Abstract

© 1998 International Monetary Fund

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© 1998 International Monetary Fund

Library of Congress Cataloging-in-Publication Data

Fiscal reforms in low-income, countries : experience under IMF

–supported programs / by George T. Abed … [et al.].

  • p. cm. — (Occasional paper; 160)

  • “March 1998”

  • ISBN 1-55775-717-8

  • 1. Fiscal policy—Developing countries. 2. Structural adjustment (Economic policy)—Developing countries. I. Abed, George T. II. International Monetary Fund. III. Series: Occasional paper (International Monetary Fund) ; no. 160.

HJ1620.F573 1998

336.3′09172′4—dc21 97-52372

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Contents

  • Preface

  • I Introduction and Summary

    • Major Findings on Overall Fiscal Performance

    • Major Findings on Revenue Mobilization

    • General Lessons for Tax Reform

    • Major Findings on Expenditure Reform

    • General Lessons for Expenditure Reform

  • II Review of Fiscal Developments

  • III Revenue Policy and Performance

    • Revenue Objectives and Program Targets

    • Program Implementation

    • Changes in Tax Structure

  • IV Expenditure Policy and Performance

    • Expenditure Objectives and Program Targets

    • Program Implementation

    • Social Aspects of Expenditure Policy

  • V Implications for Program Design

    • Revenue

    • Expenditures

  • Statistical Appendix

  • Bibliography

  • Boxes Section

  • I 1. SAF/ESAF: A Concessional Facility to Assist Poorer Countries

    • 2. SAF/ESAF: Sample Countries and Definitions

  • III 3. Revenues: Balancing Immediate Needs with Medium-Term Objectives

    • 4. Lowering Marginal Tax Rates

    • 5. Why the VAT?

    • 6. Tax Administration Reforms

  • IV 7. Challenge of Civil Service Reform

    • 8. Improving Public Expenditure Management

    • 9. Addressing Inefficiencies in Health and Education Spending

    • 10. Social Safety Nets to Cushion the Impact of Adjustment

  • Tables Section

  • II 1. Summary of Fiscal Objectives

  • III 2. Revenue: Summary of Program Targets

    • 3. Revenue: Summary of Program Implementation

    • 4. Revenue: Summary of Program Implementation by Number of Program Interruptions

  • IV 5. Expenditure: Summary of Program Targets

    • 6. Expenditure: Summary of Program Implementation

    • 7. Changes in Government Employment and Real Wages

    • 8. Summary of Expenditure by Function

    • 9. Expenditure: Summary of Program Implementation by Number of Program Interruptions

    • 10. Social Indicators for SAF/ESAF Countries

  • Statistical Appendix

    • 11. Summary of Fiscal Accounts

    • 12. Summary of Fiscal Accounts: Financing

    • 13. Indicators of Fiscal Adjustment: Total Revenue

    • 14. Indicators of Fiscal Adjustment: Tax Revenue

    • 15. Indicators of Fiscal Adjustment: Taxes on Domestic Goods and Services

    • 16. Indicators of Fiscal Adjustment: Taxes on Income, Profits, and Capital Gains

