Effect of International Commodity Price Shocks on Public Finances in Africa

Abstract

This paper empirically investigates the macroeconomic responses to commodity price shocks with a focus on fiscal variables in a sample of thirty-three African commodity-dependent countries. Using the heterogeneous panel structural vector autoregressive (SVAR) approach developed by Pedroni, we find that government revenues as well as government expenditures react to commodity export prices shock. However, there is a large degree of heterogeneity across countries. Following country characteristics, we find that the response of fiscal variables is higher for countries dependent on extractive commodities than those dependent on agricultural ones. We also highlight the benefits of flexible exchange rate regimes for accommodating external shocks and ensuring macroeconomic stability, which in turn is beneficial to government revenue mobilization. Our results suggest that the African government should seize commodities as an opportunity and increase their efforts in revenue mobilization during price booms and make a productive investment to isolate their finances from commodity price collapses.

Monetary Policy and Governance, Commodity Price Volatility and Tax Revenues in Sub-Saharan Africa

“…The lags and the square of the total population, urban population, and ethnic and cultural diversity index are used as instruments of governance. These instruments are chosen regarding the empirical literature (Diakite, et al 2019; Mbatia and Ellyne 2017; Tagem 2017).…”

“…First, focusing on a sample of 33 SSA countries, Diarra (2013) indicated that positive shocks to commodity export revenues have no significant effect on the level of tax revenues, while negative shocks reduce the level of tax revenues through the reduction of the tax rate. However, Da and Diarra (2022) assessed the effect of CPV on tax revenues in Africa over the period 1985-2017. Using ARDL modeling, the study revealed a significant effect of CPV on tax revenues in Africa with heterogeneity in the sample, depending on the level of commodity dependence.…”

“…These authors argue that the heterogeneity in the level of tax revenue is explained by countries' natural resource endowments tax evasion, and the level of the shadow economy (Thiao and Ouonogo 2021;Zídková 2014). The second and most recent strand of the literature focuses on the fiscal effects of CPV and found heterogeneous effects, depending on countries' characteristics (Da and Diarra 2022; García-Albán, González-Astudillo and Vera-Avellán 2021; Majumder, Raghavan and Vespignani 2022). This contradiction could be due to misspecification and methodological issues.…”

“…The novelty of this research is threefold. On a practical level, we reexamine the effects of CPV on revenues mobilization following existent literature by controlling for governance and institutional variables (Diakite et al 2019 ; Estrada, Mutascu and Tiwari 2014). Second, we investigate the mediating role of governance and institutional quality in mitigating the detrimental effects of CPV on revenue mobilization.…”

Economics of HIV Prevention: Understanding the Empirical Intersection between Commodity Price Shocks, Health Spending and HIV Infections in Developing Countries

“…Globally, it is a documented fact that an increase in commodity prices causes an improvement in government revenue, which boosts the economy of commodity-dependent countries [4]. The high-commodity price supports government spending.…”