## cr17153 — BUILDING FISCAL CAPACITY IN FRAGILE STATES — Case Studies (selected excerpts) ## Source details **Canonical URL:** [cr17153 — BUILDING FISCAL CAPACITY IN FRAGILE STATES — Case Studies (selected excerpts)](https://www.imf.org/-/media/files/publications/cr/2017/cr17153.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17153.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17153.pdf.json) --- ### IMF Directors’ overall conclusions on TA for fragile states - Emphasized introduction of simple organizational structures and basic processes to better manage revenue administration. - Agreed TA focus at initial stage should be on actions enabling authorities to gain immediate control over the budget; second stage—once more stable—is to modernize fiscal institutions incrementally through medium-term revenue and expenditure strategies. - Stressed need for differentiation of revenue and expenditure reforms across countries depending on starting conditions, weaknesses, and absorptive capacity; appropriate to provide TA in both areas at both stages. - Welcomed increase in IMF fiscal TA to fragile states over the past decade, facilitated by rising external funding. - Considered current modalities for TA delivery appropriate but emphasized providing training to a wider range of stakeholders. - Agreed well-defined overall reform strategies by missions from headquarters are key to coherence and effectiveness; these provide a framework for long-term and short-term advisors. - Appreciated supportive role of regional TA centers (RTACs) in the AFR, APD, MCD and WHD regions. - Emphasized ensuring good coordination with other TA providers and donors, including the World Bank. - Stressed TA should be demand driven and structured flexibly to support country-specific needs; strong country ownership is key. - Noted importance of workshops, seminars, other training and peer-to-peer activities to develop capacity. - Recognized challenges in delivering TA under difficult and sometimes dangerous circumstances; supported increasing intensity and duration of TA through communications technology and short-term and long-term experts, including resident advisors. - Acknowledged difficulties in measuring TA impact; positively viewed use of standardized tools such as Public Expenditure and Financial Accountability (PEFA) and Tax Administration Diagnostic Assessment Tool (TADAT). - Concurred there is scope for integrating fiscal TA to fragile states into Fund surveillance operations. ### Purpose and structure of the case studies paper - Provides background information for the IMF Board paper on “Building Fiscal Capacity in Fragile States (FS).” - Presents case studies on IMF TA and capacity development in the fiscal area provided by the Fiscal Affairs Department (FAD), in collaboration with the Legal Department, for: Afghanistan, Haiti, Kosovo, Liberia, Mali, Myanmar, South Sudan, and Timor-Leste. - Case studies supplement the main Board Paper and discuss experiences in building or rebuilding fiscal policy management institutions across varying stages of fragility. - Relevance highlighted in the post-Addis context on scaling-up countries’ own-revenues to achieve the Sustainable Development Goals (SDGs). - Case study structure: - Short background: political and economic context and key recent events affecting fragility. - TA approach: described in detail. - TA provided: revenues and expenditures, challenges faced, key outcomes achieved, quality and sustainability, successes and failures. - Lessons learned. ### Cross-cutting lessons from the case studies - Political or highest public service level commitment is necessary but insufficient for successful reform. - Not all fragile states necessarily lack capacity for broad-based domestic taxes such as the VAT; Kosovo and Mali have implemented VAT, with Kosovo’s VAT performing better than Mali’s in terms of revenue, but both performing less well than VAT in OECD countries. - Fragility calls for attention to country-specific factors in the design and implementation of fiscal policies, including stages and types of fragility and their effect on capacities. - Often easier and more politically tractable to work with existing laws, even if weak, to rebuild basic fiscal functions of the state; fundamental “big-bang” fiscal reforms should generally be doubted under certain conditions. - Institution building is long-term, requires constant commitment, and benefits from building on small successes. - Basic analytical and policy design capacity (e.g., macro-fiscal and expenditure and tax policy units) are important intermediaries between TA providers and policymakers. - Workshops, training, and peer-to-peer activities are important to develop capacity. - TA should be demand driven, flexibly structured, coordinated with donors, and supported by resident advisors and experienced staff where feasible. ### Afghanistan — Background and overall findings - External and internal conflict since April 1978; Taliban rule ended in December 2001; reconstruction started soon after; Fund TA started in 2002. - CPIA scores very low and deteriorated between 2005 and 2013 in fiscal policy, financial management, rule-based governance, quality of public administration, transparency, accountability and corruption in the public sector. - One of the lowest rates of tax collection among IMF member countries: about 10 percent of gross domestic product (GDP); revenue growth picked up markedly in recent years. - Introduction of a VAT postponed until at least 2020 after legislation was submitted to Parliament in 2014/15 due to very limited tax administration capacity. - Country highly dependent on donor support for expenditures. - TA missions often conducted outside Afghanistan for security reasons. ### Afghanistan — TA on revenues and tax policy - Tax policy TA focused on indirect taxation and extractive industries (EI): - (1) consolidate and modernize indirect taxes; ambitious objective to replace the business turnover tax with a VAT for large taxpayers to boost revenue by around 3 percent of GDP; - (2) improve quality of direct taxes to foster foreign investment; - (3) reform taxation of EI to increase government’s share of resource rent, in collaboration with USAID and the UK’s DFiD. - FAD tax policy mission in February 2017 proposed four measures to increase revenues: - (i) increase non-tax revenue (as already envisaged by authorities); - (ii) prepare the introduction of 4G cell phone licenses to maximize their price; - (iii) introduce a minimum corporate income tax (percentage of turnovers); - (iv) increase the corporate income tax (CIT) withholding at customs. - VAT initiative faced a severe setback and is not expected to be adopted before 2020; may take the form of a marginal improvement to the design of the existing sales tax (limited crediting mechanism). - Capacity issues and need for a higher VAT rate are significant obstacles. ### Afghanistan — TA on tax administration - 2010 mission recommended concentrating reform on high yield taxpayers: - Ensure all large taxpayers are administered by the large taxpayer office (LTO). - Expand LTO control over taxpayers that contribute to at least 70 percent of total collections. - Introduce risk based processes at customs and abandon 100 percent verification. - Strengthen post-clearance audit capabilities. - Due to security, in-country TA in revenue administration was impossible in recent years; IMF involvement limited. ### Afghanistan — PFM and expenditures TA - Initial PFM engagement began with a fiscal assessment mission in February 2002; PFM system existed on paper but had broken down during the war. - Approach: build on existing structures and initially focus on core PFM reforms including computerization of payment procedures and fiscal reporting, and consolidation of bank accounts toward a Treasury Single Account (TSA). - Resident TA advisor assigned to the treasury in Kabul from 2004 to 2006 to help implement a new Financial Management Information System (FMIS). - From 2006 onward TA covered organization of the Ministry of Finance, budget formulation, cash management, and fiscal reporting via HQ missions and short-term expert visits from METAC; TA complemented by other donors. - FMIS acquired as off-the-shelf system; success attributed to limited customization and gradual upgrades coinciding with procedure revisions. - Cash management progress timid due to lack of coordination between budget allotment management and treasury cash forecasting, and unpredictability of donor disbursements. - Ministry of Finance prepared a five-year strategic plan in 2005 and progressively developed a more efficient organization; implemented new PFM laws and financial regulations, gradual program budgeting, and MTFF-level multi-year budget preparation. - IMF in-country TA stopped from 2014 to 2016 due to security; out-of-country assistance started in 2016 following a request for an Extended Credit Facility (ECF) program. - An assessment mission found recent progress very slow and identified immediate priorities to strengthen the PFM system, including reforms initiated in 2010 but not fully implemented. ### Afghanistan — Capacity and performance outcomes - Ministry of Finance capacity remains fragile, especially within the Budget department. - Key issues: lack of skilled local staff; significant gap in remuneration compared with donors or contracting organizations. - Heavy reliance on international experts and contracted TA; IMF designed a TA strategy emphasizing capacity building and targeted advisory assistance with training by METAC. - Treasury internal capacity gradually built; donor-funded positions persisted in a small number of key Treasury posts. - Establishment of risk analysis committees improved audit selection; audit collections from assessment increased from 14.8 percent to 44.5 percent; LTO audit collections rose from 15 to 21 percent as a proportion of total LTO collections; net operating losses disallowed rose from Afghani (AFS) 4 billion to AFS 14.4 billion. ### Afghanistan — Lessons learned (selected) - Capacity to manage implementation is crucial; large and ambitious reforms are difficult to sustain—prefer gradual and realistic approaches. - Lack of coordination across ministries and lack of political commitment hamper reforms (notable in EI taxation reforms). - Building on past legal structures after conflict can facilitate political buy-in and stronger authority involvement. - Reinforcing core fiscal functions, such as budget execution, is critical when the country depends on external financing. - Avoid diverting focus from basics of PFM to more complex reforms. ### Haiti — Background and TA outcomes - Long-standing fragility aggravated by January 2010 earthquake; subsequent disasters (e.g., Category 4-Hurricane Matthews in 2016 with damage equivalent to 23 percent of GDP). - Fiscal institutions at infancy; until 2014 fiscal accounts did not include capital spending; Treasury and tax administration buildings collapsed in 2010; tax and customs revenues collected in January 2010 were only 30 percent of the forecast. - IMF multi-year TA program in tax policy and administration started in 2012 to modernize and simplify the tax system and broaden tax base (PIT and CIT); helped set up a tax policy unit (TPU) and consolidate tax laws into a single tax code. - Recommended applying VAT (when