Chapter

5 The Revenue Implications of Trade Liberalization

Editor(s):
Zubair Iqbal, and Mohsin Khan
Published Date:
December 1998
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Author(s)
Liam P. Ebrill and Janet G. Stotsky 

Trade liberalization is part of the global trend toward economic integration. In recent decades, many countries have dismantled trade barriers to open their economies to international competition.1 This trend toward liberalization has promoted economic efficiency, international competitiveness, and an expansion of trade.

Trade liberalization can take many forms, including unilateral liberalization, multilateral liberalization, and liberalization in the context of customs unions and free trade areas. Multilateral and regional trade arrangements are drawing an ever-larger number of countries within their scope (Harmsen and Leidy, 1994). The conclusion of the Uruguay Round in 1994 and the establishment of the World Trade Organization in 1995 provided a forum for advancing multilateral trade arrangements. Regional trade arrangements have also been given new impetus in recent years. Almost every region of the world has witnessed the establishment of a regional trade arrangement. For example, there are several regional trade arrangements in sub-Saharan Africa. These include the Central African Customs and Economic Union (UDEAC), the West African Economic and Monetary Union (UEMOA), and the Cross-Border Initiative (CBI) among countries in eastern and southern Africa. Regional trade arrangements are also forming in the Mediterranean region. The European Union has recently launched a program to create a free trade area with Southern and Eastern Mediterranean Rim countries.2

Nevertheless, despite the obvious progress, trade barriers are still pervasive. In some parts of the developing world, in particular, economies remain insulated from the global economy through a variety of nontariff and tariff barriers, even as the philosophy of import substitution continues to lose ground as a basis for economic development. Arguments advanced against trade liberalization include that trade taxes are needed to protect “infant industries,” and also to protect domestic producers from “unfair” trading practices of other nations.3

In addition, trade liberalization can be stymied by the concern that it will lead to a loss of tax revenues, and hence a worsening of the government’s budgetary balance. This consideration can be especially important if the country is already experiencing significant fiscal imbalances, as has been the case with a number of developing countries.4 Moreover, for many developing countries, taxes on international trade are a large (and sometimes the largest) source of government revenue. This is particularly the case with sub-Saharan African countries (see Table 1 and Figures 1 and 2), where international trade taxes accounted for 5.0 percent of GDP (using an unweighted average over all the countries).5

Figure 1.Sub-Saharan African Countries: Relationship of Trade Tax Share to Tax Index, 1995

Sources: Data provided by the country authorities; IMF staff calculations.

Key: (1) Benin, (2) Botswana, (3) Burundi, (4) Cameroon, (5) Central African Republic, (6) Chad, (7) Republic of Congo, (8) Equatorial Guinea, (9) Gabon, (10) Ghana, (11) Guinea, (12) Kenya, (13) Lesotho, (14) Mali, (15) Mauritania, (16) Mauritius, (17) Namibia, (18) Niger, (19) Rwanda, (20) Senegal, (21) Sierra Leone, (22) South Africa, (23) Sudan, (24) Swaziland, (25) Tanzania, (26) Togo, (27) Uganda, (28) Zambia, (29) Zimbabwe.

Note: This sample includes sub-Saharan African countries for which complete data were available. Data refer to 1993 for Equatorial Guinea, Gabon, Senegal, and Zambia. Data refer to 1994 for Cameroon, the Republic of Congo, Guinea, and Sierra Leone.

Figure 2.Sub-Saharan African Countries: Change in Trade Tax Indexes, 1990–95

Sources: Data provided by the country authorities; IMF staff calculations.

Key: (1) Benin, (2) Botswana, (3) Burundi, (4) Cameroon, (5) Central African Republic, (6) Chad, (7) Republic of Congo, (8) Equatorial Guinea, (9) Gabon, (10) Ghana, (11) Guinea, (12) Kenya, (13) Lesotho, (14) Mali, (15) Mauritania, (16) Mauritius, (17) Namibia, (18) Niger, (19) Rwanda, (20) Senegal, (21) Sierra Leone, (22) South Africa, (23) Sudan, (24) Swaziland, (25) Tanzania, (26) Togo, (27) Uganda, (28) Zambia, (29) Zimbabwe.

Note: This sample includes sub-Saharan African countries for which complete data were available. Data refer to 1993 for Equatorial Guinea, Gabon, Senegal, and Zambia. Data refer to 1994 for Cameroon, the Republic of Congo, Guinea, and Sierra Leone.

Table 1.Sub-Saharan African Countries: Elements of Tax Structure, 1995(As percentage of GDP)
Country1Total RevenueTax RevenueOther RevenueTaxes on Income, Profits, and Capital GainsDomestic Taxes on Goods and Services2International Trade Taxes2
TotalOf which:TotalOf which:TotalOf which:
IndividualCorporateGeneral sales, turnover, or VATExcisesImport dutiesExport duties
Angola28.3028.010.2919.550.6818.876.435.761.38
Benin3,414.4011.882.523.880.852.501.851.010.345.825.440.03
Botswana536.4827.009.497.731.436.301.571.470.105.585.580.00
Burkina Faso3,411.8810.950.932.551.061.383.682.770.294.474.470.00
Burundi318.8317.811.023.621.621.747.092.754.266.982.983.92
Cameroon3,4,614.3310.623.711.430.001.432.821.141.092.752.580.17
Cape Verde26.0819.896.206.621.893.353.343.348.388.24
Central African Republic3,49.068.650.401.860.860.762.940.620.303.853.150.70
Chad3,48.407.440.962.921.351.571.230.320.382.281.800.27
Comoros314.2212.261.951.740.591.093.471.172.302.471.150.38
Congo, Republic of 3,4,624.8412.9511.893.131.481.643.762.461.294.764.76
Côte d’Ivoire3,421.9217.834.094.021.371.817.544.502.326.282.753.52
Djibouti28.3826.761.6110.723.601.928.938.935.53
Equatorial Guinea3,4,614.859.275.580.423.592.154.331.572.76
Eritrea328.7315.2913.457.261.583.955.125.122.912.91
Ethiopia3,517.8812.375.514.290.862.575.173.790.262.632.320.31
Gabon3,629.5221.418.113.111.381.732.492.085.204.47
Gambia, The3,5,719.4617.452.023.951.612.149.294.344.944.214.21
Ghana322.3115.037.293.631.072.076.652.773.884.752.672.07
Guinea3,811.0210.330.691.010.570.294.701.442.371.591.500.02
Guinea-Bissau312.656.915.741.000.260.612.132.070.063.461.310.56
Kenya3,529.1825.973.219.6412.095.706.394.254.25
Lesotho546.4739.067.417.625.392.056.104.8125.0625.050.01
Madagascar38.528.320.211.240.430.624.303.880.012.621.190.33
Malawi3,517.9315.582.365.682.892.795.825.010.754.533.021.43
Mali3,414.4010.683.722.161.150.882.962.814.354.020.12
Mauritania323.9617.016.965.892.822.795.433.461.805.393.411.98
Mauritius517.5215.961.562.741.381.365.156.806.80
Mozambique318.2916.691.603.031.641.398.735.133.604.403.160.00
Namibia534.3230.803.539.425.833.3210.947.452.649.820.03
Niger3,47.236.620.621.931.293.12
Nigeria923.007.0016.001.401.405.601.402.90
Rwanda37.056.630,430.820.490.243.020.921.742.752.110.55
São Tomé and Príncipe316.549.796.742.330.921.282.852.853.983.020.95
Senegal 1,3,1015.0713.591.483.091.810.855.054.640.284.814.81
Seychelles1140.0128.9311.075.2920.331.29
Sierra Leone3,59.409.170.231.360.720.645.052.411.902.564.61
South Africa525.6624.860.8013.6710.243.429.616.521.311.261.22
Sudan58.696.871.832.490.171.991.660.241.422.521.430.19
Swaziland533.6932.760.949.444.044.835.364.1617.88
Tanzania3,514.9512.802.153.741.081.715.443.102.342.042.04
Togo3,415.0513.761.286.231.440.801.720.850.705.614.59
Uganda3,510.329.690.631.363.772.671.104.543.72
Zaïre5.354.930.421.230.440.391.160.560.411.451.330.13
Zambia316.9215.501.424.903.811.095.463.062.404.63
Zimbabwe528.4924.304.1912.286.764.295.954.601.355.625.62
Unweighted average, all countries19.6015.813.794.641.962.355.193.101.884.993.930.85
Unweighted average, SPA countries15.7912.543.253.231.231.464.652.781.813.973.090.88
Unweighted average, CFA franc zone countries15.4611.973.482.821.161.403.152.110.784.433.700.95
Sources: Country authorities; IMF staff estimates.

Excluding Liberia and Somalia.

For differentiating the taxes we have used Recent Economic Developments (REDs) except we have reclassified any clearly identified indirect taxes on imports from taxes on international trade to domestic taxes on goods and services.

Special program of assistance countries (SPA).

CFA franc zone countries.

Fiscal year.

Including tax revenue from oil.

Data refer to 1994.

Refers to mining sector revenue.

Data exclude royalty and direct profit income from petroleum production.

Fiscal year ending June 30, through 1991/92; calendar year data starting in 1992.

The trade and service tax replaced import duties, excise taxes, and turnover taxes in 1986; however, payment of certain turnover liabilities were deferred through 1991.

Sources: Country authorities; IMF staff estimates.

Excluding Liberia and Somalia.

For differentiating the taxes we have used Recent Economic Developments (REDs) except we have reclassified any clearly identified indirect taxes on imports from taxes on international trade to domestic taxes on goods and services.

Special program of assistance countries (SPA).

CFA franc zone countries.

Fiscal year.

Including tax revenue from oil.

Data refer to 1994.

Refers to mining sector revenue.

Data exclude royalty and direct profit income from petroleum production.

Fiscal year ending June 30, through 1991/92; calendar year data starting in 1992.

The trade and service tax replaced import duties, excise taxes, and turnover taxes in 1986; however, payment of certain turnover liabilities were deferred through 1991.

This chapter focuses on the revenue implications of trade liberalization, a topic which has yet to receive much attention.6 Despite being typically a suboptimal way to raise revenue,7 trade taxes are often justified on fiscal grounds in addition to providing protection to domestic producers. However, the revenue implications of trade liberalization depend on how trade reforms are implemented. Some trade reforms improve the structure of protection but may not necessarily lower overall nominal tariff rates. For example, if the sequencing of trade reforms initially favors: (1) the tariffication of quantitative restrictions; (2) the reduction or elimination of exemptions; (3) higher compliance and reduced incentives for smuggling through lower tariff rates; and (4) increased minimum tariff rates to reduce tariff dispersion, such reforms could be consistent with an increase in trade revenues. In contrast, if trade reforms entail lowering of nominal tariff rates, then a decrease in trade revenues is more likely; though expansion of the import base as a result of lower tariffs, the often accompanying devaluation of the currency, and faster growth, may buoy trade tax revenues.

The ability to reduce the taxation of international trade while maintaining adequate overall revenue collections also depends on both a well-functioning system of domestic taxation and effective tax and customs administrations. This chapter accordingly also reviews the role played by the domestic tax structure and tax and customs administrations in influencing the pace of trade liberalization and suggests a set of best practices for domestic tax reform, which over time would permit a reduction in a country’s reliance on international trade taxes. Nonetheless, even if reforms are implemented expeditiously, significant shifts in the structure of revenues will emerge only over prolonged periods of time. The combination of the level of economic development and associated economic structure will tend to be the preponderant influence on the tax system that typically emerges. Only as domestic productive capacity (and hence the domestic tax base) grows and broadens and administrative capacities improve will a major shift from international trade taxation to domestic taxation occur.

The remainder of the chapter is organized as follows. The second section examines the revenue implications of trade liberalization, drawing on case studies of Malawi, Morocco, the Philippines, and Senegal. The third section examines trends in tax collections on international trade. The fourth section concludes. The appendix presents the case studies.

Revenue Implications of Trade Reform

Economists typically favor a sequencing of trade liberalization reforms, with quantitative restrictions and other nontariff barriers to trade being liberalized first, followed by tariff reform, including a reduction in both the number and dispersion of tariff rates, and an overall reduction in the levels of tariffs. By focusing initially on the removal of nontariff barriers, it may be possible to preserve the revenue yield while at the same time reducing the severe distortions associated with nontariff barriers.8 In practice, however, there is no specific observed pattern to liberalization, and some countries have pursued alternative sequences or only chosen to liberalize certain aspects of the trade regime. What are the economic consequences and revenue implications of the disparate elements of trade liberalization?

Reform of Quantitative Restrictions

Reducing quantitative restrictions is typically a high priority of trade liberalization. In their study of countries undergoing World Bank-assisted trade liberalization, Papageorgiou, Choksi, and Michaely (1990) conclude that half of strong liberalizations included significant reductions in quantitative restrictions and that this was a critical ingredient for success, facilitating an overall high success rate. Liberalizations that did not include a significant element of reduction of these restrictions had a much lower rate of success.

Takacs (1990) outlines the different methods of liberalizing import quotas. These include: (1) raising quota ceilings on imports to allow the volume of imports subject to the quota to rise in gradual fashion until the quota is raised to a nonbinding level; (2) converting quotas into equivalent tariffs with the ultimate goal of reducing these tariffs (in theory, the equivalent tariff is set at a rate equal to the percentage difference between the domestic price and the import price under the quantitative restriction, though, in practice, it may be difficult to establish the equivalent tariff); (3) auctioning licenses or permits to import a specific quantity of the item (the number of licenses can then be gradually increased or these licenses can be converted into tariffs); and (4) converting quotas to tariff quotas (i.e., there are two rates of tariffs—a lower rate applied to some volume of imports and a higher, often prohibitive, rate applied to any imports above that volume) and then reducing the tariff rates.

Of course, quantitative restrictions take many forms other than quotas, including bans, restrictive practices for import licenses, state trading monopolies, and so forth. In addition, in many countries, limits on the ability to buy foreign exchange constrain imports (at least through formal markets). These controls often give rise to black markets in the currency, where purchasers pay a significant premium over official exchange rates to obtain controlled foreign exchange. These restrictions have serious efficiency and distributional implications for markets, especially by encouraging rent-seeking activities.

Some of the patterns of quantitative restrictions have been regional. For example, in CFA franc zone countries, these restrictions generally took the form of bans, quotas, import licenses, and state trading monopolies. In non–CFA franc zone sub-Saharan African countries, foreign exchange controls have been especially prevalent. In their review of trade liberalization in Africa, Dean, Desai, and Riedel (1994) note that, in almost all non–CFA franc zone countries, highly overvalued exchange rates (with large black market premiums) and extensive restrictions on the allocation of foreign exchange were the principal trade barriers and that initial reforms emphasized the liberalization of the foreign exchange market.

Although liberalizing quantitative restrictions is generally the first step in trade reform, it is unusual for countries to liberalize all quantitative restrictions at once. Typically, countries liberalize these restrictions over some period of time to minimize disruptions to the domestic economy, which could generate political problems, and to prevent a sudden surge in imports that could lead to balance of payments problems. Often quantitative restrictions are reduced or eliminated first on raw material and intermediate goods and other goods that are not viewed as competing with domestic production, as in reforms in sub-Saharan Africa in the late 1980s and early 1990s. These reforms are then typically extended to final goods, including those competing with domestic production.

The elimination of quantitative restrictions and other nontariff barriers to trade is likely to have a significant effect on trade tax revenues, though the channels will differ, depending on the nature of the restriction and on the manner of the elimination. Taking the example of quotas, even with no change in the level of imports, tariffication of quotas (or auctioning of licenses) would be likely to lead to an increase in revenues as rents are transferred from domestic producers to the government in the form of trade tax revenues. The application of tariffs to imports would also increase the base of other indirect taxes levied on these goods (though there might be offsetting revenue effects of these price increases in the economy and further indirect effects).

The other methods of liberalizing quotas described by Takacs (1990) would increase revenues primarily through an increase in the volume of trade. In the absence of tariffication, the response of trade volumes to the elimination of quantitative restrictions would depend first on the difference between the equilibrium market price and the shadow price at the restricted level. If the restrictions were only partly eliminated or relaxed, then the response would depend on the degree to which the constraints were relaxed. The larger the difference between the equilibrium market price and the shadow price at the restricted level, the greater the likely response of imports. If the restrictions were tariffied rather than just eliminated, then the response would depend on how closely the tariff-inclusive price matched the shadow price at the restricted level. The elimination of foreign exchange controls or the relaxation of restrictive licensing practices could similarly result in dramatic changes in the trade environment, possibly leading to an increase in imports and revenues from imports.

All the case studies provide evidence that a high priority was assigned to attacking quantitative restrictions, at least as a policy objective, though the pace and nature of that reform appears inter alia to have reflected revenue concerns. Both Malawi and Senegal pursued a strategy in the late 1980s and 1990s that stressed bolstering the domestic tax system and moving less rapidly with the outright elimination of quantitative restrictions. Nonetheless, there was progress in reducing such restrictions. Malawi’s trade liberalization program in the late 1980s included a program to eliminate foreign exchange rationing. Similarly, Senegal embarked in 1986 on a phased reduction in quantitative restrictions, focusing initially on goods not produced locally. In contrast, the Philippines was notable for a focus on the tariffication of quantitative restriction during the initial phases of its trade liberalization efforts. Finally, in the case of Morocco, reflecting a trade liberalization strategy adopted in 1983, reforms included a gradual elimination of quantitative restrictions on imports and the abolition of import deposit requirements.

