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Rebuilding Fiscal Institutions in Post-Conflict Countries

Author: B Clements and S Tareq
Date: 2004
Size: 24 pages (187 KB)

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Summary

What macroeconomic and fiscal challenges do post-conflict societies face? What economic and political reforms should governments undertake to reconstruct their tax and budgetary systems following conflict? This paper from the IMF Fiscal Affairs Department reviews advice given to post-conflict governments by the IMF to identify general strategies for re-establishing fiscal operations. It argues that post-conflict governments should introduce legal frameworks, a fiscal authority, simple tax policies and a transparent expenditure administration to strengthen fiscal institutions and promote economic recovery.

Reconstructing political, legal and socio-economic institutions is crucial to the promotion of economic growth and sustainable peace in societies damaged by conflict. The macroeconomic challenges in the 13 countries surveyed, which were severe before their respective conflicts, intensified during hostilities.

Among these challenges, fiscal deficits were a particular concern. Increased defence spending and loss of revenue during conflicts resulted in higher fiscal deficits, which contributed to significant inflation rises. Four years after the conflict ended, economic growth had resumed and budget deficits had fallen, but high inflation remained and neither GDP nor revenues had returned to their pre-conflict levels.

Several findings are made on post-conflict institution-building:

• Post-conflict societies are poor at using international aid for poverty reduction: development partners should assist post-conflict countries in strengthening administrative structures to absorb large aid inflows.
• To restore their capacity for fiscal management, post-conflict governments may need support in introducing a new currency or central bank, or in budget formulation, implementation and reporting.
• By prioritising the rebuilding of tax and customs systems, incorporating good governance, transparency, a strong judiciary and macroeconomic management, governments generate resources to “jump-start” the economy.
• Institution building and sound economic policies reinforce each other and reduce the risk for future conflict. By diversifying the economy and sharing resources transparently among the population, the likelihood of hostilities restarting is reduced.
• Good institutions and economic policies attract much-needed foreign investment to support recovery and peace building.

The general approach to rebuilding fiscal institutions incorporates three steps: the establishment of a legal framework, the creation of a central fiscal authority and changes in fiscal policies:

• A unified package of basic customs and tax law is an immediate concern for post-conflict governments. The re-establishment of the government’s authority to collect taxes and make budgets is central to the restoration of the rule of law. The initial simplicity of the legal framework promotes local ownership as its details are developed over time.
• The establishment or strengthening of a simply constituted central fiscal authority is essential for macro fiscal management. It ensures transparency, accountability and consistency of fiscal decisions in line with government priorities, facilitating revenue collection and reassuring donors.
• Governments should undertake a range of reforms on tax policy and administration and expenditure management. Indirect taxes on imports and exports are easier to administer, but inefficient: simple corporate and income taxes could be implemented. Fiscal administration could be underpinned by better infrastructure support, new tax registration, assessment and audit schemes and improved information on government financial flows.

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Source: Gupta, S., et al., 2004, ‘Rebuilding fiscal institutions in post-conflict countries’, Fiscal Affairs Department, International Monetary Fund, Washington
Author: International Monetary Fund, http://www.imf.org