The Effect of Monetary Policy Variables on Tax Revenue Collections in Uganda
Downloads
This study investigates the extent to which monetary policy instruments influence tax revenue mobilization in Uganda, with particular emphasis on the exchange rate, broad money supply (M2), and interest rates. Using annual time-series data and a Vector Error Correction Model (VECM), the study examines both the short-run dynamics and long-run equilibrium relationships between monetary policy variables and tax revenue performance. The results indicate the existence of a stable long-run relationship among the variables. Empirically, expansions in M2 are found to exert a positive and statistically significant effect on tax revenue, suggesting that increased liquidity stimulates taxable economic activity. Exchange rate depreciation also significantly enhances tax collections, reflecting its impact on trade-related and nominal revenue bases. In contrast, interest rates exhibit a negative but statistically insignificant effect on tax revenue, implying a limited direct transmission channel through revenue mobilization. The study contributes to the empirical literature by providing evidence on the monetary–fiscal transmission mechanism in a low-income, structurally transforming economy, highlighting how monetary policy indirectly supports domestic revenue generation. From a policy perspective, the findings underscore the importance of maintaining adequate liquidity growth while safeguarding macroeconomic stability. A cautiously managed exchange rate regime is recommended to harness revenue gains from moderate depreciation without amplifying volatility. Although interest rates appear weakly linked to tax revenue, prudent adjustments remain essential to avoid crowding out private sector activity. The study further emphasizes the need for stronger coordination between the Bank of Uganda, the Ministry of Finance, and the Uganda Revenue Authority, alongside structural reforms aimed at financial deepening, formalization, and improved tax compliance.
Adam, C. S., Bevan, D. L., & Chambas, G. (2001). Exchange rate regimes and revenue performance in Sub-Saharan Africa. Journal of Development Economics, 64(1), 173–213.
Aduhene, D. T., & Osei-Assibey. (2021). Socio-Economic Impact of COVID-19 on Ghana’s Economy: Challenges and Prospects. International Journal of Social Economics, 48, 543-556.
Agbeyegbe, T., Stotsky, J. G., & WoldeMariam, A. (2006). Trade liberalization, exchange rate changes, and tax revenue in Sub-Saharan Africa. Journal of Asian Economics, 17(2), 261–284.
Aizenman, J., & Jinjarak, Y. (2009). The collection efficiency of the value added tax: Theory and international evidence. Journal of International Trade & Economic Development, 18(3), 391–410.
Alemu, A., & Abebe, B. (2021). Determinants of tax revenue in Ethiopia: Johansen co-integration approach. Journal of Economics and Sustainable Development, 12(6), 1–12.
Auerbach, A. J. (2002). The future of fiscal policy: Reform or austerity? National Tax Journal, 55(3), 523–537.
Baunsgaard, T., & Keen, M. (2010). Tax revenue and (or?) trade liberalization. Journal of Public Economics, 94((9–10)), 563–577.
Bleaney, M., & Greenaway, D. (2001). The impact of terms of trade and real exchange rate volatility on investment and growth in sub-Saharan Africa. Journal of Development Economics, 65(2), 491–500.
BoU. (2022). Bank of Uganda. Kampala: Annual report 2021/2022.
BoU. (2023). Annual Report 2022/2023. Kampala, Uganda: Bank of Uganda .
Breusch, T. S. (1978). Testing for autocorrelation in dynamic linear models. Australian Economic Papers, 334–355.
Brooks, C. (2019). Introductory econometrics for finance (4th ed.). Cambridge University Press.
Brown, P., & Ahmed, K. (2022). Monetary policy and inflation targeting in emerging economies. . Journal of Economic Perspectives.
Cagé, J., & Gadenne, L. (2018). Tax revenues, development, and the fiscal contract. World Development, 103, 307–325.
Edwards, S. (1989). Real exchange rates, devaluation, and adjustment: Exchange rate policy in developing countries. MIT Press.
Friedman, M. (1968). The role of monetary policy. American Economic Review, 58(1), 1–17.
Ghura, D. (1998). Tax revenue in Sub-Saharan Africa: Effects of economic policies and corruption. IMF Working Paper No. 98/135.
Gujarati, D. N., & Porter, D. C. (2009). Basic econometrics (5th ed.). New York, NY: McGraw-Hill.
Gujarati, D. N., & Porter, D. C. (2009). Basic Econometrics (5th ed.). McGraw-Hill/Irwin.
IMF. (2024). Uganda: Staff Country Report No. 24/45. Washington, D.C: International Monetary Fund.
Jolliffe, I. T. (2002). Principal component analysis (2nd ed.). . Springer.
Keen, M., & Mansour, M. (2010). Revenue mobilization in Sub-Saharan Africa: Challenges from globalization. IMF Staff Papers, 57(2), 553–587.
Kennedy, P. (2008). A guide to econometrics (6th ed.). Wiley-Blackwell.
Keynes, J. M. (1936). The general theory of employment, interest and money. Macmillan.
Kusi, N. K. (2020). The impact of exchange rate fluctuations on tax revenue in developing economies: Evidence from Sub-Saharan Africa. Journal of Economic Studies, 47(3), 552–568.
Laffer, A. B. (1974). The Laffer curve: Past, present, and future.
MoFPED. (2023). Background to the Budget FY2023/24. Kampala, Uganda: Ministry of Finance, Planning and Economic Development.
MoFPED. (2025). Background to the budget FY2025/26. Kampala: Ministry of Finance, Planning and Economic Development.
Nelson, C. R., & Plosser, C. I. (1982). Trends and random walks in macroeconomic time series: Some evidence and implications. Journal of Monetary Economics, 10(2), 139-162.
Niringiye. (2020). Tax Administration and Revenue Generation in Uganda: A Case Study of KCCA Central Division. Kampala.
NPA. (2010). Uganda Vision 2040. Kampala, Uganda: National Planning Authority.
OECD. (2023). Revenue Statistics 2023. Paris, France: Organisation for Economic Co-operation and Development.
Resnik, D. B. (2020). What is ethics in research & why is it important? National Institute of Environmental Health Sciences.
Rutto, R. (2020). EFFECTS OF EXCHANGE RATES ON TAX REVENUE PERFORMANCE IN KENYA. International Journal of Economics, Business and Management Research, 4(12).
Said, S. E., & Dickey, D. A. (1984). Testing for unit roots in autoregressive-moving average models of unknown order, Biometrika, 71(3), 599-607.
Tanzi, V. (1992). Structural factors and tax revenue in developing countries. IMF Working Paper No. 92/2.
UNESCO. (2022). Education Financing in Africa: Progress and Challenges. Paris, France: United Nations Educational, Scientific, and Cultural Organization.
URA. (2023). Annual Revenue Performance Report FY2022/2023. Kampala, Uganda: Uganda Revenue Authority.
URA. (2025). Annual revenue performance report for FY2024/25. Kampala: Uganda: Uganda Revenue Authority.
Williams, C., & Zhou, Y. (2021). Demand-pull vs. cost-push inflation: A comparative analysis of economic trends. International Journal of Macroeconomics.
World Bank. (2024). Global Economic Prospects: Sub-Saharan Africa Update. Washington, D.C: World Bank Group.
