The preferred strategy for rebuilding fiscal institutions in the wake of conflict involves three basic steps: (i) creating a proper legal and regulatory framework for fiscal policy; (ii) establishing a central fiscal authority and a mechanism for coordinating foreign assistance; and (iii) implementing priority changes in revenue and expenditure policies, along with simple arrangements in revenue administration and public expenditure management that effectively leverage scarce human resources.

The preferred strategy for rebuilding fiscal institutions in the wake of conflict involves three basic steps: (i) creating a proper legal and regulatory framework for fiscal policy; (ii) establishing a central fiscal authority and a mechanism for coordinating foreign assistance; and (iii) implementing priority changes in revenue and expenditure policies, along with simple arrangements in revenue administration and public expenditure management that effectively leverage scarce human resources.

However, while this strategy formed the basis of the IMF’s technical assistance to postconflict countries for rebuilding fiscal institutions, it should be noted that technical assistance recommendations varied across countries due to local circumstances. This caveat is important, especially when country-specific measures are discussed. For example, the sequencing of the steps did not always follow the order above. While establishing a fiscal authority is a necessary early step in countries where no such institution existed before, setting up the authority can take some time. Sometimes, government officials in a postconflict situation may not have the luxury to await creation of a fiscal authority. Certain tax administration procedures may need to be promulgated even if the authority is not fully functional, including procedures for collection and payment of border taxes. On the expenditure side, procedures for government payments for salaries and purchases of goods and services may need to be put in place urgently. In some cases, certain expenditures may be necessary even before a comprehensive budget is prepared. In Timor-Leste, for example, the IMF provided recommendations for executing spending on salaries and purchases of other goods and services until a fiscal authority could become operational.

The relative importance and sequence of each of the steps for rebuilding fiscal institutions also depends on the type of conflict. In general, the three-step framework was followed closely in the wake of conflicts that led to the emergence of new countries or that took place immediately after the creation of a new country Examples are Bosnia and Herzegovina, Croatia, and Timor-Leste.

The framework was also used following conflicts in preexisting countries with widespread institutional damage and social disruption, but the sequencing of the steps was not always the same. Liberia and Cambodia closely followed the three-step framework, but in Rwanda and the Democratic Republic of the Congo, the first priority was to rebuild the basic infrastructure of the ministry of finance, and only later did the emphasis shift to creating a proper legal framework for fiscal policy. In countries where the legal framework for budget preparation and execution was basically sound but had not been applied for many years—as in Afghanistan—other important legal reforms were accorded priority in such areas as income taxes, foreign and domestic private investment, and customs.

Finally, preexisting countries where conflict resulted in relatively little institutional and social disruption did not follow all the steps. In Albania and Serbia and Montenegro, where the conflict was intense but short, fiscal institutions emerged relatively unscathed and the focus of rebuilding was on the third step. In Albania, the immediate priorities included restaffing all tax administration offices, increasing the reporting threshold for the value-added tax, and securing the cooperation of banks in accepting tax payments. In Serbia and Montenegro, the emphasis was on simplifying the tax system to facilitate the transition to a more modern and market-friendly tax environment.

The approach to rebuilding fiscal institutions also was shaped by the role of the international community. In some newly formed countries or territories, the United Nations was responsible for running government operations, which influenced the nature of the advice given. A special challenge in these cases was to ensure that local capacity was in place before responsibility was handed over to national administrators. In Kosovo, a number of complicated legal issues arose as a result of control of the territory by the United Nations Interim Administration Mission in Kosovo (UNMIK). These issues included whether the UNMIK had the right to ignore existing regulations inherited from the former Federal Republic of Yugoslavia and had the mandate to pass new regulations that contradicted these rules; whether Kosovo was accountable for any of Yugoslavia’s debt; whether the UNMIK could incur liabilities; and whether the UNMIK had the right to fire redundant workers.

Similarly, in Bosnia and Herzegovina, the Dayton Agreement largely determined the parameters within which the reconstruction of institutions had to take place. For example, the agreements spelled out a highly decentralized fiscal arrangement to accommodate different ethnic and political interests. This led to the emergence of a new state composed of two entities: the Republika Srpska and the Federation of Bosnia and Herzegovina. The agreement further mandated the creation of at least eight local cantons, of which only two had functioning administrations.

The postconflict period sometimes provided an opportunity for bold changes. In some cases, there was openness to new approaches that had been previously rejected as being politically, legally, or administratively infeasible. Thus, while administrative capacity may have been depleted in these cases—examples are Kosovo and Timor-Leste—the immediate postconflict period provided an opportunity to put in place major improvements in policies and institutions relative to the preconflict period.

