V Case Studies

Rina Bhattacharya, Benedict Clements, Sanjeev Gupta, Shamsuddin Tareq, Alex Segura-Ubiergo, and Todd Mattina
Published Date:
December 2005
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This chapter presents case studies on six countries where the International Monetary Fund, through its Fiscal Affairs Department, has provided technical assistance in postconflict situations: Afghanistan, Bosnia and Herzegovina, the Democratic Republic of Congo, Lebanon, Mozambique, and Timor-Leste. Whereas the previous chapter identified priorities for rebuilding fiscal institutions in a postconflict setting drawing on experiences in a number of countries, this chapter will provide more detailed information regarding the six selected countries. Each case study describes the postconflict environment and context in which the technical assistance was provided, as well as the overall strategy for rebuilding fiscal institutions. The studies examine the successes and failures in implementing technical assistance recommendations for revenue policy and administration and public expenditure management. For Bosnia and Herzegovina and the Democratic Republic of the Congo, the studies also examine the issue of fiscal federalism.1 As mentioned in the previous chapter, recommendations can vary across countries depending on country-specific circumstances.

Islamic Republic of Afghanistan

The war and internal conflicts that ravaged Afghanistan for more than 20 years led to a massive erosion of the government’s capacity to provide public services. Whereas many formal institutions remained in place, a significant proportion of them ceased to function due to lack of funding, qualified staff, and other resources. The legal framework for budget management was basically sound and many budget execution procedures were in line with good practices. However, there was little capacity in revenue administration departments where infrastructure and equipment had degraded significantly and staff lacked the necessary skills. Proliferation of levies and taxes imposed by different government agencies and local authorities resulted in a complex tax system. Central control over provincial fiscal operations was very weak, resulting in the nontransfer of revenues to the central authorities.

In the midst of all of these problems were some well-established laws, such as in the tax and audit areas, that could provide a sound basis for rebuilding fiscal institutions. However, the task still was daunting because, in practice, even those systems were not operational and needed updating and many improvements. Moreover, rebuilding fiscal institutions also required establishing a well-functioning tax payments system.

Through several technical assistance missions, the IMF helped design the overall strategy for rebuilding fiscal institutions. In public expenditure management, the legal framework for budget preparation and execution was basically sound at the end of the conflict, although it had not been applied for many years. Hence, the strategy focused on implementing the existing framework. In the revenue area, however, emphasis was on both policy and administrative reforms. In the early stages, the focus was on reforming customs policy and rebuilding customs administration. The strategy and the associated reform plans were endorsed by the authorities and the donor community. Hands-on implementation of the strategy was undertaken through large technical assistance programs financed by other donors. The IMF has played a monitoring role to evaluate the implementation of reforms and suggest improvements through follow-up missions.

Revenue Policy and Administration

Revenue policy and administrative reforms aimed to simplify the tax system and improve compliance and efficiency. In customs policy, reform measures included reducing the number of tariff bands from 25 to 6 and promoting the use of a harmonized market exchange rate in customs valuation. Duty rates for certain excisable goods that were mostly imported (e.g., gasoline, diesel, cigarettes, and automobiles) were also raised. In domestic tax policy, the top marginal tax rate for individuals was reduced from 60 to 20 percent and the personal exemption was increased. The wage withholding tax was restored, but only for high-income workers. A simplified and generous depreciation schedule was also recommended to provide an incentive for investment. Assistance in drafting tax law amendments was provided by the IMF’s Legal Department, in collaboration with officials from the ministries of finance and justice. The authorities prepared five-year programs of direct and indirect tax policy reforms. Critical elements of these plans supported by the IMF’s Staff Monitored Program for 2004/05 included elimination of generous tax holidays and exemptions that could seriously erode the tax base.

Key recommendations to improve revenue administration included implementing measures to ensure transfer of provincial revenue to central authorities, establishing a large taxpayer office in Kabul and several model customs offices, and extending improvements in tax and customs administration beyond the large taxpayer and selected customs offices. These measures—some of which are being used as benchmarks under the Staff Monitored Program—have been incorporated in medium-term strategic reform plans for customs and tax administration designed with the assistance of resident advisors financed by donors.

Some progress has been made in modernizing tax and customs administration, in line with IMF recommendations. A taxpayer identification system has been put in place and the enforcement powers of tax officials have been enhanced. In the customs department, progress encompasses implementation of international standards for the classification of goods, gradual recovery of customs functions from other agencies (e.g., valuation of goods), and replacement of multiple customs declaration forms with a single form for all types of imported goods. Staff recruitment and training in priority areas have improved in both the tax and customs administrations.

Public Expenditure Management

The strategy for strengthening the public expenditure management system involved a two-stage process. The first stage aimed at promoting minimum standards of budgetary operations and reporting. Most IMF recommendations in this area were formulated within a coherent strategy with clear prioritization and sequencing. Weaknesses in budget execution were to be addressed by establishing a treasury single account, improving cash management, and modernizing the chart of accounts. Simplified and centralized computerization of the public expenditure management system was recommended in the initial phase, with its gradual extension to the provinces during later stages. IMF recommendations also emphasized the importance of ensuring that donor funds were channeled through the budget and the treasury.

