The Effects of Intergovernmental Transfers on the Local Governments to Generate Own Revenue in Ghana

Abstract

This study empirically examines the effect of Central Government transfers to Local Assemblies on their ability to internally generate revenue in Ghana. The study used data from the Ministry of Local Government and Rural Development for 216 districts in Ghana from 2013 to 2017. Employing panel data and using random effects and fixed effects estimation techniques in estimating the models and correcting for serial correlation and heteroskedasticity, the study found no significant relationship between IGF and current government transfers, however, there was a positive and significant relationship between the lag of government transfers and IGF indicating that the higher the previous year’s transfers, the higher the amount of IGF that will be generated by districts. The study also found a positive and significant relationship between UDG dummy and IGF, which indicates that assemblies that receive UDG as an additional transfer generate more internal funds as compared to their counterparts who do not. We thus conclude that for the generation of local assemblies’ internal funds to be more effective in Ghana, an increase in central government transfers is complementarily required. The study recommends that the government of Ghana should increase the amount of transfers given the assemblies. Also, we recommend that the government of Ghana should include more assemblies to benefit the urban development grant (UDG). This, when done, will boost up their level of capital to enable them to generate more internal funds.