## BUILDING FISCAL CAPACITY IN FRAGILE STATES (pp041817building-fiscal-capacity-in-fragile-states)

## Source details

**Canonical URL:** [BUILDING FISCAL CAPACITY IN FRAGILE STATES (pp041817building-fiscal-capacity-in-fragile-states)](https://www.imf.org/-/media/files/publications/pp/pp041817building-fiscal-capacity-in-fragile-states.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/pp/pp041817building-fiscal-capacity-in-fragile-states.pdf.md)
- [Structured JSON version](/-/media/files/publications/pp/pp041817building-fiscal-capacity-in-fragile-states.pdf.json)

---

### Definition, incidence, and classification of Fragile States (FS)
- FS defined as having either weak institutional capacity measured by the World Bank’s CPIA score (average of 3.2 or lower) and/or experience of conflict (presence of a peace-keeping or peace-building operation in the most recent three-year period).
- IMF uses a three-year average CPIA score to reduce temporary inclusion/exclusion risks.
- At end-2016: IMF considered 39 FS.
- Between 2006 and 2016:
  - 53 IMF member countries were classified as ‘fragile’ at some point.
  - 19 countries remained ‘fragile’ throughout the period.
  - 18 countries exited fragility during this period.
- CPIA and exit-related findings (2005–2015):
  - Budget and financial management CPIA component improved significantly for countries that left fragility (e.g., a three-fold increase).
  - “Efficiency of revenue mobilization” sub-score: seven of the 13 countries that exited fragility between 2005-2015 had sub-scores that remained above 3.2; four countries improved by an average of 40 percent by 2014-2015; two still showed fragility in 2015.

### Geographic, structural characteristics, and vulnerabilities
- Regional and structural facts:
  - More than half of the 39 FS are in Sub-Saharan Africa (SSA).
  - Nearly half of SSA countries are FS.
  - FS accounted for 44 percent of countries ranked in the lowest quintile of the Global Peace Index (163 countries) in 2014.
- Natural disaster exposure:
  - 20 percent of FS are particularly vulnerable to natural disasters.
  - Annual cost of disasters for small states is nearly two percent of GDP—more than four times that for larger countries.
  - About nine percent of disasters in small states involve damage of more than 30 percent of GDP (compared to less than one percent for larger states).
- Governance and corruption:
  - 2015 CPIA sub-cluster scores for persistent FS: “Property Rights and Rules-Based Governance” and “Transparency, Accountability, and Corruption in the Public Sector” are around 2.0.
  - Average scores are 3.0 for FS that were not fragile throughout 2006–2016.
  - In 2015, 23 out of the 39 FS were ranked in the bottom third of the 168 countries and territories measured by Transparency International.

### Macroeconomic performance and basic trends (selected indicators)
- Using weighted averages (No. of Countries: FS 38 ; Non-FS 93):
  - GDP per capita (US$) (1):
    - 2006–2007: FS 1,549.25 ; Non-FS 3,660.67
    - 2014–2015: FS 1,474.83 ; Non-FS 4,428.59
  - Real GDP per capita growth (%):
    - 2006–2007: FS 3.1 ; Non-FS 5.2
    - 2014–2015: FS -0.9 ; Non-FS 2.5
  - Real GDP growth (%):
    - 2006–2007: FS 4.6 ; Non-FS 6.6
    - 2014–2015: FS 1.9 ; Non-FS 3.8
  - Inflation (%):
    - 2006–2007: FS 8.3 ; Non-FS 6.3
    - 2014–2015: FS 6.1 ; Non-FS 4.1
  - Debt (% GDP) (2):
    - 2006–2007: FS 78.4 ; Non-FS 41.9
    - 2014–2015: FS 44.9 ; Non-FS 49.9
  - Current Account Balance (% GDP):
    - 2006–2007: FS -1.3 ; Non-FS -3.8
    - 2014–2015: FS -5.4 ; Non-FS -6.6
  - Fiscal Deficit (% GDP):
    - 2006–2007: FS -2.4 ; Non-FS -0.2
    - 2014–2015: FS 2.7 ; Non-FS 3.7
  - ODA (% GNI) (4):
    - 2006–2007: FS 16.3 ; Non-FS 4.6
    - 2014–2015: FS 14.0 ; Non-FS 3.3
  - Grants (% GDP) (5):
    - 2006–2007: FS 9.2 ; Non-FS 1.9
    - 2014–2015: FS 4.7 ; Non-FS 2.1
- Notes:
  - (1) Per capita GDP is in terms of 2010 USD.
  - (2) Refers to General Government Gross Debt.
  - (4) Only 2014 values considered, due to lack of data for 2015.
  - (5) 2012–2013 averages used instead of 2014–2015 averages due to data gaps.

### Revenue performance, structure, and thresholds
- Average tax revenue-to-GDP ratio (2005–2014):
  - FS below 15 percent (examples: Iraq 1 percent; Libya 1.4 percent).
  - Non-FS average 19 percent.
- Tipping point evidence:
  - Studies find a ‘tipping point’ around 13 percent tax-to-GDP: once reached, real GDP per capita tends to increase sharply and sustainably; recommendation to aim safely above this threshold (e.g., above 15 percent of GDP).
- Country examples:
  - Liberia: tax revenue grew from 11.4 percent of GDP in 2004 to 19 percent of GDP in 2014.
  - Mozambique: tax revenue grew from 10.2 percent of GDP in 2004 to 23.8 percent of GDP in 2014.
  - In 2014 EI tax revenues accounted for 22.6 percent of total tax revenues in Mozambique and 11.3 percent in Liberia.
- Grants interaction:
  - On average, grants accounted for 48.5 percent of tax revenue for FS as opposed to 11.6 percent for non-FS during 2005-2013.

### Heterogeneity, resource-rich FS, and revenue volatility
- Resource-rich FS defined as LICs and LMICs whose revenue from exhaustible natural resources comprised at least 20 percent of GDP (2005-14 average).
- Resource-rich FS in the sample: Angola, Burundi, Chad, Dem. Rep. of Congo, Republic of Congo, Guinea, Iraq, Liberia, Libya, Nigeria, Solomon Islands and Timor-Leste.
- Finding: Resource-rich countries tend to substitute resource revenue for non-resource domestic tax revenue and face more volatile revenue due to commodity price volatility.

### Stages of reform and immediate-stage fiscal reform focus
- Immediate-stage (first stage) fiscal reform priorities:
  - Revenue-side targeting:
    - Focus on easy-to-collect taxes such as customs duties at the border and selective high-yielding excise taxes.
    - Introduce simple organizational structures and basic processes for tax and customs administration.
  - Expenditure-side targeting:
    - Enable authorities to gain immediate control over the budget, including preparing an annual budget.
    - Introduce basic payment systems and controls for budget execution.
    - Consolidate cash resources for the government to meet its immediate payment obligations.
  - Objective once stability increases:
    - Modernize fiscal institutions incrementally through medium-term revenue and expenditure strategies.

### Revenue design principles and simple taxes (first-stage specifics)
- First-stage revenue design focus:
  - Simple taxes with features: large base, highly concentrated in a small number of companies, relatively inelastic, less prone to evasion, based on “gross values” (turnover, import values).
  - Natural candidates: customs tariffs; turnover taxes; ad-valorem royalties in the resource sector; minimum turnover taxes as back-stop to profit taxes.
- Administrative design:
  - Simple regulations, short forms, minimum information requirements, minimized scope for disputes.
- Examples and outcomes:
  - Afghanistan: sales tax allowing limited deductibility on inputs.
  - South Sudan: simple single-stage tax at manufacturing level and on imports; non-oil revenue varied widely with conflict but estimated to reach 6.1 percent of GDP in 2015-2016.
  - Mali: exhibited resilience in customs after 2012 coup through temporary offices, manuals, and a back-up server.

