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CHART OF THE WEEKMission Impossible? Can Fragile States Increase Tax Revenues?

2020-09-25T10:04:09-04:00September 25, 2020|

By Bernardin Akitoby, Jiro Honda, and Keyra Primus

The COVID-19 shocks are proving to be especially challenging for fragile states. Pre-COVID, fiscal revenues were low in such countries and governments were struggling to raise them. Now, COVID-19 is hitting them hard and fiscal revenues are falling. Once the pandemic abates, restoring and further enhancing tax collection is even more important to secure debt sustainability, facilitate the post-COVID-19 recovery, and meet development financing needs in order to meet the Sustainable Development Goals. This is a formidable challenge. However, our new staff research finds that achieving sizable gains in tax collection in fragile environments is not “mission impossible.”

As our chart shows, four fragile states (Liberia, Malawi, Nepal, and Solomon Islands) achieved sizable increases in tax revenues over a decade—by between 7 and 20 percentage points of GDP. Most of these countries had introduced tax reforms when their tax revenues were far below the average for fragile states, but each went on to exceed the average, with Nepal and Solomon Islands doing so by a wide margin.

These experiences emphasize the importance of sustained tax reform efforts. In these cases, tax reforms were pursued over extended periods of time to achieve long-lasting, sizable gains. While this protracted approach may typically require political stability in order to ensure the continuity of tax reforms, it can also be achieved when administrations change, for example as we saw in Malawi.

These experiences also underscore the following lessons for tax revenue reforms in fragile states:

  • Two-handed approach. Ensuring stable tax revenue yields over time requires both well-designed tax systems and effective approaches to revenue administration. In Liberia and Nepal, we found that using multiple tax policy instruments helped to boost tax collection (for instance, reducing tax exemptions, raising excise taxes, and increasing the VAT threshold).
  • Potential source. Fairly targeting high potential sectors and areas—which should contribute significantly to tax revenues—can raise funds and promote fairness. Such sectors included the logging sector in the Solomon Islands and consumption (from large remittance receipts) in Nepal.
  • Quick and strategic. Taking immediate reform steps can address pressing needs and build momentum, while a medium-term strategy can help to properly sequence reform measures. The reform steps, with immediate effects, could include reforming indirect taxes on goods and services, curbing exemptions, establishing a Large Taxpayers Office, and enhancing risk-based audits.
  • Political commitment and international support. Sustained tax reform efforts over a long period requires strong political commitment supported by international partners. In the episodes we studied, tax reforms were often pursued with strong political will—for instance in facilitating coordination across agencies—while capacity building support from international partners also played a vital role. It is important to note, however, that political commitment is a necessary but not a sufficient condition for successful tax reform.

A “New Deal” for Informal Workers in Asia

2020-05-08T14:22:06-04:00April 30, 2020|

By Era Dabla-Norris and Changyong Rhee

عربي,  中文, Español, Français,日本語, Português, Русский

Full or partial lockdowns to curb the spread of COVID-19 are having crippling effects on businesses and workers across Asia, as elsewhere. Among the most vulnerable of the workers are the ones working in part-time and temporary jobs without social insurance, and in sectors of the economy that are neither taxed, nor regulated by any form of government.


Adil Mohommad

2019-05-23T12:40:14-04:00May 22, 2019|

Adil Mohommad is currently an Economist in the Research Department of the IMF. He has previously served as an economist on numerous IMF country teams including India, Australia, New Zealand, Nepal, Bhutan, and Tuvalu. His previous research includes topics in fiscal reforms, institutions and growth, labor markets, and trade. He holds a PhD in Economics from the University of Maryland and an M.A. in Economics from Delhi School of Economics, Delhi University (India).

Latest Posts:

Women in Finance: An Economic Case for Gender Equality

2019-03-13T14:25:03-04:00September 19, 2018|

By Martin Čihák and Ratna Sahay

September 19, 2018

 عربي中文EspañolFrançais, 日本語PortuguêsРусский

A group of women attend an event in Sao Paolo to promote women’s participation in the financial sector: women account for 51% of borrowers in Brazil (Sebastio Mareira/Newscom)

Women are underrepresented at all levels of the global financial system, from depositors and borrowers to bank board members and regulators. (more…)

Asia Needs More Access to Financial Services to Grow

2019-03-13T14:26:34-04:00September 18, 2018|

By  Sarwat Jahan, Elena LoukoianovaCormac Sullivan and Yongzheng Yang

September 18, 2018

中文, 日本語

A customer pays at a supermarket using her smartphone in Bangkok, Thailand: urban and rural areas in the region widely use mobile payment platforms to access financial services (photo: Li Mangmang Xinhua News Agency/Newscom)

In Asia, the world’s fastest-growing region, expanding access to financial services for more people will mean higher growth, as well as lower poverty and inequality. (more…)

Li Lin

2020-01-10T15:24:55-05:00August 8, 2018|

Li Lin is an economist in the Advanced Economies Unit in the IMF’s European Department, working on euro area macroeconomic outlook, inflation, and external sector issues. Previously she was a desk economist working on Romania (a program/intensive surveillance country) and an economist in the IMF’s Monetary and Capital Markets Department, where she worked on stress testing and systemic risk assessments for countries including Israel, Nepal, and South Africa. Li received her doctoral degree from the University of Oxford. Her research interest is in macro finance and she has published in journals including Economic Theory, Journal of Banking and Finance, Journal of Financial Stability, and Annals of Finance.

Latest posts:

Building Fiscal Institutions in Fragile States

2019-03-25T10:36:43-04:00August 9, 2017|

By Katherine Baer, Sanjeev Gupta, Mario Pessoa

August 9, 2017

Version in Français (French)

A porter in the market in Kathmandu, Nepal: the country increased their tax revenues in recent years with the help of technical assistance (photo: Navesh Chitrakar/Newscom)

Fragile states face more obstacles to growth than most countries.  Their per-capita GDP is less than half of most other low-income countries, and their economies are more volatile.  Many are in conflict or going through a natural disaster, or just emerging from these.  Our study is based on 39 countries, and since completed, the number of fragile states has increased to 43. 

To grow, a country needs tax policies and tax administration, laws and institutions to formulate and execute a budget, and trained staff to implement fiscal policies, among other factors.  Our preliminary results show that fragile states that have received technical assistance, also have improved their fiscal performance.


Stepping up the Fight Against Money Laundering and Terrorist Financing

2019-03-25T12:28:52-04:00July 26, 2017|

By Christine Lagarde

July 26, 2017

Versions in ربي (Arabic),  中文 (Chinese), Français (French), Русский (Russian), and Español (Spanish)

Money laundering and terrorist financing threaten economic stability. International cooperation is vital in the fight against misuse of the financial system (photo: CraigRJD/iStock by Getty Images)

Corrupt officials, tax cheats, and the financial backers of terrorism have one thing in common: they often exploit vulnerabilities in financial systems to facilitate their crimes.

Money laundering and terrorist financing can threaten a country’s economic and financial stability while funding violent and illegal acts. That is why many governments have stepped up the fight against such practices, helped by international institutions such as the IMF.


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