Creating a Proper Legal and Regulatory Framework for Fiscal Policy

Fiscal operations in any country are generally anchored in two main legal sources: the constitution and tax and budget laws. The constitution usually specifies the division of taxing powers between different levels of government, and between the executive, the legislature, and the judiciary. It also determines the nature of emergency powers available to the executive. Tax laws are critical to make tax policy legally enforceable. They define the powers of the tax administration to collect information about taxpayers and the administrative actions that can be taken against individuals or entities that evade taxes or accumulate tax arrears. New or revised financial regulations are also indispensable to ensure that the fiscal authority is vested with the legal power to control and manage public spending.

The creation of a consolidated package of customs and tax legislation, regulations, and directives often was of immediate importance in postconflict situations. In countries where preconflict legislation was not reasonably sound, a key objective was to simplify tax legislation and procedures for revenue collection in order to make them more transparent and easier to implement and administer. In a number of cases, the complexity of existing legislation made tax laws difficult to implement, especially in light of the limited administrative capacity prevailing in a postconflict environment. For example, in many cases the tax code included a wide variety of duties, tariff rates, and special taxes and surcharges. The mismatch between administrative capacity and the complexity of the existing laws and regulations often led to inevitable efficiency losses, mistakes in tax assessments, and difficulties in tax collection.

A number of countries considered the reform of customs and tax laws to be crucial.1 In Rwanda, the authorities initiated a comprehensive program to reduce tax exemptions and combat tax evasion, including a review of special conventions in the investment code. The Democratic Republic of the Congo adopted a new and simplified tariff law to reduce the scope for smuggling and fraud, and a new mining and investment code to combat tax evasion. Serbia and Montenegro introduced legislation to radically simplify the real estate property tax.2 In newly created countries like Bosnia and Herzegovina, substantial resources were devoted to fashioning tax laws nearly from scratch to provide a legal framework for a new, albeit simplified, tax system.

Designing a new budget law and adopting the first postconflict budget—sometimes a transitional one covering three to four months—also were key to initiating budget reforms. Formulating an initial budget after the conflict was one of the most important measures to be implemented. In most of these cases, including Afghanistan, Bosnia and Herzegovina, and Croatia, the existing budget law no longer reflected the current institutional structure. The purpose of the new law was to set out clear and transparent budget classification structures consistent with international standards and practices; provide strict guidelines for budget execution, such as prohibiting unbudgeted expenditures and arrears; establish a consistent framework for internal control and internal and external audits; and provide mechanisms for financing budget deficits.

The new legislation also had to address issues related to off-budget transactions, lack of clear classification of budgetary spending, and the absence of well-established procedures for managing foreign aid. Legal reforms related to public expenditure management issues were also critical. In Croatia, an IMF mission fielded one month following the announcement of the government’s stabilization program identified an urgent need for a strong legal framework for public expenditure management suited for a market economy.3

Reestablishing the authority of the government to collect taxes and preparing an adequate budget law formed an important component of the strategy to reestablish the rule of law. The success or failure of these tax and budget reforms themselves depended heavily on the capacity of the state to reestablish order and develop a system of judicial sanctions to penalize those who evade them (Maravall and Przeworski, 2003). Therefore, ensuring that key legislation was in place authorizing the tax and customs administrations to perform their basic duties was high on the list of priorities. The underlying strategy was to start simple—usually with very basic and short laws consistent with a streamlined tax policy. Over time, these were expanded, allowing for greater local ownership as the details of these laws were fleshed out and capacity improved.

Establishing a Central Fiscal Authority and a Coordination Mechanism for Foreign Assistance

Strengthening the central fiscal authority, or establishing one from scratch in new countries, was, in all postconflict cases, an essential step toward rebuilding fiscal institutions. Newly established countries needed to create a ministry of finance, while existing countries had to strengthen that ministry so it could perform a number of basic tasks essential for macrofiscal management. In a few countries such as Albania, Bosnia and Herzegovina, Serbia and Montenegro, and Tajikistan, this also involved the transformation of existing institutions designed for a planned economy into those that would support a more market-oriented system. Although the precise institutional structure, powers, and responsibilities of newly created institutions varied across countries based on specific circumstances, they shared a number of common objectives. Important objectives were to ensure that fiscal decisions not be taken in an ad hoc manner, establish transparency in fiscal operations, secure a minimum level of revenue collection, and ensure that government spending be consistent with the government’s priorities. Establishing a set of procedures to effectively control government spending and establish accountability was important for efficient service delivery and to reassure donors that funds provided for relief and reconstruction were being used as intended. Given the dearth of administrative and technical capacity available within these countries, it was recognized that the institutions had to have a simple structure.

The fiscal authority in postconflict countries was designed to perform three basic functions: (i) develop a fiscal strategy and monitor its impact on the economy; (ii) formulate expenditure policy and execute the budget; and (iii) formulate tax policy and collect revenues.