### Expenditure-side immediate priorities and medium-term sequencing
- Early expenditure actions:
  - Consolidate cash resources in a treasury-controlled account at the central bank.
  - Prepare a comprehensive cash-based annual budget covering all central government entities.
  - Restore basic fiscal controls via cash-based expenditure management and legal powers for the ministry of finance.
  - Produce basic fiscal reports on budget execution.
- Medium-term objectives:
  - Modernize institutions via Medium-Term Revenue Strategy (MTRS) and medium-term expenditure strategies.
  - MTRS core elements:
    - Broad consensus on revenue mobilization level for 5–10 years with poverty and distributional considerations.
    - Comprehensive reform plan: policy redesign, revenue agency reform, legal framework strengthening.
    - Country commitment to steady implementation (five to ten years).
    - Secured financing for capacity development.
    - Agreement among TA providers on roles.

### Revenue administration: LTOs, MTOs, IT, and compliance
- LTO/MTO role:
  - Pilots to introduce taxpayer registration, filing, payment monitoring, and close monitoring of the bulk of tax revenues.
  - Procedures piloted in LTO/MTO can be rolled out to wider administration.
- IT systems:
  - Essential to standardize procedures and produce operational and management reports; many case-study countries require implementation or upgrade.
- Compliance strategies and examples:
  - Kosovo: strengthened debt collection and audit, managed large taxpayers, tailored activities to tax risks; considered regional best practice.
  - Liberia: LRA established LTO and segmented compliance functions; long-term expert support from 2015 improved audit capacity for telecoms and banking.

### PFM reforms, systems, and sequencing
- Typical medium-term PFM reforms:
  - Establish medium-term budget framework, implement PFM-related IT systems (IFMIS where appropriate), create internal control frameworks, develop accounting/reporting standards, strengthen cash and debt management (TSA, electronic payments).
- PFM law advice:
  - Keep legislation concise and implementable in short-to-medium term; use secondary regulations activated as capacity increases.
- Expenditure composition in FS:
  - Total public expenditure in FS ~29 percent of GDP versus ~32 percent in non-FS.
  - FS spend more on wages, less on social benefits, lower interest payments, and higher capital expenditure (nearly 30 percent of total expenditure).

### TA modalities, delivery, intensity, and coordination
- TA modalities:
  - HQ missions, ten Regional Technical Assistance Centers (RTACs), long-term advisors (resident advisors), short-term advisors; all modalities deliver workshops and training.
- Delivery mix (reported percentages):
  - Revenue: 37.8% HQ missions, 57.0% STX missions, 5.1% LTX missions.
  - Expenditure: 24.4% HQ missions, 45.8% STX missions, 29.8% LTX missions.
- Trends and intensity:
  - Fiscal TA to fragile states increased from approximately seven person years of field delivery in 2006 to nearly 30 person years of field delivery each year during 2012–2016.
- Capacity and staffing:
  - Two-thirds of resident revenue advisors in SSA come from countries in the region.
  - One-half of resident PFM advisors in SSA come from countries in the region.
- Training:
  - IMF course attendees on fiscal issues increased from 1372 to 3714 (171 percent) between 2013 and 2016.
  - Proportion of attendees from fragile states fell from around 22 percent of total in 2013 to around two percent in 2016.
- Coordination with donors:
  - Effective coordination when country authorities lead, donors work to a single plan, and donor coordination groups exist in-country.
  - At least 35 donor agencies provide TA in tax and customs administration to SSA countries.
  - The MTRS concept used as a coordination framework; PCT and cooperation with World Bank and other agencies highlighted.

### Security constraints, remote modalities, and HRLs
- Stages for TA delivery under security constraints: (i) midst of conflict/disaster; (ii) most fragile/post conflict or disaster; (iii) fragile/stable but vulnerable.
- Remote TA use when on-site not possible: video conferencing, off-site missions, telephone, e-mail (examples: Afghanistan, Guinea, Liberia, Mali, Yemen).
- Liberia Revenue Authority launched on July 1, 2014 using remote TA modalities during Ebola crisis.
- Limits of remote TA: less effective than face-to-face for reviewing actual operations and “real time” procedures.
- Security-related constraints in UN-assessed ‘high risk locations’ (HRLs): additional security costs, uncertainty about ground conditions, recruitment difficulties, risk of conflict resumption.
- Suggested improvements: up-to-date local security briefings, proactive travel services, accurate contact information, intensive off-site security preparation course for staff.

### Measurement, diagnostic tools, and preliminary outcomes
- Diagnostic tools used:
  - Public Expenditure and Financial Accountability (PEFA).
  - Tax Administration Diagnostic Assessment Tool (TADAT).
- PEFA and TADAT findings:
  - Fragile states score lower than low-income and emerging market countries.
  - PEFA weakest areas: budget credibility, management of arrears, budget accounting and reporting.
  - TADAT lowest scores (grade D): timely filing and payment, efficient revenue management.
- TA intensity and outcomes (2004–2014):
  - FS with improved tax-to-GDP ratios were the most intensive recipients of IMF revenue TA.
  - Eleven of the 19 fragile states with improved revenue performance accounted for almost 70 percent of IMF TA to fragile states (measured in person years of field delivery).
- RA-FIT data limitations:
  - Only eleven fragile states provided RA-FIT data of acceptable quality; within this sample nearly 40 percent reported positive trends in taxpayer register accuracy/comprehensiveness and on-time VAT filing coinciding with improved revenue performance.
- PEFA outcome examples:
  - Kosovo and Timor-Leste: four core PFM indicators improved between two PEFA assessments.
  - Liberia and Mali: two core indicators improved, one remained constant, one worsened.
- Revenue conditionality:
  - Revenue conditionality in IMF programs does not appear to have a significant short-term impact on revenue outcomes in fragile states during the program period; effects may materialize over longer horizons.

### Key lessons and policy priorities (summarized recommendations)
- Target fiscal TA to achieve fiscal stability and secure, stable and elastic revenues:
  - Early-stage focus on easiest-to-collect taxes (customs duties, excises at the border, withholding taxes, taxes on telecommunications).
  - Build basic organizational structure and core administrative processes (registration, filing, payment) for major taxpayers/taxes.
  - Keep tax policies simple in immediate post-conflict stages and design policy and administrative reform as an integrated package.
- Expenditure-side priorities:
  - Annual budget preparation, control of budget execution, cash management, and basic fiscal reporting.
- Sequence reforms and set priorities:
  - Complex reforms (e.g., integrated revenue authority) follow establishment of sound organizational structures.
  - Advanced PFM practices introduced only once basic systems are in place.
- Promote effective donor coordination:
  - Country authorities should lead coordination; donors should align to a single plan with clear objectives (MTRS and medium-term PFM plans recommended).
- Increase TA presence and flexible delivery modes:
  - Consider more extensive TA presence, longer duration, resident advisors, and flexible use of STXs/LTXs and communications technology, balanced against cost and security constraints.
- Integrate TA into IMF lending and surveillance:
  - Further mainstream TA into Article IV consultations and lending operations; current mainstreaming exercises cover around 25 countries each year.
- Emphasize customs reform:
  - Customs reforms are critical where border taxes are significant and can improve public perceptions of fiscal institutions.

*Source: BUILDING FISCAL CAPACITY IN FRAGILE STATES, 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

### Immediate-stage fiscal reform focus
- Revenue-side targeting:
  - Focus on easy-to-collect taxes such as customs duties at the border and selective high-yielding excise taxes.
  - Introduce simple organizational structures and basic processes for tax and customs administration.
- Expenditure-side targeting:
  - Enable authorities to gain immediate control over the budget, including preparing an annual budget.
  - Introduce basic payment systems and controls for budget execution.
  - Consolidate cash resources for the government to meet its immediate payment obligations.
- Objective once stability increases:
  - Modernize fiscal institutions incrementally through medium-term revenue and expenditure strategies.

### Differentiation and sequencing of reforms
- Need for differentiation of revenue and expenditure reforms across countries depending on:
  - Starting conditions.
  - Weaknesses in each area.
  - The country’s absorptive capacity.
- In general, TA is appropriate in both revenue and expenditure areas at both stages, but the relative magnitude varies by country.

