## 10.      Comprehensive anti-corruption and governance reforms can improve growth potential

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### Introduction and framing
- Document date: May 29, 2024.
- Prepared by Yuanyan Sophia Zhang (APD), Dmitriy Rozhkov (FAD), Joel Turkewitz, Paula Zarazinski (LEG), and Azar Sultanov (RES). Ruihua Yang provided inputs and research assistance.
- Core message: Sri Lanka’s severe economic crisis exposed deep-rooted governance weaknesses and corruption vulnerabilities; authorities have begun governance reforms under the IMF-supported EFF program and the IMF Governance Diagnostic (GD) report. Comprehensive and coherent governance reforms can yield significant macroeconomic benefits.

### Key findings on corruption vulnerabilities and governance weaknesses
- Nature of corruption:
  - Corruption in Sri Lanka ranges from petty corruption to systemic/regime-level abuse across the political system and public institutions.
  - The 2023 Governance Diagnostic Assessment and perception-based third-party indicators show systemic vulnerabilities and an increase in perceived corruption from 2012 to 2022.
- Comparative indicators:
  - Regime Corruption Index (RCI) for Sri Lanka in 2022 was higher than an average Asian country.
  - Corruption in Sri Lanka is comparable to lower-middle income countries and South Asian peers but was perceived to be more prevalent than average higher-middle income countries and Asian peers in 2022.
- Fiscal and governance weaknesses identified:
  - Severe corruption vulnerabilities in revenue administration: weak accountability, fragmented tax expenditure management, and excessive human interaction between taxpayers and tax officials.
  - Weaknesses in budget credibility and inefficient public investment management (PIM) due to lack of transparency, accountability, and competitiveness in PIM stages.
  - Governance gaps across six macro-critical areas: anti-corruption legal framework, AML/CFT mechanisms, fiscal governance, financial oversight, rule of law, and Central Bank governance.
  - Common governance gaps: accountability, transparency, and independence.

### Quantified fiscal and economic impacts
- Tax revenue:
  - Pre-crisis tax revenue averaged "10-12 percent" (of GDP) on average.
  - Tax revenue fell to "less than 8 percent in 2022".
  - VAT registrations declined by "over 70 percent" and non-corporate income tax declined by "about 30 percent" in 2020.
- Public investment and efficiency:
  - Public Investment Efficiency reported as "74.5 percent (2021 update)" in the PIMA context.
- Model-based evidence from literature and simulations:
  - Prior DIG-series model applications indicate:
    - Growth could increase by "about 0.8 to 2 percent per year over the next 10 years" depending on reform magnitude.
    - Debt could decline by "2 to 3 percent of GDP annually" over the same period.
  - Governance reforms boost growth by improving public investment efficiency, revenue mobilization, and reducing firms’ distortions.

### Channels through which governance and anti-corruption reforms affect the macroeconomy
- Direct and indirect channels:
  - Revenue mobilization: corruption reduces taxpayer compliance and tax collection efficiency.
  - Public spending efficiency: corruption undermines the effectiveness of spending programs and public investment management.
  - Resource allocation: corruption distorts access to credit and public resources, privileging less productive firms and projects.
  - Institutional capacity: corruption weakens the state’s ability to perform core functions, undermining social cohesion and trust, and increasing political and economic instability.
- Empirical links:
  - Cross-country analysis finds deterioration in corruption/governance associated with lower investment and fiscal revenue, higher inequality, and less inclusive growth.
  - Legal, fiscal, and administrative reforms (fiscal transparency, public financial management, tax administration, judicial reforms) are associated with improved control of corruption and can promote investment and FDI.

