Effect of the Role of Institutions and Exchange Rate Volatility on Tax Revenue in Pakistan

Abstract

Pakistan has been one of the fragile economies facing the danger of default after events like COVID-19, post COVID-19 developments, Russia and Ukraine war. Ever-rising debt and soaring public expenditure (mainly interest payments) have almost made it impossible for the country to run day-to-day business. The root of this agony lies in the low level of tax revenue by the government. Tax collection performance has been dismal in case of Pakistan and exchange rate volatility has added to the misery of Government. By employing ARDL and measuring exchange rate volatility through standard deviation the current study found the role of exchange rate volatility to be significantly damaging the tax collection efforts. This damaging effect can be marginalized by better institutional performance. The study suggests steps should be taken to address volatility and improve the institutional performance so that the Government will be able to collect more revenue and avoid danger of default and have enough resources to spend on education and health.