UNIVERSITY OF BOTSWANA FACULTY OF SOCIAL SCIENCES DEPARTMENT OF ECONOMICS DETERMINANTS OF TAX REVENUE MOBILISATION IN LESOTHO BY: REFILOE JABARI A DISSERTATION SUBMITTED TO THE DEPARTMENT OF ECONOMICS IN PARTIAL FULFILMENT OF THE REQUIREMENTS OF THE DEGREE OF MASTER OF ARTS IN ECONOMICS JULY 2020 APPROVAL This dissertation has been examined and approved as meeting the requirements for the partial fulfillment of the Master of Arts degree in Economics. …………………………… ……………………………… Dr. Kagiso Mangadi Date (Supervisor) ………………………….... ……………………………….. HoD Economics Date ii DECLARATION This dissertation was undertaken from October 2019 to July 2020. It is my original work, and it has never been, in whole or in part, presented for the award of any degree at any other university. This excludes the acknowledged references. Author: Refiloe Jabari Signature: ……………………. Date: …………………………. iii DEDICATION This study is a dedication to my parents, Moshoeshoe Jabari and Makeisara Jabari. I would not have been where I am today without your support. You have been by my side throughout all my academic journey, and I am forever grateful. iv ACKNOWLEDGEMENTS I am sincerely grateful to God Almighty for all His blessings and for giving me the courage and strength to see through this study. I would like to pass my heartfelt gratitude to the African Economic Research Consortium (AERC) for sponsoring my master's degree programme and giving me the financial assistance to carry out this study. My thanks also go to my supervisors Dr. Kagiso Mangadi and Dr. Lexi Setlhare, who availed themselves of assistance and guidance throughout the period of this study. Again, I am thankful to the Staff of the Department of Economics and others that gave me comments and suggestions during the presentation of my proposal. Their contribution was beneficial. v Table of Contents APPROVAL ............................................................................................................................................... ii DECLARATION ........................................................................................................................................ iii DEDICATION ........................................................................................................................................... iv ACKNOWLEDGEMENTS ............................................................................................................................ v LIST OF FIGURES ..................................................................................................................................... ix LIST OF TABLES ....................................................................................................................................... ix ABBREVIATIONS ...................................................................................................................................... x ABSTRACT ............................................................................................................................................. xii CHAPTER ONE ......................................................................................................................................... 1 INTRODUCTION ....................................................................................................................................... 1 1.1 Background .............................................................................................................................. 1 1.2 Statement of the Problem ........................................................................................................ 3 1.3 Objectives of the Study ............................................................................................................ 5 1.4 Significance of the Study .......................................................................................................... 6 1.5 Organisation of the study ......................................................................................................... 6 CHAPTER TWO ........................................................................................................................................ 7 THE ECONOMY OF LESOTHO ................................................................................................................... 7 2.0 Introduction ............................................................................................................................. 7 2.1 Macroeconomic Developments ................................................................................................ 7 2.2 Tax Revenue and Expenditure Dynamics in Lesotho ................................................................. 8 2.3 The Lesotho Tax System ................................................................................................................. 9 2.4 Main sources of tax revenue ........................................................................................................ 10 2.4.1 Value Added Tax (VAT) .......................................................................................................... 10 2.4.2. Corporate Income Tax .......................................................................................................... 10 vi 2.4.3 Customs and excise duties .................................................................................................... 12 2.5 Institutional reform...................................................................................................................... 12 2.6 Structure of the economy ............................................................................................................ 13 2.7 Conclusion ................................................................................................................................... 15 CHAPTER THREE .................................................................................................................................... 16 LITERATURE REVIEW.............................................................................................................................. 16 3.0 Introduction ................................................................................................................................. 16 3.1 Theoretical Literature review ....................................................................................................... 16 3.1.1 Tax buoyancy ........................................................................................................................ 16 3.1.2 Tax elasticity ......................................................................................................................... 17 3.2 Empirical Literature Review ................................................................................................... 20 3.3 Summary of Literature review ...................................................................................................... 25 CHAPTER FOUR ..................................................................................................................................... 27 METHODOLOGY .................................................................................................................................... 27 4.0 Introduction ................................................................................................................................. 27 4.1 Theoretical Model Specification ................................................................................................... 27 4.2 Empirical Model Specification ...................................................................................................... 28 4.3 Variable Definitions and their Expected Signs ......................................................................... 29 4.4 Data Sources ................................................................................................................................ 32 4.5 Empirical Model and Estimation Techniques ................................................................................ 32 4.6 Unit root test ............................................................................................................................... 34 4.7 Conclusion ................................................................................................................................... 35 CHAPTER FIVE........................................................................................................................................ 36 RESULTS ................................................................................................................................................ 36 5.0 Introduction ................................................................................................................................. 36 5.1 Descriptive Statistics .................................................................................................................... 36 vii 5.2 Stationarity and Cointegration analysis ........................................................................................ 37 5.2.1 Stationarity test .................................................................................................................... 37 5.2.2 Cointegration analysis ........................................................................................................... 38 5.3 Lag length selection ....................................................................................................................