Economic Development Implications of Taxation and Fiscal Deficit in West African Monetary Zone (WAMZ)

This paper offered some insights into the development implications of taxation and fiscal deficit in the WAMZ with a focus on employment. Essentially, the dynamic effects of tax revenue and external debt with its servicing requirements on employment rate were examined for the six member countries of Nigeria, Ghana, the Gambia, Liberia, Seria Leone and Guinea over the period 2005-2020. The datasets obtained from the World Bank and Organization of Economic Cooperation and Development (OECD) Statistics were analyzed using the panel non-linear autoregressive distributed lag model (NARDL), Pedroni residual-based cointegration and causality test among others. Evidence of mixed integration and long-run relationship among the series was established from the panel unit root and Pedroni residual-based cointegration test respectively. The results of the panel NARDL showed that the asymmetric effect of tax revenue on employment is positive and significant at the 5 per cent level. This finding highlights that taxes help the government increase its revenue base and achieve a significant level of financial sustainability for investment in critical sectors with the potential to create jobs. However, it was found that employment responded negatively to both positive and negative changes in external debt shock in the long run. This finding suggests that the growth in external borrowings has not translated to economic development in terms of employment creation in the member countries of WAMZ. At the same time, the debt service requirements of external debt negatively affected employment during the study period. This finding suggests that debt service payment is detrimental to economic development. The causality test results showed unidirectional causality flowing from tax revenue to employment which suggests that tax revenue is important in forecasting changes in employment in the WAMZ. Given the findings, this paper recommends that policymakers should boost tax revenue and ensure the effective allocation of borrowed funds to enhance fiscal sustainability and create more opportunities for employment in the WAMZ.