### Reforms under way and required approach
- Recent reforms and steps:
  - Enactment of new Anti-corruption Bill in August 2023, strengthening the asset declaration system and CIABOC’s investigative powers.
  - Publication of the IMF Governance Diagnostic Report (first in Asia) in September 2023 and the authorities’ action plan to implement the GD recommendations.
- Recommended characteristics of reform efforts:
  - Comprehensive and coherent reforms across macro-critical areas (anti-corruption legal framework, AML/CFT, fiscal governance, financial oversight, rule of law, Central Bank governance).
  - Sustained efforts with strong political ownership, civil society engagement, and technical and financial assistance.
  - Holistic approach to address accountability, transparency, and independence gaps, including engagement with civil society and international partners.

### Modeling and analytical approach described
- Analytical tools referenced:
  - Dynamic general equilibrium model (DIG-series: Debt, Investment Growth Models) used to simulate reform impacts and capture channels of reform impact.
  - Cross-country empirical analysis and country case studies complement model simulations.
- Simulation focus:
  - Section C: theoretical framework for channels of reform impact.
  - Section D: quantitative simulations of macroeconomic impact under alternative reform scenarios using DIG model.
  - Section E: case studies to complement simulations.
  - Section F: policy implications.

### Mapping governance reforms to distortions (priority recommendations)
- Tax Collection Efficiency
  - Restrict ministerial authority to make discretionary changes to tax policy.
  - Institute anti-corruption measures across revenue agencies (IRD, custom, and excise).
  - Rollout of RAMIS 2.0.
  - Implement, track and report KPIs on tax compliance.
- Public Investment Efficiency
  - Enact public financial framework (PFM) law.
  - Enact public procurement Law.
  - Publish public procurement contracts and tax exemption information online.
  - Implement SOE reforms.
  - Abolish and suspend SDP Act until transparent process is in place.
- Private Investment Distortion
  - Revise the Banking Act and regulations, including strengthening corporate governance of state-owned banks.
  - Develop a government policy to regulate allocations of public assets.
  - Establish digital land registry.
  - Enact revised Central Bank Act to ensure CBSL independence.
  - Strengthen mandate and functions of the Judicial Services Commission.
- Cross-cutting (apply to all distortions)
  - Strengthen anti-corruption legal framework.
  - Publish asset declarations for senior officials.
  - Enact Proceeds of Crime legislation.
  - Amend National Audit Act to levy surcharges for misuse of public assets.
  - Implement beneficial ownership information regulations and establish registry.
  - Establish and operationalize independent CIABOC to fulfill new mandates.
  - Expand resources for Judicial Services Commissions.

### Reform scenarios simulated
- Central scenario: reforms phased in over 5 years with distortions reduced to benchmark levels:
  - Tax collection efficiency improved to higher-middle income class.
  - Public investment efficiency increased to 95 percent.
  - Private investment distortion reduced by half.
- Alternative scenario 1 (Alt S1): distortions gradually reduced over 10 years.
- Alternative scenario 2 (Alt S2): deeper reforms that close all private investment distortion gaps and increase tax collection efficiency to advanced economy level.
- Alternative scenario 3 (Alt S3): immediate partial reversal, reversing half of the reform efforts in the first 5 years.

### Simulation results: macroeconomic impacts
- Improving tax collection efficiency:
  - Stimulates private investment and consumption by about 1-2 percent and reduces debt-to-GDP ratio by about 1 ppts from the steady state over 10 years.
- Increasing public investment efficiency:
  - Promotes private investment and consumption by 1-2 percent from the steady state over 10 years.
- Mitigating private investment distortion:
  - Private investment up by about 6 percent and private consumption up by about 4 percent over 10 years.
- Combined (coherent) reforms:
  - Could increase growth by more than 7 percent and reduce debt-to-GDP ratio by more than 6 percent over 10 years.
- Near-term note: magnitude of gains from tax collection improvement is relatively small due to near-term dampening effect of higher tax collection on activity; combined reforms yield larger gains.

