Mr. Benedict J. Clements, Mr. Liam P. Ebrill, Mr. Sanjeev Gupta, Mr. Anthony J. Pellechio, Mr. Jerald A Schiff, Mr. George T. Abed, Mr. Ronald T. McMorran, and Marijn Verhoeven
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. 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 and Enhanced Structural Adjustment Facility during the period of 1985-95.
At the breakup of the Soviet Union, the newly independent countries faced the daunting task of enacting their own tax laws and establishing separate tax and customs administrations. Initially, the new countries simply adopted the former Soviet tax system, which had been modified just days prior to the breakup of the Soviet Union to include a value-added tax (VAT). As the transition to a market economy proceeded, however, the new tax and customs administrations had to shift from handling the taxation transactions of a highly controlled state sector to dealing with the more challenging compliance activities of the emerging private sector and increasingly autonomous state-owned firms. This shift demanded a new approach to tax policy, and a totally different operational strategy for tax administration. Most of the countries of the Commonwealth of Independent States (CIS), which includes all countries of the former Soviet Union but the three Baltic countries, have struggled to adapt to the change and have experienced declining and inadequate revenue in varying degrees of severity.1
General government revenues, which include revenue from both central and local governments, collected within the Baltics, Russia, and other countries of the former Soviet Union had already fallen below Soviet-era levels by 1993. Revenue as a share of GDP declined on average by the equivalent of about 5 percentage points, from about 35 percent of GDP (weighted average) in 1993 to under 30 percent of GDP in 1995. This reflects a modest increase in the Baltics since 1993, more than offset by a decline in the revenue to GDP ratio of substantially more than 5 percentage points for most CIS countries (Table 1). Thus, for example, the revenue-to-GDP ratio fell by 23 percentage points in Azerbaijan, probably at least 15 percentage points in Tajikistan, and 11 percentage points in Armenia from 1993 to 1996.2 In Georgia, while no comparable data are available for earlier years, the 1993 revenue-to-GDP ratio of 3.4 percent, reflecting the civil strife at the time, clearly indicates that there must have been a precipitous drop from the preceding period; thus the rising trend after 1993 is not surprising. To summarize the situation for the CIS countries in the late 1990s, experience ranged from a sizable decline in the revenue-to-GDP ratios—for example, in strife-torn Georgia and Tajikistan, where revenue dropped to 10–12 percent of GDP—to little if any change in places such as Ukraine and Belarus, where economic and structural reforms were less advanced and revenue remained as high as 40-45 percent of GDP.
This section summarizes the principal initiatives implemented by CIS countries, including those under revenue action plans in the areas of tax policy and tax administration, as well as the current status of tax policy and administration in the Baltics, Russia, and other countries of the former Soviet Union. Tax policy and tax administration are treated separately.
The paper discusses the social protection implications of the weakening financial and administrative capacity of countries undergoing economic transition. The formal sector is shrinking, and unemployment and underemployment are rising rapidly. This is affecting both the revenue base of social protection programs and the ability of these countries to target social benefits. These developments make it imperative for these countries to restructure social benefits, rely more on self-targeting mechanisms to deliver benefits, as well as take immediate steps to improve payroll tax compliance. This is a Paper on Policy Analysis and Assessment and the author(s) would welcome any comments on the present text Citations should refer to a Paper on Policy Analysis and Assessment of the International Monetary Fund, mentioning the author(s) and the date of issuance. The views expressed are those of the author(s) and do not necessarily represent those of the Fund.
Trade was also initially undermined by a severe recession. Kazakhstan is facing increased challenges from higher global commodity prices. Against this background, an encompassing policy response is needed to control inflation and mitigate the scope for second-round price effects. The increase of trade openness in the 2000s coincided with Kazakhstan becoming a major oil producer and exporter. A number of issues still need to be resolved to achieve free trade of goods and services within the borders of the union.