PETROLEUM SUBSIDY AND ITS IMPACT ON TAX REVENUE VOLATILITY

ARCH and GARCH models were applied to ascertain the volatility of tax revenue. Petroleum subsidy positively impacts tax revenue volatility; the impact was minimal but statistically significant at 1 per cent significance level. Exchange rate increased the tax revenue volatility by 5.10 point in the long-run, likewise gross domestic savings by 0.4 point in the long-run and both estimates were statistically significant at 1 per cent respectively.

Both government expenditure and gross fixed capital formation reduced the tax revenue volatility at 0.05 and 0.03 point respectively and the estimates were statistically significant at 10 per cent and 1 per cent. The ECM showed that any deviation in the estimates would be restored within a year and this is statistically significant at 1 per cent. It was therefore recommended that the government should do more to manage and maintain appropriate exchange rate policy and keep up improving on its expenditure towards capital formation and investment in order to manage tax revenue volatility.