Foreign Aid and Fiscal Resources Mobilization in WAEMU Countries: Ambiguous Effects and New Questions

Abstract

This paper analyzes the effect of different types of foreign aid on tax revenues in West African Economic and Monetary Union (WAEMU) countries. A fixed-effects panel model with instrumental variables was developed over the period spanning from 1985 to 2016. The results indicate that multilateral aid affects positively and significantly tax revenues while bilateral aid does not. Moreover, the analysis of the decomposed effect of aid revealed that concessional aid and technical assistance enhance fiscal resources mobilization. However, grants reduce tax effort. The results also show that when aid is aggregated, its effect on tax revenues is ambiguous. These results justify for many reasons the reorientation of foreign aid towards investment for effective tax systems in WAEMU countries in compliance with Addis Ababa Action Agenda 2015 of the third international conference on Financing for Development. Strengthening multilateral partnership is advocated in accordance with the 17th Sustainable Development Goals. Also, an improvement of institutional quality could make foreign aid more efficient for tax collection in the study areas.