- Rina Bhattacharya, Benedict Clements, Sanjeev Gupta, Shamsuddin Tareq, Alex Segura-Ubiergo, and Todd Mattina
- Published Date:
- December 2005
Building fiscal institutions in postconflict countries essentially entails a three-step process: (i) creating a legal and regulatory framework for fiscal management; (ii) establishing or strengthening the fiscal authority; and (iii) designing appropriate revenue and expenditure policies while simultaneously strengthening revenue administration and public expenditure management. The sequencing involved in implementing these steps varies across countries, depending on country-specific circumstances. The ultimate aim, however, is always the same—to make fiscal policy and fiscal management effective and transparent.
Four objectives have guided the International Monetary Fund’s advice to postconflict countries on building or reestablishing their fiscal institutions: (i) avoid ad hoc decision making; (ii) promote transparency in fiscal operations; (iii) ensure a minimum level of revenue collection; and (iv) ensure that spending patterns reflect government priorities. A first step usually has been to review existing legislation in order to simplify tax laws and administrative procedures, or pass new legislation if existing laws and procedures are viewed as inadequate. The next step has been to strengthen the central fiscal authority, or set one up if none existed. Such an authority usually consists of four departments: a budget department, a treasury department, and separate departments for tax and customs administrations. In some countries, an explicit mechanism for coordinating donor assistance has also been established.
The IMF’s advice in many ways has been similar to what it recommends to countries without conflicts, but with important nuances to reflect the realities of the postconflict environment. For example, the IMF’s advice to developing countries often includes recommendations to introduce simple income taxes based on withholding wages, create large taxpayer units, and improve budget classification. But this same advice has been tailored to the circumstances of postconflict countries. For example, with respect to tax policy, there generally has been more acceptance in postconflict situations of employing policies that are not first-best from an efficiency point of view (e.g., export taxes), given the urgent need to generate revenue. In a similar vein, proposals to improve tax administration have focused on basic aspects of these procedures, such as filing and payment of taxes and registration checks. Similarly, on the expenditure side, the focus has been on implementing simplified systems such as budget classifications under very broad categories of outlays that can be refined at a later stage. In some cases, the adoption of the first postconflict budget—sometimes a transitional one—became an urgent priority, unlike in the case of most other countries receiving IMF technical assistance.
The sequencing of reforms was also different in post-conflict countries. The timetable for implementing reforms that are part and parcel of an effective system of fiscal management—for example, an adequate medium-term expenditure framework—is also much longer. In general, recommendations have had to focus on a large number of intermediate measures over the short term that could gradually move budgetary practices from a crisis mode—during which budgets are sometimes implemented on a three-month basis—to a more normal state of affairs.
A number of lessons can be drawn from the IMF’s involvement in rebuilding fiscal institutions in post-conflict situations. From the standpoint of the design of this advice, six major lessons emerge. First, framing an overall technical assistance strategy at the outset is crucial for sequencing and coordinating assistance among the multiple providers that are usually active in postconflict countries. Second, there might not be a substitute for posting long-term advisors in the early postconflict phase in light of weak capacity. Third, the initial strategy should comprise simple steps and procedures. Fourth, in some instances, policies recommended for the initial postconflict period may not be optimal from an efficiency point of view, but may still be the best possible alternatives in light of limited technical and administrative capacity. Fifth, while the need for simplicity and administrative ease in designing short-term laws and procedures is paramount, care has to be taken to ensure that short-term policies are consistent whenever possible with the long-term goal of moving to a modern fiscal system. And finally, issues related to fiscal decentralization can pose a challenge to fiscal management in some cases.
With respect to the implementation of fiscal reforms in postconflict situations, there also are six central lessons. First, the overall strategy designed at the outset should be flexible enough to respond to changing circumstances on the ground. Second, the level of ownership and commitment of the authorities has an important bearing on the pace of reforms. Third—and this is an area where improvement is particularly needed—effective donor coordination is important for successful implementation of reforms. Fourth, appropriate conditionality in IMF-supported programs can facilitate implementation of reforms. Fifth, the development of local capacity in all cases has taken longer than envisaged and needs to receive greater attention. And finally, the pace of implementation of reforms can be substantially affected by the postconflict security situation.