IMF update

 

Dear MARIA, We just published a new blog—please find the full text below.  Fragile States Need Customized Support to Strengthen Institutions (Credit: Abdulsalam Alturki/UNICEF) By Tobias Adrian, Franck Bousquet, Dominique Desruelle, Vitor Gaspar, and Bert Kroese Fragile and conflict-affected states have been among the worst hit by the pandemic, Russia’s war in Ukraine, the increase in energy and food prices, climate change, and intensified political instability. Each new crisis aggravates underlying fragilities and creates spillovers that can destabilize entire regions. Conflicts forcibly displaced a record 108.4 million people last year, many of them refugees hosted in neighboring countries where fiscal conditions are already tight and growth prospects are weak. Fragility and conflict drive fragmentation and can cause reversals in trade, capital flows, and investment. Therefore, supporting fragile states by strengthening their economic and fiscal institutions is a global public good, as all countries can benefit. The economic fallout from the pandemic hampers policymaking in these countries, which have endured large economic losses compared to pre-pandemic projections. The 39 fragile and conflict-affected states experienced a large loss in economic growth rates between 2019 and 2023 compared to pre-pandemic projections. Public finances also have deteriorated. Revenue losses during the pandemic were significant and are not expected to recover in line with increased spending. These developments will squeeze government budgets and continue to add to fiscal pressures. Moreover, economic and fiscal weakness raised debt burdens. Government debt as a share of gross domestic product is down from its pandemic peak, but is now projected to start rising again next year. Previously we had projected this measure to keep declining. In addition to limited room in government budgets, fragile states share many structural characteristics that render them especially vulnerable to economic shocks, in particular weak institutions, large informal sectors, and governance challenges. Instability, poverty, and climate risks are also taking a toll. For instance, in Chad and Guinea Bissau, people endure extreme poverty and lack access to basic services. In Burkina Faso, Yemen and Somalia, these conditions are worsened by protracted armed conflicts that forcibly displaced millions of people. Pacific island countries are highly exposed to natural disasters and climate-related risks. The IMF is one among many organizations providing support, but it plays a crucial role. Our activities include financing and economic policy advice to governments, as well as capacity development—which encompasses technical assistance and training to strengthen economic institutions, for which external financing from donors is critical. The 2022 IMF Strategy for Fragile and Conflict-Affected States centers on tailoring these activities even more to each country. Closer support for authorities and intensified dialogue with partners are important elements of the new framework. To help strengthen institutions and policymaking, we are stepping up capacity development and expanding our presence in fragile states. Solid economic fundamentals are a crucial element for fostering inclusive growth and reducing poverty in any country. In fragile states, this requires several policy goals: Boosting tax revenues, controlling and prioritizing government spending, and managing public debt. Developing well-functioning central banks and ensuring sound financial institutions. Strengthening governance and anti-corruption laws and institutions, including to curb money laundering and terrorist financing.      Publishing timely and accurate economic statistic. Developing macroeconomic frameworks and basic tools to inform policy decisions. Governments in fragile states often face tough choices when economic crises, political divisions, insecurity, and social unrest combine. Limited resources confront policymakers with difficult tradeoffs between policies that can have unintended consequences in terms of taxation, debt, economic growth, and social spending. That’s why our strategy aims for frequent and comprehensive consultation with governments in fragile states, along with these fundamental objectives: Understanding the specific context of a fragile or conflict-affected state is crucial for designing the right reforms and providing technical assistance. Somalia saw a peaceful transition of power last year despite an ongoing insurgency and prevalent food insecurity. The analysis in our Country Engagement Strategy showed that insecurity, poor infrastructure, and the lack of a skilled labor force impeded economic growth. A durable fiscal framework is essential to overcome these challenges. That’s why our capacity development focuses on tax policy, revenue administration, and public financial management. Technical assistance – underpinned by Fund support for improving macroeconomic statistics – is also closely integrated with the Extended Credit Facility-supported program, contributing to Somalia’s progress towards full debt relief under the Heavily Indebted Poor Countries Initiative. Fragile states need practical and sustained in-country support, keeping in mind that progress is often in fits and starts. Assessing and improving the quality of public investment management, as in the Democratic Republic of Congo, helping create a macroeconomic projection tool for a finance ministry (Timor Leste) or central bank (Iraq) are essential steps to strengthen economic management. For impact to last, policymakers need assistance as they adjust to new and recurrent challenges. Training is often required, especially in volatile environments where staff turnover is high. In response, the Fund is deploying more staff in-country and across our network of Regional Capacity Development Centers, which serve as hubs for knowledge, training, and peer-to-peer learning. Just last year, the IMF placed more experts in fragile states and across these centers in Africa and the Middle East, increasing the number of specialized advisors focused on these countries by 30 percent. Countries experiencing armed conflict, a category unto themselves, need capacity building to preserve state institutions. In Ukraine, Russia’s invasion resulted in a 30 percent contraction of GDP last year and placed significant pressures on staff and institutions. The IMF provided technical assistance to the central bank to support continued operations. We are now assisting with the development of anti-money laundering legislation in connection with ongoing financing. The IMF strategy for fragile and conflict affected states recognizes their particular needs, helping country authorities in the design and implementation of reforms that are tailored to their specific context, increasing the resources available on the ground to support and sustain reforms, and working even more closely with other partners. External donors are crucial to providing this assistance. Establishing and strengthening effective national institutions, or state-building, requires leadership, patience, and humility. The IMF is stepping up its capacity development to help countries address the complex and difficult challenges they are facing.