In newly created countries, the new fiscal authority normally consisted of four main operational departments. First was a budget department with the responsibility to coordinate the overall expenditure program and prepare fiscal projections (including for tax revenues) and budget execution reports. This department also had responsibility for assessing the fiscal impact of policy measures.

A treasury department was responsible for controlling spending and ensuring that it was properly accounted for. The development of the treasury function was closely related to the establishment of a well-functioning payments system, since the treasury department was also charged with moving collected government revenues into treasury bank accounts, rationalizing government banking arrangements to promote transparent recording of transactions, and designing workable strategies for cash management. As noted earlier, external aid inflows tend to increase in the postconflict phase. Therefore, it is important to set up a mechanism for the proper accounting of domestic and external borrowing and other inflows. Where needed, such a function should be integrated with the treasury department to coordinate and control these flows as well as to ensure proper recording and reporting.

Finally, separate customs and domestic revenue administration departments were responsible for implementing tax policy and collecting tax revenues. In newly created countries where tax policy options were constrained by administrative capacity, it was decided in most cases to place tax policy and administration under unified management. Thus, these departments also were entrusted with responsibility for tax policy. One issue that often came up in this context was whether customs and domestic tax administration should be merged in order to simplify administration. The modest amount of resources expected from domestic taxes was cited by the authorities, in some cases, as an argument in favor of unifying administration. On the other hand, the procedures for collecting these revenues differed substantially, so the IMF argued in favor of establishing separate customs and domestic tax administration departments, with the former entrusted with the responsibility for collecting trade taxes.

In some countries, it was recommended that a macrofiscal unit be established to help support policy formulation. In Albania, Bosnia and Herzegovina, Croatia, Kosovo, and Liberia, the unit was expected to provide advice on general fiscal policy issues and formulation of the budget. More specifically, it was designed to assist the ministry of finance in preparing revenue forecasts for the budget year and fiscal policy scenarios. The unit’s tasks included preparing a medium-term expenditure framework, conducting debt sustainability analysis, analyzing tax policy issues, and assessing structural fiscal issues such as pension reform. The timeframe for the establishment of this unit varied depending on country-specific circumstances. For example, establishment of the macrofiscal unit was recommended as a medium-term measure in Rwanda, while in Afghanistan it was seen as a measure of immediate importance, as the new unit was intended to address the limited capacity for economic analysis within the ministry of finance.

Many postconflict countries also needed a mechanism to facilitate coordination of donor funds. In some instances, there were no procedural arrangements for the use of foreign aid, and insufficient coordination between donor agencies and the ministry of finance. In these cases, there was often a disconnect between expenditure needs and budgetary outlays. Better coordination was thus seen as essential for both donors and recipient countries. From the perspective of the donors, information on activities of other donors in specific areas was useful for framing their own assistance strategies and avoiding duplication. For the recipients, such a mechanism provided the spending agencies with information on activities of donors in their area of competence, and thus helped in framing their plans for spending financed from domestic resources. In addition, donor-financed projects also gave rise to future recurrent spending requirements, which needed to be incorporated into future spending plans. In some countries (such as Kosovo and Mozambique), a separate unit was set up as part of the ministry of finance or its equivalent institution to coordinate with donors. In Afghanistan and Timor-Leste, however, a multidonor trust fund was set up to carry out the coordination function. In Timor-Leste, frequent donor meetings also provided an opportunity to better coordinate assistance.

In some cases, establishing and consolidating the power of the central fiscal authority posed challenges for the difficult political equilibria reached during resolution of the conflict. In Bosnia and Herzegovina, Croatia, and the Democratic Republic of the Congo, issues of fiscal federalism/decentralization quickly acquired importance, given the strength of subnational and regional political forces with strong secessionist roots. In these countries, it became important to follow a strategy under which the decentralization necessary to keep the peace following ethnically based conflicts did not endanger economic reforms and fiscal management.

The IMF recommended a flexible approach to fiscal decentralization in postconflict countries to address these concerns. For decentralization to be successful and consistent with sound macrofiscal management, adequate administrative and institutional capacity at the subnational levels is viewed as critical. The IMF thus recommended that fiscal decentralization proceed flexibly over the medium term in tandem with the development of local capacity. In the Democratic Republic of the Congo, it was recommended that the transfer of responsibilities to subnational governments be linked to progress in building local capacity, and that the share of revenues transferred to local governments be determined in the annual budget, rather than explicitly stated in the decentralization law. In Bosnia and Herzegovina, local capacity was either disrupted or nonexistent, even though the postconflict political consensus had devolved significant responsibilities to subnational governments. While the existing distribution of responsibilities among different levels of government was generally seen as appropriate, it was nevertheless recommended that these arrangements be reviewed to take account of changing circumstances.

