Dealing with the Revenue Consequences of Trade Reform (SM/05/57, Supplement 2), prepared by the Fiscal Affairs Department.
By region, the 34 countries were: (1) Africa: Benin, Burkina Faso, Cameroon, Côte d’Ivoire, Ethiopia, Mali, Mozambique, Tanzania, and Zambia; (2) Asia and Pacific: Indonesia, Korea, Mongolia, Philippines, and Thailand; (3) Europe: Albania, Bulgaria, Moldova, Russian Federation, and Ukraine; (4) Middle East and Central Asia: Egypt, Jordan, Kazakhstan, Kyrgyz Republic, Mauritania, Pakistan, and Yemen; (5) Western Hemisphere: Argentina, Bolivia, Brazil, Guyana, Haiti, Mexico, Panama, and Peru.
There is scope for overlap in motivations. A single measure on tariff reform, for example, can help to streamline administration, improve governance (by eliminating room for misvaluation), and improve revenue. A single measure might thus be assigned multiple motivations. This is reflected in Figure 1.
This was the case for both members’ statements of policy intentions and conditionality for disbursements of Fund resources under an arrangement.
The thrust of customs reform was typically to increase trade tax revenues by increasing trade volume and better controlling exemptions. Where objectives were made explicit in staff reports, such revenue considerations were important motives in 53 percent of cases over the 1990-2004 period, economic efficiency and streamlining in 58 percent, and governance in 22 percent of cases.
These observations on sequencing are taken from Trade Liberalization in Fund-Supported Programs, World Economic and Financial Surveys, 1998
If general commitments in letters of intent are included, the percentage is significantly higher.
The nine countries in the review that had trade measures motivated by governance considerations scored worse on the World Bank’s corruption index than those that did not (-0.71 compared with -0.49, on a scale of -2.5 to +2.5).
Other reasons cited for trade measures included helping the poor, addressing domestic emergencies, and fostering regional integration—examples include Zambia’s plan to remove the duty on mosquito nets to help poor segments of the population deal with the malaria situation (1999/2000 ESAF), and regional trade commitments cited by several African and Latin American countries.
For example, in Egypt’s Stand-By Arrangement-supported program that commenced in mid-1991, the government announced its intention to remove virtually all nontariff import barriers over two years, reduce tariffs in stages and reduce export quotas; such commitments to comprehensive reform also formed part of the follow-up programs supported by an EFF and another Stand-By Arrangement.
In certain cases, programs envisaged temporary increases in import taxes—e.g., in Thailand’s 1997/2000 Stand-By Arrangement-supported program, where the authorities explained the need to increase import surcharges for fiscal reasons, while committing to reverse this increase when possible.
Exceptions include Egypt’s 1991/93 program, and Korea‘s in 1997/2000.
Conditionality, which is linked with Fund disbursements, can take the form of prior actions, performance criteria, structural benchmarks, and review clauses.
Very few countries (Egypt, Jordan, and Pakistan) had programs with trade conditionality which did not include structural benchmarks.
Programs with Egypt, Guyana, Mauritania, Moldova, Russia, Ukraine, and Yemen had five or more prior actions on trade.
Includes measures related to duty drawbacks, administrative reform, exemptions, and reference pricing.
Jordan and Peru were unusual in the sample in both having three consecutive EFFs.
Comparisons of the restrictiveness of trade regimes (using the Fund’s TRI) of the countries in these two regions show them to be relatively similar and less restrictive than the reviewed countries in Middle East, North Africa, and Central Asia and sub-Saharan Africa but more restrictive than European countries.
See separate companion paper for a discussion of the qualities and shortcomings of the TRI (Review of the IMF’s Trade Restrictiveness Index, SM/05/57).
The notion of “conditionality” here relates only to those measures captured in the Fund’s trade restrictiveness index - those related to tariffs, and such non-tariff measures as licensing requirements, quotas, or state trading. The actual year of incidence (the program year in which the measure occurred) is estimated.
An area yet to be fully examined is the extent to which there is interaction between Fund conditionality on trade measures and trade commitments under regional trade arrangements. One key question would relate to whether commitments to RTAs had a significant impact on Fund conditionality, while another issue would be the extent to which participation in RTAs affected country’s implementation of Fund trade-related conditionality.
A performance criterion and structural benchmark in the successor ESAF-supported program also required observance of the CARICOM tariff reduction schedule.
In some countries’ program documentation, e.g., Mexico’s 1995-97 Stand-By Arrangement-supported program, there was awareness of the potential trade-diverting effects of RTAs and the desirability of reducing tariffs on imports from nonpartner countries.
The reforms, supported by an Economic Recovery Credit from the World Bank, entailed elimination of import licensing, replacement of import bans with tariffs and substitution of a 15-band with a 4-band tariff structure.
Of the five EFF-supported programs still active during 2001-04, only one (Jordan’s 1999-02 EFF) included a measure that actually fell within this period. The review examined programs and assigned conditionality to the year the program was initiated; Jordan’s measure therefore does not appear in Table 3.
The differences in sample countries selected, measures included, and definitions of “trade-related” conditionality make a direct comparison between the two data sets impossible. However, the sharper decline in trade conditionality relative to all forms of conditionality supports the view that other factors besides streamlining (such as independent liberalization, the Doha Round, and the possible focus of reform efforts on addressing other economic challenges) may have contributed to the recent decline in trade conditionality.
Note that Figure 5 records measures in the year the program was initiated, rather than when the measure was actually monitored/implemented.
Another recent, albeit less frequent, development is the use of antidumping measures by developing countries.
For example, structural benchmarks in Moldova’s EFF-supported program of 1996-2000 included submission of legislation to restrict free economic zones to export-oriented production and transshipment, and in Yemen’s EFF-supported program (1997-2000) the preparation of an action plan to develop the appropriate legal, regulatory and judicial framework for a free trade zone. The need to limit fiscal leakage from such free zones has been a consistent concern within the Fund.
The average trade restrictiveness rating (as defined by the Fund’s trade restrictiveness index) for each major subregion of the 34 countries surveyed declined as follows between 1995-2000 and 2001-04: Sub-Saharan Africa, from 5.7 to 3.9; Asia and Pacific, from 4.2 to 3.9; Europe, from 4.0 to 2.7; Middle East, North Africa and Central Asia, from 5.5 to 3.8; and Western Hemisphere, from 4.0 to 3.3.
There would have been 36 tariff or NTB conditions (rather than 9) in the 90 Fund-supported programs during 2001-04 if the relative frequency of programs in countries with restrictive and less restrictive trade regimes had remained constant.
Guidelines on Conditionality, Dec. No. 12864-(02/102), Sept. 25, 2002.
The implementation index was devised as part of the forthcoming review of the 2002 conditionality guidelines. The index assigns a weight of 2 to measures implemented on time, 1 to measures implemented late or rescheduled, and 0 to measures not implemented.
In Jordan’s 1999-02 EFF-supported program, implementation of a performance criterion related to the reduction in the maximum tariff was late because of a delay in the issuance of a royal decree enacting the required legal amendment. In Mauritania’s ESAF-supported program of 1995-98 the announcement of the details of the initial phase of trade reform had to await conclusion of a background study. Administrative problems also occasionally caused slippages in the timing of customs reform.
During negotiations of Fund-supported programs, the pace of trade reforms was sometimes modified to take into account fiscal considerations—the “revenue adjusted” pace of tariff reform was then somewhat slower than otherwise.