The effect of relaxing quantitative restrictions on import volumes and revenues also depends on the flexibility of administrative capabilities. Without adequate reform, customs administrations could be incapable of handling the possible surge in imports and also of adapting their processes to focusing on certifying the value of imports rather than just the validity of licenses to import and volumes of imports, as would be necessary under a system where most trade was limited by quantitative restrictions (Tanzi, 1994). The importance of complementary customs administration reforms is a point that has often gone unnoticed in trade reform programs. Malawi and Morocco both undertook trade liberalization without first improving customs administration. Only recently have both countries made customs administration reform a central component of trade liberalization.

Tariff Reform

In addition to the elimination of quantitative restrictions (or in the absence of quantitative restrictions), the other major element of trade reform is typically the rationalization and reduction of tariff rates. There are several distinct issues to consider.

Characterization of Tariff Structures

Tariff structures are often rather complex and resist easy characterization by summary measures, thereby complicating any analysis of the revenue implications of tariff reductions (Dean, Desai, and Riedel, 1994). Unlike most broadly based domestic taxes, tariff schedules may contain dozens of different rates, ranging from zero to several hundred percent. For imports, the unweighted average of tariff rates is often taken as the simplest measure of the importance of tariffs. A simple average, however, does not accurately gauge the overall importance of trade taxes. For instance, there may be a few very high rates that apply to only a small volume of trade, introducing an upward bias to the average. A weighted average of tariff rates (or the collected tariff rate), where the weights are the shares of imports at each rate in total imports, may be a more suitable alternative measure, but it suffers from the important drawback that imports facing a high tariff are likely to be demanded in reduced quantity, introducing a downward bias to the measure. (This measure offers only an ambiguous measure of liberalization, because in fact it could rise even with a reduction in nominal tariff rates if exemptions were reduced or compliance improved.) Another useful summary indicator of tariff structure is the dispersion of the tariff rates. Some schedules may have rates that show relatively little dispersion around an average value, while others show considerable dispersion. The dispersion is often useful as a supplement to the average rate, because a low average rate could mask large dispersion in rates, and hence large differences in effective protection across goods.

Complicating measurement, in many countries there may be a considerable difference between explicit tariff rates and implicit tariff rates because of institutional features of the trade regime that distort measurement of import value. For example, where foreign exchange controls apply, the official exchange rate may differ from the exchange rate determined in the secondary (or black) market. Tariffs may be applied to import values at the official rate of exchange or at some other exchange rate, depending on the source of the funds used for importation. This may result in implicit tariffs on market values of goods being considerably different from the explicit tariffs applied to the good. In some countries, imported goods are valued at reference prices set by the government. Although these prices are presumably set to reflect market value, often they do not, and this also may create a divergence between implicit and explicit tariffs. Tariff reform may be undertaken at the same time as reform of exchange rates and reference prices, and hence changes in explicit tariffs may be a misleading indicator of changes in implicit tariffs because of changes in the valuation of the base of the tax. In practice, it may be difficult to separate these confounding influences.

Reductions in Tariff Levels

The effect of tariff reductions on revenues depends on the levels and coverage of existing tariffs, and on the extent to which they are reduced. The precise impact on revenues is difficult to predict because it depends on complex economic responses. If import values are unchanged, the immediate effect of a reduction in tariff rates is to lower revenues (if trade taxes are included in the base of domestic taxes on imports, then this reduction in trade taxes is accompanied by a reduction in excise and VAT collections levied on imports, though possibly with some offsetting revenue effects elsewhere in the economy). This potential loss of revenue is often at the root of opposition to reducing tariffs.

However, the value of imports can be expected to change in response to tariff reductions, with the magnitude of that change depending directly on the price elasticity of demand for imports. Since imports include a broad category of goods, it is hard to generalize about the price elasticity of demand. Imports of final consumption goods are likely to be more price elastic than imports of intermediate and raw materials. In many developing countries, imports of consumer goods constitute only about 10–20 percent of total imports. The aggregate elasticity of demand is therefore likely to be low in the short term, so that a reduction in tariffs is likely to lead to a revenue loss. To the extent that low imports of consumer goods reflect the effect of high tariffs, however, the aggregate elasticity of demand could be higher than the existing pattern of imports would suggest.

The response of import values also depends on the price elasticity of supply of import substitutes. The less elastic is this supply, the smaller the reduction in output for a given fall in price and hence the smaller the increase in import values. Therefore, a combination of inelastic price elasticities of demand for imports and supply of import substitutes implies relatively little increase in import values in the short term. Moreover, since price elasticities of demand and supply typically are not constant over the entire range of prices, the starting point for tariff reform is also likely to affect economic responses. For instance, the elasticity of demand is likely to be higher at high tariffs than at low tariffs. Indeed, if protectionist motives dominate the setting of tariff rates, then tariffs may more plausibly be above their revenue-maximizing levels.

Although the potential revenue effects of tariff reductions have been cast in terms of elasticities, the observed responses on any occasion will depend, inter alia, on the macroeconomic environment, and in particular on the supporting macroeconomic policies. This point is underscored by the case studies (discussed below), all of which stressed tariff reductions in their reform programs, though with mixed success, in part due to differing circumstances. Morocco was notable for its success in reducing the collected tariff rate,9 which declined from 26.3 percent in 1980 to 14.9 percent in 1995—the success in this case owes much to the manner in which improved stabilization policies supported an opening of the economy, resulting in strengthened revenue performance, which allowed the rates to decline. In contrast, Senegal’s early trade liberalization efforts in the mid–1980s faltered in the face of weaknesses in macroeconomic management and stagnant trade, and as a consequence tariff reductions were accompanied by serious revenue shortfalls, which subsequently led to a reversal of the tariff cuts. Senegal’s second phase, implemented in conjunction with the 1994 devaluation of the CFA franc, was much more successful. Reduced reliance on trade taxes in the Philippines has at times been constrained by the weakness of domestic tax mobilization. The tariffication of quotas has already been noted. In addition, the Philippines imposed a temporary import surcharge in the early 1990s. As a result, the collected tariff rate declined only slightly from 16.7 percent in 1985 to 14.4 percent in 1995. Finally, Malawi imposed a temporary export levy in the same period to address revenue shortfalls that compromised trade liberalization efforts.

Reduction in Tariff Dispersion

As already noted, reducing the dispersion of tariffs is often an objective of tariff reform. There are many different ways in which the dispersion of tariffs could be reduced. If tariff reform reduced the dispersion of the tariffs around an average value by lowering the higher tariffs and increasing the lower tariffs, the revenue effects would depend in part on which goods were affected by these changes. If those goods on which tariff rates were being reduced were relatively price elastic in demand compared with those on which tariff rates were being raised, then reducing the dispersion (leaving the average rate unchanged) could raise revenues. In some cases, a reduction in the dispersion of tariffs could be achieved by increasing the minimum rate, which could imply some overall increase in the average rate (at least temporarily), increasing the chances that the reforms would increase revenues.

Reducing the dispersion of tariff rates could also influence revenues by reducing tax evasion. Taxes that are levied at a uniform rate tend to minimize evasion and administrative difficulties, especially by reducing opportunities for mistakes and misclassification. Reducing the dispersion of tariff rates could also enhance economic efficiency by equalizing protection across goods. However, there would not seem to be any a priori reason to expect that reducing dispersion would necessarily have a large effect on revenues, except where there was a significant increase in the level and/or coverage of the minimum rate.

Related to dispersion, tariff consolidation and simplification are also often goals of trade reform. It is common to find that countries have many overlapping levies on imports, including tariffs, surcharges, fees, and stamp duties. One goal of trade reform is to rationalize and simplify this system, so that the overall charge on imports is transparent. Although simply consolidating many levies into one would not necessarily change revenues, by reducing administrative burdens, it might lead to lower evasion.

Again, the case studies provide numerous examples of the high priority that in practice has been accorded to reducing tariff dispersion and consolidating tariff structures. In the late 1980s, Malawi reduced the range of tariffs from 0–220 percent to 0–45 percent—by August 1997, the maximum tariff rate had been reduced to 35 percent. In its early reform efforts, Morocco considerably simplified and rationalized overly complex tariff schedules—the maximum tariff rate was reduced from 400 percent in 1982 to 60 percent in 1984, and the number of tariff bands was reduced from 47 in 1980 to 6 in 1996. Similarly, Senegal made progress in rationalizing its tariff structure. The Philippines had originally focused on the tariffication of quotas, which tended to militate against a reduction in measured tariff dispersion, but has more recently also successfully lowered tariffs.

Impact of Tariff Reform on Tax Evasion

A reduction in tariff rates may influence compliance with customs and tax laws. The extent of tax evasion is directly related to the potential benefits from evasion, which is reflected in the marginal tax rate on goods subject to tax (Tanzi and Shome, 1993). The lower the tariff, the lower the marginal benefit from tax evasion. Many costs are associated with customs evasion, including the need to find alternative (often more expensive) routes to avoid customs check posts, to package goods to conceal their presence or their true value, and to bribe corrupt officials; the lack of proper invoices for subsequent use of the goods, such as crediting under a VAT; and punishment, if caught. The reduction in the marginal benefit of evasion is likely to lead to a lower level of evasion where marginal benefits are again equal to the marginal cost of evasion. Evasion of customs duties is a pervasive feature of most countries with high tariffs; and revenue losses, as a result of a reduction in tariffs, would be mitigated to the extent that evasion also falls.

Export Taxes

The elimination of export taxes is also a goal of trade liberalization. Nevertheless, in some developing countries they can make up a significant component of trade tax collections. Typically, they are levied on primary commodities where there are relatively few exporters, and they represent an important component of national output. There are several arguments for export taxes. First, they may be a substitute for income taxation, where the domestic tax administration is poor and it is difficult to collect revenues from large producers of exportable commodities. Second, they may tax windfall gains from changes in international prices of commodities. Third, they may reduce supply and increase prices for the commodity. Export taxes are mainly an expedient means of raising revenue, since improvements in the domestic tax system would yield a more desirable tax system.

Export taxes often take the form of explicit tariffs on exports, levied as a combination of a basic tax, tied to a reference price, and a progressively rising rate on price increments. They may also take the form of implicit tariffs. Certain practices may give rise to implicit tariffs. Examples include overvalued exchange rates or a multiple exchange rate system, foreign exchange surrender requirements at overvalued rates, or the use of marketing boards for exports, which do not pay producers market prices. The use of implicit taxes may distort the overall picture of revenues in that they are not recorded under revenue collections, though they certainly influence the ability and willingness to pay other taxes.

Given that export taxes are often substitutes for domestic income taxes, their successful elimination will be more likely if implemented as part of an overall tax reform package to broaden the base for taxes. In Africa, progress in eliminating export taxes has been mixed. A significant achievement of tax reform in Uganda was the elimination of the coffee export tax. In Kenya, the reform package included the elimination of export taxes on commodities and manufactured products. In a few countries, however, export duties were reintroduced or maintained as a proxy for an income tax in hard-to-tax agriculture (e.g., Côte d’Ivoire and Ghana). As regards the case studies, in Malawi, the opportunity to capture windfall gains on the depreciation of the currency and a deteriorating revenue performance led to the imposition of an export levy on certain agricultural exports, though its introduction was accompanied by a plan to phase it out, which took place in 1998. In Morocco, the ad valorem taxes levied on exports were abolished in 1995, leaving only raw phosphate exports subject to a specific tax.

Regional Trade Arrangements

Trade liberalization is frequently undertaken in the context of regional trade arrangements. These arrangements lower tariffs between members but do not lower them for countries outside the arrangement. The trade-creating and trade-diverting implications of such agreements are well known. In that connection, Foroutan (1993, p. 255) argues that revenue considerations in trade liberalization clash with the conditions that minimize the likelihood of trade diversion, and that this concern is of particular importance to sub-Saharan African countries. The conditions for minimizing the likelihood of trade diversion are that the partners have extensive trade links and that they do not raise their trade barriers relative to the rest of the world. But the stronger the trade links between the partners, the greater the likelihood of a revenue loss from trade integration, and any loss is more likely to be met by raising tariffs to the rest of the world. This would enhance the trade diversion effects of integration. As a result, concerns about revenue losses from trade liberalization may make trade-creating trade arrangements less likely and trade-diverting arrangements more likely. So far, sub-Saharan Africa does not appear to have experienced significant benefits from regional trade arrangements, apart from some discipline having been imposed on the underlying trade liberalization strategy.

Taking examples from the case studies, Malawi’s trade reform efforts in recent years have been guided by its participation in regional trade initiatives, principally the Cross-Border Initiative. The CBI calls, inter alia, for members to dismantle quantitative restrictions on a reciprocal basis and to establish a common external tariff by 1998. Morocco currently faces the fiscal challenge posed by its recent (February 1996) Association Agreement with the European Union (AAEU) of removing all tariffs on industrial goods imports from the EU during 12 years. To appreciate the scale of the challenge, one estimate (Abed, 1997) is that the revenue losses Morocco will experience as a result of the AAEU could amount to 2–2.6 percent of GDP by the end of the 12-year transition period.10

Additional Aspects of Trade Liberalization

There are additional aspects of trade liberalization that clearly bear on the revenue implications of such liberalization but whose revenue implications are hard to quantify.

Tariff Exemptions

The tax base is often eroded by extensive exemptions from tariffs. In a study of several developing countries, Pritchett and Sethi (1994) found that there was only a weak relationship between statutory tariff rates and collected tariff rates (measured as the ratio of import tariff revenue to import values). They argued that as tariff rates rise, importers put more effort in gaining exemptions, so that revenue collections do not increase in proportion to the increase in tariffs (which implies the converse—that reducing very high tariffs does not always lead to a proportionate fall in revenues). As a consequence, eliminating tariff exemptions can contribute to trade reform by broadening the tax base. In addition to their direct impact on revenues, when exemptions become more prevalent, the opportunities of diversion of exempt products to nonexempt uses also grows, further contributing to a lower rate of compliance. Typically, exemptions apply to international organizations, diplomats, expenditures related to aid projects, government, foreign joint ventures, and other favored clients.

Implicit Quotas and Taxes

Modern forms of protection, in the form of voluntary export restraints and antidumping provisions, are essentially like implicit quotas and implicit or explicit taxes. By limiting volumes, voluntary export restraints function as implicit quotas, with the same distorting effects on trade, prices, and revenues (though there is some presumption that the implicit revenue accrues to exporters rather than importers in the case of quotas). These restraints limit the volume of imports and hence tax revenues from imports. Antidumping provisions, which may go into effect when the prices of exported goods are deemed to be lower than the “market” value of those goods, often take the form of duties levied on the offending goods. These duties would not be different from explicit duties in their effect on revenues. They do, however, create different incentives for producers, in that they can be avoided by upward adjustments in the price of goods. As producers adjust upward the prices of exports to avoid antidumping provisions, tax revenues would diminish. The resulting higher prices could be seen as imposing an implicit tax on consumers, with the revenue accruing to the foreign firms.

Indirect and Interactive Effects

Trade liberalization can interact with the domestic tax system and the macroeconomic environment with implications for the overall budgetary situation.

Import Composition and Economic Growth

Both relaxation of quantitative restrictions and tariff reforms may lead to considerable changes in the composition of imports. If trade reforms diminish the share of import-substituting industries in the economy, then imports of these goods will increase. If these goods are taxed at a higher rate than intermediate goods and other inputs, then this might induce an increase in revenues. If liberalization stimulates a higher share of investment or exports, this may reduce tax bases (since investment and exports are usually more lightly taxed than consumption and imports). In the medium to long term, liberalization should stimulate a higher rate of economic growth, and this should expand all potential tax bases. Investment and exports should lead to higher levels of income, which in turn are linked to higher levels of consumption and imports. But the improvements in productive efficiency of domestic suppliers may lead to lower import volumes than there otherwise would be.

Role of Domestic and International Trade Taxes

Domestic indirect taxes may reinforce protective elements of trade taxes. There are several distinct channels. One is through the differential application of excises and VAT to imports and domestic production. As taxes on domestic consumption (rather than production), excises and VATs should be applied equally to both imports and domestic production. Differential application of VATs to imports and domestic production is rare. Generally, the same rate of tax is applied to the relevant tax base, though in a few cases, surcharges may be added onto the VAT on imports. For instance, in Malawi, until 1992/93, the surtax (a broadly based sales tax) effectively taxed imported goods competing with domestic goods at a higher rate than domestic goods to reinforce the protective effect of import duties. This differential was eliminated that year, in combination with an upward adjustment in import duty rates on imported goods previously carrying the higher effective surtax rate as an offset.

Differential application of excises to imports and to domestic production is more common. Unlike other taxes, excise taxes may frequently be levied on a specific basis, as opposed to an ad valorem basis. One way in which excisable goods are treated in a differential fashion is to apply a different basis for taxation to imports than to domestic production. For instance, in some countries, excises on domestic production are levied on an ad valorem basis and on imports on a specific basis. The opposite may also be found. Or both taxes may be levied on a specific or ad valorem basis but at different effective rates. For instance, in some former Soviet Union countries, excises were levied on domestic production on a tax-inclusive basis, while they were levied on imports on a tax-exclusive basis but at the same ad valorem rate. Since the tax-exclusive rate that would correspond to a tax-inclusive rate is much higher, domestic production was effectively taxed at a much higher rate.

