Modelling the asymmetric growth implications of fiscal deficits and taxation in the West African monetary zone

Achieving rapid and sustainable growth has become pivotal across Africa, particularly among the member countries of the West African Monetary Zone (WAMZ). This involves, on one hand, establishing a robust and efficient tax system to boost revenue generation, and on the other, creating a sustainable debt strategy that includes cost-effective debt servicing. In this light, we quantify the asymmetric effects of fiscal deficit, tax revenue and debt servicing using a non-linear autoregressive distributed lag model (NARDL) and causality test with panel datasets from the Organization of Economic Cooperation and Development (OECD) Statistics and World Development Indicators (WDI). The findings show that tax revenue plays a significant and positive role in driving GDP growth in the region, highlighting its importance in fostering sustainable development. However, we found that deficit financing, especially external debt and debt servicing, negatively affected GDP growth. This points to the challenges posed by external debt and the adverse effects of debt servicing on economic prosperity. Based on these findings, the study concludes that tax revenue is crucial for long-term growth in the WAMZ. Therefore, we recommend that policymakers in the WAMZ diversify the tax base to increase tax revenue and prioritize essential social and economic infrastructure when allocating tax revenue to support sustained growth.