introduced) solely to large taxpayers with turnover of US$ 800,000 and higher and an unusually long transition period given weak capacity. - PFM support focused on: building a macro-fiscal unit, establishing a TSA (operational since late 2015), and putting in place a fiscal reporting system (accounting functions implemented in 2014). - Main TA delivery modalities: resident advisor placements, short-term expert visits, missions, desk reviews, partnership with Haiti’s School of Administration, and PFM conditionality in IMF programs. - Revenue context: tax-to-GDP ratio below 10 percent for most of 1990s and 2000s; 13.3 percent realized in 2015 driven by reconstruction efforts and unlikely to be sustainable. ### Haiti — Institutional anchor, coordination, and lessons - At launch of multiyear TA in 2012, lack of an institutional anchor and weak Ministry of Finance capacity to coordinate TA were major constraints. - Multiple bilateral TA providers (e.g., Canadian International Development Agency, US Treasury, IDB) created coordination challenges; IMF TA small relative to others. - Institutional instability: Minister of Finance changed five times in last five years; three general directors appointed in one year. - Persistent IMF TA achievements: - Macro-fiscal unit established in 2013. - Accounting functions created in 2014. - Operational TSA covering budgetary central government since 2015. - Lessons: - Authorities’ commitment and investment in human resource structures and leadership are important. - Setting up macro-fiscal and tax policy units created enabling environment for TA. - Uncoordinated TA from multiple organizations can be counterproductive. - Presence of a long-term resident advisor was essential to maintain support during TSA implementation. ### Kosovo — Background and fiscal outcomes - Post-conflict state-building challenges: parallel authorities, regional clans, criminal-political nexus, ethnic polarization, weak jurisdictional control, ineffective governance, and corruption. - CPIA score averaged 3.5 percent in 2009–2015; about 30 percent of the population is poor; remittances in range of 18-29 percent of GDP. - Kosovo’s revenue-to-GDP ratio averaged 25.0 percent over 2013-16; fragile states’ average is less than 14 percent. - IMF TA focused on efficiency- and equity-enhancing tax reforms; tax administration modernization and EI taxation advice provided. - Minerals sectors’ contribution to total revenues increased from 0.7 to 2.1 percent of GDP for 2012-2015. - Revenue increased from about 20 percent of GDP to 23 percent in 2009-2015. - VAT political economy led to deterioration: standard rate increased and some consumption items exempted or zero-rated. ### Kosovo — PFM reforms and outcomes - UNMIK established Central Fiscal Authority (CFA) in 1999; IMF TA in 1999 provided blueprint for establishing the Authority and budgetary institutions. - IMF TA contributed to improved fiscal data publication and improved PEFA score—from “D” to “A.” - Decentralization reforms increased municipal revenue autonomy: share of municipal revenues that local governments can spend freely increased from 40 percent in 2007 to 47 percent in 2012. - By 2013 Kosovo had: - Sound legal PFM system. - Very good and operational treasury system with a TSA. - Integrated IT system. - Well-established Macro-Economic and Fiscal Policy Unit. - Improved external audit function. ### Kosovo — Lessons learned - Political economy factors can limit appetite for reforms even when advice is sensible. - Addressing skills deficits in core technical staff is key to the pace of reforms. - Merging tax and customs administrations required careful sequencing to avoid disrupting business continuity. - Maintaining a longer TA association is important in unstable political environments. - A comprehensive and integrated reform plan enables efficient donor use; absence until 2009 created inefficiencies. ### Liberia — Background and recovery - Emerged from civil war in 2003 with infrastructure in complete disrepair, little economic activity, and high debt burden. - GEMAP (2005–2010) facilitated donor coordination; IMF and WB allocated principal TA responsibilities for fiscal policy. - Payment arrears to IMF cleared in 2010 under HIPC; access to PRGF. - Growth halted in 2014 due to Ebola and commodity price declines: real GDP growth dropped from 8.7 percent in 2013 to 0.7 percent in 2014; 2015 saw no growth. - By June 2016 Liberia declared Ebola free; medium term forecast growth estimated to stabilize at 6 percent over the next five years. ### Liberia — Revenues TA, outcomes, and trade-offs - Baseline tax-revenue-to-GDP ratio: 6.4 percent in 2003. - Major TA success: Consolidated Tax Amendments (CTA) to Liberian Revenue Code ratified in 2011 with clear investment policy, modifications to customs and excise regimes, specified regime for mining, petroleum and large-scale agriculture, improved transparency, curtailed discretionary tax incentives. - 2011 multi-year TA program (TPA-TTF financed) focused on strengthening revenue administration organization, defining structure, building risk strategy for large taxpayers, and building Liberia Revenue Authority (LRA) capacity. - LRA legislation passed; transition team formed; LRA opened on July 1, 2014 at height of Ebola crisis. - LRA outcomes: - New accountability framework and strategic plan. - Taxpayer segmentation operational (LTO and medium, small and micro departments). - Taxpayer service unit established. - LRA attracted Liberians from abroad as professional employer. - Trade-offs: operationalizing LRA shifted resources away from tax policy planning and Ministry of Finance collection capacity. - Ongoing priorities: align business processes, optimize procedures, improve integrity of registration and taxpayer account databases, implement e-filing and e-payment, consider expanding Goods and Services Tax to VAT. ### Liberia — PFM TA, outcomes, and lessons - Post-war PFM fragility: lack of basic office infrastructure, lack of electricity, low staff pay (average salary equivalent to US$50 a month). - 2003 needs assessment highlighted rationalizing teacher salaries, cleaning up wage bill, commitments control, cash management weaknesses, backlog of unaudited financial statements, and outdated legal framework. - PEFA scores improved 2007–2012 in monitoring of expenditure arrears, comprehensiveness of the budget, recording of cash balances, debt and guarantees, internal audit effectiveness, and timeliness of audit reconciliation. - Achievements meeting HIPC completion point: - Poverty Reduction Strategy Plan implemented. - PFM Act implemented in 2009. - Enhanced procurement transparency. - Merger of Bureau of Budget and Ministry of Finance. - Debt management strategy and pilot ministry audits. - Less progress on TSA, medium-term expenditure framework, and full integrated FMIS implementation. - Lessons: - Reform can be slow or reactive; sustained reform requires proper sequencing, innovative TA, and strong government leadership. - Combination of diagnostic TA, hands-on assistance, training, and resident advisors enabled adaptive capacity development. - Donor coordination critical; lack of coordination in PFM may have hampered basic PFM progress. - Leadership enabled LRA launch in 2014, contrasting with slower PFM progress. ### Mali — TA delivery, revenues, PFM, and decentralization - TA delivered via long-term and short-term assistance from IMF HQ and IMF Technical Assistance Center for West Africa (AFW); focus on taxation frameworks, customs and tax administrations, PFM, and fiscal decentralization. - Tax revenue percent of GDP low, averaging 12 to 15 in recent years; below WAEMU convergence criteria of 17 percent (recently increased to 20 percent) and about the average in low-income countries (about 14 percent). - Recurring tax administration weaknesses: poor compliance for medium and small taxpayers, large informal sector, significant tax arrears. - 2015 Finance Law established a synthetic tax of 3 percent of turnover replacing 288 taxes to simplify small taxpayer taxation. - Positive revenue trends 2012–16: tax revenues increased from about 12 percent to 15 percent of GDP; 26 percent increase in number of large and medium taxpayers; filing rate for large and medium taxpayers increased from 70 to 95 percent; VAT performance improved from 4.9 percent of GDP in 2013 to 5.3 percent in 2015. - PFM priorities: address major weaknesses in accounting, treasury operations and financial governance before second generation reforms; transition to TSA almost completed; present consolidated fiscal transactions based on GFSM 2001/2014 starting in 2018; Public Procurement Integrated Management System to be adopted by all ministries in 2017. - Fiscal decentralization: aim to scale up fiscal transfers to local governments to 30 percent of the country’s budgetary revenue by 2018; risks include poor governance of local finances and insufficient local revenue flows. - Lessons for TA in fragile settings: - Resume TA quickly after conflict when security allows. - Effective coordination within IMF and with donors is key. - Focus on clearly-identified basic needs and achieve milestones consistent with absorption capacity. - Maintain an up-to-date reform plan to seize opportune reform moments. ### South Sudan — acute challenges, TA approach, and outcomes - Ranks among least developed countries; since independence in 2011 institution building hindered by oil shutdowns and civil conflict starting December 2013; Transitional Government of National Unity established April 2016; relapsed into violence in July 2016. - Real GDP growth negative in all years since independence except 2013/14; estimated Real GDP declined by about 7 percent in 2015/16; projected to further shrink by 10½ percent in 2016/17. - Borrowing from the central bank pushed up to about 550 percent in 2016; sharp depreciation of exchange rate. - CPIA scores very low and deteriorated since independence in fiscal policy, public sector management, quality of public administration, and transparency/accountability/corruption. - IMF set up multi-donor South Sudan Trust Fund (SSTF) to finance TA and training in revenue mobilization and PFM; IMF assessment missions guided priorities, complemented by mentoring, coaching, and training. - Revenue TA recommendations emphasized simple tax regimes and measures: - (i) pass urgently required tax and customs legislation; - (ii) implement a 5 percent manufacturer’s sales tax applicable domestically and to imports with limited exclusions and expand excisable items; - (iii) implement PIT at subnational level piggybacking on national PIT collected and distributed by national government. - Implemented revenue policy measures: - 5 percent sales tax adopted in 2012, increased to 15 percent in 2014/15 and to 18 percent in 2016/17. - Excises levied on selected goods and services with rate increases over the years. - Advance payment of income tax on imported goods at 2 percent for food and 4 percent for other goods. - Simple business profit tax regime based on size of business. - Revenue administration outcomes: - New offices and computers; tax and customs laws enacted; procedures for registration, collection enforcement and audit implemented (about 50 audits completed in 2015 versus zero in 2011). - Non-oil tax-to-GDP grew from about 1 percent at independence to about 4 