Some countries apply two different schedules of excise rates, levying lower rates on imports than on domestic production. For instance, in some Commonwealth countries, excise taxes apply only to domestic production. In some cases, import duties can be adjusted to compensate for this differential treatment of imports and domestic production, but in practice, this adjustment is unlikely to eliminate the differences completely and is equivalent to reducing the protective element in trade taxes. Some countries levy higher rates on imports than on domestic production for the purpose of adding to protective elements in trade taxes. For example, in Poland, excise tax rates on some items are 5 percent higher on imports than on domestic production. An excise tax levied at a higher rate on imports than on domestic production is economically no different from levying a higher tariff and then equivalent excise taxes (the exact equivalence depends on the rates). Customs duties on goods that are not produced domestically are equivalent to excises and should be explicitly brought under the domestic tax system.

Interactions with Accompanying Policies

Tax and customs administration reform is an essential component of trade liberalization since without improvements in the structure and administration of the tax system, it is not possible to reduce successfully the reliance on international trade taxes. Examples of where reform of customs administration has bolstered revenues include Burkina Faso and Uganda.

Box 1 provides an outline of critical reforms to improve tax structure and administration in low-income countries with special reference to sub-Saharan Africa. In recent years, several African countries have undertaken reform of the tax system. The most successful has been Benin, which has significantly raised its tax share in GDP, though other countries have made substantial progress (Abed and others, 1998). In many countries facing fiscal imbalances, near-term or immediate measures have sometimes been resorted to so as to mobilize revenues until the important structural reforms take effect. For example, an important component of Kenya’s fiscal reforms was a package to change the tariff system to lower the average rate of effective protection, reduce the dispersion of rates, phase out export duties, and enhance the transparency of the structure of international trade taxation in general. However, the authorities also planned to introduce a presumptive tax of 5 percent on the value of gross sales of agricultural products to offset the revenue loss from the elimination of the export tax on coffee and tea.

As regards the experience in the case studies, it is instructive that all the countries recognized the importance of broadening the base for taxation as part of an overall package to liberalize their economies. In the late 1980s, Malawi embarked on a program to reform both the tax system and tax and customs administration—and greater success was achieved in attaining the objective of broadening the tax base and lowering marginal tax rates than in bolstering tax and customs administration. Trade liberalization in Morocco, for example, has been accompanied by gradual improvements in both tax structure and tax and customs administration, with the introduction of a VAT in 1986 and more recently a complete overhaul of the tax and customs administrations. In the Philippines, there was considerable progress in reforming both direct and indirect taxation, the latter through the introduction of a VAT; however, there was less progress in bolstering tax administration. Paralleling the experience of other countries, Senegal has been successfully refining its VAT (reducing the number of rates and expanding the base) to bolster revenue mobilization.

Interactions with Macroeconomic Developments

The economic adjustments to trade liberalization may also include significant changes in the macroeconomy as well. Often trade reform is accompanied by a fall in the real value of the domestic currency. If trade balances initially worsen with tariff reductions, this may lead to depreciation of the currency. In many cases, trade reform is accompanied by an intentional devaluation of the currency, such as in the CFA franc zone countries in 1994. In general, the effect of a fall in value of the currency on trade tax revenues is ambiguous since it has offsetting effects on prices and quantities, and other important effects elsewhere on the budget and in the economy (Tanzi, 1991). From the revenue perspective, the reduction in value of the currency raises the domestic currency value of a given volume of imports. Since taxes are levied on domestic value, this would tend to increase revenues. The fall in the value of the currency also tends to decrease import volumes, hence this would limit any potential expansion of the base. The price elasticity of demand again critically influences the ultimate value of the base and hence revenues. If aggregate demand is inelastic, then depreciation of the currency is likely to increase revenues.

Box 1.Best Practices for Taxes and Tariffs

Theoretical and practical considerations have yielded a set of “best practices” in tax and tariff systems in developing countries (Abed, 1997). “Best” tax systems are those that cause a minimum of distortion in the allocation of resources, are equitable, and are relatively easy to administer.

In practice, comprehensive tax and tariff policy reforms typically include most or all the following key elements:

  • The introduction or strengthening of a broadly based consumption tax, notably a VAT, preferably with a single rate and minimal exemptions, and a threshold to exclude the smaller enterprises. Although VATs are often initially applied to manufactures and imports, they are typically subsequently extended to the distribution sector and agricultural inputs. Excise taxes should be levied at ad valorem rates (unless there are particularly severe problems with valuation) and restricted to a limited list of products, principally petroleum products, alcohol, and tobacco and some luxury items. VAT and excises should be applied equally to imports and domestic products.

  • Taxes on international trade should play a minimal role. Import tariffs should have a low average rate and a limited dispersion of rates to reduce arbitrary and excessive rates of protection. Exporters should have duties rebated on inputs used for producing exports. Export duties should generally be avoided, though at times these taxes have been defended as expedients for income taxes in hard-to-tax sectors such as agriculture.

  • The personal income tax should be characterized by only a few marginal tax brackets and a moderate top marginal rate; limited personal exemptions and deductions; a standard exemption that excludes persons with low incomes; and extensive use of final withholding. The corporate income tax should be levied at one moderate rate. Depreciation allowances should be uniform across sectors. There should be little use of tax incentives.

  • The reforms above may be usefully complemented in some countries by the introduction of a simplified tax regime for small businesses and the informal sector.

  • Tax and customs administration reforms should modernize systems and procedures. Simplification of the tax and tariff system provides strong support for administrative reforms. Typical reforms stress the reorganization of tax and customs administrations along functional lines; the adoption of effective procedures for a national system of unique taxpayer registration numbers; strengthening audit and enforcement and improved taxpayer services. Computerization is generally a central component of reform along with upgrading the skills of tax and customs officers and providing them with administrative autonomy and pay incentives.

The 1994 devaluation of the CFA franc underscores the importance of the circumstances surrounding a change in the value of a currency for tax revenues. The CFA franc had been at a relatively appreciated level for some time before the devaluation, with a low level of economic activity leading to a compression of imports. Accordingly, when the currency was devalued as part of an overall adjustment package, the result was a sharp increase in imports; this surge had a positive impact on revenues.11

Summary and Complementary Evidence

To sum up the conclusions of this section, it is clear that some forms of trade liberalization are more likely to enhance revenues than others. Tariffication of quantitative restrictions or auctioning of licenses to import are sure ways to increase revenues by transferring rents from foreign producers and domestic importers to the government. The removal of quantitative restrictions is also likely to increase revenues simply by increasing volumes of trade, though the extent of increase would depend critically on how binding these restrictions were. The reform of the tariff structure is more mixed in its likely effects on revenues. Reduction of tariffs is likely to reduce revenues; but to the extent that it is accompanied by measures to reduce exemptions and that it stimulates greater levels of trade, revenues may not fall and could even rise, over some medium-term horizon, especially if the initial level of tariffs is high. Regional trade arrangements and the nonuniformity they create in tariff barriers alter simple notions about the likely economic responses to tariff changes. Reducing the dispersion of tariffs is not likely to have a strong effect on revenues, though this would depend to some extent on whether it is accompanied by an increase in a minimum tariff rate and the elasticities of demand and supply that apply to the different goods on which tariffs are being adjusted. New forms of trade barriers, such as voluntary export restraints and countervailing and antidumping duties, may lead to less reduction in trade barriers than explicit reductions in quantitative restrictions and tariffs might suggest. But at the same time, countervailing and antidumping duties could serve to maintain revenue collections. The ability of domestic markets to adjust to the new trade regime and the ability of the domestic tax and customs administrations to administer the tax system in a changed environment are likely to influence revenue collections and the ability to sustain reforms. The interaction of reforms in the trade system with broader macroeconomic developments is also critical. In their analyses of the revenue implications of trade reform, Blejer and Cheasty (1990) and Tanzi (1991) both conclude that ultimately these are an empirical matter.

In an empirical case-study approach in which they analyze the revenue implications of World Bank-supported structural adjustment loans, Greenaway and Milner (1991) conclude that a range of outcomes is possible, depending upon the initial conditions and the components of the reform package. In a recent study examining the connection between reform of trade taxes and domestic taxes in World Bank programs, Rajaram (1994) examines whether the revenue effects of tariff reform proposals were anticipated and complemented by other tax measures. He finds that in some (but not all) cases, the revenue implications of trade reform and complementary reforms of the domestic tax system were considered. He suggests that there is a need for more systematic integration of revenue and protection objectives in World Bank programs. Mitra (1992) and Datta-Mitra (1997) also conclude that in some countries with World Bank reform programs there was a need for greater emphasis on revenue issues.

Although focused on the broader issue of trade liberalization in general, a recent IMF study of countries undergoing IMF-supported programs (IMF, 1997) also finds a range of fiscal outcomes to trade liberalization. This study concludes that, in some cases, programs could have targeted more extensive trade reform if more attention had been given to supporting fiscal policies and to revenue-neutral trade measures.

Trade Liberalization and Revenue Trends

In analyzing the impact of trade liberalization on revenues, two general observations from the discussion above need to be kept in mind. First, important determinants of the degree of reliance on international trade taxes are the level of economic development and the structure of the economy of the individual countries. Second, it is unclear even how to measure the extent of trade liberalization in an economy because there are various measures of trade liberalization, including the average tariff and the collected tariff rate (Dean, Desai, and Riedel, 1994). The simple correlation between the collected tariff rate and the share of import tariffs in GDP is 0.419, for a sample of 28 sub-Saharan African countries during the 1990–95 period.

Focusing initially on the issue of reviewing trends in trade liberalization, the long-term trend in the collected tariff rate (calculated by dividing revenue from import tariffs by imports) is one potentially useful indicator of whether countries are becoming more open to international trade—in particular, unlike the average tariff, collected tariff rates are straightforward to calculate over a period of time. Collected import tariff rates are given in Tables 27.

Overall, the average collected tariff rate has declined from 12.7 percent in 1975 to 9.1 percent in the last available year (Table 2). Turning to a consideration of the regional data (Tables 27), there were clear differences in the regional developments. Sub-Saharan African countries made progress in reducing average collected tariff rates between 1975 and the 1990s, though the level of collected tariff rates remained higher in that region than in the other regions. Other regions also reduced their dependence on trade taxes. The fact that, proportionately, the sharpest collective tariff reductions were in the OECD may well in part reflect the relative ease with which those countries have been able to diversify their tax bases by means of the VAT and other taxes.

Table 2.Collected Tariffs(In percent)
Region1975198019851990Last Available

Year1
All countries12.6211.3612.2711.089.82
OECD countries25.814.193.512.881.69
Non-OECD countries15.6414.2715.8914.4113.07
African countries19.3117.3619.0918.3116.34
Asian countries14.0512.0415.6316.4813.46
Middle Eastern countries16.4714.3314.0710.7011.39
Western Hemisphere countries12.3712.6713.7711.0910.20
Sources: IMF, Government finance Statistics and World Economic Outlook (May 1997); and OECD, Revenue Statistics.Note: Collected tariffs are defined as import tax revenues divided by imports. OECD is Organization for Economic Cooperation and Development.

Last available year is 1995 for most countries, but when this information is not available the last available year is used.

Excluding Czech Republic, Hungary, Luxembourg, and Poland.

Sources: IMF, Government finance Statistics and World Economic Outlook (May 1997); and OECD, Revenue Statistics.Note: Collected tariffs are defined as import tax revenues divided by imports. OECD is Organization for Economic Cooperation and Development.

Last available year is 1995 for most countries, but when this information is not available the last available year is used.

Excluding Czech Republic, Hungary, Luxembourg, and Poland.

Turning to a consideration of individual countries, Table 4 reveals that, in sub-Saharan Africa, the tax burden on trade varies widely, as did developments over time. Only 10 of 19 countries12 reduced their collected tariff rates, though some dramatically. The reduction was greatest in Cote d’Ivoire, Ethiopia, South Africa, and the Democratic Republic of Congo, all of which reduced collected tariff rates by more than 50 percent.

Table 3.Collected Tariffs in Countries Belonging to the OECD(In percent)
Country11975198019851990Last Available

Year2
Australia11.259.609.326.653.98
Austria3.751.551.481.460.41
Belgium1.471.331.061.020.99
Canada5.544.453.682.861.41
Denmark1.541.010.920.960.82
Finland3.171.900.981.421.01
France1.581.240.990.920.77
Germany2.431.881.361.441.15
Greece2.835.434.741.400.95
Iceland19.9717.2413.2810.481.68
Ireland1.020.901.090.940.97
Italy0.420.671.131,110.84
Japan3.352.722.612.993.65
Mexico15.2710.529.067.563.20
Netherlands1.791.481.191.411.52
New Zealand4.014.354.743.624.25
Norway1.350.860.770.761.29
Portugal4.744.993.443.110.87
Spain5.214.034.364.000.99
Sweden2.411.712.512.590.96
Switzerland2.981.541.221.191.21
Turkey36.1215.608.656.403.63
United Kingdom2.382.461.761.521.49
United States4.803.183.823.342.59
Unweighted average5.814.193.512.881.69
Sources: IMF, Government Finance Statistics and World Economic Outlook (May 1997); and OECD, Revenue Statistics.Note: Collected tariffs are defined as import tax revenues divided by imports. OECD is Organization for Economic Cooperation and Development.

Excluding Czech Republic, Hungary, Luxembourg, and Poland.

Last available year is 1995 for most countries, but when this information is not available the last available year is used.

Sources: IMF, Government Finance Statistics and World Economic Outlook (May 1997); and OECD, Revenue Statistics.Note: Collected tariffs are defined as import tax revenues divided by imports. OECD is Organization for Economic Cooperation and Development.

Excluding Czech Republic, Hungary, Luxembourg, and Poland.

Last available year is 1995 for most countries, but when this information is not available the last available year is used.

Table 4.Collected Tariffs in Selected African Countries1(In percent)
Country1975198019851990Last Available

Year1
Botswana18.8123.2518.4615.4419.07
Burundi224.7520.4618.2314.90
Cameroon22.1122.4325.9119.7719.03
Côte d’Ivoire28.0731.9622.7311.73
Ethiopia34.7618.9817.4421.3713.97
Gabon221.6331.7424.9024.6824.69
Gambia, The17.1821.4726.7916.0514.55
Ghana18.5614.4518.0616.0611.18
Kenya14.9511.7815.8314.2514.28
Lesotho27.5922.0518.3529.00
Malawi25.3211.4815.0712.1610.89
Mauritius11.1216.7122.8619.2214.54
Rwanda25.3419.9224.7027.30
Senegal218.1715.7315.4024.6319.22
Sierra Leone19.9818.7817.1813,0122.86
South Africa4.023.083.886.211.04
Zaire238.6522.0818.1822.898.73
Zambia5.347.438.9312.1911.39
Zimbabwe4.5722.4525.8022.19
Unweighted average193117.3619.0918.3116.34
Sources: IMF, Government Finance Statistics and World Economic Outlook (May 1997).Note: Collected tariffs are defined as import tax revenues divided by imports.

Last available year is 1995 for most countries, but when this information is not available the last available year is used.

Data from country authorities; and IMF staff estimates.

Sources: IMF, Government Finance Statistics and World Economic Outlook (May 1997).Note: Collected tariffs are defined as import tax revenues divided by imports.

Last available year is 1995 for most countries, but when this information is not available the last available year is used.

Data from country authorities; and IMF staff estimates.

Table 5 reveals that many of the larger economies in Asia (Indonesia, Republic of Korea, Malaysia, Singapore, and Thailand) all reduced collected tariff rates; the unweighted average largely reflects the lack of liberalization in smaller island economies (such as the Solomon Islands) as well as India and Myanmar. In Middle Eastern countries (Table 6), the reduction in the average collected tariff rate of the region took place in only a few countries, such as Egypt (from 43.2 percent in 1975 to 16.7 percent in the last available year), Syria (from 16.4 percent in 1975 to 9.9 percent in the last available year), Morocco (from 25.4 percent in 1975 to 14.9 percent in the last available year), and Israel (from 4.4 percent in 1980 to 0.6 percent in the last available year). In Western Hemisphere countries, the apparent lack of progress hides the significant liberalization that took place in the region’s largest economies, notably Brazil and Argentina in recent years (Table 7).

Table 5.Collected Tariffs in Selected Asian Countries(In percent)
Country1975198019851990Last Available

Year1
Botswana23.2518.4615.4419.07
Fiji15.8213.4720.9616.1412.61
India29.7725.7248.1948.2125.54
Indonesia8.726.884.535.835.01
Korea, Republic of6.257.738.587.994.70
Malaysia11.019.008.774.864.02
Myanmar27.5820.2425.2236.3442.90
Nepal17.1115.7214.4314.149.16
Papua New Guinea6.826.4911.9817.1318.40
Philippines220.8817.2416.7015.4714.39
Singapore1.370.920.730.000.26
Solomon Islands14.0511.2614.7521.5821.58
Sri Lanka9.6210.6514.3915.609.02
Thailand13.6811.1613.9910.967.35
Unweighted average14.0512.0415.6316.4813.46
Sources: IMF, Government Finance Statistics and World Economic Outlook (May 1997). Note: Collected tariffs are defined as import tax revenues divided by imports.

Last available year is 1995 for most countries, but when this information is not available the last available year is used.

Data from country authorities and IMF staff estimates.

Sources: IMF, Government Finance Statistics and World Economic Outlook (May 1997). Note: Collected tariffs are defined as import tax revenues divided by imports.

Last available year is 1995 for most countries, but when this information is not available the last available year is used.

Data from country authorities and IMF staff estimates.