The second stage aimed to strengthen government financial management. A key recommendation was to implement a new budget law to address weaknesses in the public expenditure management system that had come to light following a more detailed analysis. Other recommendations included developing a complete and realistic annual budget, ensuring timely budget execution, and gradually introducing medium-term macroeconomic and budget projections. In consultation with the authorities and other donors, the IMF developed a two-year work program outlining the necessary steps for implementing the recommendations.

There have been substantial broad-based improvements in the public expenditure management system in the last two years. Most of these improvements have taken place at the ministry of finance, while improvements in line ministries have been much slower. A treasury single account has been established, consolidating all government accounts; a computerized management information system has been set up in the ministry of finance and will be gradually rolled out to other parts of the government; donor-funded capital spending is increasingly being channeled through the treasury; and a public financial management law has been prepared and is expected to be approved shortly.


Afghanistan’s troubled security situation has constrained implementation of the strategy, and the pace of reforms has been slow. For example, it took almost two years from the beginning of the reform process to record improvements in revenue administration. This is partly due to the fact that the central government is facing the daunting tasks of establishing its authority over the national territory, while simultaneously addressing severe security threats.

Inclusion of technical assistance recommendations as conditionality in IMF-supported programs has helped with implementation. Many of the tax policy reforms were implemented as prior actions under the Staff Monitored Program. Establishing the treasury single account was a structural benchmark under the program. The implementation of these measures was closely followed as part of program monitoring.

Flexibility in the overall strategy is important to respond to changing circumstances on the ground. The initial assessment underestimated some of the weaknesses of the public expenditure management system, since the mission could not travel outside the capital on account of the security situation. The overall strategy was adjusted following detailed assessment by subsequent missions.

Progress also was slowed by a lack of effective cooperation across government ministries. In some cases the ministry of finance fully supported and “owned” reforms, but the ministries implementing them (such as the ministries of commerce and justice) were not fully on board. This resulted in slow progress in amending the income tax and customs codes. In part, this can be attributed to the fact that in the initial stages, little effort was made to reach out to these ministries. Public expenditure management reforms (e.g., the treasury single account) could also have progressed more rapidly had line ministries been more involved at an early stage.

Effective donor coordination is critical for success, especially when a large number of donors are involved. Coordination between donor programs is needed to ensure the optimum return from technical assistance. To move this process forward, the IMF recommended the creation of steering committees in the tax and customs administrations, and the appointment of a high-level independent project manager, to coordinate donor efforts under the five-year customs modernization plan. Nevertheless, there were several instances where donor coordination fell short of what was needed, with donors sometimes providing advice on the same topic (e.g., energy taxation) in an uncoordinated fashion.

Bosnia and Herzegovina

The state of Bosnia and Herzegovina was created in December 1995 with the signing of the Dayton Peace Agreement. In the immediate postconflict period, many government structures did not exist, while those that did had suffered significant damage. Moreover, the peace agreement mandated the creation of two entities (the Republika Srpska and the Federation of Bosnia and Herzegovina) and a decentralized government. As a result, the foremost priority was to establish the legal basis for fiscal institutions at all levels of government and make them operational. The formidable task of institution building was further complicated by the fact that war-ravaged institutions that bore the stamp of a planned economy were to be transformed to support the move to a more market-based system.

The IMF played a leading role in developing the overall strategy for rebuilding fiscal institutions. Key fiscal priorities in a range of areas were identified through diagnostic missions. The recommendations of the missions were presented in the form of a technical assistance plan, with clear prioritization between immediate and short-term inputs, and clearly demarcated timelines for implementing them. Also provided were detailed descriptions of technical assistance inputs as well as the terms of reference for resident advisors required by the technical assistance program. It was recognized from the very beginning that program implementation would depend on support from other donors, a substantial amount of which was provided by the UK Department for International Development, the European Union, and the U.S. Agency for International Development.

Fiscal Federalism

Based on the country’s consensus to have a highly decentralized state, IMF recommendations provided a roadmap for critical decisions relating to intergovernmental fiscal relations. The peace agreement assigned power to various entities to determine tax policies, resulting in areas of overlapping jurisdictions. In these cases, the IMF advised the different levels of government to make clear decisions about lead players and to devise approaches to resolving differences when they arose. Flexibility was recommended in setting revenue and expenditure assignments in the initial period, while there also was an emphasis on identifying a transparent revenue-sharing agreement for the cantons. In addition, tax policy among different entities needed to be harmonized to the extent possible to avert harmful tax competition that could distort the distribution of productive resources and increase compliance costs for taxpayers. Recommendations also called for intergovernmental transfers to mitigate horizontal and vertical imbalances among regions, and for fiscal rules limiting borrowing by cantons.

Revenue Policy and Administration

To help establish viable revenue collection systems, a strong role was recommended for the central government as a revenue collector in order to exploit economies of scale and provide a harmonized tax environment, especially in the context of the planned implementation of a value-added tax. Initial IMF recommendations focused on managing the transition from the retail sales tax to an eventual value-added tax system consistent with European Union standards. Assistance was provided to establish a single customs body at the state level and an indirect tax authority and associated Governing Board. The IMF also provided technical support for implementing the value-added tax. Recommendations also called for rapid implementation of a taxpayer identification system, along with an action plan to modernize tax administration through computerization. Other suggestions included establishing a common customs administration and creating a tax board in order to harmonize procedures, tax forms, and the tax base and rates, as well as to formulate joint tax policy.