    • 17. Indicators of Fiscal Adjustment: Taxes on International Trade

    • 18. Indicators of Fiscal Adjustment: Nontax Revenue

    • 19. Revenue: Summary of Program Targets by Initial Revenue Ratio

    • 20. Revenue: Summary of Program Targets by Region

    • 21. Revenue: Summary of Program Implementation by Region

    • 22. Revenue: Summary of Program Implementation by Initial Revenue Ratio

    • 23. Indicators of Fiscal Adjustment: Total Expenditure and Net Lending

    • 24. Indicators of Fiscal Adjustment: Current Expenditure

    • 25. Indicators of Fiscal Adjustment: Capital Expenditure and Net Lending

    • 26. Indicators of Fiscal Adjustment: Wages and Salaries

    • 27. Indicators of Fiscal Adjustment: Subsidies and Transfers

    • 28. Expenditure on General Public Services

    • 29. Expenditure on Economic Services

    • 30. Military Spending

    • 31. Index of Real Education Spending

    • 32. Index of Per Capita Real Education Spending

    • 33. Education Spending in Relation to GDP

    • 34. Education Spending in Relation to Total Spending

    • 35. Index of Real Health Spending

    • 36. Index of Per Capita Real Health Spending

    • 37. Health Spending in Relation to GDP

    • 38. Health Spending in Relation to Total Spending

  • Box

    • 5. VAT: Dates of Introduction and Rates Structure

  • Figures Section

  • II 1. Overall Fiscal Balance: Outcomes Relative to Program Targets

    • 2. Revenue, Expenditure, and Deficit

    • 3. SAF/ESAF Countries: Financing of the Overall Deficit

  • III 4. SAF/ESAF Countries: Revenue Indicators by Initial Revenue Ratio

    • 5. Revenue Performance Relative to Program Targets

    • 6. Revenue Structure of CFA Franc Zone and Non-CFA Franc Zone SAF/ESAF Countries in Africa

  • IV 7. Average Expenditures

    • 8. Expenditure Performance Relative to Program Targets

    • 9. Annual Average Change in Real Per Capita Education and Health Spending Under SAF/ESAF Programs

    • 10. Change in Education and Health Spending in Relation to GDP Under SAF/ESAF Programs

    • 11. Average Annual Change in Enrollment and Infant Mortality Rates Under SAF/ESAF Programs

    • 12. Expenditures and Social Indicators

    • 13. Poverty Rates and Gini Coefficients Under SAF/ESAF Programs

The following symbols have been used throughout this paper:

  • … to indicate that data are not available;

  • n.a. to indicate not applicable;

  • — to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;

  • – between years or months (e.g., 1994–95 or January–June) to indicate the years or months covered, including the beginning and ending years or months;

  • / between years (e.g., 1994/95) to indicate a crop or fiscal (financial) year.

“Billion” means a thousand million.

Minor discrepancies between constituent figures and totals are due to rounding.

The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.

Preface

The reform of fiscal policies and institutions lies at the heart of structural adjustment in developing countries. Although the immediate aim of such reform is to reduce fiscal imbalances to achieve macroeconomic stability, the long-term goal is to secure more durable improvements in fiscal performance. To make revenue mobilization more efficient, for example, requires reforming the tax and tariff systems and their administration while, on the expenditure side, fiscal consolidation calls for reorienting public spending from current consumption toward growth-promoting investment in physical infrastructure and in social and human capital.

This study reviews the fiscal reform experience of 36 low-income developing countries that undertook macroeconomic and structural adjustment in the context of the IMF’s Structural Adjustment Facility (SAF) and Enhanced Structural Adjustment Facility (ESAF) during the period 1985–95. It was carried out in conjunction with a more comprehensive assessment by IMF staff of the Policy and Development Review Department entitled The ESAF at Ten Years: Economic Adjustment and Reform in Low-Income Countries. Against the objectives set out in the programs, the study seeks to assess how far these countries have succeeded (a) in reforming their tax systems and institutions and in achieving programmed revenue targets, and (b) in reducing government absorption while shifting expenditures toward more productive activities. The paper concludes that although notable progress has been made on all fronts, much more needs to be done. More important, it extracts both from the aggregate analysis and from the case studies more specific conclusions and, it is hoped, instructive lessons for program design.

The study is the result of a considerable collaborative effort by the staff of the IMF’s Fiscal Affairs Department. The authors are indebted to numerous colleagues but especially to Julio Escolano, Reint Gropp, Kristina Kostial, and Janet Stotsky, for their helpful comments on and significant contributions to various drafts; to Alexandras Mourmouras, Zeljko Bogetic, and Ludger Schuknecht for their thorough preparation of case studies; and to Manfred Koch and Keiko Honjo for the collection and organization of data. Diane Cross provided valuable editorial assistance while Asegedech WoldeMariam and Tarja Papavassiliou shouldered the enormous task of data manipulation with great skill and precision. Administrative support was ably provided by Meike Gretemann, Larry Hartwig, Leda Montero, Amy Deigh, and Nezha Karkas. J.R. Morrison of the External Relations Department edited the paper and coordinated production of the publication.

The opinions expressed in the paper are, of course, those of the authors and do not necessarily reflect the views of the IMF or of its Executive Directors.

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