Table 6.Collected Tariffs in Selected Middle Eastern Countries(In percent)
Country1975198019851990Last Available

Year1
Bahrain2.262.243.532.613.61
Egypt43.2425.8428.579.5816.72
Iran9.4920.9311.236.4912.28
Israel4.434.961.580.63
Jordan11.9416.4714.059.5112.31
Kuwait2.983.775.433.52
Morocco225.3826.3215.3719.0814.92
Oman0.121.323.683.363.07
Pakistan19.5424.6125.5331.6528.73
Syria16.4011.568.439.93
Tunisia19.8420.9129.9719.9819.62
Unweighted average16.4714.3314.0710.7011.39
Sources: IMF, Government Finance Statistics and World Economic Outlook (May 1997).Note: Collected tariffs are defined as import tax revenues divided by imports.

Last available year is 1995 for most countries, but when this information is not available the last available year is used.

Data from country authorities and IMF staff estimates.

Sources: IMF, Government Finance Statistics and World Economic Outlook (May 1997).Note: Collected tariffs are defined as import tax revenues divided by imports.

Last available year is 1995 for most countries, but when this information is not available the last available year is used.

Data from country authorities and IMF staff estimates.

Table 7.Collected Tariffs in Selected Non-OECD Western Hemisphere Countries(in percent)
Country1975198019851990Last Available

Year1
Argentina25.7022.6116.1810.409.74
Bahamas26.2126.1230.8028.6729.06
Bolivia12.347.854.755.01
Brazil16.426.5910.537.88
Chile17.337.2916.6910.3710.56
Colombia12.2610.3714.8218.549.06
Costa Rica5.966.9610.6410.298.26
Dominican Republic322.2215.5614.5810.6012.80
Ecuador14.9316.3524.2613.148.27
El Salvador8.494.354.254.695.88
Guatemala9.137.6011.897.038.42
Nicaragua7.158.146.448.6113.45
Panama5.936.2610.9011.389.59
Paraguay10.519.445.145.887.95
Peru22.5717.1128.1811.0111.77
Uruguay8.0217.1813.5012.726.07
Venezuela9.2211.3611.449.999.65
Unweighted average12.3712.6713.7711.0910.20
Sources: IMF, Government Finance Statistics and World Economic Outlook (May 1997).Note: OECD is Organization for Economic Cooperation and Development. Collected tariffs are defined as import tax revenues divided by imports.

Last available year is 1995 for most countries, but when this information is not available the last available year is used.

Data from country authorities and IMF staff estimates.

Sources: IMF, Government Finance Statistics and World Economic Outlook (May 1997).Note: OECD is Organization for Economic Cooperation and Development. Collected tariffs are defined as import tax revenues divided by imports.

Last available year is 1995 for most countries, but when this information is not available the last available year is used.

Data from country authorities and IMF staff estimates.

Tables 8 to 12, which summarize trends in the collection and composition of trade tax revenue during the past 20 years by region, reveal much of the same trends as observed with the collected tariff rates, suggesting that trade liberalization has on average resulted in a decline in trade tax revenues. In particular, Table 8 indicates that, as a percentage of GDP, trade taxes have diminished in importance over the past 20 years; they have declined from 4.2 percent of GDP in 1975 to 3.3 percent of GDP most recently. All regions witnessed declines in the ratio of trade tax revenue to GDP. However, the timing of the decline in trade taxes as a percentage of GDP varies markedly across regions. OECD countries appear to have reduced their reliance on trade taxes gradually over the past 20 years. Asian and Western Hemisphere non-OECD countries began their reform process much later, so that the reduction in trade taxes as a percentage of GDP only began in the 1990s. Conversely, in the Middle East, the reform process began earlier, but appears to have slowed in recent years. Despite the reduction of taxes on trade from 6.7 percent of GDP to 5.6 percent of GDP, trade taxes in sub-Saharan Africa are still higher than in other developing countries. Table 10 shows marked divergences in the reliance on international trade taxes across the individual countries of Africa.

Table 8.Taxes on International Trade(As percentage of GDP)
Tax1975198019851990Last Available

Year1
Trade taxes
All countries4.234.194.283.383.25
OECD countries1.200.910.770.600.37
Non-OECD countries5.305.215.364.404.29
African countries6.676.226.505.315.57
Asian countries3.804.835.264.363.79
Middle Eastern countries5.014.324.163.493.58
Western Hemisphere countries4.284.524.494.013.70
Import duties
All countries3.253.383.503.092.99
OECD countries1.110.870.750.580.37
Non-OECD countries4.004.174.354.063.94
African countries4.935.015.305.005.00
Asian countries2.783.143.783.873.35
Middle Eastern countries4.344.183.953.283.47
Western Hemisphere countries3.083.673.703.703.51
Export duties
All countries0.860.700.510.220.17
OECD countries0.070.020.01
Non-OECD countries1.140.910.660.300.23
African countries1.611.141.040.310.33
Asian countries0.711.250.710.490.43
Middle Eastern countries0.560.090.050.040.05
Western Hemisphere countries1.000.780.400.310.07
Sources; IMF, Government Finance Statistics and World Economic Outlook (May 1997); and OECD, Revenue Statistics.Note: “OECD” is Organization for Economic Cooperation and Development.

Last available year is 1995 for most countries, but when this information is not available the last available year is used.

Sources; IMF, Government Finance Statistics and World Economic Outlook (May 1997); and OECD, Revenue Statistics.Note: “OECD” is Organization for Economic Cooperation and Development.

Last available year is 1995 for most countries, but when this information is not available the last available year is used.

Table 9.Taxes on International Trade(As percentage of tax revenue)
Tax1975198019851990Last Available

Year1
Trade taxes
All countries26.0825.7724.6221.6519.79
OECD countries3.742.782.211.701.01
Non-OECD countries33.6333.0331.5128.7926.32
African countries41.2336.6535.9132.9232.69
Asian countries29.5933.7333.2527.4624.17
Middle Eastern countries29.3931.8030.3928.9826.88
Western Hemisphere countries26.8927.7624.8825.3520.71
Import duties
All countries19.8719.9419.3018.3517.04
OECD countries3.422.652.151.671.01
Non-OECD countries25.5125.4724.6424.6122.69
African countries30.8728.3327.3126.7526.17
Asian countries23.0621.9623.6721.9519.09
Middle Eastern countries25.3530.8129.1827.0726.31
Western Hemisphere countries19.1521.0219.8422.9519.61
Export duties
All countries5.124.913.641.981.45
OECD countries0.290.070.020.010.00
Non-OECD countries6.786.464.772.701.97
African countries9.348.928.504.824.10
Asian countries4.636.603.702.102.04
Middle Eastern countries3.140.610.300.190.28
Western Hemisphere countries6.506.002.872.280.41
Sources: IMF, Government finance Statistics and World Economic Outlook (May 1997); and OECD, Revenue Statistics.Note: “OECD” is Organization for Economic Cooperation and Development.

Last available year is 1995 for most countries, but when this information is not available the last available year is used.

Sources: IMF, Government finance Statistics and World Economic Outlook (May 1997); and OECD, Revenue Statistics.Note: “OECD” is Organization for Economic Cooperation and Development.

Last available year is 1995 for most countries, but when this information is not available the last available year is used.

Table 10.International Trade Taxes in African Countries(As percentage of GDP)
Country1975198019851990Last Available

Year1
Benin
Botswana11.4713.298.196.615.85
Burkina Faso5.546.815.24
Burundi23.525.455.154.17
Cameroon6.846.533.452.233.58
Central African Republic
Chad4.572.3111.32
Congo5.574.57
Côte d’Ivoire9.799.226.986.98
Djibouti1.221.67
Ethiopia3.726.684.522.532.50
Gabon28.016.996.723.895.04
Gambia, The9.3215.1811.118.798.79
Ghana8.043.044.614.574.48
Guinea
Kenya3.534.163.823.843.94
Lesotho14.1629.3122.0132.28
Liberia5.547.425.47
Madagascar24.523.933.783.39
Malawi22.814.094.613.054.53
Mali3.712.233.39
Mauritania5.529.36
Mauritius29.3010.4412.1211.356.74
Niger5.25
Nigeria3.141.45
Rwanda4.435.423.074.08
Senegal26.915.214.455.034.81
Sierra Leone6.678.142.312.303.67
Somalia5.49
South Africa1.180.790.780,980.45
Sudan6.884.72
Swaziland26.0223.7518.38
Tanzania3.823.051.29
Togo9.799.23
Uganda4.361.284.56
Zaire210.953.654.433.641.45
Zambia2.412.084.933.593.06
Zimbabwe1.064.715.915.88
Unweighted average6.676.226.505.315.57
Source: IMF, Government Finance Statistics.

Last available year is 1995 for most countries, but when this information is not available the last available year is used.

Data from country authorities and IMF staff estimates.

Source: IMF, Government Finance Statistics.

Last available year is 1995 for most countries, but when this information is not available the last available year is used.

Data from country authorities and IMF staff estimates.

Table 11.Import Duties in African Countries(As percentage of GDP)
Country1975198019851990Last Available

Year1
Benin
Botswana11.2113.228.166.605.85
Burkina Faso5.015.944.53
Burundi22.973.742.372.51
Cameroon4.964.812.882.042.56
Central African Republic
Chad3.88
Congo5.434.46
Côte d’Ivoire7.416.386.176.17
Djibouti1.171.63
Ethiopia2.902.762.782.192.30
Gabon27.216.146.073.344.47
Gambia, The7.2612.5610.428.768.76
Ghana2.630.841.923.113.37
Guinea
Kenya3.533.893.283.833.94
Lesotho14.0429.2621.9532.27
Liberia5.357.205.40
Madagascar24.120.860.841.19
Malawi22.814.093.703.053.02
Mali2.931.731.69
Mauritania5.065.88
Mauritius25.507.509.4810.216.74
Niger4.54
Nigeria3.141.43
Rwanda3.052.982.173.22
Senegal16.024.984.425.034.81
Sierra Leone5.246.012.182.253.62
Somalia5.13
South Africa1.110.720.730.980.18
Sudan4.814.53
Swaziland11.2020.5818.37
Tanzania2.641.941.27
Togo7.057.45
Uganda1.210.280.58
ZaÏre15.891.943.173.261.33
Zambia2.322.072.863.533.06
Zimbabwe1.064.575.735.72
Unweighted average4.985.015.305.005.00
Source: IMF, Government Finance Statistica.

Last available year is 1995 for most countries, but when this information is not available the last available year is used.

Data from country authorities and IMF staff estimates.

Source: IMF, Government Finance Statistica.

Last available year is 1995 for most countries, but when this information is not available the last available year is used.

Data from country authorities and IMF staff estimates.

Table 12.Export Duties in African Countries(As percentage of GDP)
Country1975198019851990Last Available

Year1
Benin
Botswana0.260.060.030.01
Burkina Faso0.320.450.300.11
Burundi20.541.702.771.60
Cameroon1.861.660.520.191.02
Central African Republic
Chad0.69
Congo0.140.07
Côte d’Ivoire2.372.840.810,81
Djibouti0.03
Ethiopia0.813.921.740.340.19
Gabon20.640.850.650.230.88
Gambia, The2.052.530.690.040.04
Ghana5.412.162.671.340.91
Guinea
Kenya0.270.540.01
Lesotho0.120.050.060.02
Liberia0.100.160.06
Madagascar20.411.480.800.33
Malawi20.94
Mali0.770.431.65
Mauritania0.173.48
Mauritius23.803.302.231.07
Niger0.59
Nigeria0.02
Rwanda1.382.440.780.59
Senegal20.890.230.02
Sierra Leone1.432.090.130.02
Somalia0.36
South Africa0.070.040.05
Sudan0.580.20
Swaziland14.823.17
Tanzania1.181.100.01
Togo1.390.28
Uganda3.130.983.88
Zaïre25.011.711.260.380.13
Zambia1.83
Zimbabwe
Unweighted average1.611.141.040.310.33
Source: IMF, Government finance Statistics.

Last available year is 1995 for most countries, but when this information is not available the last available year is used.

Data from country authorities and IMF staff estimates.

Source: IMF, Government finance Statistics.

Last available year is 1995 for most countries, but when this information is not available the last available year is used.

Data from country authorities and IMF staff estimates.

Turning to a consideration of the importance of international trade taxes to overall revenue collections (Table 9), the share of import duties in tax revenue for non-OECD countries has diminished only a little during the past 20 years. Whereas OECD countries more than halved the share of import duties in tax revenue (from 3.4 percent in 1975 to 1.0 percent most recently), non-OECD countries reduced their share only from 25.5 to 22.7 percent of tax revenue, and therefore have only marginally diminished the importance of import taxes in overall revenue. Regionally, of the non-OECD countries, only Asian and African countries reduced their reliance on import duties, as measured in percentage of tax revenue. Note that this stands in contrast to the conclusions reached from examining Table 8, which indicates that both of these regions increased import taxes as a percentage of GDP. This implies that, in these regions, overall tax revenues rose considerably as a share of GDP, which permitted a decline in the relative importance of tariff revenue. Reliance on import taxes remained virtually unchanged in all other non-OECD regions. Table 11 again indicates the differences across sub-Saharan African countries. All regions have made progress in the reduction of export duties.

In most countries, domestic indirect taxes collected upon imports are another important source of revenues (though the ultimate incidence is thought to be shifted forward to the consumer). Customs administrations typically collect trade taxes and any domestic indirect taxes on imports (VAT and excises) at the border. Trade taxes are levied on import values, while domestic indirect taxes are generally levied on a tax base inclusive of customs duties. Excise duties on imports are usually collected on a tax base inclusive of customs duties and then broadly based indirect taxes, such as the VAT, are stacked on top of trade taxes and excises.

There are several reasons that it is useful to assess a country’s overall dependence on tax collections on imports, when evaluating the impact of trade liberalization on revenues. First, overall collections on imports more accurately reflect the immediate vulnerability of a country’s revenue collections to shifts in foreign trade.13 Second, the interaction between trade taxes and domestic indirect taxes on imports may be important in the design of trade and tax reforms where eliminating protection is one objective. Unfortunately, the lack of data availability does not allow a comprehensive analysis of this question. Hence only a number of illustrative examples are given in Table 13. The small sample for which domestic taxes on imports could be precisely identified shows that their importance might be substantial. In several sub-Saharan African countries, domestic taxes on imports were significant. These countries not only have to gauge the revenue effect of trade liberalization with respect to import tariffs, but also with respect to domestic taxes on trade.

Table 13.Tax Revenue and Taxes on International Trade
Tax or Revenue1986198719881989199019911992199319941995
Tax revenue(As percentage of GDP)
Côte d’Ivoire20.3521.5020.4318.0917.5616.8916.9314.7816.4117.84
Ghana12.2012.7012.4012.3010.8012.4010.0012.9016.9015.00
Madagascar9.3210.9610.498.849.436.858.668.167.698.32
Mali11.909.608.509.809.8012.1010.4011.1010.0010.70
Nepal7.408.408.107.046.806.606.907.708.908.66
Niger9.008.048.138.177.907.006.706.605.406.61
Total taxes on international trade1(As percentage of GDP)
Côte d’Ivoire7.307.227.016.845.705.784.964.484.695.09
Ghana2.782.382.433.183.233.223.013.554,354,52
Madagascar2.903.734.563.864.733.073.983.963.504.31
Mali4.473.593.133.663.716.265.556.125.225.77
Nepal2.403.052.862.562.462.172.212.423.012.87
Niger3.302.702.732.673.012.352.092.231.952.62
Domestic taxes on international trade(As percentage of GDP)
Côte d’Ivoire3.133.012.762.662.111.962.001.922.102.25
Ghana0.460.620.911.311.371.361.181.381.751.85
Madagascar1.011.291.641.481.881.271.381.311.582.04
Mali2.011.371.301.581.781.631.431.521.291.69
Nepal0.230.180.120.180.300.360.230.380.36
Niger1.851.401.391.351.491.111.001.040.900.98
Customs duties(As percentage of GDP)
Côte d’Ivoire4.174.214.254.183.593.822.952.552.592.84
Ghana2.331.771.521.881.861.871.832.172.602.67
Madagascar1.902.442.922.382.851.792.622.661.932.27
Mali2.462.221.832.081.934.634.114.603.934.09
Nepal2.172.882.752.562.291.871.852.182.632.51
Niger1.461.301.341.321.521.241.091.191.051,63
Domestic taxes on international trade(As percentage of international trade taxes)
Côte d’Ivoire42.9141.6439.3538.8636.9833.9640.4042.9944.7444.21
Ghana16.3525.8837.3741.0342.3742.0539.1138.9440.2840.88
Madagascar34.6934.5135.9338.3639.8041.4733.9932.9845.0347.38
Mali44.9238.2141.6243.1048.0026.0025.8424.8924.7729.25
Nepal9.705.754.137.1513.8116.479.5512.5512.56
Niger55.9251.9450.8150.5249.5947.3447.8346.7946.3137.54
Customs duties(As percentage of international trade taxes)
Côte d’Ivoire57.0958.3660.6561.1463.0266.0459.6057.0155.2655.79
Ghana83.6574.1262.6358.9757.6357.9560.8961.0659.7259.12
Madagascar65.3165.4964.0761.6460.2058.5366.0167.0254.9752.62
Mali55.0861.7958.3856.9052.0074.0074.1675.1175.2370.75
Nepal90.3094.2595.87100.0092.8586.1983.5390.4587.4587.44
Niger44.0848.0649.1949.4850.4152.6652.1753.2153.6962.46
Sources: Country authorities; and IMF staff estimates.

The classification is based on domestic taxes on international trade plus customs duties, and excluding exports.

Sources: Country authorities; and IMF staff estimates.

