The Effects Of Intergovernmental Transfers On The Incentive For 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.