In countries such as Bosnia and Herzegovina, Croatia, and the Democratic Republic of the Congo, the IMF’s advice on decentralization focused on the overall framework governing intergovernmental fiscal affairs as they related to clarifying revenue and expenditure assignments among the different levels of government.4 The devolution of authority to subnational governments sometimes called for the creation of new institutions to coordinate policies and reduce undesired tax competition (e.g., Bosnia and Herzegovina). Also in Bosnia and Herzegovina, as well as in Croatia, an important issue was the role of intergovernmental fiscal relations in addressing regional income disparities. In such cases, the IMF recommended a transparent revenue-sharing mechanism, a system of equalization grants, and restrictions and clear rules on subnational government borrowing.

Implementing Policy Changes and Administrative Arrangements to Leverage Scarce Human Resources

A number of recommendations focused on actions to reform tax policies, strengthen tax administration, improve expenditure policies, and bolster expenditure management and control.5 In some cases, these actions were to be taken at the time that enabling laws were passed (see earlier discussion).

Policies to Mobilize Revenues

Mobilizing domestic revenues in the postconflict period presented a difficult challenge. The task was complicated in some countries where the tax base was limited in the immediate aftermath of the conflict owing to the collapse of economic activity. Such was the case in Cambodia, Democratic Republic of the Congo, Liberia, Rwanda, and Timor-Leste.

The immediate objective of tax policy in postconflict countries was to raise revenue quickly to finance the most urgent government activities such as paying civil servants and delivering basic public services, and to address large macroeconomic imbalances (Cambodia and Serbia and Montenegro). The longer-term objective was to rehabilitate the tax system in order to mobilize revenues sufficient to cover a significant portion of public expenditures. In general, tax policy proposals were consistent with the objective of establishing a fair, transparent, and efficient tax system. However, the strategy for revenue generation had to take into account the state of existing institutions and the capacity available to implement policies, as well as tax instruments in place at the time the conflict ended. In addition, there often was a trade-off between short-term revenue mobilization needs and economic efficiency objectives. Given the limited options available for generating revenues, governments in such countries as Croatia, Liberia, Serbia and Montenegro, and Tajikistan were advised to implement taxes that were less than desirable from an efficiency point of view, or to move only gradually in restructuring distortionary taxes already in place. A major challenge for some countries was that a large share of the tax base—in particular, incomes of people working for international institutions—was exempt from taxation. Many postconflict countries also experienced a large influx of expatriates in connection with relief and reconstruction work. In general, their incomes as well were exempt from income taxation. The differential treatment of expatriates risked creating a culture of tax exemptions, and in countries such as Liberia made it more difficult to implement a simple tax system where all taxpayers faced a level playing field.

The approach to revenue mobilization in some countries and territories was dictated by the tax system already in place and the administrative and technical capacity available at the time. In West Bank and Gaza, the approach was to rely as much as possible on the existing system to raise revenues in the short run, and delay major policy initiatives until sufficient capacity had been rebuilt. In some countries, major sources of revenues remained largely unaffected by the conflict or were quickly rehabilitated after the cessation of hostilities. In those countries—examples are Albania and Sierra Leone—assistance in the early postconflict period focused on restoring capacity in revenue administration. Tax instruments were left largely intact, except for modifications to make them simpler, more transparent, and easier to implement. Sometimes emphasis was also placed on the collection of arrears, as in Yemen, where a key IMF recommendation was to accelerate collection of tax arrears from public enterprises, as well as arrears on profit transfers to the budget. Where conflict had so severely damaged capacity that the existing system could not be implemented effectively—as was the case in Rwanda, Tajikistan, and West Bank and Gaza—the approach was to simplify and streamline the system by reducing the number of taxes, harmonizing rates, and reducing exemptions. In countries such as Bosnia and Herzegovina, capacity was so depleted after the conflict that only border taxes provided a significant source of revenue, even though the country’s existing tax system—on paper—was quite satisfactory.

In most postconflict countries, revenue mobilization relied heavily on indirect taxes. In the initial stages, the emphasis was on international trade taxes (including sales taxes imposed on imports). These were relatively easy to monitor and collect, given that there were only a few border points through which international trade could be conducted. In view of the limited capacity available, the structure of customs tariffs was kept simple, and in some cases consisted of one single rate with limited exemptions.6 A sales and excise tax on imports was also introduced in some countries, again with a simplified structure. In the initial postconflict period, with limited domestic production, imports accounted for a very high proportion of consumption; as such, a sales tax on imports effectively constituted a domestic consumption tax.

Exchange rate policy also had an impact on revenue collection in postconflict countries that were highly dependent on international trade. For example, in the Democratic Republic of the Congo, immediate unification of the official and parallel market exchange rates had a large positive impact on budgetary revenues, since about 60 percent of total government revenue was derived from a dollar-denominated tax base. In Lebanon and Rwanda, the customs exchange rate was adjusted toward the market rate, while in Yemen, the authorities adopted a unified exchange rate and aligned the customs exchange rate with the unified rate, with an immediate positive impact on revenues.