The classification is based on domestic taxes on international trade plus customs duties, and excluding exports.

As can be seen from the appendix, the case studies afford useful examples of how the interaction between the many dimensions of trade liberalization and the economic circumstances of individual countries played out. We consider each country in turn.

Malawi

Trade liberalization and economic reform in general went through phases. During the late 1980s, complementary tax reforms were revenue enhancing, the liberalization of foreign exchange restrictions resulted in a modest increase in the GDP share of imports, and the collected import tariff rates remained broadly constant. This would appear to be an example where the combination of focusing initially on reductions in quantitative restrictions and tariff dispersion and the favorable impact of liberalizing the foreign exchange market resulted in both strengthened revenue mobilization and a more liberalized trade regime. The more recent phase of reform provides an example of how difficult it is accurately to gauge trade liberalization. Despite reductions in tariff rates in the mid-1990s, the measured collected import tariff rate rose, likely reflecting a combination of improvements in tax and customs administration and some compositional shift in import demand toward finished goods with higher tariffs.

Morocco

With reform of its domestic tax system taking place alongside its program of trade liberalization, Morocco, during its initial reform phase in the 1980s was able to maintain a relatively stable ratio of tax revenue to GDP even as the collected import tariff rate and taxes from international trade declined. In more recent years, the sharp decline in the collected import tariff rate was largely offset by the surge in imports in response to liberalization and sounder policies.

The Philippines

The interesting phase of reform in the Philippines is that which occurred after 1986 against the background of a weak overall revenue performance (about 10 percent of GNP). The exigencies of budgetary pressures implied that trade reform focused on the elimination of quantitative restrictions, reductions in tariff dispersion, while at the same time bolstering revenues inter alia by introducing a surcharge on non-oil imports. Considering 1994–96, 1 percentage point of the increase in trade tax revenue of 2.4 percentage points of GDP could be credited to the import surcharge, with the balance being due to increased imports and the tariffication of quotas. Again, though, the conflicting trends complicate the measurement of trade liberalization.

Senegal

Senegal provides an example of how difficult it can be to pursue trade liberalization in the absence of essential supporting macroeconomic and structural policies. From 1982/83 to 1988/89, taxes on imports declined from about 5.9 to 3.7 percent of GDP even though the collected tariff rate increased. This largely reflected import compression in the face of an overly appreciated exchange rate that hurt economic activity, a problem that was alleviated with the 1994 devaluation of the CFA franc. Since 1994, import taxes have increased, with the revenue implications of significant tariff reductions and simplification being more than counterbalanced by higher import levels and temporary tariff surcharges to ease the adjustment precipitated by the elimination of import licenses (an action that is analogous to tariffication of a quantitative restriction).

Conclusions

Trade liberalization takes different forms, though it typically emphasizes the elimination of quantitative restrictions and the reduction in the level and dispersion of tariffs. The revenue implications of trade liberalization depend on the nature of existing barriers to trade, the sequencing of reform, the extent to which improvements are made in tax structure and tax and customs administrations, supporting macroeconomic policies, and other economic adjustments. The theoretical predictions are ambiguous, while the empirical evidence, based on several case studies, also suggests that a variety of outcomes is possible. The aggregate data suggest that trade liberalization has been associated with some reduction in reliance on international trade taxes for budgetary revenues.

The experience of Africa, which is highlighted in this chapter, suggests that many African countries have progressed in liberalizing trade, at least when measured by examining indicators such as the elimination of quantitative restrictions and reducing maximum tariffs. They have made less progress in reducing the reliance on trade taxes or in reducing the collected tariff rate. Generalizing broadly, it is clear that in East Africa considerable progress with trade liberalization has been made, starting in the late 1980s, while in the CFA franc zone, considerable progress has been made recently, following the devaluation of the CFA franc in 1994. The CFA franc zone is also notable for the fact that trade tax revenues increased despite tariff reductions because the devaluation resulted in a sharp rise in imports, when measured in domestic currency terms.

Turning to the case studies, all the countries made progress in trade liberalization in recent decades, though not without some hesitation and reversals in each case. Although quantitative restrictions varied across the countries, they all made significant progress in removing them. In the Philippines, the tariffication of quantitative restrictions appears to have strengthened revenues; in Morocco, increased trade resulting from trade liberalization most likely also strengthened revenues. All the countries also made progress in reducing nominal tariffs, though the impact on the revenue from trade taxes was less pronounced. Only Morocco appears to have significantly reduced its reliance on trade taxes. All these countries made at least some effort to improve the structure of the domestic tax system, and also, more recently, tried to improve tax and customs administration. Nevertheless, considerable progress remains to be made, particularly in improving administration. These examples illustrate that trade liberalization need not necessarily lead to fiscal imbalances, though successful reform requires a confluence of sound policies.

Appendix: Country Case Studies

Malawi

In the 1980s, economic growth in Malawi was constrained by a combination of poor macroeconomic management, a series of external shocks, and protectionist trade policies. However, in the late 1980s, Malawi embarked on a program of macroeconomic adjustment and structural policy reforms with the assistance of the International Monetary Fund, the World Bank, and other donors. The program included a focus on trade liberalization, which has continued to the present. Following elections in May 1994, the new government also committed itself to trade reform. The economy has performed well in the past few years with high rates of economic growth and an expansion in international trade.

Trade and Tax Reforms

Initial Conditions

In common with other countries in East Africa, taxes on international trade have traditionally comprised a significant part of Malawi’s revenue collections, with trade policy being used to contain external imbalances and to protect domestic industries. Throughout the 1980s, Malawi maintained tight administrative controls on the exchange and trade system in addition to high tariffs. Controls included surrender requirements for foreign exchange and mandatory licensing of exports and imports. The result was a flourishing black market for the Mala-wian kwacha. The tariff schedule was characterized by extensive tax exemptions and escalating tariff rates by stage of production that resulted in high effective rates of protection.

In addition, elements of Malawi’s domestic indirect tax system at that time reinforced protectionism. The broadly based sales tax was structured in such a way that: (1) higher tax rates were levied upon some imported goods than upon the same goods produced domestically; and (2) the tax was suspended for some domestic goods, resulting in protection that may in some cases have exceeded the nominal protection through the tariff system.

Trade Policy Actions

Malawi embarked on trade liberalization in the late 1980s in the context of IMF-supported adjustment programs. Important elements included:

  • A program to eliminate foreign exchange rationing by loosening exchange controls, initially on raw materials and industrial spare parts and later on intermediate and capital goods, with the eventual intention of loosening controls on most goods.

  • The tariff schedule was unified, with the range of tariffs being reduced from 0–220 percent to 0–45 percent.

  • The export regime was also liberalized through revisions to the duty drawback and industrial rebate schemes to improve rebating procedures for producers.

  • At the same time, and to support the reform efforts, the currency was devalued by 15 percent against the basket of currencies to which it was pegged.

As a result of these and related efforts, Malawi made considerable progress during the period 1988–91 in liberalizing its trade regime. By 1991, almost all products could be imported without foreign exchange approval. Certain goods were still subject to controls, including several agricultural commodities, used clothing, and matches, and some goods were controlled for health, security, and environmental reasons. The ban on used clothing assisted the domestic textiles industry, dominated by one large firm. These reforms led to reduced government intervention in major exports, better linkage of producer prices to world market prices, and an improvement in exchange rate policy.

The process of reform has continued in more recent years. In particular:

  • The remaining licensing on imports and exports has been removed.

  • There has been additional progress in tariff reform, albeit at a slow pace. The number of tariff bands was reduced to no more than six rates including zero in 1995; the maximum tariff rate was lowered from 45 to 40 percent in April 1996, and to 35 percent in August 1997; as a result, the weighted average tariff declined from about 21 percent in 1989, to 18 percent in 1995, to less than 15 percent in 1997.

  • The remaining restrictions on current account transactions have been lifted, and Malawi accepted Article VIII of the IMF’s Articles of Agreement in December 1995.

In the face of widening fiscal gaps, in 1995, the government imposed a temporary export levy of 10 percent on key agricultural exports, namely, tobacco, tea, and sugar. The levy was reduced to 8 percent in 1996, to 4 percent in 1997, but was extended to coffee exports in 1997, and then eliminated in 1998.

Complementary Policy Actions

In addition to liberalizing its trade regime in the late 1980s, Malawi also began a comprehensive reform of the tax system and tax and customs administration. The goals were to reduce marginal tax rates, broaden the tax bases, and eliminate protectionist elements in the domestic tax system.

The reform program was successful. In 1987/88, the surcharge on the sales tax rate for imports was eliminated and was replaced by an adjusted (higher) standard sales tax rate. In 1988/89, an import levy was incorporated into the regular duty rates. Moreover, the sales tax was converted into a credit-based VAT, though, as with the sales tax, the VAT did not extend to services or the retail sector.

Subsequent measures included the phased reduction of the standard corporate tax rate and the standard VAT rate to internationally comparable levels. In 1992/93, the higher surtax rate on imported goods competing with domestic goods and all surtax suspensions were eliminated. Import duty rates for goods previously carrying the higher surtax rate were adjusted upward to limit the loss in protection to domestic producers, with the understanding that these rates would be brought down over time. In 1993/94, the base of excise taxes was expanded to cover imports. These measures virtually eliminated the last remaining differences in the treatment of domestic producers and importers in the domestic tax system.

There was less progress in improving tax and customs administration, reflecting both the extent of the underlying problems with both those administrations. In January 1993, the authorities contracted with Societe Generale de Surveillance to operate preshipment inspection. However, the use of preshipment inspection resulted in limited benefits, in part, because the officials were poorly trained in using the results of preshipment inspection to reduce customs evasion.

Revenue Implications of Trade and Tax Reforms

Malawi has traditionally maintained a strong tax effort, with a substantial portion of revenues derived from taxes on international trade (see Tables 14 and 15, and Figures 3 and 4). In 1987/88, at the beginning of the reform program, tax revenues were 15.1 percent of GDP. Taxes on international trade were 19.2 percent of total tax revenues, with a collected import tariff rate of 13.4 percent (despite high nominal tariff rates). During this period, tax reforms were revenue enhancing, and as a consequence tax revenues rose to 18.5 percent of GDP in 1989/90. Liberalization of foreign exchange restrictions led to a small increase in the share of imports in GDP (from 21.5 percent in 1987/88 to 24.5 percent in 1989/90) which served to maintain the share of trade taxes in total tax revenues. The collected import tariff rate remained steady in the absence of any significant reduction in tariffs or shift in the composition of imports.

Figure 3.Malawi: Summary Measures of Economic Performance and Revenue Trends, Percentage of GDP

Sources: Ministry of Finance; IMF staff calculations; IMF, World Economic Outlook (May 1997).

Figure 4.Malawi: Central Government Revenue, Percentage of GDP

Sources: Data provided by the country authorities; IMF staff estimates.

Table 14.Summary Measures of Economic Performance and Revenue Trends for Malawi
Measure1985/861986/871987/881988/891989/901990/911991/921992/931993/941994/951995/961996/97
GDP (at current market prices, in millions of Malawi kwacha)2,010.202,332.502,992.203,660.504,558.605,338.506,252.607,255.209,648.1013,867.5024,743.1034,912.80
Exchange rates (in national currency per U.S. dollar)1.721.862.212.562.762.732.803.604.408.7415.2815.29
Value of trade = value of imports + exports (in billions of U.S. dollars)0.540.510.570.660.670.901.091.110.960.930.961.10
(In millions of Malawi kwacha)922.55940.211,258.371,700.531,859.292,462.003,058.533,999.064,213.048,103.9214,678.1916,887.79
(As percentage of GDP)45.8940.3142.0646.4640.7946.1248.9255.1243.6758.4459.3248.37
Value of imports (in billions of U.S. dollars)0.290.260.290.370.400.490.620.710.630.550.560.61
(In millions of Malawi kwacha)492.90478.00643.30948.821,117.581,338.851,725.382,567.192,787.414,847.218,514.289,350.46
(As percentage of GDP)24.5220.4921.5025.9224.5225.0827.5935.3828.8934.9534.4126.78
Value of exports (in billions of U.S. dollars)0.250.250.280.290.270.410.480.400.320.370.400.49
(In millions of Malawi kwacha)429.65462.21615.07751.71741.711,123.151,333.141,431.871,425.633,256.716,163.917,537.33
(As percentage of GDP)21.3719.8220.5620.5416.2721.0421.3219.7414.7823.4824.9121.59
Tax revenue (in millions of Malawi kwacha)373.40391.10450.20653.60844.70888.101,021.701,126.701,407.602,031.503,854.405,651.20As
(As percentage of GDP)18.5816.7715.0517.8618.5316.6416.3415.5314.5914.6515.5816.19
International trade taxes
(In millions of Malawi kwacha)92.6080.2086.60113.80152.20162.80211.50256.40269.90458.601,121.401,358.70
(As percentage of GDP)4.613.442.893.113.343.053.383.532.803.314.533.89
(As percentage of tax revenue)24.8020.5119.2417.4118.0218.3320.7022.7619.1722.5729.0924.04
Import duties (in millions of Malawi kwacha)74.3075.8086.40117.10152.20162.80210.00255.50267.90457.00746.401,018.20
(As percentage of GDP)3.703.252.893.203.343.053.363.522.783.303.022.92
Collected international trade tariff = international trade taxes/value of trade10.048.536.886.698.196.616.926.416.415.667.648.05
Collected import tariff = import duties/value of imports15.0715.8613.4312.3413.6212.1612.179.959.619.438.7710.89
Domestic taxes on goods and services (in millions of Malawi kwacha)129.30146.20189.70258.40336.30347.20391.00423.00619.40816.601,439.901,965.00
(As percentage of GDP)6.436.276.347.067.386.506.255.836.425.895.825.63
(As percentage of tax revenue)34.6337.3842.1439.5339.8139.0938.2737.5444.0040.2037.3634.77
Budget deficit excluding grants (in millions of Malawi kwacha)201.50-304.10-273.10-266.80-301.40-359.00-395.00-1,048.00-799.00-3,891.60-3,427.30-2,793.70
(As percentage of GDP)-10.02-13.04-9.13-7.29-6.61-6.72-6.32-14.44-8.28-28.06-13.85-8.00
Budget deficit including grants (in millions of Malawi kwacha)-156.70-224.50-197.00-57.70-91.50-246.30-187.00-874.00-515.00-2,376.30-1,441.10-1,086.00
(As percentage of GDP)-7.80-9.62-6.58-1.58-2.01-1.61-2.99-12.05-5.34-17.14-5.82-3.11
Current account balance (in billions of U.S. dollars)-0.07-0.04-0.03-0.02-0.14-0.06-0.15-0.22-0.22-0.15-0.11-0.11
(As percentage of GDP)
Excluding official transfer-8.55-5.98-5.19-8.23-13.97-8.02-9.77-19.99-16.96-17.93-15.95-8.49
Including official transfer-6.38-3.54-2.60-1.36-9.07-3.52-7.05-12.08-11.00-11.42-7.84-5.19
Sources: Ministry of Finance; IMF staff estimates; IMF, World Economic Outlook (May 1997).
Sources: Ministry of Finance; IMF staff estimates; IMF, World Economic Outlook (May 1997).
Table 15.Central Government Revenue in Malawi(As percentage of GDP)
Component1980/811981/821982/831983/841984/851985/861986/871987/881988/891989/901990/911991/921992/931993/941994/951995/961996/97
Total revenue19.3619.4018.9419.0920.4121.9921.1319.5021.2621.8119.5418.9018.3616.8816.0917.9317.02
Tax revenue16.2215.7216.1015.9417.1118.5816.7715.0517.8618.5316.6416.3415.5314.5914.6515.5816.19
Taxes on income, profits, and capital gains6.315.436.166.266.777.436.965.737.607.676.966.605.865.285.395.687.05
Individual2.482.432.662.702.602.342.512.502.993.152.782.743.002.672.952.893.17
Corporate3.833.003.503.564.175.094.453.244.614.524.173.862.852.612.442.793.88
Other taxes on income, profits, and capital gains
Taxes on property0.010.010.010.020.010.020.020.010.010.030.010.010.010.01---
Taxes on payroll
Social security contributions
Domestic taxes on goods and services5.755.815.735.746.396.436.276.347.067.386.506.255.836.425.895.825.63
Taxes on general sales, turnover or VAT4.724.744.524.535.325.165.085.336.136.445.655.485.135.685.055.014.74
Excises0.760.790.900.870.720.680.590.440.570.630.570.520.530.620.760.750.83
Other taxes on domestic goods and services0.270.270.310.350.350.600.600.570.360.300.280.240.170.120.080.060.05
Taxes on international trade4.094.414.073.913.854.613.442.893.113.343.053.383.532.803.314.533.89
Imports4.094.414.073.913.853.703.252.893.203.343.053.363.522.783.303.022.92
Exports0.910.190.01-0.09------1.430.95
Other taxes on international trade0.020.010.020.010.080.02
Other taxes10.060.070.140.020.090.080.090.070.080.120.120.100.300.090.060.040.05
Tax refunds----------------0.49-0.43
Nontax revenue3.143.682.843.153.303.414.364.453.413.282.912.562.832.291.442.360.84
Sources: Country authorities; and IMF staff estimates.Note: Fiscal year beginning April 1.

Includes stamp duties and drought levy.

Sources: Country authorities; and IMF staff estimates.Note: Fiscal year beginning April 1.

Includes stamp duties and drought levy.

