Estimating the underground economy, illegal money and tax evasion in Qatar evidence from currency demand function

Awadh Ahmed Mohammed Gamal

Abstract

Purpose – Up to now a country-specific study on Qatar with respect to underground economy, illegal money and tax evasion has not been undertaken. This paper aims to contribute by separately estimating the magnitude of the underground economy in Qatar from 1980 to 2010 using adjusted currency demand function. Design/methodology/approach – The study uses the Zivot–Andrews unit root test for the stationarity analysis and applies the Gregory and Hansen long run cointegrating technique for estimating the underground economy based on the latest form of the currency demand function model. While the general to specific technique is used to estimate the short run error correction model. Findings – The results show that the average size of the underground economy in Qatar is about 17.03 per cent of the official gross domestic products (GDPs). The average level of tax evasion as a per cent of the total non-oil tax revenues is estimated at around 16.50 per cent and is about 2.12 per cent of the official GDP. The average level of illegal money to the total money from banking sector is estimated at 26.70 per cent. Originality/value – This study is the first to separately estimate the extent of the underground economy, illegal currency and tax evasion in Qatar. It overcomes the methodological errors and spurious estimation problems encountered in the previous studies that included Qatar with other countries based on cross-country data without taking into consideration the economic differences between countries. The authors believe that the findings may help the government of Qatar to re-formulate its economic policies, thus, enabling it to curb the growing underground economic activities.

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