### Distributional effects and inequality
- Tax collection efficiency improvement:
  - Benefits poor households by 2-3 percent and rich households by 1-2 percent (poor benefit more due to higher targeted social transfers; rich face higher marginal tax).
- Private investment efficiency improvement:
  - Benefits poor households around 5 percent and rich households around 3 percent (private efficiency boosts jobs and transfers; rich face higher taxes on consumption and capital gains).
- Ordering of distributional benefits: private income efficiency improvement generates most distributional benefits, followed by tax collection and public investment efficiency.
- Combined reforms: aggregate decline in consumption inequality by more than 15 percent over 10 years.

### Interaction with other structural reforms
- IMF structural reform database analysis: reducing structural gaps in external finance, trade, product market and labor market to the EM frontier could raise annual growth by around 1 ppts for Sri Lanka.
- With governance reforms, combined growth gain amounts to 1.7 percent (reflecting better business environment and stronger legal/accountability framework to facilitate domestic reforms).
- Caveat: amplifying effects from interaction of governance and other structural reforms are not fully captured; estimates are conservative.

### Scenario-specific medium-term outcomes and policy implications
- Alt S2 (deeper reforms): governance reforms can increase medium term growth from 3.1 percent in the baseline to 4.2 percent.
  - In ten years, GDP per capita could increase to 7000 US$, almost 1000 US$ higher than the baseline.
- Pace and commitment matter:
  - Faster and deeper reforms (Central and Alt S2) yield higher growth gains than slower reforms (Alt S1).
  - Partial reversal (Alt S3) wastes early reform efforts; full reversal would produce larger economic losses.
- Policy implication: sustained reform effort, coherent strategy, strong political ownership and international partner support are critical to realize gains.

### International experience
- Georgia (reform drive starting in 2003): anti-corruption campaign, simplification of tax system and tax administration reforms raised tax revenues from 12 percent of GDP in 2003 to 22 percent in 2007; accompanied by improvements in fiscal transparency and public investment management.
- Rwanda: achieved notable success in improving control of corruption, strengthening fiscal governance and reforming tax administration to raise tax revenues over a relatively short period.
- Other examples referenced for instruments and practices: Chile, Brazil, Mexico, Slovakia, Timor-Leste, Bangladesh, North Macedonia, Bhutan, Romania, Ukraine, Liberia.

### Conclusions and policy implications
- Corruption vulnerabilities reflect fundamental challenges to Sri Lanka’s governance framework and require a comprehensive set of reforms across fiscal governance, financial oversight, AML/CFT, anti-corruption legal framework, rule of law, and Central Bank independence.
- Authorities have set out a reform agenda, including as part of the EFF program, taking on recommendations from the GDA; some early steps have been taken.
- Reforms should be designed and implemented coherently to account for reinforcing effects across areas, with prioritization from near-term to medium-term horizons and corresponding resource allocations.
- Macroeconomic gains from governance reforms:
  - Comprehensive reforms increase growth potential by improving state capacity, business environment, service delivery, human capital, fiscal performance (enhanced tax collection and public investment efficiency), and more efficient resource allocation (by reducing private investment distortions).
  - Depending on the pace and depth of reforms, real growth gain could increase from 0.6 to 1.2 percent per year, accelerating Sri Lanka’s move to higher income status.
  - Governance reforms can improve income distribution and debt dynamics.
- Implementation and sustainability:
  - Reforms need to be phased in systematically with strategies to address implementation challenges; strategic planning and prioritization are essential.
  - Sustaining reform efforts is key: capacity development, broader commitment to transparency and accountability, and consistent multi-stakeholder support are required.
  - Long-run commitment is necessary to avoid short-lived anti-corruption drives; reversal of reforms can be costly and successful reforms typically continue for long periods.
  - Support from the highest political level is crucial to create the perception that rules have changed and corruption is no longer tolerated at any level.