The IMF recommended a federal-level corporate income tax based on the argument that this would prevent evasion, head off harmful tax competition, minimize distortions in resource allocation, and facilitate the negotiation of international tax treaties and horizontal equity for taxpayers in different regions. The personal income tax was to be retained at the local level to reflect regional preferences and income patterns.

Despite the difficult conditions in which the reforms took place, there was progress in reforming the customs administration. Advances included the (i) merger of the existing customs administrations of the Bosniac-majority and Croat-majority areas into a centralized Federation customs administration; (ii) removal of internal borders between the Bosniac-majority and Croat-majority areas; and (iii) adoption of a unified external customs tariff. By late 1999, the customs administrations of the Federation of Bosnia and Herzegovina and the Republika Srpska had completed a comprehensive modernization process with substantial European Union support.

Progress with tax administration reforms was slower, although two main objectives were achieved in the immediate postconflict period. In the Federation of Bosnia and Herzegovina, a tax administration law was prepared and approved, establishing the legal basis for the organization and operations of tax administration, and the existing tax administrations of the Bosniac-majority and Croat-majority areas were formally merged into a centralized Federation tax administration. The Republika Srpska’s tax administration, customs administration, and financial police were merged into the ministry of finance, and several measures were implemented to improve the effectiveness of tax administration.

Administrative reforms led to tangible increases in tax revenues. By mid-1996, the budget of the Republika Srpska was about balanced, based partly on improvements in tax collection. At the Federation level, revenue performance from customs and excise tax collections was strong, which enabled the Federation to maintain a significant fiscal surplus during the first half of 1996.

Public Expenditure Management

Recommendations in this area were couched first in terms of immediate needs and then more medium-term capacity-building requirements. Three broad objectives underpinned the recommendations addressing immediate needs. The first was to put in place adequate macroeconomic control mechanisms to stabilize the economy and limit the inflationary impact of large foreign inflows in the context of a crippled productive base. Recommended actions included broadening institutional input in the development of macroeconomic policy at the State level, establishing a cash management unit at the Federation level to ensure that revenues and expenditures were balanced, and creating fiscal rules to prohibit borrowing at the cantonal level, at least in the early years.

The second objective was to enable the new administration to use the substantial expected inflows of foreign assistance for reconstruction and development as quickly and effectively as possible. Recommendations included establishing a ministry for reconstruction and development to manage the linkages between donor funding and the different levels of government, developing an action plan for reconstruction with technical assistance, and designing a viable institutional structure for fiscal management at the cantonal level.

The third objective was to transform war-ravaged institutions from those that were more appropriate for a planned economy to those supporting a modern market economy. Recommendations included developing a framework for the budget process and undertaking immediate improvements in budget preparation and execution techniques.

The medium-term objectives were twofold. The first was to put in place a workable budget system for the Federation. Toward this end, an organic budget law was recommended to provide the legal framework for budgeting. In addition, importance was placed on strengthening the institutional framework for preparing and executing budgets in the context of the reorganized Federation. Concurrently, budget preparation techniques were to be strengthened through such mechanisms as better budget classification and improved analytical capacity in the budget department.

The second medium-term objective was to establish a treasury department to improve budget execution. The treasury would exert control over government payments, account for their use, and manage government cash resources. The approach focused initially on preserving and reformulating those elements of the existing system that were workable, so that a treasury system could become operative as soon as possible. It was envisaged that the existing payments bureaus could serve as an elementary treasury system in the initial period. A treasury single account was recommended for consolidating government cash balances and guiding the execution of the budget through a process of cash planning.

The public expenditure management system improved considerably, slowly at first but then at an accelerating rate. An organic budget law was introduced in 1998, spelling out the role of the treasury. A treasury single account and general treasury ledger were established in 2000, and regulations on budget accounting were introduced later that year. Financial regulations regarding the chart of accounts, financial reporting, and annual accounts were issued in the following year.


Effective cooperation among different technical assistance providers is essential to any successful rebuilding exercise. Initially in Bosnia and Herzegovina, the IMF recommended a gradual approach to dismantling the existing treasury system, while other providers advocated what could be described as a “bigbang” approach. However, the donors eventually worked together to take a unified stand on the issue. In the end, the big-bang approach that was adopted was not as disruptive as the IMF had feared, mainly because the different technical assistance providers worked together extensively to ensure the success of the transformation from the old payments system to a modern treasury system.

The implementation as well as the sequencing and prioritization of reforms must take into account the fact that some reforms take more time than others. For example, in the public expenditure management area it is possible to establish an expenditure control system in a much shorter time frame than analysis and policy development capacity. In the case of Bosnia and Herzegovina, an effective budget execution system incorporating a treasury single account was established reasonably quickly, while progress in fiscal policy development and in enhancing budget analysis skills was much slower.

Country ownership determines the pace of implementation of reforms. Progress in tax policy reforms was slower precisely because, in the initial stages, ownership of reforms was weak. In particular, it took some time for the political leadership in the country’s two constituent entities to come to an agreement on the distribution of powers regarding tax policy and administration. In a similar vein, implementation of public expenditure management reforms also got off to a slow start, but subsequently the pace picked up.