### Modalities and delivery of technical assistance (TA)
- HQ missions define overall reform strategies. Implementation is supported by:
  - Ten Regional Technical Assistance Centers (RTACs).
  - Long-term advisors (resident advisors).
  - Short-term advisors.
- All three modalities also deliver workshops and other training and peer-to-peer activities to develop capacity.
- Directors’ emphasis on TA characteristics:
  - TA should be demand-driven and structured flexibly to support country-specific needs.
  - Strong country ownership is key for long-term reform success.
  - Training should be provided to a wider range of stakeholders to ensure effectiveness.
  - Good coordination with other TA providers and donors, including the World Bank, is critical.

### Capacity development, delivery intensity, and coordination
- Recent trends and resource intensity:
  - Fiscal TA to fragile states increased from approximately seven person years of field delivery in 2006 to nearly 30 person years of field delivery each year during 2012–2016.
- Directors’ views on delivery enhancements:
  - Increase intensity and duration of TA supported by greater use of communications technology.
  - Greater use of short-term and long-term experts, including resident advisors, which are crucial for implementation.
  - Increased visits by experienced staff to countries to gain in-depth knowledge and provide tailor-made support.
- Recognition of constraints:
  - Acknowledge considerable efforts in often difficult and sometimes dangerous circumstances, where progress is slow.
  - Inherent difficulties in measuring the impact of TA on reform outcomes on both revenue and expenditure sides.

### Measurement, tools, and integration
- Use of standardized diagnostic and assessment tools to gauge TA impact:
  - Public Expenditure and Financial Accountability (PEFA).
  - Tax Administration Diagnostic Assessment Tool (TADAT).
- Directors concurred on further scope for integrating fiscal TA to fragile states into IMF surveillance operations.
- Some Directors called for similar reviews of TA provided to fragile states by other functional departments.

### Key lessons and policy priorities highlighted
- Target fiscal TA to achieve fiscal stability and secure, stable and elastic revenues.
- Set priorities and pay attention to reform sequencing.
- Promote effective donor coordination.
- Design and implement formal Medium-Term Revenue Strategies (MTRS) and medium-term expenditure reform strategies to help countries exit fragility.
- Consider a more extensive TA presence and more flexible TA delivery modes.
- Further integrate TA to fragile states into IMF lending and surveillance operations.

*Source: BUILDING FISCAL CAPACITY IN FRAGILE STATES, April 18, 2017.*

### 8.      This paper follows the same definition of FS as in previous IMF work in the area.

### BUILDING FISCAL CAPACITY IN FRAGILE STATES

### Definition and classification of Fragile States (FS)
- FS defined as having either weak institutional capacity as measured by the World Bank’s Country Policy and Institutional Assessment (CPIA) score (average of 3.2 or lower) and/or experience of conflict (signaled by presence of a peace-keeping or peace-building operation in the most recent three-year period).
- The World Bank’s CPIA score:
  - Measured against 16 criteria grouped in four clusters: economic management, structural policies, policies for social inclusion and equity, and public sector management and institutions.
  - Countries eligible for assistance under IDA are classified as fragile when they have a rating of 3.2 or less.
  - Maximum score is 6.0.
- IMF adaptation:
  - Uses a three-year average CPIA score (instead of the World Bank’s annual CPIA score) to reduce risk of temporary inclusion/exclusion from the fragile list.
- At end-2016:
  - IMF considered 39 FS.
  - Appendix I includes the list of the 39 countries the IMF currently considered as being FS.

### Incidence, persistence, and exits from fragility
- Between 2006 and 2016:
  - 53 IMF member countries were classified as ‘fragile’ at some point (nearly 30 percent of total IMF membership).
  - 19 countries remained ‘fragile’ throughout the period.
  - 18 countries exited fragility during this period.
- CPIA sub-score findings related to exiting fragility (2005–2015):
  - The budget and financial management component of CPIA improved significantly for countries that left fragility (e.g., a three-fold increase).
  - “Efficiency of revenue mobilization” sub-score:
    - Seven of the 13 countries that exited fragility between 2005-2015 had sub-scores that remained above 3.2 during this period.
    - Four countries in the ‘exiting’ group that started the period with scores below 3.2 improved them by an average of 40 percent by 2014-2015.
    - Only two of the countries that exited fragility still showed “revenue mobilization” fragility in 2015 (scores below 3.2).
- Heterogeneity:
  - FS vary by economic structure, sources and degree of fragility, and macroeconomic performance.
  - Reasons for fragility include conflict, military regimes, post-conflict reconstruction needs, and natural disasters requiring large investments.

### Geographic and structural characteristics
- Regional distribution:
  - More than half of the 39 FS are in Sub-Saharan Africa (SSA).
  - Nearly half of SSA countries are FS.
- Conflict exposure:
  - Many FS are affected by external or internal wars; conflicts destroy infrastructure and institutions and deplete human capital.
  - FS accounted for 44 percent of countries ranked in the lowest quintile of the Global Peace Index (163 countries) in 2014.
  - The Global Peace Index estimated the cost of global conflicts in 2014 at USD817 billion (0.8 percent of global GDP).
- Vulnerability to natural disasters:
  - 20 percent of FS are particularly vulnerable to natural disasters (e.g., small island FS in the Pacific, Haiti).
  - Annual cost of disasters for small states is nearly two percent of GDP—more than four times that for larger countries.
  - About nine percent of disasters in small states involve damage of more than 30 percent of GDP (compared to less than one percent for larger states).
- Governance and corruption:
  - 2015 CPIA sub-cluster scores for FS that were fragile throughout 2006–2016:
    - “Property Rights and Rules-Based Governance” and “Transparency, Accountability, and Corruption in the Public Sector” are around 2.0 for these persistent FS.
    - Average scores of 3.0 for FS that were not fragile throughout the period.
  - In 2015 two thirds of the FS were among countries with the highest corruption levels as measured by the Transparency International corruption perception index:
    - 23 out of the 39 FS were ranked in the bottom third of the 168 countries and territories measured.

### IMF engagement and macroeconomic performance
- IMF program incidence (2006–2016 analysis period):
  - 25 of the 39 FS (at end-2016) had an IMF program during the period.
  - 54 of the 98 non-FS (at end-2016) had an IMF program during the same period.
  - Nearly all FS IMF programs aim at protecting vulnerable households by setting a social spending floor.
  - Many programs include structural reforms to improve expenditure efficiency and transparency, and benchmarks in public financial and investment management.
- Volatility and growth:
  - Using Penn World Table (PWT) data for 1990-2014:
    - Real per capita GDP growth is more volatile in FS.
    - Growth is lower for FS relative to non-FS.
    - On average, intensity of recessions in FS is twice that of recessions in non-FS.

### Basic economic trends: Fragile vs. Non-Fragile States (2006–2007 vs. 2014–2015)
- Table 1 highlights weighted averages (number of countries indicated):
  - GDP per capita (US$) (1):
    - 2006–2007: FS 1,549.25 ; Non-FS 3,660.67
    - 2014–2015: FS 1,474.83 ; Non-FS 4,428.59
  - Real GDP per capita growth (%):
    - 2006–2007: FS 3.1 ; Non-FS 5.2
    - 2014–2015: FS -0.9 ; Non-FS 2.5
  - Real GDP growth (%):
    - 2006–2007: FS 4.6 ; Non-FS 6.6
    - 2014–2015: FS 1.9 ; Non-FS 3.8
  - Inflation (%):
    - 2006–2007: FS 8.3 ; Non-FS 6.3
    - 2014–2015: FS 6.1 ; Non-FS 4.1
  - Debt (% GDP) (2):
    - 2006–2007: FS 78.4 ; Non-FS 41.9
    - 2014–2015: FS 44.9 ; Non-FS 49.9
  - Current Account Balance (% GDP):
    - 2006–2007: FS -1.3 ; Non-FS -3.8
    - 2014–2015: FS -5.4 ; Non-FS -6.6
  - Current Account Balance (% Exports) (3):
    - 2006–2007: FS 15.5 ; Non-FS -14.8
    - 2014–2015: FS -0.2 ; Non-FS -23.0
  - Fiscal Deficit (% GDP):
    - 2006–2007: FS -2.4 ; Non-FS -0.2
    - 2014–2015: FS 2.7 ; Non-FS 3.7
  - Reserve Assets (% GDP):
    - 2006–2007: FS 15.2 ; Non-FS 19.8
    - 2014–2015: FS 18.5 ; Non-FS 21.0
  - ODA (% GNI) (4):
    - 2006–2007: FS 16.3 ; Non-FS 4.6
    - 2014–2015: FS 14.0 ; Non-FS 3.3
  - Grants (% GDP) (5):
    - 2006–2007: FS 9.2 ; Non-FS 1.9
    - 2014–2015: FS 4.7 ; Non-FS 2.1
  - No. of Countries (6):
    - 2006–2007 and 2014–2015: FS 38 ; Non-FS 93
- Notes from Table 1 (as stated in source):
  - (1) Per capita GDP is in terms of 2010 USD.
  - (2) Refers to General Government Gross Debt.
  - (3) Excluding Timor-Leste, the average Current Account Balance (% Exports) for Fragile States would instead be equal to -28.6 percent in 2006–2007 and -22.1 percent in 2014–2015.
  - (4) Only 2014 values considered, due to lack of data for 2015.
  - (5) 2012–2013 averages instead of 2014–2015 averages, due to lack of available grant data for 2014 and 2015.
  - (6) Observations not available for all countries in all years, given the variables in question.

