External Aid and Tax-Effort In Ghana:1965-2005

This paper gives an empirically estimate of the effects of external aid inflows on revenue mobilization in Ghana. Using a Vector Auto Regression Model,the major findings indicate that the impact of loans and grants on domestic tax revenue are different in both the long run and short run. For instance in the long run, the results show that foreign grants are negatively correlated with domestic revenue while foreign loans appear to be positively related to domestic revenue. In the short run results external grants are rather positively related to domestic revenue while loans are negatively related. These differential results in the short and long run are not surprising because loans by their nature take time to be processed by donors and as result, its impact takes some time to actualize. For this reason in the short run domestic revenue mobilization may be substituted for loans while grants are used as complement. While in the long run the financing terms of the government might become more stable and the effects of loans and grants becomes clearer.