Democratic Republic of the Congo2

The end of the civil war in the Democratic Republic of the Congo (DRC) was marked by a vicious circle of hyperinflation, a depreciating currency, and general impoverishment of the population. The primary factor behind this was the monetization of an uncontrolled budget deficit resulting from the collapse of the expenditure control system and revenue collections. By 2001, the expenditure management system had dramatically deteriorated: a large part of government revenue collection and expenditure was being conducted outside the treasury, and government expenditure was no longer being reported in an orderly fashion. The poor revenue performance resulted from a complex tariff and tax system and a narrow tax base due to numerous exemptions and discretionary measures. Significant weaknesses in the revenue agencies also resulted in poor tax compliance.

The IMF took the lead in designing the overall strategy for rebuilding fiscal institutions in the DRC. The strategy was formulated even while the conflict was still ongoing and only about half of the national territory was under government control. An initial multitopic mission in March 2001 was followed by specialized missions to design reform strategies and identify technical assistance needs. A strong resident technical assistance program was put in place along with regular follow-up missions to assess reforms and provide further guidance. The World Bank also provided substantial support to complement the work of the IMF.

Revenue Policy and Administration

On the revenue side, efforts focused on strengthening revenue administration capacity before introducing policy reforms. The strategy for strengthening revenue administration was implemented in two phases. The first phase included measures to strengthen the customs and tax departments (Office des Douanes et Accises—OFIDA—and the Direction Générale des Impôts—DGI) and set up a large taxpayer unit for the 500 to 600 largest taxpayers (accounting for about 70 percent of total tax collections).

The objective of the first phase of reforms was to restore the administrative capacity to collect revenue from major revenue sources, before extending the reforms to the entire country and all taxpayers. The DGI headquarters was reorganized only in early 2003, and large taxpayer unit operations began in March of that year. Modern organizational principles and simplified collection procedures (such as self-assessment and payment through banks), supported by new computer systems, were introduced in the large taxpayer unit upon its inception. During the same period, customs administration reform focused on introducing a basic management system to provide statistical information and monitor customs exemptions, and establishing a pilot customs office in Matadi (the DRC’s main port of entry) to introduce a new organizational structure and simplified procedures and systems (including the ASYCUDA computer system).

The second reform phase began in 2003 with the aim of expanding new organizational principles, procedures, and systems to the entire revenue administration. Relying on the modern processes developed in the large taxpayer unit and the pilot customs office, the program aims to restructure the network of local tax offices, modernize customs organization and procedures, and progressively expand the DGI and OFIDA modernization efforts to other regions, following the installation of a government with control over the entire country. The DGI is preparing to set up medium-size enterprise centers in Kinshasa, and OFIDA has plans to restructure and computerize new customs offices in the Kinshasa and Lubumbashi areas. Implementation of this second phase of reforms is still in the early stages, as organization and procedures in the model offices have to be strengthened further.

Tax policy reforms were introduced in March 2003 following completion of the first phase of revenue administration reforms. The custom tariff structure was simplified by reducing the number of rates from five to three and by eliminating the surtax applied to specific products. In the area of indirect taxation, the turnover tax was reformed by reducing the applicability of the concessionary rate to only investment goods and agricultural inputs and extending the standard rate to all other products, and by authorizing enterprises to deduct the turnover tax paid on their inputs. At the same time, the standard rate was extended to all products subject to excises, and the petroleum product price structure was simplified.

Public Expenditure Management

A gradual approach was adopted for strengthening the public expenditure management system. The first steps were intended to address the most critical shortcomings in the management capacity of the government’s financial operations in an environment where a government priority was to curb the budget deficit to fight hyperinflation. These steps included centralizing all revenue and expenditure in the treasury account at the central bank and restoring the authority of the treasury to control and monitor all payments.

These actions were complemented by the establishment of a medium-term strategy to rehabilitate the public expenditure system, implemented with technical assistance provided through long-term resident experts. This strategy aimed at restoring an orderly budget process and facilitating the reporting of government expenditure, and included the adoption of a comprehensive and realistic budget; implementation of streamlined budget execution procedures; monitoring of a monthly cash flow plan; regular data reconciliation and reporting mechanisms; streamlining of government bank accounts; and implementation of a simple government accounting framework.

Significant progress has been made toward reestablishing proper budget management at the central level. Revenues and expenditures are now centralized in the treasury single account; a new budget classification has been implemented that allows for identification of poverty-reducing spending; budget execution procedures have been streamlined and partially automated; and cash reconciliation and management has improved substantially. Improvements are noticeable in all areas of the public expenditure management system, although more so in budget formulation and reporting than in execution.

Fiscal Decentralization

The IMF also provided advice on the institutional framework for fiscal decentralization. Given the collapse of local administrative and institutional capacity in the DRC, the government was counseled to view decentralization as a gradual process. Furthermore, to help evaluate progress and guide this process, it was suggested that an institutional mechanism be established. Toward this end, the IMF mission recommended creating a commission in the senate and the assembly to deal with decentralization issues. To facilitate coordination among different government ministries and agencies, as well as to set objectives, it was proposed that a working group be created, made up of the ministers of finance, budget, and interior, as well as the provincial governors.

IMF technical assistance also focused on the legal framework for intergovernmental fiscal relations. It was recommended that the assignment of responsibilities be the core of any decentralization law. Any transfer of responsibilities would be firmly linked to progress in reinforcing local administrative and institutional capacity. Given the gradual approach recommended, the IMF suggested that the revenue transfer rate be explicitly stated not in the decentralization law, but rather in the annual budget law. The transfer of revenue would be linked to the transfer of expenditure responsibilities.