Dear MARIA, We just published a new blog—please find the full text below.  Countries Can Tap Tax Potential to Finance Development Goals (Credit: brunoat/iStock by Getty Images) By Vitor Gaspar, Mario Mansour, and Charles Vellutini Emerging markets and developing economies need $3 trillion annually through 2030 to finance their development goals and the climate transition. That amounts to about 7 percent of these countries’ combined 2022 gross domestic product and poses a formidable challenge, particularly for low-income countries. Our new research finds that many countries have the potential to increase their tax-to-GDP ratios—enabling them to provide critical government services—by as much as 9 percentage points through better tax design and stronger public institutions. Making use of this potential would also contribute to financial development and private sector entrepreneurship. Easier financing, in turn, together with efficient and well-targeted spending, including to strengthen social safety nets, would go a long way toward delivering sustainable development. Stalled progress The average tax-to-GDP ratio in emerging market and developing economies has increased by about 3.5 percentage points to 5 percentage points since the early 1990s, driven primarily by taxes on consumption such as value-added and excise taxes. Some countries have been remarkably successful in raising revenue, such as Albania, Argentina, Armenia, Brazil, Colombia, and Georgia—all of which mobilized more than 5 percentage points of GDP. Much of this increase occurred before the 2008 global financial crisis, however, suggesting that progress has been difficult and fragile in the face ofrecent shocks. Moreover, progress on raising revenue since the early 1990s has varied widely across countries. Half of emerging market economies and two-thirds of low-income countries had a tax-to-GDP ratio in 2020 that was lower than 15 percent— a tipping point above which growth has been found to accelerate. And resource-rich countries have typically generated less tax revenue, as some governments reduced taxes as a result of higher revenue from natural resources. Countries have considerable room to collect more revenue based on their tax potential—the maximum a country can collect given its economic structure and institutions. We find that low-income countries could raise their tax-to-GDP ratio by as much as 6.7 percentage points on average. Improving public institutions, including reducing corruption, to the level of those in emerging market economies would result in an additional 2.3-point increase. The total revenue-raising potential, at 9 percentage points of GDP—a staggering two-thirds increase relative to their tax-to-GDP ratio in 2020—would go a long way toward enabling the state to play its crucial role in development. Similarly, emerging market economies can raise their tax-to-GDP ratio by 5 percentage points on average, while improving their institutions to the average of advanced economies could raise an additional 2 to 3 points. Some policymakers hope for additional revenue from the ongoing international collaboration on taxing profits of large multinational corporations. But the direct revenue impact of this initiative is likely to represent only a tiny fraction of the overall revenue needs, as shown in a February policy paper. Essential reforms To build tax capacity, governments will need to take a holistic and institution-based approach that focuses on leveraging core domestic tax policies. We offer the following concrete advice: Improve the design and administration of core domestic taxes—value-added taxes, excises, personal income taxes, and corporate income taxes. VAT revenue in low-income countries, for instance, could be doubled by limiting preferential treatments and improving compliance without increasing standard tax rates. And the widespread adoption of digital technologies would result in higher revenue collection and narrow compliance gaps. Implement bold reform plans and focus on tax base broadening through the rationalization of tax expenditures, more neutral taxation of capital income, and better use of property taxes. Headline tax rates are generally not the main concern. Excise taxes—particularly fuel excises and forms of carbon pricing—can mitigate domestic health and climate-related costs. This multi-pronged approach, over the long term, can balance equity and efficiency considerations—the Achilles’ heel of managing the political economy of tax reforms. Improve the institutions that govern the tax system and manage tax reform. The political economy of tax reform has proven to be hard. Policymakers need evidence to convince the public of the gains and show progress in policy implementation over time. This requires adequate staffing to forecast and analyze the impact of tax policies on the economy, greater professionalization of public officials working on tax design and implementation, better use of digital technologies to strengthen compliance, and transparency and certainty in how policy and administration are translated into legislation. Carefully prioritize and coordinate reforms across government agencies, because the broader institutional context matters. This creates a virtuous circle by which enhanced institutions improve state capacity, which in turn increases the quality of tax design and its acceptance by citizens. This is in a nutshell the IMF’s approach to supporting countries in tax system reform and raising domestic revenue. Jeff Kearns Managing Editor IMF Blog jkearns@IMF.org   Thank you again for your interest in IMF Blog. Read more of our latest content here. Take good care!