In the next phase of tax reform, reductions in marginal tax rates and rationalization of the tax system, which were not accompanied by a corresponding expansion in tax bases and a strengthening of tax administration, led to a weakening of tax revenues. The ratio of tax revenue to GDP fell steadily to 14.6 percent in 1993/94. The expansion in imports as a share of GDP in this period buoyed trade taxes, which rose slightly as a share of total tax revenues, even though the collected import tariff rate fell toward the end of this period. This decline in the collected import tariff rate appears to have reflected the effect of both trade reforms (including those under international commitments) and declining administrative effectiveness in this period.

In the most recent phase of reform, tax revenues have begun to strengthen, rising to 16.2 percent of GDP in 1996/97. In part, this increase reflects the stabilization of the economy and rapid growth in recent years, the cessation of reductions in marginal tax rates in the domestic tax system, some improvements in tax administration, and the effect of the temporary export levy. International trade taxes were 24.0 percent of tax revenues in 1996/97, after peaking at 29.1 percent the previous year. This increase appears to reflect a combination of both the temporary export levy and an increase in the collected import tariff rate. This latter increase is surprising given the reductions in tariff rates. It probably reflects a combination of both improvements in administrative effectiveness and perhaps some compositional changes in imports toward finished goods, which face higher tariffs. Domestic indirect taxes have not shown the same improvements, in part because of delays in implementing a fully fledged VAT.

Conclusions

In the past decade, Malawi has liberalized its trade regime by eliminating virtually all quantitative and foreign exchange restrictions, liberalizing and improving the operation of foreign exchange markets, simplifying and consolidating the tariff schedule, and reducing tariff rates. In recent years, there has been some reduction in the collected import tariff rate, reflecting tariff cuts. The introduction of a temporary export levy for revenue reasons in 1995 has been the only backsliding on trade liberalization. Despite this impressive record of trade liberalization, Malawi continues to depend heavily on trade tax revenues. Continuous and significant reform of the domestic tax system has eliminated elements of protectionism and has dramatically improved its structure. Nevertheless, Malawi has yet to implement a fully fledged VAT, and tax and customs administration reform has lagged seriously—though, with the aid of technical assistance, it is now under way. Malawi’s experience with trade liberalization leads to several conclusions:

  • Strengthening the domestic tax system and removing elements that contribute to protection for domestic industries are essential components of successful reform; however, reforms that reduce marginal tax rates may entail revenue losses if they are not accompanied by measures to improve tax administration and if they proceed too rapidly.

  • Strengthening customs administration is an equally important component of successful reform. Preshipment inspection is no substitute for adequate reforms.

  • Rationalizing and simplifying tariffs and liberalizing foreign exchange markets are also essential components of successful reform and should be undertaken early in the process.

Morocco

Morocco is an example of a country that has achieved substantial liberalization of its economy. The country implemented comprehensive trade and other structural reforms in the context of IMF- and World Bank–supported adjustment programs during the period 1980–92. Subsequently, Morocco has further liberalized its trade and exchange system, launched a privatization program, and undertaken a comprehensive overhaul of the financial sector.

Trade and Tax Reforms

Initial Conditions

Until the early 1980s, Morocco’s trade policy attempted to promote industrialization through protectionism and to use trade restrictions to raise revenues and contain external imbalances. There was extensive resort to both quantitative restrictions and high tariffs, resulting in high effective protection and discrimination against labor-intensive activities. Specifically, imports were regulated by a program, which categorized goods between those that could be freely imported, those for which quantitative restrictions applied, and those whose importation was prohibited. Quantitative restrictions were enforced through import licensing and state trading. Supplementing these restrictions were foreign exchange controls on, inter alia, the repatriation of profits and capital, foreign ownership of local enterprises, and foreign borrowing by local firms. Exporters were required to surrender foreign exchange earnings. In addition, ad valorem taxes applied to exports of agricultural products and their derivatives (1 percent) and mineral products (5 percent). Phosphate exports were subject to a specific tax.

Trade Policy Actions

During the 1980s, the trade and foreign investment regimes were reformed in a shift toward outward-oriented development. Focusing on the trade liberalization strategy adopted in 1983, which was intended to reduce gradually the level and dispersion of tariffs, important reforms included:

  • Quantitative restrictions on imports were gradually eliminated, although licensing requirements remained.

  • The maximum tariff rate was cut from 400 percent in 1982 to 60 percent in 1984 (except for a few agricultural goods), and the special import tax rate was cut from 15 percent in 1983 to 5 percent in 1987. Import taxes other than tariffs were simplified in 1988 by replacing the special import taxes and stamp duties on imports with a single flat import levy of 12.5 percent applied to virtually all imports. This rate was raised to 15 percent in 1993 for most products. The number of tariff bands was reduced from 47 in 1980 to 26 in 1988 to 9 in 1992 and to 6 in 1996.

  • As regards exchange restrictions, import deposit requirements were abolished in 1984, and the requirement of approval from the Moroccan Exchange Office for payments for imports on goods subject to quantitative restrictions was eliminated in 1990.

Additional important reforms were implemented during the 1990s:

  • The ad valorem taxes levied on exports were abolished in 1995, leaving only raw phosphate exports subject to a specific tax. Export licensing requirements were virtually abolished by 1994.

  • There were measures to improve tax administration in the areas of procedures for tax assessment, collection, and auditing, though important deficiencies remain. Since late 1996, a complete overhaul of the customs administration has been undertaken.14 These reforms emphasize value controls, improved electronic data processing, staff training, and codification of customs legislation.

  • Morocco accepted Article VIII status in January 1993. Moreover, by the end of 1993, Morocco had achieved virtually full capital account convertibility for foreign investors. Additional steps were taken to liberalize capital mobility for domestic residents as well, through the elimination of surrender requirements and foreign borrowing restrictions.

Although most quantitative restrictions were replaced with tariffs, the collected import tariff rate fell from 26.3 percent in 1980 to 19.3 percent in 1993 and to 14.9 percent in 1995 (see Tables 16 and 17 and Figures 5 and 6). However, numerous commodities remain subject to reference prices, thus rendering collected tariff rates on some of them as high as 300 percent. Moreover, tariffs are still widely dispersed, with higher rates on locally produced goods and lower rates on inputs, equipment goods, and nonlocally produced goods. Although quantitative restrictions applied in 1994 to only a few goods, and although over time there has been a reduction in licensing requirements, many imports are still subject to licensing, particularly in the food, beverages, tobacco, and fuel and lubricants areas.

Figure 5.Morocco: Summary Measures of Economic Performance and Revenue Trends, Percentage of GDP

Sources: Data provided by the Moroccan authorities; IMF staff estimates; IMF, World Economic Outlook (May 1997).

Figure 6.Morocco: Central Government Operations, Percentage of GDP

Sources: Data provided by the authorities; IMF staff estimates.

Table 16.Summary Measures of Economic Performance
Measure1980198119821983198419851986198719881989199019911992199319941995
GDP (at current market prices, in millions of Moroccan dirhams)74,090.079,034.092,898.099,143.0112,345.0129,507.0154,725.0156,690.0182,230.0193,931.0212,820.0242,360.0242,910.0249,223.0279,295.0276,878.0
Exchange rates
(In national currency per U.S. dollar)3.95.26.07.18.810.19.18.48.28.58.28.78.59.39.28.5
Value of trade = value of imports + exports
(In billions of U.S. dollars)6.26.25.95.45.75.75.96.68.08.310.510.510.711.913.216.1
(In millions of Moroccan dirhams)24,490.031,867.035,456.038,239.050,578.057,121.053,797.055,435.065,544.770,670.086,625.591,729.091,074.9110,807.0121,166.0137,829.0
(As percentage of GDP)33.140.338.238.645.044.134.835.436.036.440.737.837.544.543.449.8
Value of imports
(In billions of U.S. dollars)3.83.83.83.33.63.53.53.94.45.06.36.36.77.07.69.3
(In millions of Moroccan dirhams)14,845.019,864.022,986.023,482.031,460.035,370.031,691.032,184.035,789.242,400.051,767.554,445.057,114.964,911.070,201.079,149.0
(As percentage of GDP)20.025.124.723.728.027.320.520.519.621.924.322.523.526.025.128.6
Value of exports
(In billions of U.S. dollars)2.52.32.12.12.22.22.42.83.63.34.24.34.04.95.56.9
(In millions of Moroccan dirhams)9,645.012,003.012,470.014,757.019,118.021,751.022,106.023,251.029,755.428,270.034,858.037,284.033,960.045,896.050,965.058,680.0
(As percentage of GDP)13.015.213.414.917.016.814.314.816.314.616.415.414.018.418.221.2
Tax revenue
(In millions of Moroccan dirhams)13,888.015,321.018,141.019,093.021,173.023,695.027,835.030,702.037,577.040,458.046,462.050,452.057,952.057,868.059,386.060,885.0
(As percentage of GDP)18.719.419.519.318.818.318.019.620.620.921.820.823.923.221.322.0
International trade taxes
(In millions of Moroccan dirhams)4,121.04,892.05,792.05,262.05,627.05,771.05,600.05,639.07,345.08,512.010,038.011,466.012,286.012,556.012,990.011,843.0
(As percentage of GDP)5.66.26.25.35.04.53.63.64.04.44.74.75.15.04.74.3
(As percentage of tax revenue)29.731.931.927.626.624.420.118.419.521.021.622.721.221.721.919.5
Import duties
(In millions of Moroccan dirhams)3,907.04,635.05,546.05,039.05,331.05,438.05,376.05,456.07,176.08,335.09,875.011,346.012,258.012,547.012,978.011,811.0
(As percentage of GDP)5.35.96.05.14.74.23.53.53.94.34.64.75.05.04.64.3
Collected international trade tariff = international trade taxes/value of trade16.815.416.313.811.110.110.410.211.212.011.612.513.511.310.78.6
Collected import tariff = import duties/value of imports26.323.324.121.516.915.417.017.020.119.719.120.821.519.318.514.9
Domestic taxes on goods and services
(In millions of Moroccan dirhams)5,806.06,040.07,813.08,693.09,561.010,847.014,710.016,530.019,923.020,469.020,926.023,042.026,380.027,528.028,629.030,299.0
(As percentage of GDP)7.87.68.48.88.58.49.510.510.910.69.89.510.911.010.310.9
(As percentage of tax revenue)41.839.443.145.545.245.852.853.853.050.645.045.745.547.648.249.8
Overall balance (payment - order basis
(In millions of Moroccan dirhams)-7,510.0-11,098.0-11,522.0-11,985.0-12,575.0-12,457.0-8,290.0-9,270.0-8,397.0-11,589 0-7,526.0-7,515.0-5,338.0-7,521.0-8,854.0-1,4553.0
(As percentage of GDP)-10.1-14.0-12.4-12.1-11.2-9.6-5.4-5.9-4.6-6.0-3.5-3.1-2.2-3.0-3.2-5.3
Overall balance
(Cash basis, in millions of Moroccan dirhams)-7,246.0-11,229.0-8,561.0-11,413.0-9,061.0-11,104.0-8,834.0-9,938.0-10,482.0-9,389.0-9,830.0-7,518.0-4,997.0-8,932.0-9,143.0-9,430.0
(As percentage of GDP)-9.8-14.2-9.2-11.5-8.1-8.6-5.7-6.3-5.8-4.8-4.6-3.1-2.1-3.6-3.3-3.4
Current account balance
(In billions of U.S. dollars)-1.5-1.6-1.9-1.0-1.4-0.7-0.7-0.20.2-1.10.1-0.1-0.6-0.5-0.7-1.5
(As percentage of GDP)
Excluding official transfer0.68-4.81-2.71-2.11-2.37-2.08-2.53-4.91
Including official transfer-7.76-10.75-12.29-7.32-10.95-5.79-3.88-1.071.08-4.650.36-0.22-2.03-1.97-2.35-4.69
Sources: Moroccan authorities; IMF staff estimates; and IMF, World Economic Outlook (May 1997).
Sources: Moroccan authorities; IMF staff estimates; and IMF, World Economic Outlook (May 1997).
Table 17.Central Government Operations in Morocco(As percentage of GDP)
Component1980198119821983198419851986198719881989199019911992199319941995
Total revenue122.0922.5722.0521.2720.8920.6518.8420.9022.5322.6023.9522.9226.2126.0424.1923.92
Tax revenue18.7419.3919.5319.2618.8518.3017.9919.5920.6220.8621.8320.8223.8623.2221.2621.99
Taxes on income, profits, and capital gains4.514.774.124.384.444.584.034.524.765.025.285.496.846.115.375.75
Individual1.471.651.681.861.801.871.741.901.862.042.012.182.732.802.602.78
Corporate2.322.281.681.801.911.921.631.802.042.072.562.322.972.161.851.86
Other taxes on income, profits, and capital gains0.720.830.760.720.730.800.660.820.860.910.720.991.151.160.921.11
Taxes on property0.380.340.330.350.350.360.340.400.390.360.38
Taxes on payroll
Social security contributions
Domestic taxes on goods and services7.847.648.418.778.518.389.5110.5510.9310.559.839.5110.8611.0510.2510.94
Taxes on general sales, turnover or VAT4.955.115.856.065.845.985.075.235.235.455.635.546.125.865.375.71
Excises2.462.212.092.312.231.991.712.021.941.992.093.914.615.134.805.14
Other taxes on domestic goods and services0.430.320.470.410.450.412.733.303.763.122.120.060.120.060.080.08
Taxes on international trade5.566.196.235.315.014.463.623.604.034.394.724.735.065.044.654.28
Imports5.275.865.975.084.754.203.473.483.944.304.644.685.055.034.654.27
Exports0.290.330.260.220.260.260.140.120.090.090.080.050.010.000.000.01
Other taxes on international trade
Other taxes0.460.440.430.450.540.520.500.520.500.531.621.091.101.020.991.02
Nontax revenue1.763.182.522.012.042.360.851.311.911.742.122.102.352.822.931.93
Sources: Country authorities; and IMF staff estimates.

Includes extrabudgetary revenue in 1980. Excludes receipts from privatization.

Sources: Country authorities; and IMF staff estimates.

Includes extrabudgetary revenue in 1980. Excludes receipts from privatization.

Complementary Policy Actions

Reform of the domestic tax system has taken place along with trade reform. Morocco reformed its import and manufacturing-stage turnover tax that was associated with cascading and multiple rate excises with a VAT in April 1986 on goods and services. The VAT initially had five rates, ranging from 7 to 30 percent with the basic rate fixed at 19 percent, but the number of rates was subsequently reduced to three in 1993 (7, 14, and 19 percent). The VAT has, to a large extent, achieved simplification and neutrality by unifying the two sales taxes, extending the tax base to the distribution sector, reducing the number of rates, and generalizing the tax credit mechanism to eliminate the cascading effects of the tax on services. The introduction of the VAT also spurred increased use of computerization. A corporate tax was introduced in 1988 at a rate of 40 percent, which was reduced to 36 percent in 1994. The personal income tax was introduced in 1990. The maximum rate of 52 percent had been reduced to 46 percent by 1994.

International Commitments

In addition to commitments under the WTO-GATT agreement, Morocco signed an Association Agreement with the European Union in February 1996 which calls, inter alia, for a gradual removal of all tariffs on industrial goods imports from the EU during 12 years. Tariff removal will be fastest for imported inputs and investment goods and slowest for imports competing with domestically produced consumer goods. While agricultural trade is not liberalized under the agreement, preferential access for certain Moroccan exports is increased, and the regime for agricultural trade will be reviewed in 2000 with a view to moving to a more liberal regime.

Morocco is also a member of the Arab Maghreb Union (AMU), which includes Algeria, Libya, Mauritania, and Tunisia. Two conventions have been signed within the framework of the Union. The first, dating from 1991, has yet to be ratified. It exempts a number of goods from nontariff barriers and provides for the application of a compensatory tax of 17.5 percent on goods benefiting from a special customs regime. The second convention, dating from 1990, deals with trade in agricultural products. The AMU intends to establish a free trade area.

The authorities are committed to further trade liberalization and tariff reforms under WTO-GATT and AAEU. During a period of 12 years, Morocco will dismantle its import duties on imports from the EU according to a timetable depending on the nature of the good—capital goods not manufactured in Morocco will be duty free as from the implementation of the agreement, whereas the reduction on duties on most items manufactured in Morocco will be reduced by 10 percentage points each year during the 12 years following the date of implementation. Quantitative restrictions on imports from the EU were abolished in 1997.

Revenue Implications of Reform

Despite extensive trade reform, Morocco maintained a relatively stable tax revenue share in GDP during the 1980s. The ratio remained in the range of 18 to 21 percent, only rising substantially toward the end of the decade, reflecting the influence of the introduction of the VAT in 1986. This overall trend contrasts with that for international trade taxes, mainly import duties, which declined steadily from 1982 to 1987, during the initial period of reform. The collected import tariff rate dropped sharply between 1983 and 1984 (from 21.5 to 16.9 percent) in response to the initial round of trade reforms. The value of imports, in contrast, did not rise during this period but remained relatively stable. Toward the end of the decade, imports, the collected import tariff rate, tax revenues, and international trade taxes reversed their trend and rose. The increase in the collected import tariff may have reflected the beneficial effect of consolidation and simplification of the import levies (and therefore an effective increase), or a shift in the composition of imports. Exports, in contrast, fluctuated in this period. In the 1990s, tax revenues continued to strengthen, reaching 22 percent of GDP by 1995. A large increase in imports was accompanied by a sharp decline in the collected import tariff rate (reaching 14.9 percent of GDP in 1995), leading to a decline in international trade taxes as well (falling to 4.3 percent of GDP in 1995).