percent in 2015/16. - PFM progress limited: approval of key PFM legislation, greater focus on budget control, FMIS transaction processing, draft Petroleum Revenue Management Bill, new budget preparation system, survey of government bank accounts, quarterly budget vs outturn reports. - Breakdown of PFM gains during economic and political turmoil: unrealistic budgets, circumvented financial controls, lost payroll control, exponential rise in expenditure arrears, revenues retained by collecting agencies. - TA resumed April 2016 then suspended after July 2016 due to worsening security. - Recommended priorities when TA resumes: - realistic budgeting, transparent payment decisions, full and timely recording of cash inflows/outflows in FMIS, integrity checks in fiscal reports, interim audits. - TA delivery to be subject to authorities’ commitment and adequate counterpart staff. ### South Sudan — Lessons learned - Focus on basics and fundamentals; separate short-term actions for state functioning from longer-term institution building. - Tight donor and TA coordination critical; uncoordinated advice after independence impeded progress. - Countries must recruit minimum middle-management officials with public finance competencies to steer reforms, coordinate donors, and train others. ### Timor-Leste — PFM reform progress, TA approach, and lessons - Since restoration of independence in 2002, implemented advanced and transparent governance framework for the petroleum sector, well-managed Petroleum Fund, efficient TSA, comprehensive and timely reporting, and public availability of key fiscal information. - Improvements in 9 of 28 applicable PEFA indicators in 2010–13; half of indicators still at or below “C” score in 2014 PEFA. - Persistent weaknesses: low budget credibility, management of expenditure arrears in infancy, oversight of autonomous entities not established, internal audit almost non-existent, weak capital budget planning and implementation in line ministries, procurement not defaulting to open tenders. - IMF TA milestones: - 1999 framework for CFA and long-term modern budgetary and treasury functions. - 2004 resident expert to assist creation of Petroleum Fund; Petroleum Fund created July 2005. - 2007–2013 resident treasury adviser, diagnostics, short-term experts; TSA implementation included since 2008. - 2010 PEFA and fiscal transparency assessments. - 2012 third stage of PFM reforms focusing on structural reforms and change management. - 2016 assessment of public investment management efficiency and action plan for Petroleum Fund investments. - Legal reforms: Budget and Financial Management Act (2009) enhanced transparency, accountability, budget calendar, special funds, reporting and audit requirements, and penalties. - Lessons: - Long-term resident advisors instrumental in setting up fundamental reforms such as the Petroleum Fund. - Extremely low capacity may require TA to substitute for local resources short term; donor-funded international advisors initially focused on daily management before reform/capacity building. - In medium to long run, shift focus to strategic planning and prioritization; by 2012 Government became more selective of donor initiatives. - Sustainability requires constant effort; conditions remain challenging though Timor-Leste expected to graduate from FS status in 2017 per WB classification. *Prepared from cr17153 — BUILDING FISCAL CAPACITY IN FRAGILE STATES—CASE STUDIES (selected excerpts, April 18, 2017).* ### introduction of simple organizational structures and basic processes to better manage revenue ### introduction of simple organizational structures and basic processes to better manage revenue ### IMF Directors’ overall conclusions on TA for fragile states - Emphasized introduction of simple organizational structures and basic processes to better manage revenue administration. - Agreed TA focus at initial stage should be on actions enabling authorities to gain immediate control over the budget; second stage—once more stable—is to modernize fiscal institutions incrementally through medium-term revenue and expenditure strategies. - Stressed need for differentiation of revenue and expenditure reforms across countries depending on starting conditions, weaknesses, and absorptive capacity; appropriate to provide TA in both areas at both stages. - Welcomed the increase in IMF fiscal TA to fragile states over the past decade, facilitated by rising external funding. - Considered current modalities for TA delivery to be appropriate but emphasized providing training to a wider range of stakeholders to ensure effectiveness of Fund TA. - Agreed that well-defined overall reform strategies by missions from headquarters are key to coherence and effectiveness; these provide a framework for long-term and short-term advisors. - Appreciated supportive role of regional TA centers (RTACs) in the AFR, APD, MCD and WHD regions. - Emphasized ensuring good coordination with other TA providers and donors, including the World Bank. - Stressed TA should be demand driven and structured flexibly to support country-specific needs; strong country ownership is key for long-term success. - Noted importance of workshops, seminars, other training and peer-to-peer activities to develop capacity. - Recognized considerable efforts and challenges in delivering TA in often difficult and sometimes dangerous circumstances where progress is slow. - Supported increasing intensity and duration of TA through greater use of communications technology and short-term and long-term experts, including resident advisors; increased visits by experienced staff needed to gain in-depth knowledge and provide tailor-made support. - Acknowledged difficulties in measuring TA impact on reform outcomes; positively viewed staff efforts to gauge impact using standardized tools such as Public Expenditure and Financial Accountability (PEFA) and Tax Administration Diagnostic Assessment Tool (TADAT). - Concurred there is scope for integrating fiscal TA to fragile states into Fund surveillance operations; some Directors called for similar reviews of TA by other functional departments. ### Purpose and structure of the case studies paper - Provides background information for the IMF Board paper on “Building Fiscal Capacity in Fragile States (FS).” - Presents case studies on IMF TA and capacity development in the fiscal area provided by the Fiscal Affairs Department (FAD), in collaboration with the Legal Department, for: Afghanistan, Haiti, Kosovo, Liberia, Mali, Myanmar, South Sudan, and Timor-Leste. - Case studies supplement the main Board Paper and discuss experiences in building or rebuilding fiscal policy management institutions across varying stages of fragility. - Relevance highlighted in the post-Addis context on scaling-up countries’ own-revenues to achieve the Sustainable Development Goals (SDGs). - Case study structure: - Short background: political and economic context and key recent events affecting fragility. - TA approach: described in detail. - TA provided: revenues and expenditures, challenges faced, key outcomes achieved, quality and sustainability, successes and failures. - Lessons learned. ### Cross-cutting lessons from the case studies - Some lessons are general; others are country-specific. - Political or highest public service level commitment is necessary but insufficient for successful reform. - Not all fragile states necessarily lack capacity for broad-based domestic taxes such as the VAT; Kosovo and Mali have implemented VAT, with Kosovo’s VAT performing better than Mali’s in terms of revenue, but both performing less well than VAT in OECD countries. - Fragility calls for attention to country-specific factors in the design and implementation of fiscal policies, including stages and types of fragility and their effect on capacities. - Often easier and more politically tractable to work with existing laws, even if weak, to rebuild basic fiscal functions of the state; fundamental “big-bang” fiscal reforms should generally be doubted under certain conditions. - Institution building is long-term, requires constant commitment, and benefits from building on small successes. - Basic analytical and policy design capacity (e.g., macro-fiscal and expenditure and tax policy units) are important intermediaries between TA providers and policymakers; they have little short-term impact but are important for long-term institutional capacity development. - Example: Haiti—despite little tax policy change during the TA program, policy dialogue and the Ministry of Finance’s capacity to own policy proposals improved. ### Afghanistan case study — Background - Afghanistan has experienced external and internal conflict since April 1978. - Taliban rule ended in December 2001; reconstruction started soon after with international support; the Fund started TA in 2002. - CPIA scores are very low and deteriorated between 2005 and 2013, especially in: fiscal policy, financial management, rule-based governance, quality of public administration, transparency, accountability and corruption in the public sector. - Afghanistan continues to have one of the lowest rates of tax collection among IMF member countries (about 10 percent of gross domestic product (GDP)), although revenue growth has picked up markedly in recent years. - Due to very limited tax administration capacity, introduction of a VAT had to be postponed until at least 2020 after legislation was submitted to Parliament in 2014/15. - Country highly dependent on donor support for expenditures. ### Afghanistan case study — Technical Assistance Approach (Revenues) - Tax policy TA focused on indirect taxation and extractive industries (EI), including: - (1) consolidating and modernizing indirect taxes; an ambitious objective was to replace the business turnover tax with a VAT for the large taxpayers, to boost revenue by around 3 percent of GDP; - (2) improving the quality of direct taxes, in particular to foster foreign investment; - (3) reforming taxation of EI to increase the government’s share of the resource rent, in collaboration with USAID and the UK’s DFiD, which provided TA on EI. - TA missions have taken place outside Afghanistan for security reasons. ### Afghanistan case study — Technical Assistance Approach (Tax administration) - 2010 mission recommended concentrating reform efforts on high yield taxpayers: - Ensure all large taxpayers are administered by the large taxpayer office (LTO). - Expand the LTO control over the taxpayers that contribute to at least 70 percent of total collections. - Introduce risk based processes at customs and abandon 100 percent verification. - Strengthen post-clearance audit capabilities. - Due to the security situation, delivery of in-country TA in revenue administration has been impossible in recent years; IMF involvement in this area has been rather limited. ### Afghanistan case study — Technical Assistance Approach (Expenditures / PFM) - Initial engagement in PFM began with a fiscal assessment mission in February 2002; found PFM system consistent with some good practices existed on paper but had broken down during the war. - Approach: build on existing structures and initially focus on core PFM reforms including computerization of payment procedures and fiscal reporting, and consolidation of bank accounts. - A resident TA advisor was assigned to the treasury in Kabul from 