Some countries also introduced or maintained a tax on major exports. In cases where one or two products constituted the bulk of the exports whose production was quickly restored following the end of the conflict, an export tax was seen as another area for revenue mobilization in the early postconflict period. From an efficiency standpoint, these taxes leave much to be desired, as they divert resources away from their most productive uses. In addition, by retarding investment in export sectors, these taxes may contribute to future difficulties in the balance of payments. To avoid these distortions, an income tax—including on the incomes of exporters—could be imposed, instead of a tax on exports per se. In some post-conflict countries, however, this was not a viable option for raising a large amount of revenue, given the complexity of administering this tax. In this light, in countries such as Liberia, Tajikistan, and Timor-Leste a tax on exports was seen as a necessary evil, albeit one that would, over the longer term, be phased out as other sources of revenue became available.

Taxes on relatively easily taxable services such as restaurants, hotels, and car rentals were recommended in Cambodia, Kosovo, and Timor-Leste. A broader tax on domestically produced goods was considered to be unrealistic in some countries, given the widespread destruction caused by the conflict and limited administrative capacity. At the same time, the large influx of expatriates led to a surge in spending at a small number of hotels and restaurants, providing an easily identifiable tax base that could be exploited in a simple and straightforward manner. The fact that the burden of these taxes would fall on these expatriates also made them politically attractive. In the initial stages, this tax was to be confined to a few large business organizations. As administrative capability developed, the coverage of the tax was to be broadened to cover areas such as professional, legal, and accounting services.

In a few countries, changes in administered prices also provided an important source of revenue. For example, in Yemen, domestic market prices of petroleum products were adjusted significantly in order to generate revenue, rationalize the consumption of energy, and discourage smuggling to neighboring countries. This was followed by the introduction of a comprehensive system for taxing energy (or other natural resources) from domestic sources.7

In most countries, some form of income taxation was deemed necessary for two reasons. First, policymakers were concerned that if an income tax of some sort were not introduced from the outset, it would be politically difficult to do so later on. Second, in some countries, the income tax, in some form or another, existed in the preconflict period. Thus, although the tax was complex to administer, there was previous experience to draw upon while revitalizing this source of revenue. In all cases, the form of taxation proposed had to take into account the country’s available administrative and technical capacity, as well as the loss of some of the tax base owing to the adverse effects of conflict on economic activity and the stock of private sector capital. It was generally recommended—in Cambodia, Lebanon, and Tajikistan, for example—that tax rates be harmonized and reduced to encourage compliance, and that the tax base be broadened by limiting exemptions.

A flat withholding tax on wages was seen as a particularly attractive form of income taxation in the early post-conflict period in such countries as Afghanistan, Albania, Bosnia and Herzegovina, Kosovo, and Timor-Leste. The tax had three advantages. First, its administration was relatively straightforward. Second, given the relatively small private sector, most of the taxpayers were public servants or local employees of international organizations working on relief and reconstruction projects. In addition, in some cases (e.g., Afghanistan), the tax initially applied to relatively high income earners. Thus, the tax did not affect the large majority of the population, thereby reducing resistance to it. And, third, in cases such as Albania, Bosnia and Herzegovina, and Kosovo, there was some sort of a tax on wages before the conflict began, and thus the reintroduction of the tax in the early stages of the postconflict period was deemed appropriate.

Measures were suggested for taxing business income in Bosnia and Herzegovina, Kosovo, Rwanda, and Timor-Leste. In the initial postconflict periods in Kosovo and Timor-Leste, for example, a presumptive tax on income was recommended for small businesses. Tax assessments were based on the type of product sold, square footage of the enterprise, or a rough estimate of turnover. While the expected revenue yield from such a tax was not projected to be significant, it was envisaged that small businesses would quickly become a visibly active part of the economy. As such, there was concern that exempting those firms from taxation would promote a culture of tax noncompliance. A presumptive tax was considered appropriate at this stage, as small businesses were not expected to be able to maintain reliable accounts, and audit capacity in revenue administration was weak. For large unincorporated businesses, a similar tax was proposed. In Yemen, a minimum business profits tax of 1 to 2 percent of the previous year’s turnover was proposed, in part because the measure could be implemented without the passing of a new law.

In postconflict countries such as Cambodia and Rwanda, it was recommended that corporate income taxes be simplified, while in others such as Afghanistan, a profit tax already existed but yielded paltry revenues on account of excessively generous tax incentives. In this latter case, it was suggested that tax incentives be replaced with a simple and less generous tax credit for investment in fixed assets. In other countries such as Liberia and Rwanda, the recommendation was to replace the progressive corporate tax with a flat income tax on all business income. In Rwanda, it was also suggested that investment incentives be streamlined and made more transparent.