Diagnostic missions in specialized areas were helpful in designing the overall strategy and identifying technical assistance needs in the Democratic Republic of the Congo. A medium-term strategy with appropriate prioritization and sequencing of actions was drawn up for both revenue and expenditure reforms. In the course of the process, the overall strategy was partially redirected to take into account the actual pace of reforms, emerging priorities (such as the need to track poverty-related expenditures and possible decentralization), and the identification of additional weaknesses. Such adjustments call attention to the need for early and regular follow-up missions in a situation where conditions on the ground are evolving rapidly.

The role of the resident advisors was critical in rebuilding fiscal institutions in the DRC. Given weak initial technical capacity in the ministry of finance and limited involvement of other donors, hands-on assistance provided by the IMF through the posting of a resident advisor was essential to effectively implement technical assistance recommendations. However, progress with reforms stalled once resident advisors left.

Greater priority should have been accorded to budget preparation and accounting. The technical assistance program paid excessive attention to providing hands-on assistance to implementing the budget execution and reporting system, to the detriment of other areas. For example, until 2001, the adoption of the annual budget was not completed until late in the year, if at all. This diminished the role of the budget in allocating and prioritizing government spending. A better balance in technical assistance would have resulted in more assistance to such areas as budget preparation, leading to faster progress in these areas.

Close monitoring within the framework of an IMF-supported program helped in implementing the technical assistance recommendations. Some of the recommendations were included as conditionality in IMF-supported programs. Others, though not representing formal conditionality, were key elements of the authorities’ program, and their implementation was monitored as part of the IMF-supported program.

The strength of the authorities’ commitment was a key factor in successful implementation of measures. Little progress was made in the period preceding the nomination of the transition government. Technical assistance was effective only when institutional resistance waned and political commitment to reform was reiterated by the transitional government.

Decentralization should proceed in tandem with progress in developing capacity at local levels. In cases where institutional capacity at the subnational levels is weak, a gradual approach to fiscal decentralization may be appropriate. This also highlights the importance of efforts to strengthen local institutions.


Lebanon’s 16-year civil war exacted a heavy toll in human and material terms. The nation’s public finances deteriorated significantly, owing to the lack of central government authority and the inability to collect revenues. Following the 1989 Taif Accord for National Reconciliation, government authority was gradually restored, and hostilities came to an end in 1990. Toward the end of 1991, with political stability returning, the authorities began the difficult task of postwar reconstruction and development, including rebuilding fiscal institutions. Consistent with the authorities’ preference, early efforts focused on rebuilding the tax system. It was only later that the effort was extended to the public expenditure management area.

Revenue Policy and Administration

Rehabilitation of the tax system focused initially on customs and domestic tax policy. The strategy was to raise government revenues quickly by relying as much as possible on the existing tax system. Revenue administration capacity, though diminished due to the conflict, was deemed capable of implementing the existing system. Therefore, initially, technical assistance tended to be in the policy area—it was some time later that the reform effort shifted, in a significant way, to rebuilding revenue administration. Even in revenue policy, the initial emphasis was on reforming existing tax instruments rather than introducing new ones (such as the value-added tax).

Tax and tariff reforms were progressively introduced from 1993 onward. The reform of taxes on income and profits aimed to encourage investment and improve taxpayer compliance by reducing high rates. Tariff reform in 1995 simplified the tariff structure by consolidating charges and duties and lowering rates. To boost revenues, excises were also increased, especially those on tobacco, cigarettes, and petroleum products.

Collectively, these policy initiatives contributed to an increase in the tax-to-GDP ratio from 9.3 percent in 1993 to around 14 percent in 1996.3 Of equal importance, they laid the foundation for subsequent reforms, including introduction in 2001 of a new customs law that included provisions consistent with the World Trade Organization valuation agreement, and in 2002 of a value-added tax. A further major policy reform—a global income tax to replace the current scheduler taxes—is planned for 2007.

Efforts to rehabilitate revenue administration commenced in 1995. The customs department embarked on a modernization program that was to span the next several years. Under this program, customs procedures were simplified and automated, and a self-assessment approach to the release of goods was introduced at ports of entry. The IMF assisted the authorities in refining these procedures and approaches, particularly in relation to the post-release compliance program.

Computerization of revenue administration was an important element of the rehabilitation program.4 This was intended to provide the impetus for badly needed administrative reforms, given low levels of tax compliance and generally weak tax administration at the time. However, little advantage was taken of the capabilities offered by the system until the introduction of the value-added tax in 2002. The newly created value-added tax administration successfully utilized the computer system, and reaped the gains of a function-based organizational structure that improved the efficiency of tax administration. The introduction of the value-added tax and associated administrative reforms contributed to a further increase in the tax-to-GDP ratio to 16 percent by 2004. However, income tax revenue yields remain extremely low, suggesting significant tax evasion and inefficient income tax administration. Consequently, the IMF has recommended that a comprehensive modernization program be mounted to cover all areas of revenue administration.