### Vulnerabilities and structural implications
- Natural disaster exposure and impacts:
  - Greater exposure results in lower investment, lower GDP per capita, higher poverty, and a more volatile revenue base for small states.
- Institutional weaknesses:
  - Persistent poor governance and extractive institutions identified as central constraints to development and state-building.
  - References to literature highlight traps: civil war, landlocked with ‘bad neighbors’, dependence on resource extraction, and bad governance.
- Corruption and governance indices:
  - Low CPIA sub-cluster scores and Transparency International rankings indicate high incidence of corruption among many FS.

### Revenue trends and tax structure
- Average tax revenue-to-GDP ratio (2005–2014):
  - FS below 15 percent (examples: Iraq 1 percent; Libya 1.4 percent).
  - Non-FS average 19 percent.
- Tipping point evidence:
  - Studies cited find a ‘tipping point’ around 13 percent tax-to-GDP: once reached, real GDP per capita tends to increase sharply and sustainably.
  - Recommendation from studies: ideally aim to be safely above this threshold (e.g., above 15 percent of GDP).
- Country examples of revenue gains:
  - Liberia: tax revenue grew from 11.4 percent of GDP in 2004 to 19 percent of GDP in 2014.
  - Mozambique: tax revenue grew from 10.2 percent of GDP in 2004 to 23.8 percent of GDP in 2014.
  - Note: Tax revenues from the EI sector contributed to these increases:
    - In 2014 EI tax revenues accounted for 22.6 percent of total tax revenues in Mozambique and 11.3 percent in Liberia.
- Revenue structure and diversification:
  - FS rely more on trade taxes than non-FS and much less on taxes on goods and services.
  - Over time:
    - Non-FS: tax shares relatively stable; decline in trade taxes offset by increase in indirect tax revenues and, to a lesser extent, income taxes.
    - FS: share of trade taxes declined more significantly; losses were made up primarily through income taxes, notably corporate income tax (CIT); taxes on goods and services played no role.
  - Puzzle noted: expectation was that FS would rely more on taxes on goods and services and excises given collection point concentration (customs posts, large companies); data suggests this potential remains untapped.
  - Resource-rich FS show much higher reliance on income taxes and especially CIT than non-resource FS.
- Grants and aid interactions:
  - On average, grants accounted for 48.5 percent of tax revenue for FS as opposed to 11.6 percent for non-FS during 2005-2013.
  - High external grants may have contributed indirectly to lack of diversity in FS tax structures through negative impact on total revenue.

*Source: pp041817building-fiscal-capacity-in-fragile-states (IMF PDF chapter).*

### 20.      Despite some common features, the evolution of FS over the past decade shows stark

### 20.      Despite some common features, the evolution of FS over the past decade shows stark

### Heterogeneity of Fragile States and Revenue Implications
- Finding: FS show "stark heterogeneities" that affect revenue mobilization.
- Finding: Of the sample studied, FS tend to remain low-income for long periods—20 in the sample studied were in this position starting in 2006 through 2014.
- Finding: FS that graduated to middle-income status are either very small island economies or rich in natural resources.
- Finding: 11 FS are resource-rich countries, with a higher level of economic development compared to non-resource rich counterparts, but face more volatile revenue due to commodity price volatility.
- Empirical note: Evidence indicates resource-rich countries tend to substitute revenue from exhaustible natural resources for non-resource domestic tax revenue (references noted in source).
- Definition used in the source: “Resource-rich fragile states” refers to LICs and LMICs whose revenue from exhaustible natural resources comprised at least 20 percent of GDP, based on a 2005-14 average.
- Enumerated resource-rich FS in the sample: Angola, Burundi, Chad, Dem. Rep. of Congo, Republic of Congo, Guinea, Iraq, Liberia, Libya, Nigeria, Solomon Islands and Timor-Leste.
- Enumerated LMIC and UMIC FS in the sample: LMIC FS include Republic of Congo, Côte d'Ivoire, Kiribati, Kosovo, Myanmar, Micronesia, São Tomé and Príncipe, Solomon Islands, Sudan, Syria, Timor-Leste, and Yemen. UMIC FS include Angola, Bosnia and Herzegovina, Iraq, Libya, Marshall Islands, and Tuvalu.

### Fragility Duration, Revenue Performance, and Dynamics
- Typology: Three types of FS distinguished in the sample: Constant FS (remained fragile), New FS (became fragile), and Former FS (were fragile in 2008 but left fragility).
- Finding: New FS had higher per capita GDP levels compared to former and constant FS (especially in 2008) but experienced a drastic decline in GDP per capita since 2010 due to political shocks and wars.
- Specific example: The sharp drop in 2011 is driven by the outbreak of civil war in Libya.
- Finding: A substantially higher tax-to-GDP ratio, despite lower income levels, seems to be associated with exiting fragility.
- Comparative observation: States that remained fragile the whole period (“Constant FS”) performed better than New FS despite having a lower per capita GDP.

### Public Expenditure Levels and Composition
- Key statistic: Total public expenditure in FS is somewhat lower than in non-FS—29 percent of GDP compared to around 32 percent of GDP.
- Causal observation: Principal reason for lower public expenditure in FS is lower tax revenue levels; many low-income FS lack access to financial markets and donors fund a large proportion of total expenditure.
- Composition findings:
  - Wages: FS spend more on wages (compensation of employees) relative to non-FS; in conflict FS this may reflect absorbing combatants; in many FS the public sector is the major employer.
  - Social benefits: FS spend considerably less than non-FS on social benefits such as social assistance and pensions.
  - Interest payments: Tend to be lower than in non-FS because FS rely more heavily on concessional or grant financing.
  - Capital expenditure: Higher than in non-fragile LICs; capital expenditure is the second largest expenditure category, representing nearly 30 percent of total expenditure; reflects need to rebuild infrastructure and lack of basic public services.
- Institutional constraint: Size and structure of public expenditure in FS is constrained by the quality of public institutions and scarcity of skilled staff; only a few FS (e.g., Kosovo) had an inherited social safety net that could be adapted.

### Recovery Challenges After Conflict or Disaster
- Finding: During conflict many skilled staff overseeing budget management left; budgets ceased to be used to regulate public resources; public funds were dispersed outside the control of the ministry of finance (examples: Mali after the 2012 coup; Haiti between 2010 and 2015).
- Post-conflict challenge: Public expenditure systems often must be rebuilt from scratch in environments resistant to fiscal discipline, with widespread corruption, lacking legal frameworks, and facing competition for scarce skilled staff from donors and other government areas.

### IMF Technical Assistance (TA) Approach and Coordination
- TA design: IMF TA responds to member country demand and supports IMF surveillance and lending; annual TA programs are planned with area department teams and reflect evolving country priorities.
- Coordination: TA missions often overlap with area department missions (including Article IV); FAD staff sometimes join area missions as technical experts.
- Case example (Myanmar):
  - Baseline: Tax and non-tax revenue collection was about 4½ percent of GDP in 2012.
  - Findings and action: FAD missions outlined a sequencing plan for tax policy and administration reforms; under the Tax Policy and Administration Topical Trust Fund (TPA-TTF) program (2013–2016) reforms were executed.
  - Outcome: Since 2012 revenues from major taxes increased on average over 20 percent year-on-year, and the tax-to-GDP ratio is projected to reach 8 percent in 2017–2018.
  - Expenditure reforms: Article IV and FAD missions addressed automatic monetization of the budget deficit, fiscal decentralization risks, and prioritized building core PFM capabilities including treasury management and market-oriented cash and debt management.