*Source: IMF staff chapter "10. Comprehensive anti-corruption and governance reforms can improve growth potential" (1lkaea2024002).*

### References _____________________________________________________________________________ 23

### GOVERNANCE AND GROWTH: LESSONS AND POLICY IMPLICATIONS

### Introduction and framing
- Document date: May 29, 2024.
- Prepared by Yuanyan Sophia Zhang (APD), Dmitriy Rozhkov (FAD), Joel Turkewitz, Paula Zarazinski (LEG), and Azar Sultanov (RES). Ruihua Yang provided inputs and research assistance.
- Core message: Sri Lanka’s severe economic crisis exposed deep-rooted governance weaknesses and corruption vulnerabilities; authorities have begun governance reforms under the IMF-supported EFF program and the IMF Governance Diagnostic (GD) report. Comprehensive and coherent governance reforms can yield significant macroeconomic benefits.

### Key findings on corruption vulnerabilities and governance weaknesses
- Nature of corruption:
  - Corruption in Sri Lanka ranges from petty corruption to systemic/regime-level abuse across the political system and public institutions.
  - The 2023 Governance Diagnostic Assessment and perception-based third-party indicators show systemic vulnerabilities and an increase in perceived corruption from 2012 to 2022.
- Comparative indicators:
  - Regime Corruption Index (RCI) for Sri Lanka in 2022 was higher than an average Asian country.
  - Corruption in Sri Lanka is comparable to lower-middle income countries and South Asian peers but was perceived to be more prevalent than average higher-middle income countries and Asian peers in 2022.
- Fiscal and governance weaknesses identified:
  - Severe corruption vulnerabilities in revenue administration: weak accountability, fragmented tax expenditure management, and excessive human interaction between taxpayers and tax officials.
  - Weaknesses in budget credibility and inefficient public investment management (PIM) due to lack of transparency, accountability, and competitiveness in PIM stages.
  - Governance gaps across six macro-critical areas: anti-corruption legal framework, AML/CFT mechanisms, fiscal governance, financial oversight, rule of law, and Central Bank governance.
  - Common governance gaps: accountability, transparency, and independence.

### Quantified fiscal and economic impacts
- Tax revenue:
  - Pre-crisis tax revenue averaged "10-12 percent" (of GDP) on average.
  - Tax revenue fell to "less than 8 percent in 2022".
  - VAT registrations declined by "over 70 percent" and non-corporate income tax declined by "about 30 percent" in 2020.
- Public investment and efficiency:
  - Sri Lanka: Public Investment Efficiency reported as "74.5 percent (2021 update)" in the PIMA context.
- Model-based evidence from literature and simulations:
  - Prior DIG-series (Debt, Investment and Growth) model applications for other countries indicate:
    - Growth could increase by "about 0.8 to 2 percent per year over the next 10 years" depending on reform magnitude.
    - Debt could decline by "2 to 3 percent of GDP annually" over the same period.
  - Governance reforms boost growth by improving public investment efficiency, revenue mobilization, and reducing firms’ distortions.

### Channels through which governance and anti-corruption reforms affect the macroeconomy
- Direct and indirect channels:
  - Revenue mobilization: corruption reduces taxpayer compliance and tax collection efficiency.
  - Public spending efficiency: corruption undermines the effectiveness of spending programs and public investment management.
  - Resource allocation: corruption distorts access to credit and public resources, privileging less productive firms and projects.
  - Institutional capacity: corruption weakens the state’s ability to perform core functions, undermining social cohesion and trust, and increasing political and economic instability.
- Empirical links:
  - Cross-country analysis (IMF 1998; IMF 2019; IMF 2023) finds deterioration in corruption/governance associated with lower investment and fiscal revenue, higher inequality, and less inclusive growth.
  - Legal, fiscal, and administrative reforms (fiscal transparency, public financial management, tax administration, judicial reforms) are associated with improved control of corruption and can promote investment and FDI.