2004 to 2006 to help implement a new Financial Management Information System (FMIS). - From 2006 onward TA covered organization of the Ministry of Finance, budget formulation, cash management, and fiscal reporting through a combination of headquarters missions and short-term expert visits from METAC; TA was complemented by other donors. *April 18, 2017 — BUILDING FISCAL CAPACITY IN FRAGILE STATES—CASE STUDIES (selected excerpts)* ### 8. Progress in tax policy has been slow compared to PFM reforms, due to capacity issues ### 8. Progress in tax policy has been slow compared to PFM reforms, due to capacity issues ### Tax policy reforms: overall progress and recent proposals - Progress in tax policy has been slow compared to PFM reforms, due to capacity issues and lack of coherent political commitment among the various parties. - Some relative success has been achieved on excises, but these do not account for much revenue. - A reform to the income tax is in the making, but it is not expected to bring many additional resources. - A FAD tax policy mission in February 2017 proposed four measures to increase revenues: - (i) increase non-tax revenue (as already envisaged by authorities); - (ii) prepare the introduction of 4G cell phone licenses to maximize their price; - (iii) introduce a minimum corporate income tax (percentage of turnovers); - (iv) increase the corporate income tax (CIT) withholding at customs. - The VAT initiative has faced a severe setback and is not expected to be adopted before 2020, and may take the form of a marginal improvement to the design of the existing sales tax (which has a limited crediting mechanism for input taxes). - Capacity issues, coupled with the need for a higher VAT rate, have proven to be significant obstacles. ### Technical assistance and extractive industries (EI) - The IMF helped in the design of the tax regime for EI. Two TA missions took place since 2013. - These missions: - built capacity in understanding the analytical work underlying evaluation of taxation regime options; - helped authorities evaluate their own options for reform; - made several recommendations to modernize the corporate income tax (CIT), including elements of international taxation. - One key institutional recommendation: establish a formal EI tax unit within the LTO of the Afghanistan Revenue Service Department to undertake monitoring and other analyses regarding the sector. - Outcome: Ministry of Mines and Petroleum developed a policy paper entitled Fiscal Policy Options for the Mining Sector in Afghanistan that contained many IMF recommendations and signaled government ownership. - Implementation constraints: authorities were not able to advance the reform agenda largely due to personnel turnover and lack of political commitment. - Risk noted: mining and petroleum sectors continue to develop slowly, but are expected to be significant contributors to economic growth in the future; without an adequate tax system the country may not reap its fair share from the mining rent. ### Expenditures and PFM implementation - January 2002: fiscal and financial functions of the Ministry of Finance were not operational; priority was given to strengthening expenditure controls, fiscal reporting, and accountability through computerization of PFM systems and consolidation of government bank accounts to move to a Treasury Single Account (TSA). - FMIS implementation: - Acquired as an off-the-shelf system; progress was remarkable despite early resistance. - Success factor: authorities accepted implementation without too much customization. - Upgrades were gradual and coincided with revisions to procedures after comprehensive analysis by treasury and budget departments. - Cash management progress was timid due to: - lack of adequate coordination between budget department’s in-year allotment management and treasury department’s cash forecasting and management functions; - unpredictability of cash flows from donor disbursements. - Organizational reforms: - Ministry of Finance prepared a five-year strategic plan in 2005 and progressively developed a more efficient organization. - Implemented new PFM laws and financial regulations, gradual implementation of program budgeting, and multi-year budget preparation mostly at level of the MTFF. - Afghanistan National Development Strategy (ANDS) developed to set national priorities and coordinate donor budgets. - Noted achievements between 2010 and 2013: implementation of a basic approach of program budgeting in line ministries; however, the Medium-Term Fiscal Framework (MTFF) remained inadequate as fiscal sustainability analysis was absent. - IMF in-country TA stopped from 2014 to 2016 due to security situation; out-of-country assistance started in 2016 following a request for an Extended Credit Facility (ECF) program. - An assessment mission found recent progress very slow and identified immediate priorities to strengthen the PFM system, including reforms initiated in 2010 but not fully implemented. ### Capacity constraints and human resources issues - Capacity of the Ministry of Finance remains fragile, especially within the Budget department. - Key issues: - lack of skilled local staff; - significant gap in remuneration offered by the administration compared with donors or contracting organizations. - Consequences: - heavy reliance on international experts and contracted TA; - IMF designed a TA strategy emphasizing capacity building and targeted advisory assistance with a training component to be provided by METAC. - Weaknesses remain in budget preparation; the budget—particularly the capital budget—is unrealistic and not consistent with priorities defined by ANDS. - Treasury progress: Treasury could gradually build internal capacity and reduce reliance on donor-funded Afghan positions; only a small number of key positions at the Treasury were funded by donors. ### Performance improvements linked to tax administration risk analysis - Establishment of risk analysis committees helped guide selection of tax audit cases. - Audit performance improvements (output of Risk Analysis Committees): - actual collections from audit assessment increased from 14.8 percent to 44.5 percent; - LTO audit collections have risen from 15 to 21 percent as a proportion of total LTO collections; - net operating losses disallowed have risen from Afghani (AFS) 4 billion to AFS 14.4 billion. ### Lessons learned - Capacity to manage implementation of reforms is crucial; large and ambitious reforms are difficult to implement sustainably—prefer gradual and realistic approaches. - Lack of coordination across relevant ministries hampers reforms; lack of political commitment worsens coordination (notable in attempted EI taxation reforms). - Building on past legal structures after conflict can facilitate political buy-in and stronger authority involvement, focus on immediate priorities, and avoid wasting time on drafting new legislation. - Reinforcing core fiscal functions, such as budget execution, is critical—especially when the country depends on external financing. - Avoid diverting focus from basics of PFM to more complex reforms; unrealistic and unsuitable reforms often lead to frustration and reduced political support. - Build greater domestic PFM capacity at an early stage in post-conflict countries where local skilled personnel are limited and public remuneration is insufficient to attract and retain them. ### Haiti (introductory material included in the source) - Haiti had long-standing fragility aggravated by the January 2010 earthquake; the earthquake and subsequent disasters (e.g., Category 4-Hurricane Matthews in 2016 with damage equivalent to 23 percent of GDP) further weakened fiscal institutions. - Fiscal institutions were at infancy: budget rarely passed by parliament, planning and budgeting functions not integrated, fiscal reporting almost nonexistent, and until 2014 fiscal accounts did not include capital spending. - The earthquake collapsed Treasury and tax administration buildings and killed many staff; tax and customs revenues collected in January 2010 were only 30 percent of the forecast. - IMF actions in Haiti: - multi-year TA program in tax policy and administration started in 2012 to modernize and simplify the tax system and broaden the tax base (PIT and CIT); - help set up a tax policy unit (TPU) and consolidate various tax laws into a single tax code; - recommended applying VAT (when introduced) solely to large taxpayers with turnover of US$ 800,000 and higher and an unusually long transition period given weak capacity and the concentration of indirect taxes; - advised reorganization of the tax department toward function-based headquarter units and operational offices organized by taxpayer segmentation. - PFM support focused on three critical areas: building a macro-fiscal unit, establishing a TSA (operational since late 2015), and putting in place a fiscal reporting system (accounting functions implemented in 2014). - IMF TA delivery modalities in Haiti: resident advisor placements, short-term expert visits, missions, desk reviews, partnership with Haiti’s School of Administration, and PFM conditionality in IMF programs. - Revenue context: Haiti’s tax-to-GDP ratio was below 10 percent for most of 1990s and 2000s; 13.3 percent realized in 2015 is a commendable improvement but unlikely to be sustainable as it is primarily driven by reconstruction efforts. *Source: cr17153 - 8. Progress in tax policy has been slow compared to PFM reforms, due to capacity issues* ### 28. At the launch of the multiyear TA program in revenue policy and administration in ### 28. At the launch of the multiyear TA program in revenue policy and administration in ### Haiti — institutional anchor, TA coordination, and expenditures - At the launch of the multiyear TA program in revenue policy and administration in 2012, a key issue was the lack of an institutional anchor. - Several bilateral agencies had sizable TA programs, including the Canadian International Development Agency, the US Treasury, and the IDB; IMF TA was small relative to the total provided by the other bilateral agencies. - Weak capacity of the Ministry of Finance in coordinating TA was a determinant factor in holding back reforms in tax policy and administration. - Authorities were slow in making required organizational changes; despite reform traction in 2014, inadequate strategic management and political uncertainty (e.g., three general directors appointed in one year) impeded reform. - At the end of the TA program, main milestones were only partially achieved: - A function-based organizational structure for the Tax Department headquarters has not been implemented. - Taxpayer segmentation was in place, but not all taxpayers have been transferred to the respective large or medium taxpayer office. - Institutional instability and turnover hindered reforms: - For the last five years, the Minister of Finance changed five times. - Treasury reforms were compounded by lack of interest from the central bank and resistance from line ministries that perceived reforms as reducing their control over sectoral spending. - Persistent IMF TA achievements: - A macro-fiscal unit was established in 2013. - Accounting functions were created in 2014. - Haiti now has an operational TSA covering budgetary central government since 2015. - Expenditures: reforms in treasury and expenditure management were constrained by institutional instability and resistance from line ministries. ### Haiti — Lessons Learned - It is important for the authorities to be committed to reforms, and to invest in necessary human resource structures and leadership. - Setting up macro-fiscal and tax policy units created an enabling environment for TA, and proved to be a success irrespective of the size and quality of reforms undertaken; by mid-2013 many challenges, including institutional instability, prevented TA from having a sizable and lasting impact on the employees of the Ministry of Finance. - In revenue administration, a large amount of uncoordinated TA by various organizations raised significant challenges and proved counterproductive. - Some success in PFM reforms could have been larger and achieved faster if there were better functioning state institutions. - The presence of a long-term resident advisor was essential to maintain support during the implementation of the TSA; it is likely the TSA reform would not have been possible or would have been delayed significantly without this permanent local support. *Prepared material covering Haiti from the source content.