### Capacity Building Framework (CBF) and Three-pronged Strategy
- Initiative: TA design and delivery is consistent with a Board-endorsed Capacity Building Framework (CBF) to provide dedicated support to FS.
- Pilot scope: A number of pilot countries (up to six in the Sub-Saharan Africa region, of which 5 are FS) will be part of this initiative starting 2017.
- SSA CBF pilot countries listed: Central African Republic, the Democratic Republic of Congo, Liberia, Mali, and Sierra Leone.
- Three-pronged overall approach to building fiscal capacity in FS:
  1. Define and implement needed tax and expenditure policies and basic arrangements for administering revenues and managing public finances using scarce human resources and leveraging donor assistance.
  2. Establish a proper legal and regulatory framework for fiscal policy.
  3. Establish an effective central fiscal authority (ministry of finance) and a mechanism for coordinating donor assistance.
- TA targeting: TA target areas are identified through diagnostic or strategy-defining missions; revenue and expenditure missions can take place concurrently; LEG staff often join missions or undertake separate visits.

### TA Modalities by Stage of Fragility and Security Constraints
- Stages recognized: (i) midst of conflict/disaster; (ii) most fragile/post conflict or disaster; (iii) fragile/stable but vulnerable.
- In-conflict modality: For countries in major insecurity where on-site TA is not possible, approach is to "wait" for direct engagement but use alternative modalities (video conferencing, off-site missions, telephone, e-mail) to maintain support (examples: Afghanistan, Guinea, Liberia, Mali, Yemen).
- Example: Liberia Revenue Authority was launched on July 1, 2014, at the height of the Ebola crisis using remote TA modalities.
- Security constraints for TA delivery in UN-assessed ‘high risk locations’ (HRLs):
  - Key constraints include additional cost of security, uncertainty about ground conditions, difficulty recruiting short-term and long-term experts, and risks of resumption of conflict.
  - Improvements suggested: more up-to-date and practical security briefings from local security consultants or UN personnel; proactive travel services on airport security and alternative routing; ensuring accurate contact information for mission travelers and consultants.
  - Limits of remote TA: Video-conferencing, telephone, and e-mail are less effective than face-to-face interactions; IMF staff cannot review actual operations or "real time" procedures essential for some tax, customs, and budget execution reviews.
- Training note: A recent improvement includes an intensive off-site course designed to prepare staff to handle security risks in HRLs.

### Revenue Design Principles for Early-stage Reforms
- Core policy question: How tax policy can help countries manage or end fragility; taxation and state-building require political engagement, inclusiveness, accountability and transparency, and equitable and simple tax systems.
- Practical principle: Simplicity and neutrality should be overriding principles in revenue system design in early stages of fragility (post-conflict or after major natural disasters).
- Equity strategy: Achieving equity is often better pursued through expenditure policies rather than complex income taxation, because lack of tax administration capacity and low income levels make progressive income or wealth taxes costly and difficult to implement.
- Trade-offs and linkages:
  - Simple taxes are more transparent and can support neutrality and horizontal equity.
  - In contexts where simple taxes are distortionary (e.g., import duties, taxes on gross transaction values), their cost may be minor relative to state-building benefits.
  - Market conditions matter: regulated markets that generate locational rent may justify taxes (e.g., specific taxes on telecommunication companies) that would not be appropriate under competitive market conditions.

*Source: https://www.imf.org/-/media/files/publications/pp/pp041817building-fiscal-capacity-in-fragile-states.pdf*

### 36.      In a first stage, the primary focus of revenue policy and administration is on the design

### pp041817building-fiscal-capacity-in-fragile-states - 36.      In a first stage, the primary focus of revenue policy and administration is on the design

### Revenue design — First stage: simple taxes and rationale
- Primary focus: design of simple taxes that require low administrative capacity.
- Desirable features of simple taxes:
  - Large base, highly concentrated in a small number of companies, and relatively inelastic.
  - Less prone to evasion through base erosion schemes.
  - Preference for taxes based on “gross values”, such as turnover or import values.
- Natural candidates and examples:
  - Customs tariffs.
  - Turnover taxes on companies in general, such as ad-valorem royalties in the resource sector.
  - Minimum turnover taxes which can act as back-stop to profit taxes (example cited: Mali).
- Advantages:
  - Provide the basis, in a later stage, for adoption of an effective VAT.
  - Simple tax legislation reduces likelihood of tax disputes in FS that lack judicial capacity.
  - Domestic tax base should be within reach of state authority to avoid costly collection in remote/ insecure areas (example cited: Afghanistan).

### Characteristics of simple tax design and administration
- Simple tax attributes:
  - Do not require complex legislation.
  - Rely on simple regulations or application rules, short tax forms, minimum information requirements, and minimized scope for disputes.
- Importance:
  - Reduces escalation to weak or politically-manipulated judicial systems.
  - Helps prevent taxpayer tactics to delay payment through court actions.

### Case studies and examples of simple tax use
- Afghanistan: sales tax allowing some deductibility of tax on input (mainly imported intermediate goods).
- South Sudan: implemented a simple single-stage tax at the manufacturing level and on imports.
- Debate: whether to progress from a sales tax to a VAT in FS given VAT’s minimum administrative requirements; working towards VAT can prepare for meeting such requirements.

### Administrative priorities — setting up basic procedures
- Immediate tasks to achieve high short-term revenue impact:
  - Establish basic administrative processes: registration, filing, and payment for major taxpayers and taxes.
- South Sudan example:
  - Focus on basic rules/processes in key compliance areas (registration, filing, payment); strengthening the large taxpayer office (LTO) and customs at the largest port; implementing simple procedures and automated systems.
  - Non-oil revenue history quoted: collected a mere 1.1 percent of GDP in nonoil revenue in 2011-2012 (at independence); increased to 2.4 percent of GDP in 2012-2013; dropped to 1.8 percent in 2013-2014 during the civil conflict; increased to 3.1 percent of GDP in 2014-2015; estimated to have reached 6.1 percent of GDP in 2015-2016.
- Myanmar example:
  - Initial focus on larger taxpayers to secure large percentage of tax revenue and lay foundations for progressive strengthening.

### Ensuring continuity during crises
- Protecting against revenue collapses by ensuring continuity of basic operations:
  - Mali (2012–2014 crisis) example:
    - March 2012 coup: pillaging of Direction Générale des Douanes (DGD) and numerous customs offices, including IT systems and vehicles.
    - Imports declined by 16 percent in 2012 because of the ECOWAS embargo and conflict in the north.
    - DGD actions: opened temporary offices, required use of procedural manuals, and installed a back-up server — leading to only a minor impact on revenue collection due to resilience.

### Organizational structure and institutional setup
- Key actions:
  - Set up basic organizational structure for tax and customs administration.
- Examples:
  - South Sudan: transfer of customs administration from Ministry of the Interior to Ministry of Finance and Economic Planning (noted that in practice transfer not fully occurred due to lack of commitment and plan for former combatants who make up majority of customs staff).
  - Liberia: reforms beginning in 2006 included redesign of organizational structure, laying basis for establishment of LRA in 2014.

### Information on taxpayer base
- Early focus: obtain accurate information on taxpayer base.
- Myanmar: strategy to broaden tax base by increasing registered taxpayers and improving compliance while minimizing compliance costs.