Strengthening Revenue Administration

Newly created countries needed to establish a revenue administration (tax and customs), while existing countries, depending on the degree of disruption caused by the conflict, managed to preserve some revenue administration capacity, although it was less effective than before the conflict.

Establishing or strengthening revenue administration in postconflict countries generally involved a two-stage process. In the first stage, the priority was to get the tax and customs administrations up and running. This meant starting revenue collection and registering and controlling the flow of goods across borders within the 12 months immediately following the end of the conflict. In the second stage—anywhere from 12 to 18 months after the conflict—the emphasis was on helping countries design, and begin implementing, a medium- to long-term strategy for reforming revenue administration. Such strategies were designed to fit country-specific circumstances and were based, to the extent possible, on international best practices.

Reestablishing Basic Tax Administration Infrastructure

Once key legislation was in place, a critical priority was to secure the basic infrastructure such as buildings, office equipment, and materials necessary for a functioning revenue administration. In newly created countries or territories such as Bosnia and Herzegovina, Kosovo, and Timor-Leste, often the most basic requirements for a functioning national revenue administration (telephone lines, vehicles, physically sound buildings) were needed before operations could even begin. International financing was made available in several countries for this purpose. In all cases, the IMF worked closely with the authorities and donors to mobilize resources and define their use. Many countries needed to establish a basic information system to enable the authorities to produce revenue statistics and monitor such key operations as the number of registered taxpayers, tax returns filed, and payments made. In Rwanda, the provision of basic equipment and the reinforcement of mobile surveillance and antismuggling operations were deemed an early priority. Given countries’ limited capacity, it was often recommended that the process of modernization begin with a few selected tax offices collecting the bulk of government revenue.

Identifying and Appointing Key Staff

An important step in getting the revenue administration up and running in postconflict countries was to identify and appoint key staff in senior positions. This was a challenging task in places like Albania and Timor-Leste, which either had no preexisting national revenue administration or had a seriously impaired one following the conflict, and as such had no pool of experienced government officials to manage and staff the revenue administration. In Timor-Leste, IMF technical assistance was used to help identify a foreign expert who could serve as a “shadow” commissioner. This senior official took the lead in managing the fledgling revenue administration while working closely with national counterparts to train local staff. The objective was to transfer management responsibilities to local personnel in as short a time as possible.

Registering and Identifying Taxpayers

In newly formed countries such as Timor-Leste, legislation was needed to require individuals or companies engaged in commercial activities to register with the authorities. In Kosovo, where a taxpayer register existed, it was used as the starting point. In some countries, however, conflict resulted in important changes in the nature and structure of activities of these taxpayers, necessitating a rebuilding of the taxpayer register. Measures also needed to be taken to ensure that all potential new taxpayers were registered. Therefore, registration-check audits were recommended, along with an appropriate penalty regime for those who failed to register.

It was also recommended that all registered taxpayers be assigned a unique taxpayer identification number to be used for filing their taxes (e.g., Bosnia and Herzegovina, Kosovo, Liberia, Serbia and Montenegro, Rwanda, and Timor-Leste). This system was expected to effectively identify taxpayers nationwide, assist the revenue administration in cross-checking information on taxpayer compliance, and at a later stage, facilitate computerization of tax administration.

Establishing Basic Filing and Payment Procedures

Several recommendations focused on establishing simple procedures for filing and payment of taxes or simplifying existing procedures. In many cases, simple return filing and payment procedures were set up with which taxpayers could easily comply, and which placed the least administrative burden on the fledgling revenue administrations (e.g., Kosovo and Timor-Leste). Tax return forms were simplified to enable taxpayers to calculate and report their tax liabilities easily and accurately. In some countries, the national language changed as a result of the conflict, and new forms were designed to take this into account. Countries were also advised to undertake public information campaigns to educate taxpayers on procedures to calculate their tax liabilities, complete their tax returns, and pay the taxes owed. Internal procedures were also defined for processing tax returns and payments, and reconciling payment information with that of the banks and the national treasury. A well-functioning payments system is necessary to facilitate tax payments and collection, which in turn highlights the importance of progress in financial sector reform for the rebuilding of fiscal institutions.