* ### Kosovo — background and fiscal context - Kosovo faced post-conflict state-building challenges: parallel authorities, powerful regional clans, a criminal-political nexus, ethnic polarization, weak jurisdictional control in resource-rich areas, ineffective governance, and corruptive practices. - Kosovo’s CPIA score averaged 3.5 percent in 2009 through 2015, higher than the threshold for classifying a country as fragile, but the continued presence of UN peace-keeping operations exposes the country’s fragile context. - About 30 percent of the population is considered poor. - The economy is supported by a large diaspora providing remittances in the range of 18-29 percent of GDP. - The WB’s 2015 CPIA found persistent problems: misuse of public resources, lack of quality in public administration, corruption, lack of transparency, and weak rules-based governance. ### Kosovo — TA approach and revenue outcomes - Kosovo is an outlier relative to other fragile states: its revenue-to-GDP ratio averaged 25.0 percent over the period 2013-16 percent, while the fragile states’ average is less than 14 percent. - IMF TA focused on efficiency- and equity-enhancing tax reforms given Kosovo’s lower-middle-income-like characteristics. - Modern recurrent property tax could only be introduced after a cadaster establishment and refined aerial photography in map format was provided to local governments. - IMF TA in revenues included tax policy for non-natural resource sectors (2008; 2011), tax administration (2010-16), and taxation of extractive industries (2012). - Tax policy priorities and measures: - Increase the share of direct taxes (direct taxes accounted for about 18 percent of the total). - Broadening PIT and CIT bases by rationalizing tax expenditures. - Improving recurrent property taxation. - Limiting tax base erosion through excessive interest deductions. - Broadening the use of excises (traditional excises and environmental charges); authorities were willing to extend environmental taxes beyond fuel tax (e.g., packaging waste charges). - Taxation of extractive industries (EI) advice included: - Propose an increase in the CIT rate and reinforce rules protecting the tax base. - Limit company gearing by capping interest deductions. - Maintain internationally competitive ad valorem royalty rates for metallic minerals (specific royalties for lignite). - Impose a 5 percent withholding tax on non-residents’ technical service delivery. - Introduce a capital gains tax on transfer of mining interests, including gains from sales of shares attributable to immovable assets. - Add a 10 percent cash flow tax surcharge. - Minerals sectors’ contribution to total revenues increased from 0.7 to 2.1 percent of GDP for 2012-2015. - Tax administration modernization focused on debt collection, audit, managing large taxpayers, tailoring activities to tax risks, and building trust with taxpayers; tax compliance management by the Kosovo Tax Administration is considered regional best practice. - Authorities pursued a merger of customs and tax administrations; IMF provided extensive TA to manage organizational risks. - Revenue results: - Revenue increased from about 20 percent of GDP to 23 percent in 2009-2015. - Political economy factors led to VAT deterioration: instead of moving toward a single rate, the standard rate was increased, and some consumption items were exempted or zero-rated. - IMF TA coordination: with SECO, USAID, EU, and UNMIK to ensure consistency. ### Kosovo — PFM reforms, sequencing, and outcomes - Post-1999 PFM priorities: establish basic PFM institutions since pre-conflict centralized PFM functions were performed in Belgrade. - UNMIK established the Central Fiscal Authority (CFA) in 1999 with responsibilities including budget preparation, budget execution, treasury functions, public procurement, tax collection, and customs administration. - IMF TA in 1999 provided a detailed blueprint for establishing the Authority and budgetary institutions; follow-up assistance focused on developing a reliable budget execution system (ensuring transactions were properly recorded) before more sophisticated reforms. - From 2001, as Kosovo was not an IMF member until 2008, IMF TA slowed; Ministry of Economy and Finance was created and PFM responsibilities gradually transferred from the CFA. - Constitutional framework and Law on PFM Accountability were drafted and implemented with USAID and WB support. - IMF provided complementary TA on budget classification and chart of accounts, enabling comprehensive and timely fiscal data publication, reducing corruption opportunities, and improving PEFA score—from “D” to “A.” - Decentralization and municipal finances: - A TA mission in October 2007 proposed a framework for decentralization, recommended phased implementation, and addressed municipal financing design. - A new law on local governments increased grant financing and clarified municipal competencies but weakened incentives to raise own-source revenue. - Follow-up mission in 2010 recommended strengthening incentives for collecting own-source revenues by granting more autonomy in their use. - The share of municipal revenues that local governments can spend freely increased from 40 percent in 2007 to 47 percent in 2012. - From 2009, government ownership of the PFM reform agenda increased; the first government-produced comprehensive and integrated reform plan for PFM was produced in 2009 focusing on debt and cash management. - From 2009 to 2015, IMF provided ad hoc TA in cash management, expenditure arrears management, fiscal rules, and conducted a PIMA in 2015 followed by implementation support. - PIMA findings: most public investment institutions are medium or good strength on paper but much weaker in practical implementation (e.g., public investment program database is comprehensive but data quality is poor due to lack of quality assurance). - By 2013, Kosovo had: - A sound legal PFM system. - A very good and operational treasury system with a treasury single account. - An integrated IT system. - A well-established Macro-Economic and Fiscal Policy Unit. - Improved external audit function. ### Kosovo — Lessons Learned - Political economy factors can temper authorities’ appetite for adopting reforms; Kosovo’s revenue effort of 20 percent of GDP was solid to begin with, and advice on rationalizing tax expenditures, environmental charging, reducing inefficiencies, and improving EI taxation was sensible but politically constrained. - Addressing skills deficits in core technical staff is a key determinant of the pace of tax policy, administration, and PFM reforms. - The authorities’ wish to proceed briskly with an integrated tax and customs administration needed tempering to ensure proper foundation and sequencing to avoid disrupting business continuity. - Maintaining a longer TA association with a country is important to influence contemplated changes against a relatively unstable political environment. - A comprehensive and integrated reform plan helps more efficient use of donor resources; absence of such a plan until 2009 created inefficiencies, duplication, and weak integration of reform outputs. - A largely donor-driven PFM reform agenda had limits in motivating ownership; absence of a government-owned PFM reform plan until 2009 contributed to limited capacity and appetite to plan, coordinate, and drive the PFM reform process. *Excerpted and summarized from the provided source content.* ### 50. Liberia emerged from civil war in 2003, facing an infrastructure in complete disrepair, ### Liberia emerged from civil war in 2003, facing an infrastructure in complete disrepair, ### Background and early recovery - Liberia emerged from civil war in 2003 with: - infrastructure in complete disrepair, - little economic activity, - a cash-strapped government saddled with a high debt burden. - Socioeconomic structure characterized by inequality of income, lack of education and opportunity, and social tensions. - Foreign assistance increased after the presidential elections and signing of an IMF-supported Staff Monitored Program in 2006. - The Governance and Economic Management Assistance Program (GEMAP) was established for 2005-2010 to facilitate donor coordination; IMF and WB allocated principal responsibilities for TA in fiscal policy. - In 2010, Liberia’s payment arrears to the IMF were cleared under the Heavily Indebted Poor Countries (HIPC) initiative; the country could access IMF resources under the Poverty Reduction and Growth Facility (PRGF). - After a decade of strong performance (2003 to 2013), growth halted in 2014 due to the Ebola outbreak and decline in international commodity prices: - Real GDP growth dropped from 8.7 percent in 2013 to 0.7 percent in 2014, - 2015 saw no growth. - By June 2016, Liberia was declared Ebola free, and medium term forecast growth was estimated to stabilize at 6 percent over the next five years. ### Technical Assistance Approach — Revenues - IMF needs assessment shortly after the Accra Peace Agreement (2003) informed revenue policy and administration TA. - TA approach: - basic short- and medium-term actions list to increase government revenue, - phased multi-faceted delivery on tax policy and administration to create a tax system based on sound economic principles, broad tax bases, and limited discretionary tax policy. - 2011: IMF launched a multi-year TA program financed by the Tax Policy and Administration Topical Trust Fund (TPA-TTF) focused on: - strengthening the revenue administration organization, - defining organizational structure, administrative and operational frameworks, - building a comprehensive risk strategy for large taxpayers, - building capacity of the Liberia Revenue Authority (LRA) to service taxpayers. - From 2015: TA activities focused on customs administration modernization, including: - preparation for implementing World Trade Organization (WTO) rules on import valuation (WTO accession underway), - capacity building in risk management and post-clearance tax audit, - inclusion of Liberia Customs in a TA project for coordinated modernization of seaport customs procedures among West African coastal countries (reflecting Freeport of Monrovia’s