### Expenditure design — early-stage priorities
- Quick wins and easy-to-implement measures to avoid overburdening limited capacity:
  - Consolidate cash resources in an account controlled by the treasury at the central bank for priority expenditures.
  - Put in place capacity to prepare a comprehensive cash-based annual budget covering all central government entities.
  - Restore basic fiscal controls through cash-based expenditure management; equip ministry of finance with legal powers to define expenditure chain and provide operational guidance.
  - Develop capacity to produce basic fiscal reports on budget execution to ensure accountability to public and donors and help fight corruption.
- South Sudan expenditure TA example:
  - Focus on budget execution control, accounting and reporting systems, monitoring and reporting accumulation of payment arrears, development of macro-fiscal analysis capacity, and institutional framework for comprehensive budget planning and preparation.
- Short- to medium-term: draft and adopt appropriate legislation to support reforms; in post-conflict situations, partial amendments to existing PFM legislation and use of an annual budget law can be employed.

### Second stage reforms — overview and sequencing
- Objective: modernize fiscal institutions incrementally through medium-term revenue and expenditure strategies.
- TA delivery: medium-term projects supported by long-term or peripatetic experts.
- TA approach: similar to low-income countries, with careful sequencing reflecting low but gradually improving administrative capacity.

### Medium-Term Revenue Strategy (MTRS) — purpose and core elements
- Purpose: modernize tax systems and administration and increase revenues significantly via holistic legal, policy, and administrative reforms.
- Key challenge: secure country authorities’ strong, public, and medium-term commitment (five to ten years).
- Benefits: helps coordinate donor activities.
- Main elements of an MTRS (Box 4):
  - A broad consensus on the level of revenue mobilization effort for the medium-term (5–10 years) with due consideration to poverty and distributional implications.
  - A comprehensive reform plan for the tax system reflecting country circumstances and institutional capacity:
    - A redesign of the policy setting to meet the revenue goal.
    - A reform of revenue agencies to properly administer the policy setting and achieve high taxpayer compliance.
    - A strengthening of the legal framework to enable policy redesign and administration reform, including balancing revenue agencies’ powers and taxpayers’ rights.
  - A country’s commitment to steady and sustained implementation, notably by securing political support and resourcing.
  - Secured financing for the CD effort (technical assistance and training).
  - Agreement among TA providers on the respective roles they will play.

### Moving toward equity and taxation of individuals
- As fragility decreases, tax design can address equity more directly; the personal income tax (PIT) is the main tool.
- Trends and constraints:
  - PIT has increased in recent years in FS; Kosovo example of expanded use of income taxes.
  - In most LICs, PIT largely confined to withholding on wages at employer level and primarily from public service employment.
  - Investment income largely untaxed due to low savings rates and possibilities to hide wealth abroad.
- Two developments that may help:
  - Dual Income Tax (DIT):
    - Wage income taxed at progressive rate; capital income taxed at a single rate, usually the lowest marginal rate on wage income.
    - Both wage tax and most capital income taxes (other than corporate tax) can be collected through final withholding if tax base is simple.
    - Example design: wage tax with a general deduction and no itemized deductions can be withheld at employer level.
  - International taxation developments:
    - Relaxing bank secrecy and strengthening exchange of information.
    - G20/OECD BEPS project aimed at curtailing tax avoidance by multinationals; country-by-country reporting can provide insights into multinationals’ tax affairs.
    - These developments require legal frameworks (e.g., tax treaties), confidentiality safeguards, and administrative capacity that may exceed many FS.

### Taxation of small and micro-enterprises
- Objective: ease transition into the standard tax system and build a sense of fairness.
- Policy options:
  - Simple levies on turnover at a rate high enough to encourage transition into the tax system, but not so high as to encourage concealment.
- Caution:
  - Resist extending complex tax rules to small and micro-enterprises; income concealed in the formal sector often exceeds potential tax from informal sector activities.

### VATs and second-stage consumption tax reforms
- Introduction or strengthening of broad-base consumption taxes, notably VATs, in relatively stable FS (examples: Kosovo and Mali).
- Design departures from high-income country recommendations:
  - IMF advice has typically favored a relatively high registration threshold and use of tax exemptions in limited cases rather than lower rates (example cited: Liberia).
  - Experience with VAT exemptions is mixed; multiple VAT rates more common now than in early 2000s.
- Caution on sequencing:
  - Transition from extreme fragility to less extreme fragility can be long; VAT introduction and design advice should be reconsidered in light of slow changes in political and security conditions (examples: Afghanistan and Haiti).

### Building headquarters capacity and sequencing reforms
- Key challenge: build capacity of headquarters offices of tax and customs administrations to define strategy, plan and monitor operations, and oversee IT and human resources.
- Haiti example post-2010 earthquake (IMF advice starting 2012):
  - Focus on delineating headquarters and operational functions; ensure headquarters focus on main tax administration functions and operational offices are organized by taxpayer segments.
  - Implementation challenges: function-based organizational structure not approved or implemented due to weak strategic management and high turnover of senior management (three tax administration directors appointed in one year).
- Liberia example:
  - Legislation approved to establish a revenue authority starting in 2012; transition team formed under strong leadership.
  - FAD advice: begin by strengthening fundamental tax and customs operations before introducing VAT, especially during challenging periods such as the Ebola crisis.

*Source: pp041817building-fiscal-capacity-in-fragile-states - 36.*

### 51.      Establishing function-based Large Taxpayer Offices (LTOs) and Medium-sized

### 51.      Establishing function-based Large Taxpayer Offices (LTOs) and Medium-sized Taxpayer Offices (MTOs)

### Revenue administration: LTOs, MTOs, and segmentation
- LTOs and MTOs serve as pilots to introduce basic core procedures: taxpayer registration, filing and payment monitoring, and close monitoring of the bulk of tax revenues.
- Once established, LTO/MTO procedures can be rolled out to other tax offices and taxpayer segments.
- Liberia case:
  - Following IMF advice in the decade after the conflict, the LRA established an LTO and departments focusing on compliance of medium, small, and micro taxpayers.
  - Starting 2015, a long-term expert (LTX) provided hands-on support to strengthen LTO operations, emphasizing improving the tax audit function, including auditing complex sectors such as telecoms and banking.

### IT systems to support core tax processes
- Designing and implementing an IT system is essential to:
  - Standardize core procedures across the organization.
  - Allow production of periodic operational and management reports.
- In the case study countries, IT systems require expansion and upgrades or need implementation from scratch (South Sudan).
- IMF Technical Notes (IMF 2017a, 2017b, 2017c) provide practical guidance for tax administrations with no or limited/outdated technology.

### Compliance improvement strategies
- Establishing basic compliance improvement strategies for individual taxes and/or taxpayer segments is critical.
- Kosovo example:
  - TA focused on strengthening core tax administration functions (debt collection, audit), managing large taxpayers, and tailoring administrative activities to specific tax risks.
  - Building trust and cooperation with taxpayers became a priority.
  - These reforms helped improve revenue yields and achieve a cost-effective use of resources.
  - Tax compliance management by the Kosovo Tax Administration is considered regional best practice.

### Expenditure design: medium-term strategy and systems
- Typical medium-term strategy components (usually defined with an HQ diagnostic mission or PEFA) include:
  - Establishing a medium-term budget framework to ensure budget appropriations in future years are consistent with meeting the government’s medium-term fiscal objectives given expected available resources.
  - Implementing PFM-related IT systems to support planning and implementation, including introduction of an integrated financial management information system (IFMIS) where appropriate; well-designed solutions that consider capacity constraints have the best chances of success (examples: Kosovo, Afghanistan).
  - Creating an internal control framework to manage budget execution and reporting to reduce budget overruns and unauthorized expenditures; payment arrears are common in fragile states and introduction of commitment controls is crucial to prevent arrears accumulation.
  - Developing accounting and reporting standards in accordance with international practice, including preparation and implementation of a chart of accounts that meets these standards and coverage of all levels of government and state-owned enterprises.
  - Strengthening cash and debt management arrangements: gradual establishment of a treasury single account (TSA), comprehensive electronic government payment system, cash planning capacity, debt recording and reporting system, and integrated cash and debt management capabilities.

- Kosovo example:
  - After independence in 2008, produced a comprehensive and integrated PFM reform plan supported by IMF in areas including cash management, expenditure arrears management, and design/implementation of a credible fiscal rule.

