Financial inclusion and tax effort in sub-Saharan Africa: the role of institutional quality

Abstract

Addressing growth challenges in developing countries requires mobilising domestic resources in the face of declining external financing. This paper explores the effects of financial inclusion on tax efforts in sub-Saharan Africa, conditioned by institutional quality. To do this, a finite mixture model that takes into account the potential presence of unobserved heterogeneity was estimated based on a sample taken from 43 countries over the 1996–2019 period. Tax effort scores were constructed using several stochastic frontier models. The results show that the impact of financial inclusion on tax efforts differs across country groups. For example, financial inclusion stimulates tax effort in sub-Saharan Africa in 93.8 per cent of cases and inhibits tax effort in only 6.2 per cent of cases. These results are robust to several sensitivity tests. This paper highlights the need for countries in sub-Saharan Africa to improve access to financial systems by increasing mobile banking coverage and accessibility and reducing financial services costs. These countries should also look to capitalise on the benefits of financial inclusion by protecting political rights and fighting corruption.