The effect of real exchange rate depreciation on Import Tax Revenue in Kenya, 1970-2009

Abstract

Taxation play a critical role in raising the resources needed for financing government activities in developing countries. On the other hand, the volatility of real exchange rate (RERs) has generated significant concern among academics and policy makers in view of its . effects on macroeconomic variables such as tax revenue generation. This study therefore focuses on the effects of real exchange rates on import tax revenues in Kenya. The specific .. objectives of the study were to determine the nature of the real exchange rates depreciations r in Kenya from 1970 to 2009 and to establish the effects of the depreciations on the import tax revenues in Kenya from 1970 to 2009.

The study formulated a dynamic specification for the real custom duties function incorporating the error correction term which was then estimated using the ordinary least squares. The results showed that import price indices, inflation rates and lagged real custom duties have a negative effect on the real custom duties. A liberalized exchange rate regime as introduced in Kenya in 1993 was found to have a positive effect on the real custom duties. Results also showed that real exchange rate has a statistically significant negative effect on custom duties. An increase in the real exchange rate (depreciation) leads to imports being expensive hence discouraging imports. Consequently, import volumes decline reducing revenue from the imports. It is desirable to have a real exchange rate devoid of destabilizing effects on the economy.