potential to become a regional transit port). ### Technical Assistance Approach — Expenditures (PFM) - IMF provided long-term resident expert and advisory missions to develop the Public Finance Management Act and regulations, and to craft a PFM reform strategy and action plan. - After slow progress, IMF intensified TA after 2012 by: - complementing long-term experts with in-country training on budget formulation and public investment management, - exposure of officials through study tours and short-term expert visits and training from neighboring countries. - 2014 Ebola epidemic halted in-country TA; IMF continued support remotely via conference calls, Skype, and email. - In-country TA resumed after travel restrictions lifted, including posting long-term experts in revenue administration and organizing a workshop for senior officials to define post-Ebola strategic plans in revenue policy, administration, and PFM, and to address human resource capacity issues. ### Key Issues and Outcomes — Revenues - Baseline: tax-revenue-to-GDP ratio of 6.4 percent in 2003 (among the lowest in the world). - Causes of weak revenue: tax concessions, poor administration, extremely low tax morale, widespread governance problems. - Tax structure: heavy dependence on trade and income taxes; domestic sales and excise taxes contributions were very small. - Major TA success: Consolidated Tax Amendments (CTA) to the Liberian Revenue Code, ratified in 2011: - contained a clear investment policy, - modifications to customs and excise tax regimes, - specified regime for mining, petroleum and large-scale agriculture sectors, - improved transparency and curtailed discretionary provision of tax incentives. - CTA success factors: strong leadership at the Ministry of Finance and sustained IMF advice, including legal drafting assistance. - Institutional challenges emerged quickly after CTA passage; implementation capacity was constrained. - Revenue administration reforms (from 2006) included: - redesign of organizational structure, - new tax identification number, - integrated tax administration system, - establishment of tax policy capacity in the Ministry of Finance, - development of a comprehensive compliance program. - 2012 onward: legislation to create a revenue authority passed; a transition team formed under strong leadership; IMF TA supported design, transition, and implementation of the LRA in coordination with donors. - Innovative TA delivery during Ebola included remote electronic modes and later embedding a long-term expert with the LRA. - LRA opened on July 1, 2014, at the height of the Ebola crisis; supported by intensive FAD TA, outcomes included: - new accountability framework and strategic plan, - taxpayers managed by segments (LTO and medium, small and micro departments functional), - establishment of taxpayer service unit, - LRA recognized as professional employer attracting Liberians from abroad, - fundamental facilities in place to assess and collect revenues. - Trade-offs and ongoing priorities: - Operationalizing the LRA shifted resources away from tax policy planning and implementation capacity at the Ministry of Finance, hampering short-term domestic revenue collection efforts. - IMF TA now focuses on aligning business processes, optimizing operational procedures, and improving integrity of registration and taxpayer account databases to support effective compliance management. - Liberia is focused on implementing e-filing and e-payment and considering expanding the Goods and Services Tax to a VAT system with a broader tax base. - The LRA has emerged as a major player to help facilitate a strong economic recovery. ### Key Issues and Outcomes — Expenditures (PFM) - Post-war destruction of basic infrastructure hampered day-to-day functions: - Ministry of Finance building lacked windows, office furniture, equipment, and an automated reporting system. - Lack of electricity led to use of expensive generators. - Staff capacity limited by lack of training and low wages—average salary equivalent to US$50 a month—hindering attraction of skilled staff. - 2003 IMF needs assessment highlighted fragility across all PFM institutions; priority issues included: - rationalizing teacher salaries (donor-paid at higher rates), - cleaning up the wage bill, - commitments control and cash management weaknesses, - backlog of unaudited financial statements, - outdated legal framework. - Fragmented budget formulation prior to reforms: Bureau of Budget (Office of the President) and Ministry of Finance duplicated functions; capital budget separated from recurrent budget limiting a comprehensive annual budget. These areas were subject to conditionality in the 2006 IMF-supported staff monitored program. - GEMAP limitations: did not recognize authority of the newly appointed Minister of Finance to approve payments, assigning responsibility to international experts; government officials found ways to circumvent co-signatory authority. - Progress recorded (PEFA scores improvement 2007–2012) in: - monitoring of expenditure arrears, - comprehensiveness of the budget, - recording of cash balances, - debt and guarantees, - effectiveness of internal audit, - timeliness of audit reconciliation. - Achievements meeting HIPC completion point requirements: - implementation of a Poverty Reduction Strategy Plan, - implementation of a PFM Act in 2009, - enhanced transparency in procurement, - merger of the Bureau of Budget and Ministry of Finance, - development of a debt management strategy, - auditing of pilot ministries. - Less progress in priority PFM areas: - Treasury Single Account (TSA), - medium-term expenditure framework, - full implementation of an integrated financial management information system. - Successive Fund-supported programs included structural benchmarks on cash management and TSA, but benchmarks were not met; likely reasons: - benchmarks may have been too advanced for country capacity, - poor working relationship between Ministry of Finance, Central Bank, and other ministries and agencies, - Legislature’s continuous failure to approve the budget on time contributed to under spending, especially on public investment. - Post-2012 TA approach progressed until Ebola shock in early 2014 stalled delivery; after Ebola, TA was refined to address human resource implications and reprioritize reforms. A seminar helped authorities agree on a list of IMF recommendations and prioritize: - commitment control, - fiscal reporting, - cash management, - the TSA, - public investment management. - Seminar also discussed procurement irregularities in public investment management and lack of accountability by the Ministries of Public Works and Transport. ### Lessons Learned - Reform dynamics in fragile contexts: - The nature and pace of reform can be slow or reactive to immediate needs and can stop during crises. Reform can be sustained through properly sequenced and innovative TA approaches, championed by strong government leadership. - Effective TA modalities: - Combination of diagnostic TA, focused hands-on short-term assistance, dedicated training, and resident long-term advisors enabled IMF to adjust capacity development priorities as circumstances changed (examples: legal drafting assistance for tax policy, combination of in-country and international PFM training, sequenced debt reduction reforms, remote TA during Ebola that supported major reforms). - Trade-offs of institution-building: - Establishing a new organization like a revenue authority can divert limited resources and slow other reforms; success in creating the LRA came at the cost of short-term revenue mobilization efforts at the Ministry of Finance and delays in basic tax administration foundations (taxpayer register reliability, reconciliation of taxpayer accounts, tax arrears management). Emphasis needed on basic building blocks while sustaining achieved reforms. - Donor coordination: - Coordination of donors in the same assistance space is critical; examples show success in revenue administration. Lack of coordination in PFM (duplication of efforts, failure to prioritize needs) may have contributed to lack of progress on basic PFM requirements due to focus on advanced reforms. - Leadership matters: - Strong and consistent leadership from the President enabled Liberia to launch its revenue agency in 2014. This contrasts with PFM where significant TA support resulted in slower progress. *Prepared by Lesley Fisher, Alpa Shah, and Rebecca Sparkman.* ### 73. TA to Mali has been delivered through a mix of long-term and short-term assistance ### cr17153 - 73. TA to Mali has been delivered through a mix of long-term and short-term assistance ### C. Key Issues and Outcomes — Overview of IMF TA delivery - TA was delivered through a mix of long-term and short-term assistance from IMF headquarters and the IMF Technical Assistance Center for West Africa (AFW). - IMF TA focused on: taxation frameworks, customs and tax administrations, PFM framework, and cross-cutting issues related to fiscal decentralization. ### Revenues — findings and outcomes - Tax revenue in percent of GDP has been low, averaging 12 to 15 in recent years, well below the WAEMU convergence criteria of 17 percent—recently increased to 20 percent—and about the average in low-income countries (about 14 percent). - Recurring weaknesses in tax administration: - poor tax compliance for medium and small-sized taxpayers; - large informal sector; - significant tax arrears indicating low payment compliance and poor collection capacity. - Policy/design issues compounding administration problems: - generally complex rules; - widespread tax preferences in the form of temporary and permanent exemptions; - low-yield excises due to design flaws; - complex system of fees and stamps that yields little revenue. - Impact of 2012–14 crisis: - forced closure of offices in northern regions accounted for less than 0.5 percent of domestic taxes; - the Direction Générale des Douanes (DGD) suffered sacking and pillaging in March 2012, including loss of IT systems and vehicles; - DGD actions to ensure continuity: opened temporary bureaus, implemented procedures manuals, installed a backup server. - Tax policy and transparency measures: - 2015 Finance Law: established a synthetic tax of 3 percent of turnover replacing 288 taxes (simplifying taxation of small taxpayers). - New Petroleum Code promulgated in July 2015. - Amendments to the Mining Code drafted but adoption delayed. - Government published all mining and petroleum contracts on the Ministry of Mines’ website. - June 2015: newly created inter-ministry unit in charge of mining taxation trained in financial modeling and fiscal regime analysis using the Fund’s Fiscal Analysis of Resource Industries (FARI) methodology; further capacity support is needed. - Positive revenue trends despite crises (2012–16): - tax revenues increased from about 12 percent to 15 percent of GDP; - increase of 26 percent in the number of large and medium-sized taxpayers; - filing rate for large and medium-sized taxpayers increased from 70 to 95 percent; - VAT performance improved from 4.9 percent of GDP in 2013 to 5.3 percent in 2015. - Medium-term tax objectives and TA priorities: - broaden the taxable base of major taxes; - further streamline nuisance taxes; - reduce disincentives to the labor market caused by very high labor taxes; - improve design