### Reforms under way and required approach
- Recent reforms and steps:
  - Enactment of new Anti-corruption Bill in August 2023, strengthening the asset declaration system and CIABOC’s investigative powers.
  - Publication of the IMF Governance Diagnostic Report (first in Asia) in September 2023 and the authorities’ action plan to implement the GD recommendations.
- Recommended characteristics of reform efforts:
  - Comprehensive and coherent reforms across macro-critical areas (anti-corruption legal framework, AML/CFT, fiscal governance, financial oversight, rule of law, Central Bank governance).
  - Sustained efforts with strong political ownership, civil society engagement, and technical and financial assistance.
  - Holistic approach to address accountability, transparency, and independence gaps, including engagement with civil society and international partners.

### Modeling and analytical approach described
- Analytical tools referenced:
  - Dynamic general equilibrium model (DIG-series: Debt, Investment Growth Models) used to simulate reform impacts and capture channels of reform impact.
  - Cross-country empirical analysis and country case studies complement model simulations.
- Simulation focus (as described for the paper):
  - Section C: theoretical framework for channels of reform impact.
  - Section D: quantitative simulations of macroeconomic impact under alternative reform scenarios using DIG model.
  - Section E: case studies to complement simulations.
  - Section F: policy implications.

*Source: IMF staff report "GOVERNANCE AND GROWTH: LESSONS AND POLICY IMPLICATIONS" (May 29, 2024).*

### 10.      Comprehensive anti-corruption and governance reforms can improve growth potential

### 10.      Comprehensive anti-corruption and governance reforms can improve growth potential

### Channels through which governance reforms raise growth
- Tax collection efficiency: fiscal governance and anti-corruption reforms (for example on-line tax portal, anticorruption measures across revenue agencies) help increase fiscal revenue to support inclusive and growth-enhancing expenditures (e.g., capital expenditure or targeted social support). The rest can be used to pay down debt. Improved fiscal sustainability in turn lowers sovereign risk premium and borrowing costs.
- Public investment efficiency: improving public investment efficiency (for example through PFM reform) allows more public infrastructure to be built, supporting tourism, labor mobility, and industrial production capacity.
- Efficient access to credit and public resources: reforms to facilitate a level playing field for private sector access to credit and public resources (e.g., strengthening anti-corruption legal framework and CIABOC’s operational capacity, improving governance of state-owned banks and creating rules for allocations of rights on public assets) can promote private investment.
- Better business environment: strengthening contract enforcement and property rights protection rebuilds public trust, attracts foreign investment, facilitates technology transfer through trade and FDI, and raises productivity and opportunities to integrate into global value chains.

### Model, calibration, and key parameters
- Analytical framework: Debt, Investment, Growth (DIG-series) general equilibrium model captures interactions across agents and reduces economic distortions in three areas: private investment distortion, public investment efficiency, and tax collection efficiency.
- Calibration specific to Sri Lanka:
  - Public investment efficiency = 74.5 percent (based on 2017 PIMA report).
  - Tax collection efficiency = 32 percent for VAT (based on IMF FAD tax efficiency database).
  - Steady states set to historical averages before COVID period; private investment distortion calibrated to difference between actual and benchmark private-investment-to-GDP ratio (average for EMs based on Aligishiev et al. 2023).

### Mapping governance reforms to distortions (summary of priority recommendations)
- Tax Collection Efficiency
  - Restrict ministerial authority to make discretionary changes to tax policy.
  - Institute anti-corruption measures across revenue agencies (IRD, custom, and excise).
  - Rollout of RAMIS 2.0.
  - Implement, track and report KPIs on tax compliance.
- Public Investment Efficiency
  - Enact public financial framework (PFM) law.
  - Enact public procurement Law.
  - Publish public procurement contracts and tax exemption information online.
  - Implement SOE reforms.
  - Abolish and suspend SDP Act until transparent process is in place.
- Private Investment Distortion
  - Revise the Banking Act and regulations, including strengthening corporate governance of state-owned banks.
  - Develop a government policy to regulate allocations of public assets.
  - Establish digital land registry.
  - Enact revised Central Bank Act to ensure CBSL independence.
  - Strengthen mandate and functions of the Judicial Services Commission.
- Cross-cutting (apply to all distortions)
  - Strengthen anti-corruption legal framework.
  - Publish asset declarations for senior officials.
  - Enact Proceeds of Crime legislation.
  - Amend National Audit Act to levy surcharges for misuse of public assets.
  - Implement beneficial ownership information regulations and establish registry.
  - Establish and operationalize independent CIABOC to fulfill new mandates.
  - Expand resources for Judicial Services Commissions.

