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IMF Executive Board Discusses Building Fiscal Capacity in Fragile States

Author(s):
International Monetary Fund. Fiscal Affairs Dept.
Published Date:
June 2017
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On May 12, the Executive Board of the International Monetary Fund (IMF) discussed the staff paper “Building Fiscal Capacity in Fragile States (FS),” which analyzes recent country experiences, describes the IMF’s technical assistance (TA) approach for FS, highlights how it differs from non-FS, and derives lessons for future work.

The paper notes the importance of targeting fiscal TA to achieve stability and secure, elastic revenues. Other key lessons include prioritizing reform sequencing, promoting effective donor coordination, implementing formal Medium-Term Revenue Strategies (MTRS) and expenditure reform strategies to help countries exit fragility, as well as considering further integration of TA to FS to better complement IMF lending and surveillance operations.

The number of countries in post-conflict or fragile situations (more commonly referred to as FS) represent slightly more than twenty percent of the IMF’s membership. How best to support these countries build their institutions continues to be a major concern for the IMF. In recent years, the volume of fiscal TA to FS has increased significantly, from approximately seven person years of field delivery in 2006 to nearly 30 person years of field delivery each year during the past five years (2012–2016).

The TA approach to building fiscal capacity in FS differs depending on the stage of fragility. This approach broadly takes into consideration the state of fragility: (1) midst of conflict/disaster; (2) most fragile/post conflict or disaster; and (3) fragile/stable but vulnerable. Countries often do not progress in a linear manner through these stages: they may start off in conflict/disaster, move to post-conflict/post-disaster, and then fall back into conflict or experience additional disasters. The duration of each stage varies widely across countries. The approaches described are not meant to be prescriptive or “one-size-fits-all”, but to provide a sense of the principles that guide interventions in the fiscal area at various stages of fragility.

The first stage, the immediate post-conflict/post-disaster stage, includes a focus on tax revenue collection. In this stage, targeting is on easy-to-collect taxes such as customs duties at the border and selective high-yielding excise taxes, and introducing simple organizational structures and basic processes for tax and customs administration. On the expenditure side the focus is on actions that allow the authorities to gain immediate control over the budget, including preparing an annual budget, introducing basic payment systems and controls for budget execution, and consolidating cash resources for the government to meet its immediate payment obligations. Once countries become more stable (but still vulnerable), the objective of TA is to modernize fiscal institutions incrementally through medium-term revenue and expenditure strategies. Overall, reforms should be paced and sequenced to take into account country-specific circumstances and conditions, including absorptive capacity and initial conditions.

The synchronization between revenue and expenditure reforms is critical. In general, TA is provided in both areas at the same time. However, their relative magnitude varies depending on the starting conditions, the weaknesses in each area, and the country’s absorptive capacity.

IMF TA responds to demands from IMF member countries, and is designed to support the IMF’s surveillance and lending activities. In this regard, annual TA programs are planned in collaboration with the authorities and the IMF area department teams, and reflect evolving country priorities. IMF staff also coordinate TA advice and activities with other donors and TA providers. These coordinating efforts are easiest when they are country-led, which underscores the importance of political ownership for the long-term success of reforms.

IMF missions from headquarters (HQ) define overall reform strategies, whose implementation is supported by the ten Regional Technical Assistance Centers (RTACs), long-term advisors, and short-term advisors. All three modalities—missions from HQ, RTACs and advisors—also deliver workshops and other training activities to help develop capacity in FS. The IMF’s Institute for Capacity Development (ICD) also offers training on fiscal issues to officials in FS.

Executive Board Assessment

Executive Directors welcomed the staff paper on the review of the Fund’s effort to build fiscal capacity in fragile states based on recent country experiences in delivering IMF technical assistance (TA) in the fiscal area. They also welcomed the comprehensive and balanced analysis of how the TA to fragile states differs from that to non-fragile states and the lessons that can be derived for future work in this area so as to better serve this important segment of the membership.

Directors agreed that staff’s strategy to building fiscal capacity in fragile states has been broadly appropriate: first, defining and implementing the needed tax and expenditure policies; second, establishing a proper legal and regulatory framework for fiscal policy; and third, establishing an effective central fiscal authority (ministry of finance) and a mechanism for coordinating donor assistance.

Directors acknowledged that the approach taken regarding TA differs between an immediate post-conflict/post-disaster stage, and a second, more stable (but still vulnerable) stage. They agreed on the staged approach, under which the focus in the first stage on the revenue side should be on securing receipts by targeting easy-to-collect taxes, with the concurrent introduction of simple organizational structures and basic processes to better manage revenue administration. On the expenditure side, they agreed that the focus of TA at this stage should be on actions that will enable the authorities to gain immediate control over the budget. Once a fragile state becomes more stable, they agreed that the second stage is to modernize fiscal institutions incrementally through medium-term revenue and expenditure strategies.

Directors stressed the need for differentiation of revenue and expenditure reforms across countries depending on the starting conditions, the weaknesses in each area, and the country’s absorptive capacity, noting that in general, it is appropriate to provide TA in both areas at both stages.

Directors welcomed the increase in IMF fiscal TA to fragile states over the past decade, which was facilitated by rising external funding. They considered the current modalities for TA delivery to be appropriate but emphasized the need for providing training to a wider range of stakeholders to ensure the effectiveness of Fund TA. Directors agreed that ensuring that the overall reform strategies are well defined by missions from headquarters is key to coherence and effectiveness in meeting the longer-term needs of fragile states. Both long-term and short-term advisors then have a framework to guide implementation of the reform strategies. Directors appreciated the supportive role played by the regional TA centers (RTACs) in the AFR, APD, MCD and WHD regions. Ensuring good coordination with other TA providers and donors, including the World Bank, is critical. Directors emphasized that TA should be demand driven and structured flexibly to support the country’s specific needs. They considered strong country ownership to be key for the long-term success of reforms. The importance of workshops and seminars, as well as other training and peer-to-peer activities, to develop capacity was also noted.

Directors recognized the considerable efforts involved in building capacity in fragile states and commended staff involved in delivering TA in often difficult and sometimes dangerous circumstances, where progress is slow. As part of future capacity development strategies, they generally agreed that increasing the intensity and duration of TA can be supported by greater use of communications technology and of short-term and long-term experts, including resident advisors, which are crucial for implementation of fiscal reforms. Directors were also of the view that increased visits by experienced staff to countries are needed to gain in-depth knowledge and provide appropriate, tailor-made support. Directors acknowledged the inherent difficulties in measuring the impact of TA on reform outcomes, both on the revenue and expenditure sides, and positively viewed staff’s efforts to gauge the possible impact of TA based on the application of standardized tools such as Public Expenditure and Financial Accountability and Tax Administration Diagnostic Assessment Tool. Directors concurred that there is further scope for integrating fiscal TA to fragile states into Fund surveillance operations. Some Directors also called for similar reviews of TA provided to fragile states by other functional departments.

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