evidence on how macroeconomic instability undermines domestic revenue mobilization. The results highlight the need for greater exchange rate stability, improved investment policies, and regional coordination to strengthen fiscal resilience.