### Reform scenarios simulated
- Central scenario: reforms phased in over 5 years with distortions reduced to benchmark levels:
  - Tax collection efficiency improved to higher-middle income class.
  - Public investment efficiency increased to 95 percent.
  - Private investment distortion reduced by half.
- Alternative scenario 1 (Alt S1): distortions gradually reduced over 10 years.
- Alternative scenario 2 (Alt S2): deeper reforms that close all private investment distortion gaps and increase tax collection efficiency to advanced economy level.
- Alternative scenario 3 (Alt S3): immediate partial reversal, reversing half of the reform efforts in the first 5 years.

### Simulation results: macroeconomic impacts
- Improving tax collection efficiency:
  - Stimulates private investment and consumption by about 1-2 percent and reduces debt-to-GDP ratio by about 1 ppts from the steady state over 10 years.
- Increasing public investment efficiency:
  - Promotes private investment and consumption by 1-2 percent from the steady state over 10 years.
- Mitigating private investment distortion:
  - Private investment up by about 6 percent and private consumption up by about 4 percent over 10 years.
- Combined (coherent) reforms:
  - Could increase growth by more than 7 percent and reduce debt-to-GDP ratio by more than 6 percent over 10 years.
- Near-term note: magnitude of gains from tax collection improvement is relatively small due to near-term dampening effect of higher tax collection on activity; combined reforms yield larger gains.

### Distributional effects and inequality
- Tax collection efficiency improvement:
  - Benefits poor households by 2-3 percent and rich households by 1-2 percent (poor benefit more due to higher targeted social transfers; rich face higher marginal tax).
- Private investment efficiency improvement:
  - Benefits poor households around 5 percent and rich households around 3 percent (private efficiency boosts jobs and transfers; rich face higher taxes on consumption and capital gains).
- Ordering of distributional benefits: private income efficiency improvement generates most distributional benefits, followed by tax collection and public investment efficiency.
- Combined reforms: aggregate decline in consumption inequality by more than 15 percent over 10 years.

### Interaction with other structural reforms
- IMF structural reform database analysis: reducing structural gaps in external finance, trade, product market and labor market to the EM frontier could raise annual growth by around 1 ppts for Sri Lanka.
- With governance reforms, combined growth gain amounts to 1.7 percent (reflecting better business environment and stronger legal/accountability framework to facilitate domestic reforms).
- Caveat: amplifying effects from interaction of governance and other structural reforms are not fully captured; estimates are conservative.

### Scenario-specific medium-term outcomes and policy implications
- Alt S2 (deeper reforms): governance reforms can increase medium term growth from 3.1 percent in the baseline to 4.2 percent.
  - In ten years, GDP per capita could increase to 7000 US$, almost 1000 US$ higher than the baseline.
- Pace and commitment matter:
  - Faster and deeper reforms (Central and Alt S2) yield higher growth gains than slower reforms (Alt S1).
  - Partial reversal (Alt S3) wastes early reform efforts; full reversal would produce larger economic losses.
- Policy implication: sustained reform effort, coherent strategy, strong political ownership and international partner support are critical to realize gains.

