Innovative Development Financing Amidst Uncertainty: How Can African Countries Leverage Domestic Resource Mobilization?

In achieving the African Union Agenda 2063 – The Africa We Want – and financing SDGs, African economies will require an unprecedented mobilization of resources. This study examines the role of financial development on the nexus between domestic resource mobilization (DRM) and inclusive growth using an unbalanced panel of 31 African countries from 1990-2022. The study finds that: (1) in the presence of a sound financial sector, DRM contributes positively to inclusive growth; (2) African countries with higher inclusive growth benefit more from the positive impact of tax revenue than those with lower growth; (3) regional characteristics differ in terms of the impact of DRM on inclusive growth; and (4) countries must maintain an annual threshold of DRM and financial development to harness the benefits of DRM. The empirical results are robust to different measures of DRM and estimators (two-step system GMM, Machado and Silva quantile regression, and the dynamic panel threshold model). In leveraging the benefits of DRM, the study recommends that African governments should improve their financial sector, and they can learn from the success story of the South African Financial Sector Development and Reform Program.