Rich for its creditors: is tax evasion in the natural resources sector helping to reduce Africa's external debt?

Abstract

The massive drain on resources that tax evasion represents, is undermining the dynamic of optimal mobilisation of national resources. In particular, it is essential to recover the resources needed to finance the State's activities and ensure its external and internal solvency. The ability of economies to achieve sustainable development objectives depends essentially on the security of public finances. The mobilisation of both tax and non-tax revenues is a key element for many governments. This study therefore analyses the effect of tax evasion in the natural resources sector on the external debt of 14 African countries, over the period 2009-2022. The results of this analysis are revealing on two levels: firstly, the use of several estimation techniques, such as Ordinary Least Squares (OLS) and Pooled Least Squares (PLS), shows a positive and significant direct effect of tax evasion in the natural resources sector on external debt in Africa. This basic result is robust to alternative estimation techniques such as Instrumental Variable Least Squares (IV-2SLS) and System Generalized Least Squares (S-GMM). Second, the consideration of governance variables as transmission channels, shows negative and moderating effects on indebtedness. On the basis of these results, we suggest that good governance should be put in place to mobilise tax revenues and strengthen controls on international profit transfers. Jel codes: H26, H61, P48, H63