### International experience
- Georgia (reform drive starting in 2003): anti-corruption campaign, simplification of tax system and tax administration reforms raised tax revenues from 12 percent of GDP in 2003 to 22 percent in 2007; accompanied by improvements in fiscal transparency and public investment management.
- Rwanda: achieved notable success in improving control of corruption, strengthening fiscal governance and reforming tax administration to raise tax revenues over a relatively short period.

*Source: IMF staff chapter "10. Comprehensive anti-corruption and governance reforms can improve growth potential" (1lkaea2024002).*

### 20.      Fiscal governance reforms often require significant efforts across several dimensions.

### 20.      Fiscal governance reforms often require significant efforts across several dimensions.

### Tax Policy and Revenue Administration
- Key element of the 2003 reforms in Georgia: simplifying the tax code and procedures and removing exemptions to level the playing field and eliminate the incentive to lobby for tax exemptions and special regimes, a major source of corruption.
- Broadening the tax base measures in Georgia: shutting down unlicensed vendors, requiring cash registers, and opening one-stop windows for businesses to deal with tax authorities; contributed to a sharp increase in tax collection.
- Other country examples undertaking revenue institution reforms: Rwanda and Liberia.

### Fiscal Transparency
- Reforms focus on better disclosing budget information and promoting accountability to reduce corruption.
- Many countries improve budgetary frameworks by:
  - developing government balance sheets and income statements;
  - introducing the medium-term budget frameworks (MTBF);
  - publishing detailed statements on fiscal risks.
- The MTBF, fiscal risks statement and scenario analysis are included in budget documents to improve transparency and justify budgets to the public.
- Examples of successful reforms: Georgia, Chile, and Brazil.

### Public Investment Management
- Strong public investment management systems strengthen public confidence that tax revenue is not misused and improve predictability of public funding.
- Well-functioning and transparent e-procurement systems help track spending and assure the public that procurement is fair and not biased in favor of politically connected businesses (examples: Chile, Bangladesh, North Macedonia).
- Importance of a sound process for project appraisal (examples: Mexico, Slovakia, Timor-Leste).

### Anti-corruption Commissions (ACCs)
- Effective and independent ACCs play a pivotal role in combating corruption; models inspired by Hong Kong SAR and Singapore.
- Effective models characteristics:
  - clear legal framework;
  - independence;
  - adequate resources;
  - transparency in operations;
  - collaborative efforts with other domestic and international entities.
- These practices are reflected in UNCAC and the Jakarta Principles for anti-corruption agencies.
- Selection and recruitment:
  - Commissioners are appointed through a merit-based and independent process based on international good practice.
  - Initial recruitment can be conducted by a pre-selection committee in collaboration with civil society organizations and/or experts with international experience.
- Institutional and operational framework example: Bhutan Anti-Corruption Commission (ACC) has a well-structured institutional and operational framework including a well-articulated mandate, strong institutional capacity, a development strategy focused on education, investigation, and prevention, real time analysis of evidence from investigation, and an accessible and open management approach with detailed and documented procedures.
- Public support and political ownership:
  - Bhutan ACC gained wide trust and support following significant outreach and awareness raising campaigns, including public opinion surveys.
  - World Bank studies show success can be challenged by political resistance to changing elite privileges and traditional norms (World Bank 2020).
  - Political ownership and aligned incentives are important to sustain anti-corruption reforms.