The implementation of the AAEU in the next few years is expected to result in a gradual loss of tariff revenue from EU imports, estimated by the Moroccan Customs Office to reach cumulatively up to 3.2 percent of 1995 GDP after 12 years; the loss of tariff revenue will ultimately depend on the extent to which imports from non-EU countries will be replaced by imports from the EU.

Conclusions

As the above discussion makes clear, Morocco has succeeded in achieving a substantial liberalization of its economy without to this point experiencing a sharp deterioration in revenue performance. Several features in the reform process should be highlighted:

  • The revenue from international trade taxation has held up, despite the many tariff rate reductions reflecting, inter alia, the positive impact on revenues of (1) the elimination and reduction of quantitative restrictions on trade, (2) the relaxation of foreign exchange controls, and (3) the lowering of tariff rates that were effectively prohibitive.

  • More generally, the combination of trade liberalization and improved stabilization policies has resulted in a significant increase in the openness of the economy, resulting in a strengthened revenue performance.

  • The broadening of the tax base, notably by the introduction of the VAT, has supported the process of reform by helping to insulate budgetary revenues from the direct impact of trade liberalization.

However, with the next stage of trade reform arising from Morocco’s closer association with the EU likely to have a significant impact on revenues, Morocco faces the challenge of having to further broaden the tax base.

The Philippines

Since the debt crisis of late 1983, the Philippine authorities have been working to place the economy onto a path of sustained growth. The first growth spurt, in 1988/89, proved to be short, however, because the economic structure that had precipitated the 1983 default remained unchanged and because the economy was subjected to a number of shocks. On the former, sheltered by protectionist barriers, the industrial sector was oriented toward the domestic market. Consequently, the higher demand arising from growth quickly spilled over into an import surge and a large overall balance of payments deficit. On the latter, the shocks included an attempted coup, a sharp rise in world oil prices, and several natural disasters. The result was a large fiscal deficit and significant debt accumulation. The authorities responded by encouraging export-oriented growth and pursuing sound financial policies, in particular fiscal consolidation. To open up the economy, quantitative restrictions were eliminated and replaced by tariffs. The foreign exchange system was liberalized and fiscal policy was tightened. The consolidated public sector deficit was reduced to near budget balance in recent years.

Trade and Tax Reforms

Initial Conditions

As noted above, the trade regime in the Philippines has been characterized by a high degree of protectionism to encourage import substitution. In addition to tariffs, the trade regime has also relied on quantitative and foreign exchange restrictions.

Trade Policy Actions

Trade tax reform in the Philippines took place in three phases. The first two phases covered 1980–85 and 1986–90 and achieved the following:

  • Between 1980 and 1985, the average statutory tariff was reduced from 41 to 28 percent. The import ban on 921 consumer goods was lifted, although their importation continued to require government approval. Domestic indirect taxes were reformed to remove the anti-import bias, including the elimination of differential excise taxes and sales taxes on imported and domestically produced goods.15

  • Between 1986 and 1990, when the focus was on the tariffication of quantitative import restrictions, import quotas were liberalized for 1,477 items, representing about 17 percent of total imports in 1987. Generally, quotas were replaced by tariffs, which in some cases reached 100 percent.

As regards the impact of the liberalization, in value terms, imports of liberalized goods increased by a multiple of 2.5, whereas imports in general doubled; this small difference implies that either a number of import quotas were nonbinding, or that quotas were replaced with equivalent tariffs. The developments, however, are strikingly different across product groups. Whereas import growth of liberalized capital goods was not significantly different from that of other capital goods, the share of the liberalized imports of consumer goods in total imports of consumer goods increased from 19 percent in 1987 to 47 percent in 1992. This could imply that the quantitative restrictions had been binding, that the tariff imposed was not equivalent, that import patterns changed during the period, or a combination of all three factors.

The more recent third phase of reform is distinguished by the following:

  • There were further significant reductions in quantitative restrictions when the number of items subject to quantitative import restrictions was reduced from 447 in 1990 to 126 in 1992. In March 1996, quantitative restrictions were lifted on all agricultural goods except rice and were replaced with the maximum tariffs allowed under the Uruguay Round (40–100). Apart from rice, the only remaining quantitative restrictions were imposed for health, safety, and environmental reasons.

  • Reacting to fiscal exigencies, a 9 percent import surcharge was levied on non-oil imports in 1990, which was to be eliminated in mid-1992, but extended at a lower rate (5 percent) through 1993.

  • There was some additional progress with tariff reform. In 1994/95, the maximum standard tariff was reduced from 50 to 30 percent.

  • All foreign exchange restrictions were eliminated as of September 1, 1992.16 In addition, in 1992, all foreign exchange surrender requirements were eliminated.

As regards the impact of these measures, reflecting the modest impact of the reforms, the average statutory tariff fell only minimally from 28 percent in 1990 to 25 percent in 1995, and the collected tariff rate fell only slightly between 1985 and 1995 (Tables 18 and 19 and Figures 7 and 8). Tariffication of quantitative restrictions led to modest changes in average tariffs and tariff dispersion. Moreover, the higher excise for imported cigarettes remained, duty exemptions remained a problem, and the valuation of imports continued to be based on home consumption value (rather than transaction value in accordance with WTO rules).

Figure 7.The Philippines: Summary Measures of Economic Performance and Revenue Trends, Percentage of GDP

Sources: Data provided by the Philippine authorities; IMF staff estimates; IMF, World Economic Outlook (May 1997).

Figure 8.The Philippines: National Government Revenue, Percentage of GDP

Sources: Data provided by the Philippine authorities; IMF staff estimates.

Table 18.Summary Measures of Economic Performance and Revenue Trends for the Philippines
Measure19851986198719881989199019911992199319941995
GNP (at current market prices)595.10619.80673.10795.20913.801,078.001,255.001,375.001,500.001,737.001,968.00
Exchange rates (In national currency per U.S. dollar)18.6120.3920.5721.0921.7024.3027.5025.5027.1226.4225.71
Value of trade = value of imports + exports
(In billions of U.S. dollars)9.779.8912.4615.2318.2420.3920.8924.3428.9734.8243.84
(In billions of pesos)181.72201.53256.21321.34395.81495.53574.50620.75785.72919.841,127.07
(As percentage of GNP)30.5432.5238.0640.4143.3145.9745.7845.1552.3852.9657.27
Value of imports
(In billions of U.S. dollars)5.145.046.748.1610.4212.2112.0514.5217.6021.3326.38
(In billions of pesos)95.59102.83138.56172.11226.09296.63331.40370.24477.23563.60678.20
(As percentage of GNP)16.0616.5920.5921.6424.7427.5226.4126.9331.8232.4534.46
Value of exports
(In billions of U.S. dollars)4.634.845.727.077.828.188.849.8211.3813.4817.46
(In billions of pesos)86.1398.71117.65149.22169.72198.89243.11250.51308.49356.24448.87
(As percentage of GNP)14.4715.9317.4818.7718.5718.4519.3718.2220.5720.5122.81
Tax revenue
(In billions of pesos)61.1965.4085.5090.40122.50151.70182.30208.70230.30271.40310.60
(As percentage of GNP)10.2810.5512.7011.3713.4114.0714.5315.1815.3515.6215.78
International trade taxes
(In billions of pesos)18.1717.8026.0025.6038.9046.5065.0073.6082.7082.3097.90
(As percentage of GNP)3.052.873.863.224.264.315.185.355.514.744.97
(As percentage of tax revenue)29.7027.2230.4128.3231.7630.6535.6635.2735.9130.3231.52
Import duties
(In billions of pesos)15.9716.8025.7025.0038.4045.9064.4072.9082.0081.6097.60
(as percentage of GNP)2.682.713.823.144.204.265.135.305.474.704.96
Collected international trade tariff = international trade taxes/ value of trade10.008.8310.157.979.839.3811.3111.8610.538.958.69
Collected import tariff = import duties/value of imports16.7016.3418.5514.5316.9815.4719.4319.6917.1814.4814.39
Domestic taxes on goods and services
(In billions of pesos)22.9326.7035.9033.0042.0049.2049.6055.4063.8076.1084.40
(As percentage of GNP)3.854.315.334.154.604.563.954.034.254.384.29
(As percentage of tax revenue)37.4840.8341.9936.5034.2932.4327.2126.5527.7028.0427.17
Overall deficit excluding grants
(In percent of GNP)-1.88-5.05-2.99-2.92-2.14-3.45-2.10-1.16-1.460.00-0.19
Excluding central bank restructuring0.940.57
Current account balance
(In billions of U.S. dollars)0.521.210.200.32-1.46-2.70-1.03-0.86-3.02-2.95-3.26
(As percentage of GDP)
Excluding official transfer-6.92-3.05-2.27-6.10-5.34-5.01
Including official transfer1.704.040.600.84-3.41-6.11-2.27-1.62-5.55-4.60-4.40
Sources: Philippine authorities; and IMF staff estimates; and IMF, World Economic Outlook (May 1997).
Sources: Philippine authorities; and IMF staff estimates; and IMF, World Economic Outlook (May 1997).
Table 19.National Government Revenue in the Philippines(As percentage of GNP)
Component1980198119821983198419851986198719881989199019911992199319941995
Total revenue13.1111.8411.3912.0510.8011.5912.7814.3814.0016.0116.3717.2117.3717.2320.0518.99
Tax revenue11.5210.3510.0710.449.5010.2810.5512.7011.3713.4114.0714.5315.1815.3515.6215.78
Taxes on income, profits, and capital gains2.742.562.472.332.343.093.083.213.514.114.584.875.104.995.295.56
Individual
Corporate
Other taxes on income, profits, and capital gains
Taxes on property
Taxes on payroll
Social security contributions
Domestic taxes on goods and services4.133.813.653.463.573.854.315.334.154.604.563.954.034.254.384.29
Taxes on general sales, turnover or VAT1.881.761.681.491.401.451.661.981.611.871.881.932.022.232.102.20
Excises12.242.061.971.962.172.402.653.362.542.722.682.022.012.022.282.09
Other taxes on domestic goods and services
Taxes on international trade4.393.683.654.343.393.052.873.863.224.264.315.185.355.514.744.97
Imports4.233.583.564.273.002.682.713.823.144.204.265.135.305.474.704.96
Exports0.160.100.090.070.330.170.100.000.000.000.000.000.000.000.000.00
Other taxes on international trade20.070.200.060.040.080.050.060.050.050.050.040.02
Other taxes30.260.300.300.300.200.280.290.300.490.440.610.530.700.601.210.96
Nontax revenue41.581.491.321.611.301.312.232.352.833.272.713.072.472.014.473.26
Sources: Country authorities; and IMF staff estimates.

Data on the components of excise duties are based on Bureau of Internal Revenue collections, which differ slightly from the records of the treasury from 1981 to 1985.

Includes travel tax and foreign exchange tax from 1981 to 1985.

Property taxes, travel tax, and others from 1981 to 1985.

Includes grants and Economic Support Fund.

Sources: Country authorities; and IMF staff estimates.

Data on the components of excise duties are based on Bureau of Internal Revenue collections, which differ slightly from the records of the treasury from 1981 to 1985.

Includes travel tax and foreign exchange tax from 1981 to 1985.

Property taxes, travel tax, and others from 1981 to 1985.

Includes grants and Economic Support Fund.

Complementary Policy Actions

As a cornerstone of their overall reform efforts, the government initiated a wide-ranging tax reform in 1986. The tax reform package included (1) a shift from a schedular to a global income tax (reversed in 1992); (2) a shift from the family to the individual as the unit of taxation; (3) an increase in withholding tax rates on interest income and royalties, combined with a reduction in the withholding tax rate on dividends; (4) a shift from a two-rate corporate income tax to one rate of 35 percent; (5) the introduction of a 10 percent VAT and the concurrent elimination of a number of nuisance taxes in 1988 (fixed taxes on businesses, the compensatory tax, the miller’s tax, the contractor’s tax, and the broker’s tax); and (6) a shift from specific to ad valorem excise taxes.

Reform in tax administration did not keep up with the pace of tax reform. The main weaknesses in the Philippine tax administration remain the extreme centralization of the collection system, the lack of cooperation among agencies relating to tax collection, lack of resources, especially reflected in lack of computerization, and poor personnel management. Manasan (1994) estimates that in 1992 the collection rate for income taxes was only about a third of the potential revenue and for the VAT less then 40 percent. She also estimates that only about 23 percent of all potential taxpayers actually pay taxes.

The Revenue Implications of Reform

The revenue trend in the Philippines in recent years has been positive. Total revenue increased from 13.1 percent of GNP in 1980 to 19 percent of GNP in 1995. The 6 percentage point increase was to a large extent owing to an increase in tax revenue, which increased from 11.5 percent of GNP in 1980 to just under 16 percent in 1995.17 Focusing on the entire 15-year period would overlook, however, the two distinct phases in the revenue development in the Philippines. Phase one, which lasted from 1980 to 1986, saw a continuous erosion in revenues and coincides with the persistent high-inflation, low-growth period. The fundamental tax reform outlined above, which was initiated in 1986, and marks the beginning of the second phase, is reflected in a significant and rapid improvement in the tax revenue to GNP ratio; from the trough in 1984 to 1987 revenue as a percentage of GNP increased by more than 3 percentage points, with an increase of an additional 3 percentage points during the late 1980s and early 1990s. At the same time, the composition of tax revenue also changed. Whereas taxes on goods and services, despite the introduction of a VAT, stayed constant as a percentage of GNP, both income taxes and taxes on international trade increased substantially. The 1986 tax reform package immediately reflected upon higher income tax receipts, but it was only able to stem the erosion of taxes on goods and services.

Trade reform in the Philippines has been revenue enhancing. Revenue-enhancing components of trade reform were pursued with greater vigor than revenue-reducing measures, such as a substantial reduction in tariffs and a corresponding reduction in tariff dispersion. The introduction of the temporary surcharge of 9 percent and the replacement of import quotas with high (temporary) tariffs is evidence that revenue preserving or even enhancing objectives were paramount in the minds of the authorities. This goal was accomplished. Trade tax revenues increased from a trough just before the reform of less than 3 percent of GNP in 1986 to around 5 percent of GNP in the early 1990s. In part, this increase is attributable to the surcharge of 9 percent on all non-oil imports that was imposed in 1990 and then maintained at 5 percent until 1993.

Comparing trade tax revenue data for the period 1994–96 with data for the years during which the surcharge was in effect, a rough estimate can be made of the revenue effect of the surcharge. Of the total increase in trade tax revenue of 2.4 percentage points, just under 1 percentage point can be attributed to the surcharge; the remainder is owing to increased imports and to the revenue from tariffs levied upon goods previously subject to quantitative restrictions.

Conclusions

Trade tax reform in the Philippines resulted only in a small reduction in the average statutory tariff and no reduction in the collected tariff rate. Nevertheless, almost all quantitative restrictions were eliminated or converted into tariffs, improving the transparency of the trade system. In total, the reform was revenue enhancing, but this is in part due to the surcharge of 9 percent imposed in the early 1990s. In summary, the following conclusions can be drawn from the Philippine experience:

  • The Philippines implemented the revenue-enhancing aspect of trade reform at the outset, possibly necessitated by the weak revenue performance and substantial fiscal imbalances. As a result, trade tax reform was called upon to contribute significantly to improvements in the fiscal balance.

  • The Philippine experience shows that the elimination of quantitative restrictions and their replacement with equivalent tariffs can lead to significant increases in revenue, while improving the transparency and fairness of the trade system.

  • The accompanying tax reforms appear to put the Philippines in a position where revenue losses that might arise from reductions in tariffs could be relatively easily compensated for by domestic taxes.

  • The most urgent problem to be solved before more significant reduction in tariffs can take place would be the problem of lack of administrative capacity, both in customs and in tax administration.

Senegal

As a member of the CFA franc zone, Senegal’s currency is pegged to the French franc. Accordingly, the marked appreciation of the French franc after 1985 had a significant influence on the country’s competitiveness. Nonetheless, since 1985, Senegal has experienced two distinct trade liberalization episodes. The first, in 1986, was unsuccessful since many of the reforms were reversed in the face of tax revenue and budgetary constraints. The second, which is ongoing, followed the 50 percent devaluation of the CFA franc in 1994.

Trade and Tax Reforms

Initial Conditions

In the early 1980s, trade policy in Senegal, in common with other countries in the CFA franc zone, was very restrictive, characterized by high tariff protection and widespread use of quantitative restrictions (except on imports from countries in the franc zone and on imports from the six original countries in the European Union), and selective trade and tax preferences. Unlike non-CFA counterparts, however, there was no widespread reliance on foreign exchange restrictions. Taxes on international trade were a principal source of government revenue.

First Reform Period: Trade Policy Actions

The first major trade reform program began in 1986, the major elements of which were:

  • Quantitative restrictions were reduced, initially on goods not produced locally, followed by a more general and gradual lifting of restrictions, though with some exceptions.

  • Tariff reform entailed progressive reduction and narrowing of the bands of harmonized tariffs in stages over the 1986/87–1988/89 period to achieve a lower and more uniform level of effective protection. In the first stage, inter alia, the basic customs duty was fixed at a single rate of 15 percent for most-favored countries. Supplemental/special duties were also reduced. The second round of reductions in July 1988 cut the basic tariff by 5 percentage points and the maximum fiscal duty rate (applying to goods competing with finished goods produced locally) to 50 percent.

  • Reference prices on some goods were also abolished.