Public Expenditure Management

Efforts to strengthen public expenditure management in Lebanon began in early 1993. The IMF prepared the overall strategy and a set of specific recommendations for improving budget formulation, execution, and reporting. These included introducing a new budget classification, computerizing budget execution, and revising the budget law. A United Nations Development Program (UNDP) project assisted the authorities with computerization. Financing for this effort was also provided by the World Bank. The IMF provided a long-term advisor who prepared a new budget classification, updated the accounting framework, and advised the UNDP team on computerization.

The implementation of public expenditure management reforms has been mixed. Progress has been made in improving the transparency of budget execution. A new budget classification has been implemented and monthly reports of budget and treasury operations are prepared and published. Weekly reconciliation of fiscal and monetary accounts is being undertaken. However, the budget law has still not been revised. While some improvements have been made to enable the ministry of finance to “manage” the spending process, there is still considerable discretion in this regard, and the budget process remains disjointed.


Sequencing reforms in accordance with country priorities makes them more likely to be implemented. The overall strategy in Lebanon focused first on tax policy reforms in accordance with the preference of authorities. This led to greater country ownership of the strategy, which facilitated implementation of the reforms. Where sequencing according to the preferences of authorities is not possible due to the nature of the reforms or conditions on the ground, the rationale for the proposed sequencing should be explained to the authorities to obtain their concurrence and support.


The protracted civil conflict in Mozambique lasted for more than 10 years. Although peace negotiations started as early as 1992, when a provisional cease-fire went into effect, the general peace agreement was successfully concluded only in 1994. Democratic institutions were established in December of that year with the convening of the parliament and the formation of a government by the newly elected president. At that time, revenue administration in Mozambique was extremely weak. Both the tax directorate and customs services were in dire need of reform, particularly the latter, which was unable to enforce payment of duties and taxes or control widespread smuggling.

The overall strategy for rebuilding Mozambique’s fiscal institutions, designed by the IMF, involved a phased approach that focused first on the most pressing problems. In the case of tax policy, the first phase consisted of tariff reforms. The second phase addressed issues related to the indirect tax system, while the reform of direct taxes was left for the third phase. In revenue administration, problems related to customs administration were addressed first. Based on available diagnostic studies, action plans were drawn up for both customs and domestic tax administration reforms, and for initial planning to put in place a modern value-added tax. The tax would only be implemented, however, over the medium term. The authorities decided to seek assistance from other donors besides the IMF and the World Bank for implementation of the reforms. Overall coordination in the fiscal area, however, was to remain the responsibility of the IMF.

The IMF was not involved in public expenditure management reforms in the immediate postconflict period because other donors were active in this area. In 2001, an administrative unit—UTRAFE—was created within the ministry of finance to coordinate public expenditure management reform. Later in the year, a public expenditure reform strategy (SISTAFE) was launched with the objective of integrating and standardizing budget, treasury, and accounting information, and improving budget coverage, cash management, and the chart of accounts. The government found it difficult to deal with many different donors providing different recommendations, and in 2001 it asked the IMF to coordinate and lead the process of public expenditure management reforms. A basic framework for the reforms was prepared by the IMF in 2002 following a diagnostic mission and is currently being implemented.

Revenue Policy and Administration

Revenue policy recommendations focused on removing distortions, simplifying the tax system, and eliminating disincentives to private investment. Reform of the tariff structure involved reducing both the rates as well as the number of tariffs. A value-added tax was recommended, along with selected excises, to replace cascading turnover and consumption taxes. More recently, the IMF made recommendations regarding the reform of direct taxes following a comprehensive review of the direct tax system. The IMF’s Legal Department has also been assisting the authorities with draft tax legislation, drawing on experts with a background in the Portuguese legal traditions that influence the Mozambican system.

Reforms of revenue administration were designed to complement policy reforms, reduce evasion, and enhance compliance. Measures were recommended for comprehensive reform of customs management, with a view to reducing evasion. A key recommendation was to introduce preshipment inspection and privatization of customs management. A new value-added tax service was to be set up, along with a new computerized support system. Preparations are also under way to set up a central revenue authority.

Significant progress has been achieved in transforming the Mozambican tax system and its administration. The tariff structure was simplified by reducing the number of tariff levels from 24 to eight in the first stage and then to five; the maximum tariff rate was reduced from 105 to 35 percent in 1996 and to 30 percent in 1999. A value-added tax was introduced in the same year, and new personal and corporate income taxes came into effect in 2003. In customs administration, a new and more effective preshipment inspection system was introduced in 1996. A comprehensive private customs management and reform project initiated in 1997 resulted in a noticeable increase in customs revenues. Customs operations were gradually handed back to Mozambican staff during the 2000–02 period.

In domestic tax administration, a new value-added tax service, organized along functional lines and staffed with newly recruited professionals, was created within the tax directorate; new audit procedures were developed and implemented by a small number of newly recruited tax auditors; and new computerized value-added tax support systems were set up in Maputo. Institutional capacity of the revenue administration has improved and taxpayer compliance levels have significantly increased. Both are now more or less at par with regional averages. Implementation was also facilitated by incorporating several reform measures as benchmarks and performance criteria in IMF-supported programs.

Implementation of the strategy resulted in a significant increase in government revenues. Total tax revenue increased from about 9.6 percent of GDP in 1994 to about 14.3 percent in 2003, in spite of the revenue losses stemming from tariff reform and other changes in the tax system that eliminated distortions. The authorities are targeting a tax-to-GDP ratio of 15 percent by 2006.

