Effective Exchange Rate and the Value-Added Taxes: Impacts of Macroeconomic Policies on the Sudanese Economy

Abstract

There is always a deceptive trap where decision-makers fall into doing times of economic distress in developing countries. Elevating taxation rates levels can be the shortest way to collect the required deficits in an economy enduing failures. However, those can be short sighted solutions as the drainage of money and capitals from people means definite impact on the real economic sectors. That is logical and quick to understand conclusion. Thereby we cannot claim that such solutions are taken by blind or ignorant officials. Probably, they take it with apathy and carelessness of the broad macroeconomic impacts. That is my primary theory here, that under developing economies and especially with totalitarian regimes, there are immature and imposed, compulsory decisions taken that probably hurt or result in economic imbalances. They cannot be described as a bitter cure, though they should be shunted as an economic poison. Rationally, a government should start by austerity measures, decreasing her expenditure and get rid of stigma of high spending on useless, defenseless and obsolete armies of security and attributes Sudan is plagued with all the above-mentioned economic pests. Economic shocks rocked the country’s economy for the past two decades due to civil problems and mal-administration. However, oil production has kept the economy going until the year 2011. After that the secession of the Southern pat of the country deprived Northern Sudan's economy from 75% of its public revenues. Public revenues were drastically reduced. So the authority selected the quicker way of increasing taxation levels in the country. Deprivation of the larger chunk of oil revenues also reduced the flow of foreign currencies required to pay for the imports. Meanwhile, the country’s real economic sectors were degenerated and virtually in tatters after decades of negligence. The government, however, did not declare coherent macroeconomic policy. It has reverted to take day-by-day economic decisions to deal with the crisis. So it has floated the Sudanese currency and under the current situation that decreased its value by over 300%. The revenue structure became dependent on taxation which has many forms of value added tax as the principle one. Value added taxation system was introduced in 2004 with the rate of 5%. However, with economic crisis it was gradually increased to 15% in 2011. With negligence, there was subsequent degeneration of the real economic sectors. Meanwhile, the deprivation of a great part of oil after secession, VAT represented considerable portion of the state revenues though it is also a burden on the public. The present study uses a computable general equilibrium (CGE) model to investigate the impacts of implementing of VAT system on the Sudan economy. A benchmark is compared with a sequence of equilibria for measuring the effect of tax policy. Increasing the value-added tax rate from 5, 10 to 15% are used to estimate the impacts scenarios. The results show that although government revenues significantly managed to increase, however, GDP and people welfare decreased.

Keywords: Macroeconomics, Effective Exchange Rate, Economic Performance

JEL Classification: A10, B22, B23, F3, F30, F31, F32, F33, F34