First Reform Period: Complementary Policy Actions

Following the 1986 trade liberalization, the domestic tax system was reformed to bolster fiscal revenues. A new tax code implemented in 1987 simplified the tax schedule, improved the structure of the tax system, and modernized a number of administrative procedures, which included improving the computerization of the tax and customs administrations.

Background to Second Reform Period

Reflecting the economic difficulties that afflicted the CFA franc region in general, Senegal experienced significant revenue shortfalls, which by 1989 had led to an almost full reversal of the 1986 trade liberalization. Despite the trade reform reversals, the government continued to improve the domestic tax system. In 1990/91, a corporate profits tax of 35 percent and a single personal income tax were introduced. The taxation of petroleum products was reformed in favor of a simpler and more transparent system. These measures were accompanied by improvements in the tax and customs administrations during the 1988–92 period.

By 1992, Senegal’s economic difficulties had worsened. Further tariff rate increases followed. As a result, by 1993, tariff rates ranged from 0 to 65 percent, the customs stamp rate ranged from 6 to 12 percent, and there were five different VAT rates ranging from 7 to 34 percent. This led to cumulative tax rates on imports—excluding excise duties—ranging from 12 to 127 percent. These rates were supplemented by quantitative restrictions, mostly in the form of import licenses (mainly on agricultural commodities). In addition, monopoly import rights were granted through special agreements (conventions spéciales) with large domestic firms and a system of prior authorization for the import or export of numerous products.

Second Reform Period: Trade Policy Actions

The second major phase of trade reform began in 1994 as part of a major adjustment effort in connection with the 50 percent devaluation of the CFA franc. Elements to be highlighted include:

  • Tariff reductions and simplification, the latter by reducing the number of tariff categories from seven to five. The customs duty rate was reduced from 15 percent to 10 percent and the maximum fiscal duty rate was reduced tp 50 percent. The customs stamp rate was also reduced 5 percent and was extended to all imports with only a few exceptions. In addition, surtaxes of 10 or 20 percent were applied to a limited number of agricultural producers.

  • Most import and export licenses were eliminated. For some products that had been previously covered by import licenses, temporary tariff surcharges over the customs and fiscal duty were introduced to provide local producers time to adjust to foreign competition. In March 1995, rice imports and prices were completely liberalized.

Reflecting these reforms, by September 1995, there were five different customs tariffs ranging from 0 to 60 percent and a 5 percent customs stamp. Including the impact of the VAT, this implied that total taxation of imports ranged from 5 to 98 percent, excluding surtaxes.

Second Reform Period: Complementary Policy Actions

Again with a view to bolstering revenues while making the tax system as a whole more efficient, the domestic tax system was reformed to broaden the tax base, reinforce tax collections, and reduce fiscal fraud. Initially, the number of VAT rates was reduced from five to three (0, 10, and 20 percent), with the base also being enlarged and some goods being taxed at the standard rate rather than at preferential rates. More recently (1996), the VAT base was expanded by including all importers and manufacturers’ clients, converting the informal sector’s equalization tax into a withholding tax on VAT payments, and incorporating excise taxes into the VAT base.

International Commitments

As a member of the West African Economic and Monetary Union (WAEMU)18—established immediately after the devaluation in January 1994—Senegal is committed to further liberalize its international trade with other member countries and is preparing for the implementation by January 2000 of the common external tariff, announced in November 1997. In that context, Senegal introduced in April 1998 a new tariff structure with four rates (0, 5,10, and 25 percent) and the 5 percent customs stamp. In addition, Senegal participates in two other regional agreements, namely: (i) the Economic Community of West African States (ECOWAS),19 which in 1990 introduced a liberalization scheme to phase out a number of tariffs on industrial goods produced by enterprises granted ECOWAS community status—this is prospective since the basic customs documentation remains to be agreed upon; and (ii) the Organization of African Unity (OAU), which in 1991 agreed to create an African Economic Community by the year 2000.

Revenue Implications of Reform

For the better part of the past 15 years, Senegal’s tax effort has been declining. The relatively poor revenue performance can be explained by the narrow tax base, weak customs and tax administrations, persistent fiscal fraud, and a growing informal sector not captured in the tax net. From 1982/83 to 1988/89, tax revenue as a percent of GDP declined from 18.5 to 13.3 percent of GDP (Tables 20 and 21 and Figures 9 and 10). Import duties fell from 5.9 to 3.7 percent of GDP during the same period. Since the collected import tariff rate rose during the period, this decline mainly reflected import compression. The decline in domestic taxes on goods and services may also have reflected the decline in import volumes, since domestic indirect taxes on imports are substantial. Initial trade liberalization efforts in 1986 appear not to have resulted in increased trade volumes, likely reflecting the steady appreciation of the CFA franc over this period.

Figure 9.Senegal: Summary Measures of Economic Performance and Revenue Trends, Percentage of GDP

Sources: Data provided by the Senegalese authorities; IMF staff estimates; IMF, World Economic Outlook (May 1997).

Note: Data for 1989/90–1990/91 are IMF staff estimates. For some years, the authorities did not distinguish between VAT on imports and custom duties; for those years, we estimated the VAT on imports and reclassified it under VAT. Fiscal year ended June 30, through 1991192; calendar year data starting in 1992.

Figure 10.Senegal: Budgetary Revenue, Percentage of GDP

Sources: Data provided by the authorities; IMF staff estimates.

Note: Fiscal year ended June 30, through 1991/92; calendar year data starting in 1992.

Table 20.Summary Measures of Economic Performance and Revenue Trends for Senegal
Measure1985/861986/871987/881988/891989/901990/911991/92199219931994199519961
GDP (at current market prices)1,244.301,342.601,432.801,479.901,514.601,551.201,581.401,612.801,586.602,155.102,429.802,637.50
Exchange rates (in national currency per U.S. dollar)449.26346.30300.54297.85319.01272.26282.11264.69283.16555.20499.10511.60
Value of trade = value imports + exports
(In billions of U.S. dollars)1.311.541.631.631.772.061.922.021.791.812.192.25
(In billions of CFA francs)588.62533.42488.83486.80564.09560.40540.78534.59507.951,006.571,090.881,152.86
(As percentage of GDP)47.3139.7334.1232.8937.2436.1334.2033.1532.0246.7144.9043.71
Value of imports
(In billions of U.S. dollars)0.800.880.960.961.001.161.111.191.091.021.221.27
(In billions of CFA francs)357.47305.93287.23284.66320.32317.04314.33315.49307.67567.45607.46648.40
(As percentage of GDP)28.7322.7920.0519.2421.1520.4419.8819.5619.3926.3325.0024.58
Value of exports
(In billions of U.S. dollars)0.510.660.670.680.760.890.800.830.710.790.970.99
(In billions of CFA francs)231.15227.49201.60202.14243.77243.36226.46219.10200.28439.13483.42504.47
(As percentage of GDP)18.5816.9414.0713.6616.0915.6914.3213.5912.6220.3819.9019.13
Tax revenue
(In billions of CFA francs)185.10196.00205.50196.20219.00241.40264.10247.10222.20267.90330.30369.30
(As percentage of GDP)14.8814.6014.3413.2614.4615.5616.7015.3213.8812.4313.5914.00
International trade taxes
(In billions of CFA francs)55.3560.1562.7355.9068.3378.0886.7083.5571.6393.00116.78133.73
(As percentage of GDP)4.454.484.383.784.515.035.485.184.514.324.815.07
(As percentage of tax revenue)29.9030.6930.5228.4931.2032.3432.8333.8132.5334.7135.3536.21
Import duties
(In billions of CFA francs)255.0559.5562.0355.2068.3378.0886.7083.5571.6393.00116.78133.73
(As percentage of GDP)24.424.444.333.734.515.035.485.184.514.324.815.07
Collected international trade tariff = international trade taxes/value of trade9.4011.2812.8311.4812.1113.9316.0315.6314.109.2410.7011.60
Collected import tariff = import duties/value of imports15.4019.4721.5919.3921.3324.6327.5826.4823.2816.3919.2220.62
Domestic taxes on goods and services
(In billions of CFA francs)76.3580.2579.9876.6083.0888.9386.3085.3579.58100.00122.63139.18
(As percentage of GDP)6.145.985.585.185.485.735.465.295.024.645.55.28
(As percentage of tax revenue)41.2540.9438.9239.0437.9336.8432.6834.5436.1437.3337.1337.69
Overall fiscal balance (deficit -) commitment basis (As percentage of GDP)
Including grants-2.30-1.50-1.20-2.10-3.102.000.20-2.50-3.00-1.80-0.20-0.20
Excluding grants-3.80-2.60-2.60-4.00-4.400.30-1.00-3.80-4.00-5.70-3.20-2.00
Overall fiscal balance (deficit -) (Cash basis, as percentage of GDP)-3.30-3.40-3.80-2.40-1.900.400.50-0.20-9.30-2.70-0.20
Current account balance
(As percentage of GDP)-0.27-0.27-0.31-0.41-0.38-0.44-0.45-0.48-0.50-0.19-0.24-0.27
Excluding official transfer-16.82-12.09-11.61-10.63-10.22-8.92-9.39-9.09-9.99-8.92-7.56-6.87
Including official transfer-10.54-7.11-6.65-8.32-8.23-7.79-8.20-7.84-8.90-4.94-4.84-5.32
Sources: Country authorities; IMF staff estimates; and IMF, World Economic Outlook (May 1997).

Preliminary estimate.

Data for 1989/90–1990/91 are IMF staff estimates. For some years, the authorities did not distinguish between VAT in imports and custom duties; for those years we estimated the VAT on imports and reclassified under VAT.

Sources: Country authorities; IMF staff estimates; and IMF, World Economic Outlook (May 1997).

Preliminary estimate.

Data for 1989/90–1990/91 are IMF staff estimates. For some years, the authorities did not distinguish between VAT in imports and custom duties; for those years we estimated the VAT on imports and reclassified under VAT.

Table 21.Budgetary Revenue in Senegal(As percentage of GDP)
Component1980/8111981/821982/831983/841984/851985/861986/871987/881988/891989/901990/911991/92199219931994199519962
Total revenue19.3520.0719.7019.3818.8317.5818.7017.5516.6017.1619.4019.4318.1916.1313.9915.0714.95
Tax revenue18.2218.4618.4518.1517.5514.8814.6014.3413.2614.4615.5616.7015.3213.8812.4313.5914.00
Taxes on income, profits, and capital gains4.534.234.124.104.053.543.383.573.453.653.953.813.713.492.743.093.00
Individual31.291.661.331.261.201.111.081.241.221.492.232.282.182.061.601.811.72
Corporate1.591.181.101.081.220.970.950.950.890.991.041.091.040.720.680.850.86
Other taxes on income, profits, and capital gains1.651.391.681.761.631.451.351.381.341.180.680.440.500.710.470.430.41
Taxes on property0.600.450.310.290.260.270.250.240.280.250.231.230.420.270.290.240.23
Taxes on payroll0.320.210.430.440.420.380.380.330.320.320.290.280.270.260.190.190.21
Social security contributions
Domestic taxes on goods and services7.307.387.447.427.196.145.985.585.185.485.735.465.295.024.645.055.28
Taxes on general sales, turnover or VAT46.056.326.356.346.245.385.224.814.504.905.094.844.734.454.234.644.91
Excises50.920.790.810.840.660.530.520.540.470.400.470.460.410.400.300.280.25
Other taxes on domestic goods and services0.320.260.280.250.280.230.230.230.210.180.170.160.150.160.110.140.12
Taxes on international trade5.216.056.025.715.484.454.484.383.784.515.035.485.184.514.324.815.07
Imports64.985.885.905.645.444.424.444.333.734.515.035.485.184.514.324.815.07
Exports0.230.170.120.070.050.020.040.050.050.000.000.000.000.000.000.000.00
Other taxes on international trade
Other taxes0.250.150.130.180.160.110.130.240.260.240.330.430.450.330.250.210.22
Nontax revenue1.131.611.261.231.272.704.103.213.342.703.842.732.872.251.561.480.95
Sources: Country authorities; and IMF staff estimates.

Fiscal year ending June 30, through 1991/92; calendar year data starting in 1992.

Preliminary estimate.

Includes tax on wages and salaries.

For some years the authorities did not distinguish between VAT in imports and custom duties; for those years, we estimated the VAT on imports and reclassified under VAT.

Includes taxes on alcohol and cement.

Data for 1989/90–1990/91 are IMF staff estimates.

Sources: Country authorities; and IMF staff estimates.

Fiscal year ending June 30, through 1991/92; calendar year data starting in 1992.

Preliminary estimate.

Includes tax on wages and salaries.

For some years the authorities did not distinguish between VAT in imports and custom duties; for those years, we estimated the VAT on imports and reclassified under VAT.

Includes taxes on alcohol and cement.

Data for 1989/90–1990/91 are IMF staff estimates.

There was a temporary reversal in these adverse trends in the period FY1988/89–1991/92, reflecting both the overhaul of the tax code and improved efficiency in the tax and customs administrations. Taxes on international trade rose during the period, as did the collected import tariff rate. By 1991/92, the collected import tariff rate was a record 27.6 percent. However, the adverse trends re-emerged, with tax revenues falling to a new low of 12.4 percent of GDP in 1994,20 this time reflecting a decline in all major taxes.

Since 1995, however, there has been a clear improvement in tax revenues, reflecting reforms in the trade and domestic tax systems and the recovery of economic activity that followed the devaluation. By 1996, tax revenues had increased to 14 percent of GDP. The most noticeable recovery was in customs tax collection, which increased between 1994 and 1996 by almost 1 percent of GDP to 5.1 percent. Senegal’s tax system remains heavily dependent on trade taxes, reflecting the high proportion of imports in GDP and the aggregation of tariff receipts with revenues from the VAT on imported goods.

Conclusions

The contrast between the effectiveness of Senegal’s two reform efforts is instructive. In particular, the more recent successful reform drive demonstrates that a precondition for successful reform is sound macroeconomic policies. In the Senegal context, the CFA franc devaluation in 1994 alleviated many of the pressures that had been building up in the economy, with the result that tax revenues have since increased somewhat, reflecting mainly an increase in taxes on international trade. This increase in tax revenues has been based on an increase in the volume of trade in reaction to the successful stabilization and trade liberalization and demonstrates that trade liberalization is not inconsistent with a subsequent enhanced revenue performance.

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Note: In addition to the authors, Asegedech WoldeMariam contributed all tables and figures, and Reint Gropp contributed the case study on the Philippines and to the main text, Dominique Simard, the case study on Senegal, and M. Zuhtu Yucelik, the case study on Morocco. The authors also acknowledge valuable comments from George Abed, Michael Keen, Stephen O’Connell, colleagues in the IMF’s Fiscal Affairs, African, Asian, and Middle Eastern departments, and participants in the Institute Conference. The opinions expressed in this chapter are strictly those of the authors and do not necessarily reflect the official views of the International Monetary Fund.

For an analysis of the economic benefits and costs of trade liberalization, see Krueger (1995).

In North America, the North American Free Trade Area (NAFTA) has linked the United States, Mexico, and Canada; Argentina, Brazil, Paraguay, and Uruguay have formed the Southern Cone Common Market (MERCOSUR); and in East Asia, the ASEAN (Association of Southeast Asian Nations) Free Trade Arrangement (AFTA) was established.

For example, the group of African countries that entered into SAF or ESAF arrangements with the IMF during the 1980s and 1990s had overall fiscal deficits averaging more than 9 percent of GDP in their respective preprogram years. See Abed and others (1998).

In interpreting these numbers, note that it is not always possible to obtain a clean separation of customs tariffs per se from other indirect taxes, such as excises and sales taxes, that are also collected at customs (e.g., Benin, Burkina Faso, Mali, and Tanzania).

While the optimal tax/tariff solution depends on the range of tax instruments available to the government and the structure of the economy, for one benchmark case (that of the small open economy with the full range of commodity taxes available and no other distortions), the solution to the optimal tax problem has no role for tariffs due to the desirability of ensuring production efficiency (for example, Dixit and Norman, 1980).

For example, in addition to not providing revenue to the budget, quotas are associated with wasteful rent-seeking activities that would typically be more significant than the excess burden distortions associated with traditional tariffs.

This is measured as the ratio of import tax collections to import values.

The range reflects alternative assumptions about how much Morocco substitutes non-EU imports for EU imports.

The CFA franc devaluation was also associated with a series of IMF-supported adjustment programs for the countries involved. As it happened, the increases in the trade values in response to the devaluation were overestimated, in part because the devaluation had been widely anticipated. There is also some evidence of over-importing before and under-importing after the devaluation (Clément and others, 1995).

Data on other sub-Saharan African countries were incomplete.

For example, whereas the revenue effect of a reduction in import tariffs on revenue from import duties is ambiguous, for domestic taxes on imports it is unambiguously positive, as long as some positive import elasticity exists.

Customs administration has been in sore need of reform. Obsolete procedures imply that the average period of stay of goods in port can be 16 days (as compared with 1–3 days in most industrial countries). Moreover, there are numerous exemptions, leading to loss of revenue and creating opportunities for evasion and fraud.

Only a higher excise on imported cigarettes was left in place.

The peso had been allowed to float since 1985, albeit with significant central bank intervention.

Nontax revenues also increased significantly, due to receipts stemming from the privatization process.

WAEMU membership includes Benin, Burkina Faso, Cote d’Ivoire, Mali, Niger, Senegal, and Togo.

ECOWAS was founded in 1975 and comprises 16 countries.

In 1992, Senegal reverted to a system where fiscal years coincide with annual years.

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