### Public Officials’ Asset Declarations
- Since 1996, asset declaration systems have been implemented in over 160 countries.
- International frameworks (UNCAC) and regional/international documents (including G-20 high level principles on asset disclosure) provide guidance for implementation.
- Ukraine and Romania experience highlight the importance of public access and institutional autonomy for successful asset declaration systems.
- Public access:
  - Benefits documented in literature (Kotlyar and Pop 2017, Djankov et al. 2009).
  - 97 percent of OECD high-income countries require publication of asset declarations.
  - 70 percent of countries in Europe and Central Asia require publication of asset declarations.
  - Romania: mandatory public access critical to ANI’s success; by end 2022, more than 10 million asset and interest disclosures were published.
  - Ukraine: by 2019, four million e-declarations had been made available to the public (World Bank 2021).
  - By early 2024, more than 1,5 million asset declarations had been submitted for 2021-22 according to the National Agency on Corruption Prevention (NACP).
  - Public access has enabled civil society and journalists to investigate officials’ assets and helped banks and regulated entities in complying with AML/CFT obligations.
- Preventive measures in procurement:
  - PREVENT (Romania, launched 2017) is an automated system to flag potential conflicts of interest in procurement.
  - From June 2017 to December 2019, PREVENT reviewed more than 43,000 procurement procedures and gave 117 integrity warnings.
- Institutional autonomy:
  - Romania’s ANI: integrity inspectors selected competitively, full autonomy to conduct investigations, annual evaluation by an independent external auditor, and judicial scrutiny.
  - ANI president and vice-president appointed following a merit-based competitive process.
  - ANI can proactively start investigations ex-officio and does not rely solely on law enforcement or judiciary to sanction corruption.
  - Ukraine: NACP revamped in 2019 with new leadership selected (in 2020 and now in 2024) through a highly competitive process contributing to a more effective system.

### Civil Society Engagement and International Support
- Civil society and international partners play catalytic roles in reform adoption and implementation.
- Ukraine: civil society was key in adopting the electronic asset and interest disclosure system in 2014; international partners (IMF, UNDP, World Bank) provided technical and financial assistance.
- Civil society helped appoint anti-corruption commissioners (e.g., Bhutan) and investigate published asset declarations (e.g., Ukraine and Bhutan).
- Electronic public asset declaration systems enabled civil society to create a Politically Exposed Persons database (pep.org.ua) to verify and identify discrepancies; the PEP database is temporarily closed due to the war.
- Ongoing international support and civil society engagement helped reinstate public access to declarations in Ukraine despite the ongoing war.

### Conclusions and Policy Implications
- Corruption vulnerabilities reflect fundamental challenges to Sri Lanka’s governance framework and require a comprehensive set of reforms across fiscal governance, financial oversight, AML/CFT, anti-corruption legal framework, rule of law, and Central Bank independence.
- Authorities have set out a reform agenda, including as part of the EFF program, taking on recommendations from the GDA; some early steps have been taken.
- Reforms should be designed and implemented coherently to account for reinforcing effects across areas, with prioritization from near-term to medium-term horizons and corresponding resource allocations.
- Macroeconomic gains from governance reforms (dynamic general equilibrium simulations):
  - Comprehensive reforms increase growth potential by improving state capacity, business environment, service delivery, human capital, fiscal performance (enhanced tax collection and public investment efficiency), and more efficient resource allocation (by reducing private investment distortions).
  - Depending on the pace and depth of reforms, real growth gain could increase from 0.6 to 1.2 percent per year, accelerating Sri Lanka’s move to higher income status.
  - Governance reforms can improve income distribution and debt dynamics.
- International experience underscores macro-criticality of governance reforms, the importance of civil society engagement, and international support.
- Reforms need to be phased in systematically with strategies to address implementation challenges; strategic planning and prioritization are essential.
- Sustaining reform efforts is key: capacity development, broader commitment to transparency and accountability, and consistent multi-stakeholder support are required.
- Long-run commitment is necessary to avoid short-lived anti-corruption drives; reversal of reforms can be costly and successful reforms typically continue for long periods.
- Support from the highest political level is crucial:
  - High-level involvement helps create perception that rules have changed and corruption is no longer tolerated at any level.
  - Strengthening fiscal governance helps show that the government budget is becoming clean and transparent, reducing opportunities for high-level theft.
  - Case studies show importance of leading governance reforms from the top.

*Source: IMF country chapter excerpt on fiscal governance, anti-corruption, and asset declaration systems.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1lkaea2024002.pdf_