### PFM law and sequencing of reforms
- A new overarching PFM law can cement reform results and move to advanced PFM practices; typical provisions include roles and responsibilities in the budget process, timeline for fiscal framework and budget approval, budget execution procedures, debt and cash management, accounting and fiscal reporting, and ex-post control and audit functions.
- More recent PFM legislation typically includes fiscal responsibility and fiscal risk management provisions, but comprehensive legislation requires high capacity for even partial implementation.
- Fragile countries often attempt to skip initial stages and adopt comprehensive laws prematurely; this can undermine credibility if implementation is weak.
- Recommendation: keep legislation concise for areas implementable in the short to medium-term and use detailed secondary regulations to be activated as capacity increases.

### Expenditure policy support and subsidy reform
- IMF advice on subsidy reform often accompanied by TA to reform social safety nets and fiscal decentralization.
- Examples:
  - Haiti and Mali: target reducing budget pressure from fuel subsidies, establish automatic price mechanism, and better targeted subsidy schemes.
  - Kosovo: reforming social pensions and benefits through an overarching reform program; advice on fiscal decentralization to devolve revenue and expenditure decisions.

### Synchronization between revenue and expenditure reforms
- Synchronization varies across fragile states; TA advice favors coordinated approach.
- Establishing a centralized Treasury account is key for accurate accounting/reporting of tax revenue flows and enabling reconciliation between tax administration and Treasury—applied in Haiti, Liberia, South Sudan, Timor-Leste, and others.
- TA provided in both revenue and expenditure areas in all case study countries except one (Kosovo).
- Relative magnitude of revenue vs. expenditure TA depends on starting conditions and absorptive capacity:
  - South Sudan: relatively more revenue TA due to very low tax-to-GDP ratio and uncertainty about EI revenue flows.
  - Liberia: balance tipped toward revenue TA after LRA establishment, and later supported by a resident advisor focused on large taxpayer compliance.
  - Timor-Leste: early focus on establishing the Timor-Leste Revenue Service (2001–2002); later emphasis on managing oil and gas wealth.
  - Haiti: more TA in treasury management to establish a TSA after the 2010 earthquake and subsequent shocks, including recent hurricanes.
- TA pace should match counterpart absorptive capacity—lack of basic infrastructure, IT systems, qualified staff, and management teams requires slow start and ramp-up.

### Tools to identify TA needs: PEFA and TADAT
- PEFA and TADAT can help identify common TA needs.
- PEFA and TADAT scores for fragile states are lower compared to low-income and emerging market countries.
- PEFA findings:
  - Lowest scores for fragile states relate to budget credibility (effectiveness of budget execution), management of arrears, and budget accounting and reporting—areas where IMF provides TA.
- TADAT findings (limited sample and new tool):
  - Areas with lowest scores (grade D) are timely filing and payment of taxes, and efficient revenue management (tax revenue accounting, timely refunds, provision of data for revenue forecasting).
  - Some fragile states score well on legal framework for resolving tax disputes, but good legal frameworks do not necessarily imply effective administration.
- Sample sizes noted:
  - Fragile State Average (n=23)
  - LIDC Average (n=44)
  - EME Average (n=40)
- Caution: in TADAT, sample size for fragile states is still small; care needed in interpreting results.

### Focus of IMF TA in case study countries
- Revenue TA focus areas:
  - Strengthening excise taxation and EI fiscal regimes.
  - Rationalizing tax expenditures and tax incentives.
  - Strengthening core operations in tax and customs administration: taxpayer database integrity, taxpayer services, compliance with filing and payment obligations, audit and verification programs; for customs: trade facilitation, control of importers/exporters reporting and payment, customs clearance controls, enforcement through audit and anti-smuggling.
  - IT-related issues, LTU/LTO development, segmentation/risk management, integration with customs, organization/functions/basic setup, introducing risk-based processes, post-clearance audit.
- Expenditure TA focus areas:
  - Annual budget preparation, budget execution, cash management, reporting—corresponding to PEFA-identified weakest areas.

### Trends and delivery of FAD TA
- Fiscal TA to all LICs and fragile states increased during the past decade, enabled by rising external funding.
- Funding sources include multi-donor trust funds (examples listed in the source) and bilateral funding.
- Delivery mix:
  - TA from headquarters is around one-third of total FAD TA delivered in both revenue and expenditure areas.
  - HQ missions, short-term expert (STX) missions, and long-term expert (LTX) missions play roles in implementation and backstopping.
- Reported mix of delivery by mission type (as percentages):
  - Revenue: 37.8% HQ missions, 57.0% STX missions, 5.1% LTX missions.
  - Expenditure: 24.4% HQ missions, 45.8% STX missions, 29.8% LTX missions.

*Source: pp041817building-fiscal-capacity-in-fragile-states - 51. Establishing function-based Large Taxpayer Offices (LTOs) and Medium-sized Taxpayer Offices (MTOs).*

### 66.      The mix between long-term and short-term experts (LTXs and STXs) is different in the

### pp041817building-fiscal-capacity-in-fragile-states - 66.      The mix between long-term and short-term experts (LTXs and STXs) is different in the

### Mix of experts (LTXs and STXs) and resident advisors
- The mix between long-term and short-term experts is different in the revenue and expenditure areas, with expenditure using more resident advisors compared to revenue.
- One reason: PFM reforms typically require interventions across a greater number of agencies and donors often require assurance that donor funds are used effectively and transparently.
- The IMF seeks local expertise when recruiting experts:
  - two-thirds of the resident revenue advisors in SSA come from countries in the region.
  - one-half of the resident PFM advisors in SSA come from countries in the region.

### Training modalities and capacity development
- All three modalities—HQ missions, LTXs, and STXs—deliver workshops, seminars and other training activities.
- Resident advisors in the IMF’s RTACs in four regions (APD, AFR, MCD and WHD) provide support to nearly all fragile states.
- The IMF’s Institute for Capacity Development (ICD) offers training on fiscal issues in fragile states; the Revenue Mobilization Trust Fund includes a training module on tax policy and administration; TADAT participants generally receive training in the TADAT methodology before assessments.
- Box 5 — IMF Training on Fiscal Issues in Fragile States (highlights):
  - Course topics include: Budget Formulation and PFM; Combatting Fiscal and Customs Fraud; Management of Oil and Natural Gas Revenues; Macroeconomic Management and Fiscal Policy; Medium-Term Expenditure Frameworks; Fiscal Transparency and Fiscal Risk Management.
  - Attendees in IMF courses covering fiscal issues increased from 1372 to 3714, or 171 percent, between 2013 and 2016.
  - Over the same period attendees in all IMF courses increased 82 percent.
  - The proportion of attendees from fragile states fell from around 22 percent of total in 2013 to around two percent of total in 2016.
  - Expansion of on-line learning can benefit officials in fragile states, provided internet connections are maintained.

### Coordination of technical assistance (TA) with donors and other providers
- FAD TA teams invest considerable time coordinating TA with other donors/TA providers before, during, and after missions.
- Coordination is easier when:
  - country authorities lead coordination efforts;
  - donor/TA agencies work to a single plan with clear objectives;
  - donor coordination groups exist in-country.
- Examples of coordination effectiveness:
  - Head of Liberia’s Revenue Authority played a critical role coordinating donor activities for tax administration reforms.
  - An informal PFM working group in South Sudan (IMF + ten other development partners) helped coordinate activities.
- At least 35 donor agencies provide some type of technical assistance in tax and customs administration to SSA countries.
- The concept of a Medium-Term Revenue Strategy (MTRS) can provide a robust framework for coordinating multiple donor activities.
- The PCT (Platform for Collaboration on Tax) should provide a venue for discussing TA among IMF, World Bank, OECD, UN, with additional collaboration from IDB, WCO.
- Cooperation with the World Bank includes joint strategy meetings, participation in steering committees, IMF designing fiscal reform strategies with World Bank projects supporting implementation, and inter-agency research collaboration.

