Building Fiscal Institutions in Fragile States

IMF Blog, August 9, 2017

Source details

Study authors: Katherine Baer, Sanjeev Gupta, Mario Pessoa.
Publication date: August 9, 2017.
Sample basis: study is based on 39 countries; since completed, the number of fragile states has increased to 43.
Context: Fragile states have per-capita GDP that is less than half of most other low-income countries and experience greater economic volatility; many are in conflict, undergoing natural disasters, or emerging from these shocks.

Finding: Fragile states that have received technical assistance also have improved their fiscal performance.
Exact result: Eleven out of the eighteen fragile states that were the most intensive recipients of IMF support in tax policy and tax and customs administration improved their revenue performance from 2004 to 2014.
Countries singled out for noticeable improvements: Democratic Republic of Congo, Guinea, Liberia, Malawi, and Nepal.

Finding: In public financial management, scores based on a standardized assessment of a country’s public expenditure framework have improved significantly in countries where IMF technical assistance has been more intensive.
Budget credibility improvements observed in: Haiti, Kosovo, Mali and Timor-Leste.
Cash management capacity improvements observed in: Afghanistan, Kosovo, Mali and Timor-Leste.

Revenue levels: Revenues in fragile states are below those in other low-income countries that are not ‘fragile’—around 13 percent of GDP compared to around 19 percent of GDP.
Tax structure: Fragile states tend to rely on fewer types of taxes, including trade taxes, reflecting heavy reliance on taxes collected at borders.
Public spending composition: Public spending in fragile states is mostly on wages and capital spending to build infrastructure and expand public services, leaving less money for goods and services and for social services.

Short-term focus for post-conflict or disaster settings:
- Ensure basic tax revenues are collected, emphasizing easy-to-collect border taxes and a few high-yielding excise taxes.
- Introduce simple organizational structures and basic processes for tax and customs administration.
- Emphasize gaining control over the budget, preparing and executing the annual budget, and consolidating cash resources so the government can meet immediate payment obligations.
Medium-term focus once stability improves:
- Improve design of major taxes or introduce a value-added tax.
- Establish large and medium-size taxpayer offices.
- Introduce medium-term budgeting and IT systems to support public financial management.

Time horizon: Because institutions are weak, staff capacity is low, and reforms are often interrupted, revenue and expenditure reforms need a medium-term focus—anywhere from five to ten years.
Coordination: Countries and development partners must be completely on board regarding the overall reform program, work towards common goals, and coordinate their activities.
Sequencing: Policies should be clearly sequenced—overly ambitious reforms risk not working.
Customs: Customs administration should be part of the reform given that these states rely heavily on border-collected taxes.
Flexibility: Technical assistance should be flexible and reflect countries’ needs and changing circumstances.
Conditionality: The impact of revenue conditionality in IMF-supported programs works over time; because fiscal institutions are weak, program conditionality may not yield the desired results during the program period.
Core message: The institutions that most countries take for granted are often non-existent or deficient in fragile states; building strong institutions will help fragile states build more resilient economies.

Source: Building Fiscal Institutions in Fragile States — IMF blog post, August 9, 2017.