REMITTANCES AND INDIRECT TAX REVENUES IN ALGERIA: EVIDENCE FROM THE ARDL AND ECM MODELS

Abstract

This study investigates how remittances from migrants affect Algeria's indirect tax collection between 1977 and 2023. The study uses autoregressive distributed lag (ARDL) and error correction model (ECM) methods to analyse long-term structural impacts and short-term dynamic effects while using the GDP import share and inflation rate as control variables to address the single-country study gap. The research findings show a complex relationship and use bounds testing to establish a long-run equilibrium between the two systems. However, the research shows that remittances do not affect indirect tax revenue through structural changes in the economy. The short-term dynamics responded positively to remittance shocks because the transfers led to temporary increases in consumption, which did not translate into permanent growth in tax revenue. Error correction revealed that institutional adjustment was extremely slow, with indirect tax revenues adjusting toward their long-term balance at an annual rate of 10.5%. Granger causality tests show no predictive feedback of remittances and indirect tax revenues at any level. This study shows that indirect tax collection suffers from two problems: structural rigidity and the informal economy. Addressing these constraints requires two complementary policy interventions: expanding access to formal banking and promoting businesses’ use of digital payments. The government must establish a new VAT policy to turn temporary remittance expenses into tax revenue for the country. Furthermore, the study enriches the limited empirical evidence on the fiscal effects of remittances in developing economies and provides insights for policymakers seeking to strengthen domestic revenue mobilisation.