Public Expenditure Management

Following an IMF diagnostic mission, the basic framework for public expenditure management reforms was prepared in early 2002 in the context of the SISTAFE reform strategy that had been developed the previous year. The reform program was to be implemented over a five-year period, with the objective of strengthening budget formulation, execution, and reporting. Early actions were recommended to develop a new chart of accounts, improve budget execution procedures, and introduce a financial management information system. A treasury single account was recommended to consolidate all government revenues and expenditures. Over the medium term, several important recommendations involved updating budget management practices to improve transparency and efficiency and strengthen budget control. Another key recommendation was to gradually extend budget coverage by incorporating own revenues of government entities and all foreign grants and credits into the budget. The 2005 budget was to include, for the first time, own revenues of some line ministries and expenditures funded by them.

There has been considerable progress in the development of the budget execution and treasury systems. The authorities have taken important steps to consolidate government bank accounts. Progress has been made in developing a financial management system and setting up a treasury single account. To strengthen the management framework for the reform process, a local project manager was appointed in early 2004, with special responsibility for detailed project planning and monitoring of progress, as well as for establishing a coherent risk management framework. In November 2004, the central and branch officers of the ministry of finance began to execute the budget through a basic version of the information management system (e-SISTAFE), in parallel with existing systems. Full rollout of the system is expected in early 2006.


The initial implementation schedule for public expenditure management reforms in Mozambique was unrealistically ambitious. The reform process has encountered delays and setbacks, which has led to several revisions to the timetable for reform. The current timetable is still very tight, but clearly more realistic than the initial one. The establishment of UTRAFE was an important step.

Domestic institutional capacity has remained a constraint throughout the period. Identifying and recruiting suitable professionals has proved more difficult than anticipated. Training needs were substantial, and even generous donor contributions could not overcome these constraints, given the limited absorption capacity of the staff. The slow pace of the overall civil service reform effort has also contributed to delays in establishing a satisfactory revenue administration.

Strong government commitment and good coordination among donors have been important factors in determining the pace of reforms. Government commitment to the reform process was strong from the beginning and remained so throughout. Donor support has also been strong since 1995. In this context, UTRAFE has played an effective role in coordinating donor inputs in a meaningful manner. A quality assurance group has also been established to identify specific weaknesses and risks in the organization and implementation of the public expenditure management reform program. While some donors initially resisted coming under the UTRAFE umbrella, there is now universal acceptance (as evidenced by progressive unanimity in assessments by the quality assurance group) that this coordination is critical to ensure the sustained progress of institutional reforms in Mozambique.

IMF resident advisors have played an important advisory role in catalyzing reform. In the absence of sufficient local capacity, several advisors were appointed to help with implementation of the reform program. They have focused on providing advice to improve core financial management functions and systems, but they have not gotten directly involved in broader public administration reforms. This has enabled them to play their role more effectively and has contributed to the progress in rebuilding fiscal institutions.

Incorporation of concrete reforms as benchmarks or performance criteria in IMF-supported programs can facilitate implementation of reforms. In Mozambique, this has helped raise the profile of the reform measures and focus the attention of the authorities on the steps necessary to improve the tax system.


Widespread violence in the wake of the August 1999 independence referendum led to extensive damage and destruction of infrastructure, displacement of the population, and loss of life. In late October 1999, the United Nations Transitional Administration in East Timor (UNTAET) was established to administer the territory during its transition to independence. No permanent structure was in place that could effectively prioritize spending according to even basic principles, nor was there any spending accountability in place, beyond standard UN procedures. Therefore, the formidable challenge was to create a working ministry of finance that would be responsible for a consolidated budget for the East Timor Administration. Reestablishing the government’s revenue collection capacity was an immediate priority. Toward this end, a coherent tax system needed to be established along with a new revenue administration. Urgent measures were required to establish public expenditure management and treasury operations, virtually from scratch, within a very tight timetable. UNTAET needed to put these institutional capacities in place quickly in order to manage public services and reconstruction effectively.

Reestablishing Fiscal Operations

Making the central fiscal authority operational was the first element of fiscal institution-building in Timor-Leste. It was envisaged that the authority would design the overall fiscal strategy, formulate tax policy, administer revenue collection, and coordinate the public expenditure program, including the control and execution of public spending. The central fiscal authority would consist of four departments: a budget department to formulate the budget; a treasury department to execute the budget; a tax administration department to collect domestic revenue; and a customs department to raise revenue from import taxes. It was also recommended that the revenue administration departments take responsibility for revenue policy formulation in the initial stages. An interim set of procedures to execute expenditures was also implemented, with a view to achieving a minimal degree of transparency and accountability until the authority could become fully operational.

Initially, the central fiscal authority was to be largely staffed by international experts. Prior to independence, most of the staff in fiscal institutions were Indonesians, who left following the 1999 referendum. So there was little local capacity left to staff the new institutions. Therefore, the different departments of the authority were at first headed by expatriate staff financed by donors. The next step was to recruit and train the Timorese to enable them to take over day-to-day authority activities.