of property taxes and taxation of the telecom sector; - develop a compliance strategy focused on simplification; - increase audit coverage to address risks related to VAT credit claims; - enhance monitoring of tax arrears; - upgrade IT systems to automate most processes; - avoid imposing unjustified penalties on taxpayers; - introduce performance management as part of broader HR strategy. - Customs administration TA (FAD and AFW) focus areas: - secure and facilitate procedures in a landlocked country environment; - recommended move away from inspection services by private providers and strengthen internal capacities; - redeploy staff to high value-added functions; - regional-level TA on risk management provided by AFW (project delayed by the 2012–24 crisis and IT system upgrade; project still underway). ### Expenditures — PFM reforms, outcomes, and priorities - PFM reform history: - first reform in late 1990s to align accounting and budget practices with international standards; - since 2009, second set of reforms to improve cash management and move toward second generation reforms (computerized accounting, expenditure processing, cash management, public investment management). - Current PFM weaknesses: - weak fiscal discipline (despite progress since 2014 in settling past expenditure arrears and avoiding accumulation ones); - derogatory procedures for spending hampering financial reporting; - frequent delays and use of restricted procedures in procurement; - little impact of audit and parliamentary scrutiny on financial accountability. - Governance/perception indicators: - Mali’s Transparency International corruption perception index: 127 out of 175 countries in 2013 (improving in 2014–15). - breaches in financial integrity during 2013 to 2015. - Sequencing and TA emphasis: - major weaknesses in accounting, treasury operations and financial governance are being addressed before moving toward second generation reforms such as program budgeting and new accounting standards in 2019. - IMF TA focused on core PFM functions to lay a sound basis for second generation reforms; AFW provided TA on implementing WAEMU directives (e.g., program budget and chart of accounts). - Other donors involved in external audit (European Commission and Canada), subnational government capacity strengthening (Canada and Switzerland), and procurement (WB). - Progress and milestones: - transition to the Treasury Single Account (TSA) almost completed; - measures adopted to enhance budget transparency and improve presentation of Mali’s fiscal accounts; - progress toward submitting the draft finance law under the program budgeting format; - presenting the government consolidated fiscal transactions based on the 2001 Government Finance Statistics Manual (GFSM 2001/2014), starting in 2018; - Public Procurement Integrated Management System to be adopted by all ministries in 2017. ### Fiscal decentralization — risks, TA, and outcomes - Context and targets: - decentralization has delivered mixed results historically; - after 2013 conflict and political instability, decentralization became central in peace talks; - Malian administration envisaging scaling up fiscal transfers to local governments to the tune of 30 percent of the country’s budgetary revenue by 2018. - Risks associated with regionalization: - poor governance of local finances; - insufficient revenue flows to local budgets; - ineffective local policies with little economic and social impact. - IMF TA in 2014–15 addressed early risk mitigation: - sharing of taxation powers between central government and regions; - designing an equitable and efficient transfer system to local governments; - strengthening local governance through strong accountability; - capacity building and training for local officials. - Implementation and donor roles: - authorities prepared a three-year strategy to boost regional development projects; - IMF engagement with local governments has been thin due to resource constraints; - other donors (e.g., Switzerland and Canada) focus on capacity development of local government administrations. ### D. Lessons Learned — operational guidance for TA in fragile settings - TA should resume quickly after an armed conflict. - The IMF resumed TA to Mali as soon as the security situation allowed, helping mobilize authority commitment and donor interest. - Effective coordination is key to progress. - Within the IMF, collaboration across departments was efficient with the African department playing a leading role. - IMF-led coordination with other donors and international organizations effectively channeled TA to critical fiscal management areas and showed progress relatively quickly. - Focus on clearly-identified basic needs. - Post-crisis priorities should stick to basics and deliver quick solutions; in Mali these included improving cash management, financial integrity, and supporting early stages of fiscal decentralization. - Achieving basic milestones consistent with country absorption capacities helps sustain momentum. - Maintain an up-to-date reform plan. - In fragile states where implementation can be erratic due to political economy, security, and capacity, an up-to-date reform plan at the level of key fiscal institutions helps seize opportune reform moments quickly and effectively. *International Monetary Fund — BUILDING FISCAL CAPACITY IN FRAGILE STATES—CASE STUDIES (cr17153)* ### 102. South Sudan is a FS with acute challenges. It ranks among the least developed countries ### South Sudan is a FS with acute challenges. It ranks among the least developed countries ### Overview and recent history - South Sudan ranks among the least developed countries in the world and scores very poorly on almost all SDGs indicators. - Since independence in 2011, institution building and development have been hindered by: - volatile relations with Sudan that resulted in a 15-month shutdown of oil production, and - a three-year civil conflict that started in December 2013. - A civil conflict erupted late 2013. Following the establishment of a Transitional Government of National Unity in April 2016, the country relapsed into violence in July 2016. ### Economic performance and macro-fiscal effects - Real GDP growth has been negative in all years since the country’s establishment, except for 2013/14. - Real GDP is estimated to have declined by about 7 percent in 2015/16. - Real GDP is projected to further shrink by 10½ percent in 2016/17. - Falling oil proceeds have hampered fiscal revenue and led to an unprecedented acceleration in borrowing from the central bank, which in turn, pushed up to about 550 percent in 2016, and caused a sharp depreciation of the exchange rate. ### Institutional indicators and social impacts - CPIA scores are very low and have deteriorated since independence, especially in: - fiscal policy, - public sector management and institutions, - quality of public administration, and - transparency, accountability and corruption in the public sector. - The civil conflict and economic crisis contribute to: - persistence of extreme poverty in certain regions, and - large displacements of civilians and refugees. - Extreme dependence on oil production, price uncertainty, finite reserves, and volatile revenue flows underscore the importance of developing the non-oil economy. ### Technical Assistance (TA) approach - The IMF followed a coordinated approach to TA delivery with many players and leveraged development partner resources by setting up the multi-donor South Sudan Trust Fund (SSTF) shortly after independence to finance TA and training in areas including revenue mobilization and PFM. - IMF assessment missions guided authorities and development partners on reform priorities and next steps, complemented by hands-on mentoring, coaching, and training. ### Key issues and outcomes — Revenues - Fiscal challenges are compounded by lack of adequate capacity in many areas of revenue policy and administration: - Lack of capacity to administer taxes previously collected at the national level by the former Sudan Government of National Unity (GoNU) institutions. - Equivalent laws or transitional provisions were not promulgated at independence for South Sudan to administer these taxes. - Capacity to develop policy options and draft legislative amendments within the Ministry of Finance and Economic Planning (MoFEP) and the Ministry of Justice is very weak. - Revenue administration directorates (Directorate of Taxation and South Sudan Customs) are infant institutions with weak skills and management capacity and have been heavily supported by development partners. - Major development partners and technical assistance providers included DfID, German Agency for International Cooperation (GiZ), USAID/Deloitte Consulting LLP (Deloitte), Trade Mark East Africa (TMEA), the WB, and Japan International Corporation Agency (JICA). - IMF TA focus and recommendations: - Focused on non-oil taxation since a 2010 mission found most inherited oil contract fiscal regimes to be in line with good international practice (exception: pipeline charge negotiated with Sudan). - Designed comprehensive reform strategies guiding reform implementation over six years. - Pragmatic tax policy advice emphasized simple tax regimes and measures: - (i) Passing urgently required tax and customs legislation to provide the mandate to collect taxes and duties from a much wider base; - (ii) Implementing a 5 percent manufacturer’s sales tax applicable domestically and to all imports, with limited exclusions; expanding the number of excisable items; - (iii) Implementing PIT at the subnational level that piggybacks on the national PIT and that is collected and distributed by the national government. - Revenue administration recommendations focused on high-impact priorities: - (i) Establishing basic infrastructure in key compliance management functions; - (ii) Strengthening the large taxpayer unit and customs operations at the largest port; - (iii) Transferring customs administration from the Ministry of the Interior to the MoFEP; - (iv) Implementing simple procedures and automated systems. - Implemented revenue policy measures: - A simple 5 percent sales tax regime adopted in 2012, subsequently increased to 15 percent in 2014/15 and to 18 percent in 2016/17. - Excises levied on selected goods and services, and an increase in excise rates over the years. - Advance payment of income tax on imported goods charged at 2 percent for food, and at 4 percent for all other goods. - A simple business profit tax regime based on the size of business. - Revenue administration outcomes: - Basic infrastructure and institutions set up, including new offices and computers. - Tax and customs laws and regulations enacted. - Administrative procedures for taxpayer registration, collection enforcement and audit put in place (about 50 audits were completed in 2015 compared to zero in 2011). - A viable large taxpayer unit set up and operations at the largest border post improved. - Basic information technology systems implemented. - Non-oil tax-to-GDP has grown from about 1 percent of GDP at independence to about 4 percent in 2015/16, though potential remains largely untapped. - Note: implementation of reforms has been painstakingly slow and at times not fully implemented; e.g., despite adoption by Parliament and signatures by the President, new taxes were not implemented