Creating a Large Taxpayer Unit

Setting up a large taxpayer unit to focus on taxpayers accounting for a significant majority (usually 60 to 80 percent) of tax revenues was recommended for many postconflict situations, including Albania, Kosovo, Liberia, Serbia and Montenegro, Timor-Leste, and West Bank and Gaza. In the initial phases of the postconflict period, enforcing compliance with basic tax regulations was a major challenge. Scarce administrative capacity could best be used, it was argued, by concentrating on the relatively small number of taxpayers accounting for the lion’s share of tax collections. In the latter phases of the postconflict period, focusing audit activity on firms monitored by the large taxpayer unit was seen as more effective in helping raise the level of compliance by these taxpayers (and thus revenue) than more generalized approaches applied to all taxpayers. Moreover, it was also envisaged that setting up a large taxpayer unit would contribute to longer-term development of tax administration by providing a pilot based on best practices with respect to new organizational structures, systems, and procedures (taxpayer registration, filing and payment, audit, enforcement, and taxpayer services). Setting up the large taxpayer unit in a postconflict environment, however, was not an easy task. First, it demanded a qualified pool of tax staff who could effectively audit the large taxpayers. This required a higher degree of preparation and training than was often available in postconflict countries. Second, the disruption of economic activity during the conflict made it difficult to identify large taxpayers and assess the impact of the new legislation affecting them.

Reestablishing Expenditure Management and Control

Upon entering the postconflict period, most countries lacked a well-functioning public expenditure management system. The immediate objectives for improving budget management in postconflict environments included restoring control over the expenditure aggregates (fiscal discipline), ensuring that budgetary spending was consistent with the approved budget, and giving donors fiduciary assurances that their money would be spent in line with their objectives. The last point was particularly important, given that most post-conflict countries received a substantial amount of foreign assistance for humanitarian and reconstruction purposes. Thus, the objective of obtaining accurate and meaningful information on government spending dictated that donor funds should flow through the government expenditure system. However, donors would only agree to this if transparent and accountable procedures for executing public spending were in place. These concerns underscored the need for giving urgent attention to improving public expenditure management systems.

Ensuring that the budget was executed—and not just that total expenditures were under control—was also a central challenge in the postconflict period. In some countries, budgets were not being executed, given the inexperience of the government. In part, this was due to poor budget planning, with unrealistic estimates of the capacity to implement capital projects incorporated in the budget. This implied that some critical programs for reconstruction were not being implemented.

Some aspects of the public expenditure management system were accorded greater priority than others in the early postconflict period. Two areas received special attention during this phase: (i) ensuring that the central authority had control over all revenues and expenditures (e.g., Croatia, Democratic Republic of the Congo, Liberia, Serbia and Montenegro, and West Bank and Gaza); and (ii) establishing a simple accounting and reporting framework with an appropriate budget classification (e.g., Albania, Rwanda, Serbia and Montenegro, Timor-Leste, and West Bank and Gaza). In countries where a system was already in place, the approach was to strengthen existing systems. In other countries, the emphasis was on establishing basic public expenditure management systems that were capable of timely and transparent formulation and reporting of expenditures and revenues at a fairly aggregate level.8 As noted above for Bosnia and Herzegovina and Croatia, however, the nature of the conflict in some instances did not permit the centralization of all revenues and expenditures.

In some cases, training was seen as an urgent need in the short run. In Kosovo, Rwanda, and Timor-Leste, an intensive training course in basic accounting, financial management, and computer operations was critical to getting the public expenditure management system up and running.

Since a significant portion of revenue and spending had not been flowing through the treasury during the conflict period in some countries, government accounts presented only a partial picture of the fiscal situation. With a return to more normal conditions, an attempt was made to reduce fiscal operations conducted through extrabudgetary channels by integrating all government revenues and expenditures into the treasury (e.g., Albania and Democratic Republic of the Congo).9 Another complicating factor was that in the initial postconflict phase, a large part of both recurrent and capital expenditure was financed by donors. In some cases, donors wanted to maintain control over the outlays they financed. This led to an additional management problem—bifurcation of the budget system into a “local resources” budget and an externally funded capital budget, with the latter being outside the control of the authorities. It was recommended that all donor funds flow through the government’s public expenditure management system, and that donors avoid establishing competing or conflicting aid disbursement and management mechanisms.

Improved information on government financial flows was also seen as important for ensuring that all public revenues and spending be captured in a comprehensive fashion. In particular, complete information on government accounts in the banking sector was needed to help ascertain the accuracy of data on fiscal outturns based on accounting data. To improve the quality of financing data and to simplify the process of collecting this information, a treasury single account was recommended in such countries as Albania, Croatia, Democratic Republic of the Congo, Kosovo, Liberia, and Serbia and Montenegro. It was envisaged that all government revenues and expenditures would flow through this account, and that over time it would allow for better cash management by consolidating cash resources in a single account.

In some countries, such an account already existed, but was not comprehensive. In such situations, such as in the Democratic Republic of the Congo, the approach was to gradually integrate revenue and expenditure flows that were outside of the treasury single account. In other cases, such as Afghanistan, where spending agencies held literally hundreds of different accounts in commercial banks, the approach was to gradually consolidate these accounts into the treasury single account.

