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)| false Abed, George T., Liam Ebrill, Sanjeev Gupta, Benedict Clements, Ronald McMorran, Anthony Pellechio, Jerald Schiff, and Marijn Verhoeven, 1998, Fiscal Reforms in Low-Income Countries: Experience Under IMF-Supported Programs, IMF Occasional Paper No. 160 ( Washington: International Monetary Fund).
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This paper is based on the author’s presentation given at the “Middle East Economic Forum” held in Marrakesh during the period May 15-17, 1997. I wish to thank A.M. Abdelrahman, Adrienne Cheasty, Liam Ebrill, Julio Escolano, Reint Gropp, Janet Stotsky, and staff of the Middle Eastern Department for helpful comments and suggestions and A. WoldeMariam for valuable research assistance.
This refers to the tendency for trade and investment flows from third countries to become even more concentrated in the EU as a way of accessing individual markets in the SMR; this is partly because of weak economic links among the SMR states themselves but also because the EU has pursued separate agreements with each of the SMR countries.
SMR countries have expressed concern that the narrow application of the rules of origin does not encourage regional integration nor does it take into account certain “special trade relations” in the region. For example, Lebanon, which, despite having very close trade relations with Syria, may not, according to the EU, claim as “local content” any inputs imported from Syria; however, for members of the Arab Maghreb Union (Algeria, Libya, Morocco, and Tunisia), intra-Union trade of inputs may be so claimed.
It is worth noting that trade liberalization does not necessarily imply revenue loss. Forexample, starting from a highly restrictive trade regime, certain trade liberalization measures (e.g., the tariffication of quantitative restriction and reductions in excessively high tariff rates, which may have encouraged evasion) could initially lead to higher tariff receipts. However, most SMR countries are liberalizing from moderate protection levels and tariff reductions therefore imply the loss of revenue for most countries in the region.
Excises and VAT on imports, where applicable, are also collected at customs, the latter being normally assessed on a tax base that includes tariffs. To the extent that tariffs are eliminated, VAT assessments and collections at customs would also be expected to decline.
When measured in relation to GDP, the revenue losses would be highest for Lebanon and Tunisia, the latter mainly because of its relatively high ratios of tax revenue-to-GDP and EU imports to total imports.
See Devarajan and others (1997), for a fuller analysis of the main direct and indirect revenue effects. For a more comprehensive treatment of the revenue impact of trade liberalization, see Ebrill, Stotsky, and Gropp (forthcoming).
Rutherford did not measure the revenue loss directly but took it to be equivalent to the additional VAT collections that would be needed to restore revenue neutrality.
This assumption may not be as unrealistic as it first appears. Since 1976, trade between Tunisia and the EU countries has been progressively liberalized and the ratio of imports from these countries to total imports has remained in the range of 65–75 percent through 1995, with an average of 70.3 percent. A similar trend has also been observed for Morocco and to a somewhat lesser extent for Algeria.
Other features of Lebanon’s economy and the terms of its agreement under discussion with the EU also make the gains from a closer trade association with the EU appear relatively less attractive. See Martin (1996).
Non-tax revenue can still be an important component of a reformed tax system. For example, the user fees that would result from the appropriate commercialization of the supply of government services in areas such as health and education would count as non-tax revenue. Moreover, profits realized by parastatals in a perfectly competitive market environment could also be considered a durable source of revenue, although such cases are likely to be rare. Of course, in countries rich in energy resources such as Algeria and Libya, non-tax revenue is likely to remain significant for some time.
These are expected to be phased out beginning in June 1998, when Morocco applies the terms of the World Trade Organization.
It should be noted that some exemptions are legal and represent common practice (e.g. diplomatic franchise, imports by non-governmental organizations); some are either unnecessary or economically inefficient, even when legal (e.g. targeted investment incentives), and in these cases, revenue losses can be reversed by amending existing legislation. However, some revenue losses due to exemptions represent abuse of privilege or outright fraud.
In a recent IMF staff study, a 10-point index of trade liberalization was computed for 27 developing countries combining the effects of import tariffs and nontariff barriers (NTBs). Five classifications of import tariffs and three classifications of NTBs were used to construct the index, with the most open import tariff and NTB regimes assigned a “1”, the most restrictive a “10” (see IMF (1998), Annex I).
The average expenditure ratio in the SMR countries (excluding Israel) during 1994-96 was 31.2 percent, compared to 30.5 percent for the OECD countries and 18.9 percent and 28.1 percent for non-OECD Asian and African countries, respectively.