immediately. - Additional external shocks and constraints: - Sharp fall in commodity prices since 2014. - Donor support dwindled due to internal conflict and political instability. - “Green shoots” of reform progress are visible despite constraints. - Recommended revenue-area measures going forward: - Develop capacity of states to collect their own revenue to establish viable subnational governments. - Renegotiate with Sudan the exorbitant pipeline charges to transport oil. - Reform the exemptions and incentives regime. - Professionalize revenue administration and reduce corruption. - Establish the proposed National Revenue Authority while strengthening tax and customs operations and appointing management and staff with requisite experience and skills. - Address the challenge of a large number of inexperienced staff, particularly in customs (former combatants), judiciously. ### Key issues and outcomes — Expenditures and PFM - PFM institutions were nonexistent or extremely weak at independence: - Existing PFM systems were only partially implemented and not sufficiently consolidated. - Most senior government staff were drawn from the diaspora with little PFM experience. - No systematic budget planning or policy development; ad hoc decisions used surplus oil revenues for expansion of government activities and progressive increase of government expenditure. - No in-year and end-of-the-year fiscal reports/accounts; FMIS used only for ex-post recording of transactions. - IMF PFM TA actions between independence and 2014: - IMF led assessment of PFM status and assisted authorities to identify priority reforms and develop a medium-term strategy via SSTF Steering Committee agreement. - Initial diagnostic mission in August 2011 set out an action plan prioritizing: budget execution control, accounting/reporting systems, macro-fiscal analysis, and budget planning and preparation. - Follow-up missions in August 2012 and November 2013 reviewed progress and provided further advice and capacity building. - PFM achievements (slow and limited over three years): - Approval of key PFM legislation. - Greater focus on budget control. - Processing of transactions through the FMIS. - Preparation of a draft Petroleum Revenue Management Bill with an oil benchmark price-based fiscal rule. - A new budget preparation system in spending agencies. - Launch of a survey of government bank accounts. - Preparation of quarterly reports comparing budget estimates and outturn. - Breakdown and reversal of PFM gains during economic and political turmoil: - Early reforms undermined or reversed due to dwindling revenue, spiraling inflation, and armed conflict. - Outcomes included: highly unrealistic budgets; lifted or circumvented financial controls; lost control over payroll; ad hoc and nontransparent payment decisions; exponential rise in expenditure arrears; revenues retained by collecting agencies; civilian agencies left without resources. - TA from IMF and most development partners discontinued during this period. - Resumption of TA and urgent PFM priorities after April 2016 - Setting up of the Transitional Government of National Unity in April 2016 allowed TA to resume briefly. - An IMF mission in May 2016 identified urgent PFM reforms in three broad areas: budget preparation, budget execution, and fiscal reporting. - Recommended actions aimed to: - (i) ensure basic functioning and trust in the PFM system, - (ii) be implementable in the coming 18 months, and - (iii) demonstrate the government’s full engagement to domestic and international stakeholders. - Note: the worsening security situation in July 2016 led to suspension of missions to South Sudan since July 2016, undermining TA impact because of high staff turnover and absence of resident advisors. - Sequencing and TA delivery considerations: - Early support should focus on reforms demonstrating basic control systems are in place: - realistic budgeting, - transparent payment decisions, - full and timely recording of government cash inflows and outflows in the FMIS, - integrity checks in fiscal reports, and - interim audits. - Only after consolidation of basics should more ambitious reforms be pursued. - IMF TA delivery should be subject to authorities’ commitment to implement reforms and providing adequate and suitable staff as counterparts. - Predictability and adequate presence of TA experts on the ground are important. ### Lessons learned - Three key lessons for TA effectiveness in extreme fragility contexts: - First: Authorities should remain focused on basics and fundamentals of simple policies and institution building; separate short-term actions necessary for state functioning from longer-term institution building. - Example: a turnover tax of 5 percent has significant and quick impact on revenues, but without linkages to longer term measures can become distortionary and difficult to reverse (illustrated by increase to 18 percent). - Second: Tight coordination of interventions from multiple donors and TA providers is necessary for success; lack of coordination can delay reforms and state building. - Immediately after independence there was an influx of uncoordinated donor advice; coordination helped form an integrated TA approach, including an informal PFM working group (representatives of the IMF, the WB, African Development Bank, European Commission, USAID, DfID, Embassies of Canada, Japan, Norway, UK, and USA). - Third: Countries must recruit a minimum of middle-management officials with the right competencies in public finance to steer reforms, coordinate with donors, and act as trainers to other officials—this improves ownership and effectiveness of TA (e.g., in auditing large taxpayers and enforcing expenditure controls). *Prepared by Miguel Angelo Alves, Diego Mesa-Puyo, Andrew Kazora Okello.* ### 120. Since the restoration of independence in 2002, Timor-Leste has made significant ### cr17153 - 120. Since the restoration of independence in 2002, Timor-Leste has made significant ### PFM reform progress and current weaknesses - Since 2002, Timor-Leste implemented: an advanced and transparent framework for the governance of the petroleum sector, a well-managed Petroleum Fund, an efficient TSA, comprehensive and timely reporting and availability of key fiscal information to the public. - Compared to an earlier PEFA from 2010, Timor-Leste made solid progress in strengthening PFM systems: - Improvements were measured in 9 of the 28 applicable PEFA indicators in the 2010–13 period. - Half of the indicators are still assessed at or below “C” score in the 2014 PEFA. - Persistent weaknesses identified in the last PEFA that have remained unchanged or worsened since 2010: - Low budget credibility, indicating limited capacity to prepare realistic and reliable budgets. - Management of expenditure arrears is in its infancy. - Oversight of autonomous entities (state owned enterprises) has not been established. - Internal audit is almost non-existent. - Budget planning and implementation capacity, especially capital budget, in line ministries are weak. - Procurement processes remain challenging; open tenders are still not a default method. ### IMF technical assistance (TA) approach and timeline - IMF TA history and roles: - In 1999, under the United Nations Transitional Administration, the IMF provided the framework for the development of the CFA and long-term strategy for modern budgetary and treasury functions. - In 2004, the IMF placed a resident expert in the Ministry of Finance to assist with creation of a Petroleum Fund based on principles from the Norway model. - The Petroleum Fund was created in July 2005. - From 2007 until 2013, support included a resident treasury adviser, diagnostic missions, and short-term expert visits. - Implementing a TSA was included in the IMF’s TA program in 2008. - In 2010 the IMF conducted two assessments (PEFA and a fiscal transparency Report on Observance of Standards and Codes). - In 2012 a third stage in PFM reforms started, involving major structural reforms and change management in the Ministry of Finance and key PFM institutions. - After a successful TA program in treasury management, the IMF reduced support as many other donors had comprehensive TA programs. - In 2016 the IMF provided an assessment of public investment management efficiency and proposed an action plan to improve effectiveness of Petroleum Fund investments. - Treasury-related TA focus areas in the second phase (started 2006): - (i) strengthening institutional and organizational arrangements in the Ministry of Finance and line ministries; - (ii) capacity building of Treasury staff; - (iii) decentralizing treasury functions to line ministries; - (iv) improving the financial management information system; - (v) modernizing the legal framework. ### Legal and institutional reforms - Budget and Financial Management Act developments: - The Budget and Financial Management Act, 2001 was drafted during UN Transitional Administration. - A new Budget and Financial Management Act (2009), developed under leadership of the IMF’s treasury advisor, brought greater transparency and accountability. - The amended Act promulgated in 2009 introduced: - discipline regarding the opening of bank accounts and government borrowing; - a defined budget calendar; - allowance for creation of special funds; - regulation of budget transfers; - defined reporting and audit requirements; - stipulated penalties for various offences committed by civil servants. ### Key outcomes of reform phases - Initial phase outcomes: - CFA made operational and designed overall fiscal strategy, formulated tax policy, administered revenue collection, and coordinated the public expenditure program. - Emphasis on effective management of oil and gas wealth, creation of a Petroleum Fund, and a comprehensive public investment program. - Petroleum Fund’s strong governance is a cornerstone of Timor-Leste’s PFM system. - Second phase outcomes: - Strengthened expenditure management, treasury operations, and fiscal reporting. - Advice on maintaining fiscal discipline after devolving expenditure assignments to line ministries and subnational governments. ### Lessons learned - Long-term resident advisors are instrumental in setting up fundamental fiscal reforms, such as the Petroleum Fund. - Extremely low capacity may require TA to substitute for local resources in the short term: - Example: Australia Capacity Building Project and the WB PFM Capacity Building Project funded several important reforms, including many international advisors who initially focused more on daily management of PFM functions than on reform or capacity building. - In the medium to long run, focus should shift toward strategic planning and prioritization: - This occurred in 2012 when a third stage in PFM reform started and the Government became more selective of donor funded initiatives to ensure alignment with its overall strategy. - Sustainability of reforms requires constant effort and improvement: - While Timor-Leste is expected to graduate from the FS status in 2017, the overall conditions remain challenging and there are many potential risks to the PFM reform processes. - According to the WB’s Fragile State (FS) classification. *International Monetary Fund — BUILDING FISCAL CAPACITY IN FRAGILE STATES—CASE STUDIES (cr17153)* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17153.pdf_