The recommended route for establishing the second public expenditure management objective—a meaningful accounting framework—varied according to country circumstances. In countries such as Afghanistan, the existing accounting structure was reasonably compatible with acceptable international standards, and thus could be used in the initial phases of the post-conflict period. However, this was not the case in other countries such as Albania, Cambodia, Croatia, and the Democratic Republic of the Congo. In newly created countries such as Timor-Leste, no accounting structure even existed. There was thus the need to introduce a simple classification system based on administrative units and core functions (such as health, education, security), a few broad economic items (such as wages and salaries, goods and services, and capital expenditures), and a funds/projects classification to facilitate the tracking of funds from different donors. Such a classification system provided for streamlining and simplifying budget documentation and thereby promoted fiscal transparency. In addition, a unified reporting format also was developed in these countries (an example was Serbia and Montenegro) to facilitate timely and transparent reporting of fiscal operations to both the government and donors.

Following the establishment of a basic public expenditure management system, additional steps were recommended to strengthen budget execution. Improved cash flow planning was seen as essential to improving budget management in Bosnia and Herzegovina, Cambodia, Croatia, Serbia and Montenegro, and West Bank and Gaza. A system to control spending at the commitment stage was also recommended. In some countries, such as Serbia and Montenegro, early implementation of commitment control was recommended to contain growing arrears. In others, such as Albania and Croatia, this was a medium-term priority. In Rwanda and the Democratic Republic of the Congo, where a commitment control system already existed, it was recommended that the system be strengthened. A basic computerized system to process checks, record information, and produce timely fiscal reports was recommended for Afghanistan, while in Timor-Leste, computerization was viewed as feasible only for central offices, with branch offices continuing to use manual procedures.10 Further improvements in expenditure procedures were also recommended, but for the later phases of the reconstruction process. These involved reinforcing the administrative and technical capacity of the line ministries and implementing more advanced training programs, usually with donor financing. Other priorities included drafting manuals on budget preparation and expenditure authorization procedures, as was done in Rwanda. Over time, it was envisaged that a clear set of procedures for the monitoring and control of spending would also be developed and disseminated to all relevant government agencies.

The gradual development and strengthening of auditing capacity, together with the establishment of a code of fiscal conduct, was recommended as a way to limit corruption, waste, and misappropriation of public resources. In Rwanda, the IMF recommended a review of the adequacy of financial controls and greater clarity of responsibilities of the auditor general’s office. In Serbia and Montenegro, it was proposed that the jurisdiction of the national audit office be extended to all public spending agencies.


In several postconflict countries—including Afghanistan, Albania, Liberia, Mozambique, Rwanda, Tajikistan, and Timor-Leste—the IMF’s Legal Department provided substantial assistance in drafting these laws.


This tax had accounted for less than 2 percent of the Republic of Serbia’s revenue, and yet the law prescribed burdensome procedures for its administration. Revenue agencies had to annually adjust the taxable value of 1.6 million properties based on information collected from 160 counties on sales of new buildings.


The existing legal framework required further delineation of revenue and expenditure allocations for the new layers of government envisioned under the authorities’ fiscal decentralization plans. Legislative amendments were also required to strengthen the authority of the ministry of finance for fiscal management and provide the basis for a modernized treasury.


The IMF typically has not provided assistance for institution building at the subnational levels. This task has been undertaken by other multilateral institutions and donors. In the Democratic Republic of the Congo, the World Bank provided advice on strengthening fiscal management capacity at the provincial level. The World Bank also has capacity-building projects aimed at local levels of government in Bosnia and Herzegovina. The U.S. Agency for International Development has provided assistance to Bosnia and Herzegovina for strengthening local public sector accounting.


Advice on expenditure priorities in postconflict countries has been provided by other development partners, and thus is not reviewed here. In a number of cases (e.g., Cambodia, Democratic Republic of the Congo, Lebanon, Rwanda, Sierra Leone, Tajikistan, Timor-Leste, and Yemen), the World Bank provided advice on expenditure composition in the context of a public expenditure review.


This represented a radical departure from existing practices for some countries. In Afghanistan, for example, where trade taxes accounted for up to 70 percent of total tax revenue, tariff rates had ranged from 7 to 150 percent and were allocated across 888 tariff headings.


Nontax revenues, such as timber royalties and other fees in the case of Cambodia, can also serve as new sources of revenue in the postconflict period.


In Timor-Leste, for example, it was recommended that a rudimentary budgetary circular be prepared to provide key assumptions on such areas as staffing in order for the spending departments to submit their budget requests.


Lags in fiscal reporting were also a concern, even in the post-conflict period. For a period of more than six months in Afghanistan, for example, the treasury did not receive any cash transfers from about half of the provincial tax collection agencies.


In most countries, full computerization of the treasury ledger and payments system was viewed as a medium- rather than a short-term objective.

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