### Preliminary assessment of outcomes
- Measuring the impact of TA is limited by difficulty isolating TA effects from other factors such as overall economic performance.
- IMF revenue TA intensity and revenue outcomes (2004–2014):
  - FS with improved tax-to-GDP ratios during 2004–2014 have been the most intensive recipients of IMF revenue TA.
  - Eleven out of the 19 fragile states with improved revenue performance during 2004–2014 accounted for almost 70 percent of IMF TA provided to fragile states (measured in person years of field delivery).
- RA-FIT data and selected revenue indicators:
  - Only eleven fragile states provided RA-FIT data of acceptable quality.
  - Within this sample, nearly 40 percent reported positive trends in taxpayer register accuracy/comprehensiveness and on-time VAT filing that coincided with improved revenue performance (examples: Cote d’Ivoire, Mali, Togo, Sierra Leone).
- Revenue conditionality in IMF programs:
  - Revenue conditionality does not appear to have a significant impact on revenue outcomes in fragile states during the program period.
  - Because basic institutions and administrative capacity are weak in fragile states, revenue conditionality is less effective during the program period—impacts are likely to be felt over a longer period beyond the program.
- PFM outcomes:
  - PEFA scores have improved significantly in countries where FAD’s TA has been more intensive.
  - Examples: Kosovo and Timor-Leste saw four core PFM indicators improve between two PEFA assessments; Liberia and Mali saw two core indicators improve, one remain constant, and one worsen; Haiti’s results were more mixed.
  - PEFA score range is 0 (lowest) to 4 (highest).
- Budget credibility:
  - There has been an improvement in budget credibility for a group of fragile states between 2011 and 2016, measured by the difference between budget forecast and outturn.

### Lessons learned and policy recommendations
- Target fiscal TA to achieve fiscal stability, financial control, and secure ‘own’ revenues:
  - Early stages: focus on easiest-to-collect taxes (e.g., customs duties and excises at the border, withholding taxes, taxes on telecommunications), basic organizational structure for tax and customs administrations, and core administrative processes (registration, filing, payment) for major taxpayers/taxes.
  - Keep tax policies simple in immediate post-conflict stages.
  - Design tax policy and administrative reform as an integrated package.
  - Expenditure-side focus: annual budget preparation, control of budget execution, cash management and basic fiscal reporting.
- Set priorities and sequence reforms:
  - Complex reforms (e.g., integrated revenue authority) should come after sound organizational structures exist.
  - Advanced PFM reforms (e.g., medium-term budgeting) should be introduced only when basic PFM systems are in place.
  - Building fiscal institutions takes a long time and reforms often span several political cycles.
- Promote effective donor coordination:
  - Country authorities should lead coordination.
  - Donor/TA assistance should follow a single plan with clear goals and milestones (medium-term revenue and expenditure strategies can be key).
  - Establish donor coordination groups where absent.
- Value of a medium-term reform focus:
  - Designing and implementing formal MTRS and PFM reform plans can help countries exit fragility.
  - Once fragile states move beyond the ‘basic needs’ stage, focus should shift to formal MTRS and PFM reform plans.
- Do not underestimate customs:
  - More attention is needed on reforming and strengthening customs, especially where border tax revenue is significant.
  - Customs reform can improve public perceptions of fiscal institutions and signal reductions in corruption/arbitrariness.
- Consider more extensive TA presence and flexible delivery modes:
  - Sustainable reforms in fragile states are long-term; increase intensity and duration of TA and flexibility of delivery modalities.
  - Posting long-term advisors can provide permanent, hands-on support, ensure continuity, and accelerate reform—though cost and security constraints exist.
  - Short-term and peripatetic experts, and modern communications technology, can provide flexibility according to country needs, absorptive capacity and security situation.
- Further integrate TA into IMF lending and surveillance:
  - Mainstreaming TA into surveillance work and giving TA advice a prominent role in Article IV consultations can benefit fragile states.
  - The current coverage for “mainstreaming” exercises is around 25 countries each year.

### Issues for discussion (as posed in the source)
- Do Directors agree with the approach that the IMF has been following, building fiscal institutions in an incremental way based on the ‘starting’ conditions?
- Do Directors agree with the mix of TA in revenue and expenditure adopted thus far, which has been driven by country circumstances?
- Do Directors believe the balance of modalities for dealing with the special needs of fragile states set out in the paper to be appropriate?
- Do Directors have suggestions, beyond those in the paper, for making IMF support for fiscal capacity building in fragile states more effective?

*International Monetary Fund — BUILDING FISCAL CAPACITY IN FRAGILE STATES (excerpt from pp. 66–48 of the source PDF)*

### Appendix II. Recent IMF Publications on FS

### Appendix II. Recent IMF Publications on FS

### Overview of IMF engagement and reviews
- In the past decade, the IMF has prepared three major papers and a guidance note on issues relating to the IMF’s broader engagement in FS.
- In 2008, the IMF reviewed its experience and discussed options to enhance the quality of its engagement with FS. It observed that the IMF had been engaged in some form in almost all FS to improve economic management and performance, though it had not adopted a specific and differentiated policy toward them.
- Following the Executive Board’s discussion of the 2011 paper, a staff guidance note was issued (2012), providing operational guidance on the IMF’s engagement with low and middle-income countries in fragile situations.

### 2011 SPR paper: key recommendations to strengthen IMF engagement with fragile situations
- (1) For fragile LICs, fuller use of the Rapid Credit Facility (RCF) to support a more flexible approach to adjustment and reforms where needed. For fragile Middle Income Countries (MICs), establishment of a unified non-concessional facility for emergency assistance, which would provide greater flexibility.
- (2) Greater flexibility built into program design, while being mindful of applicable conditionality standards, to reflect better FS’ limited implementation capacity, as well as the importance of delivering “quick wins” to populations.
- (3) Fuller attention to the political context in fragile situations.
- (4) Closer coordination with donors, particularly in the field, to help foster prioritization on key objectives, participate in the process of identification of “quick wins,” and assess the financial implications of such priorities, including the identification of financing gaps.
- (5) Continued efforts to plan for technical assistance over a medium-term horizon and to provide “boots-on-the-ground.”

### Rapid Credit Facility (RCF)
- The RCF allows the use of small amounts of Fund financing while countries prepare policies that would merit support under upper credit tranche arrangements.
- The RCF has been used in a few cases by FS.

### 2015 stocktaking paper and the proposed Country-Based Framework (CBF)
- The 2015 paper, based on surveys of country authorities, area department teams, and functional departments, takes stock of the state of IMF engagement with FS.
- It outlines possible follow-up actions in the areas of capacity building, financing facilities and program design, and policy support, including a new pilot approach for providing support to FS using a CBF.
- Features and intended functions of the proposed CBF:
  - Establish goals for institution building.
  - Identify immediate and planned TA and training from the IMF and other development partners.
  - Allow for fine tuning of support, where needed, based on the evolving needs of FS.
  - Build on the new results based management (RBM) framework to help strengthen monitoring and reviewing of outcomes of the CBF.
- Additional proposals in the paper:
  - Steps to strengthen program success in protecting priority social spending through more targeted specification of spending floors and adoption of contingency plans to preserve spending from fiscal shocks.
  - Continued training on political economy issues and knowledge-sharing across teams working on FS, including through a new intranet-based FS thematic site.
- Implementation note: The CBF framework is now being piloted in a few countries, including 5 SSA countries.

### 2015 AFR paper: determinants of resilience in Sub-Saharan Africa fragile states
- The 2015 AFR paper assessed the state of fragility in SSA and progress made in building resilience, including the role of fiscal policies and institutions.
- The paper suggests three key factors that determine the success of countries in building resilience:
  - (1) Sufficiently inclusive political arrangement that helps sustain peace and prevent major political turmoil.
  - (2) A committed leadership that is both willing and capable of promoting policies that translate this strategy into action and implement reforms that improve governance, transparency, and accountability. The leadership factor is critical for promoting economic stability, generating policy space to deliver improvements in living standards, and strengthening institutions and capacity over time.
  - (3) Strong international support in the form of financial and technical assistance focused simultaneously on security and on development. International stakeholders should be prepared to engage with fragile countries on a long-term basis, provide financial assistance in ways that can improve the effectiveness of the state, coordinate their efforts closely, and focus capacity development efforts on economic institutions.

*Appendix II. Recent IMF Publications on FS*

---


_Source: https://www.imf.org/-/media/files/publications/pp/pp041817building-fiscal-capacity-in-fragile-states.pdf_