Revenue Policy and Administration

Revenue policy recommendations aimed to establish a tax system that was fair and transparent as well as simple to administer. The objective was to generate sufficient revenue to cover one-half of government current spending in the first year and most of the recurrent budget by the end of the third year (Valdivieso and others, 2000). The proposed tax structure included a single rate customs duty, a sales tax on imports, a service tax on hotel and restaurant receipts and housing and vehicle rentals, various excises, a wage withholding tax, and a presumptive income tax on coffee exports. An interim structure of fees, such as on airport departure and car registration, was also proposed. User charges based on cost-recovery principles were recommended for public utilities and for use of airports and ports. Not all the measures that were implemented were successful, however. The presumptive tax on coffee exporters had an unduly depressing effect on the sector in the wake of sharply falling international prices, and revenue from this tax became negligible. In the end, the tax was abolished by the authorities.

The rapidly changing legal environment posed a challenge to securing changes in tax legislation. During the period of UN administration, for example, Indonesian law continued to apply. Thereafter, the adoption of Portuguese as the official language required that close attention be paid to the Portuguese version of the laws. Frequent personnel changes among counterpart officials also complicated the process.

The IMF provided operational support for setting up a new revenue administration. A commissioner was assigned to secure and lead a team of experts engaged by other donors, which included the United Nations, AusAID, and the Canadian International Development Agency. The commissioner also was tasked with developing the administrative framework required to (i) support a domestic tax collection system based on the principle of self-assessment, which involved providing assistance in drafting legislation, designing structures, systems, and procedures, engaging local staff, and conducting training and public education campaigns; (ii) facilitate the collection of revenue from the Timor Sea participants (mainly multinational oil companies); and (iii) oversee day-to-day management of the revenue administration department. Procedures were recommended to identify and register taxpayers and to set up a large taxpayer unit. The IMF also provided assistance in establishing procedures for filing and payment of taxes, enforcing collection, and developing an audit function.

A fully functional tax administration was developed by mid-2003. By the end of the IMF’s involvement, an appropriate tax law was in place, a full set of processing systems had been developed, and a nearly complete information technology system was installed. Taxpayers had been registered, tax returns were being filed, and revenues were being collected. The department had recruited sufficient Timorese nationals to manage the system. At the same time, extensive training was being delivered. Auditing and arrears collection operations were under way, and a basic taxpayer service was functioning. The number of Timorese nationals managing the system increased, but significant work is still needed to fully develop local staff capacity.

Public Expenditure Management

A key objective of the public expenditure management recommendations was to establish a treasury system that would meet international standards for efficiency, accountability, and transparency. Institutional structures and procedures had to be developed to manage the revenues and expenditures, as well as assets and liabilities, of the East Timor Administration. A comprehensive and reliable financial management information system was also needed to enhance fiscal reporting and support efficient execution of the budget. With this end in view, the IMF recommended setting up a treasury single account, and the IMF’s Fiscal Affairs and Legal Departments also worked closely in assisting with the drafting of the budget law. In addition, a capacity-building plan for the ministry of planning and finance was designed with IMF’s help. Assistance in budget preparation was provided through the services of a resident advisor in 2002.

The core expenditure management system in Timor-Leste compares favorably with the systems of other low-income countries. A recent assessment by the World Bank concluded that the system meets 12 of the 15 benchmarks used for assessing the capacity of public expenditure management to track poverty-reducing spending (World Bank, 2004). The assessment noted further, however that improvements were still needed in expenditure classification, identification of poverty-reducing spending, and public expenditure tracking surveys to ensure that funds were being used as intended. The biggest weakness of the system was poor budget execution, with significant and consistent underspending in priority areas.


The overall strategy of integrating several revenue administration activities into a single agency was beneficial to Timor-Leste. The near absence of any tax policy, law, or administrative capacity when postconflict institution building began made it possible to integrate into a single agency all activities relating to legislative drafting, process design, and policy development and implementation. By so doing, a working tax administration was established in a remarkably short period of time.

The external environment can affect the success of tax policy measures. The decline in international coffee prices, for example, resulted in the presumptive income tax on coffee having a more adverse effect on the sector than envisaged.

The strong lead role taken by UNTAET in reestablishing the fiscal system facilitated rapid progress during the period prior to independence. The pace of reform slowed afterward, however, reflecting the limited capacity of local staff and the waning availability of suitably qualified international experts (particularly those with the requisite language skills) to assist the ministry of planning and finance.

Donor support was crucial in rebuilding fiscal institutions in Timor-Leste. Several donors were involved from the start and provided experts who were instrumental in designing and administering the basic processes, while also training locally recruited staff. This international support proved to be crucial, as domestic capacity constraints were significantly greater than expected. Coordination of donor technical assistance was problematic, however, in the area of public expenditure management, where systems and traditions in donor countries are different, and personnel provided by them were not always familiar with each other’s systems. IMF support for public expenditure management focused on developing the basic treasury system and the budget preparation function. Getting basic treasury operations up and running helped demonstrate to donors (especially the United Nations) that, while rudimentary, a well-functioning public expenditure management system was in place.

Fiscal federalism was also important in Croatia, which is not among the case studies in this chapter.

See Clément (2005) for a comprehensive discussion of post-conflict developments in the Democratic Republic of the Congo.

The tax-to-GDP ratio subsequently dropped to an average of about 13 percent over 1997–2001 because of the country’s serious economic problems.

The Canadian International Development Agency provided most of the support for this program, including financing for the new computer system called the Standard Integrated Government Tax Administration System.

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