IMF and CEF Strengthening Cooperation on Fiscal Management in South East Europe

Posted by Brian Olden and Norman Gillanders

Given the challenging international economic environment, the IMF and the Center of Excellence in Finance (CEF),

Working with the CEF - Why it makes sense

In 2011 the IMF’s regional PFM and Revenue Administration advisors, located at the CEF in Ljubljana, had a mixed agenda with a number of requests to assist with specific weaknesses in institutional or management capacity that the economic crisis has highlighted, coupled with ongoing reform agendas to strengthen institutional capacity over the longer term. Technical assistance was delivered through a mixture of short individual missions, longer missions with teams bolstered by IMF headquarters staff and regional experts, targeted short-term experts visits and ad hoc desk-based research and reviews. A significant segment of the work also consisted of identifying training needs in the SEE region and, in close cooperation with the CEF, delivering workshops and seminars. This combination of CEF training and IMF technical assistance creates synergies and increases the impact of capacity development efforts in CEF member countries.[2]

Highlights of technical assistance in 2011

Public Financial Management

In 2011 the biggest challenges related to addressing immediate needs, while ensuring that the medium-term focus of regional reform programs was not neglected. In public financial management priority capacity development initiatives were, inter alia, targeted to strengthen fiscal discipline and help facilitate fiscal consolidation. More immediate technical assistance demands focused on management and reduction in payment arrears, improved fiscal reporting and control over expenditure at the central and local government level, and meeting immediate requests to strengthen cash and debt management operations. Technical assistance to tackle longer-term reforms emphasized improvements in medium-term budget frameworks, strengthening independent fiscal oversight, introduction of fiscal rules and enhancing the performance orientation of budget processes. Strengthening debt management offices’ institutional capacity was also a key activity in 2011. Countries experienced ongoing problems with financing government operations due to reduced investor appetite for domestic government bonds, ongoing repricing of risk and the continuing high yields being demanded for sovereign debt in the international capital markets. Revising medium-term debt management strategies to take account of this more challenging environment has been a significant area of provided TA.

Revenue Administration

Similarly, on the tax side, efforts to implement the IMF’s technical assistance strategy to strengthen tax administrations in Southeast Europe have been accompanied by short term efforts to bolster revenue to mitigate the impact of the economic crisis. Reform efforts aim at aligning tax administrations in the region with good international practices across key components of tax administration, including management, organization, and businesses processes. A major focus of the strategy, which involves a number of TA delivery tools (headquarter based missions, long and short term advisors, and training activities), is to facilitate the tax agencies in implementing modern, risk-based approaches to compliance management, which are also being promoted by the EU and the OECD. The emphasis is on segmenting the taxpayer base into discrete risk categories, devising standard risk treatments for each category and treating the least compliant cases first. The revenue administration advisor’s work on managing large taxpayers and the creation of specialist units for managing high worth individuals have supported the risk segmentation strategy. The IMF’s advice on these themes is increasingly reflected in annual compliance plans of regional revenue administrations and in their multi-annual strategies. Significantly, segmented and risk-based approaches to revenue administration, when fully adopted, reduce the level of intrusion into largely tax compliant businesses, greatly improving the business climate and reducing costs of administration for tax agencies and businesses.

Further capacity development - Where do we see demand in the short to medium term

While there has been a noted increase in regional commitment to reforms in both PFM and revenue administration, further capacity development will be necessary to ensure fiscal sustainability in economies in the region over the longer term. Scarce resources need to be managed more efficiently and expenditure prioritization and revenue mobilization efforts will need to be significantly improved in an environment where the requirement to “do more with less” is likely to become an increasing reality, if economic growth remains sluggish. On the PFM side, there is a need to further strengthen medium-term budgeting and to turn attention towards meaningful introduction of performance-oriented budgeting systems that focus on achievement of outputs and outcomes rather than the management of inputs. Further development of accounting policies should also be considered to improve fiscal reporting and increase the level of transparency of government operations, while internal and external audit capacity also needs to be further improved. Recent surveys in the region indicate that more work is needed in establishing independent and parliamentary oversight of fiscal policy design and implementation, while identification and monitoring of fiscal risks also needs considerable attention.

On the revenue mobilization side, short-term efforts are needed to improve the quality of the tax register and to improve the levels of timely tax filing and payment; these improvements are essential building blocks for long-term reform of tax administration. Generally, these reforms are hampered by current inadequacies in underlying information technology. Modern tax administration cannot function properly without the data integration, risk analysis and streamlined processes that modern IT systems support. Most regional administrations are moving towards better IT, with World Bank and IMF support.

Creating government revenue and expenditure systems that are efficient, transparent and responsive to their citizens’ needs is a worthwhile objective. Most of the countries in the region have made good progress in this area but the road is long and there are many more obstacles to overcome before it will be possible to say that public financial management and revenue systems in South East Europe can compete with good international practice. Hopefully, the resolve to continue the reform process will continue in 2012 and beyond. The journey will not be smooth-public sector reform is never easy-but the citizens of the region deserve it and will increasingly demand it.

The activities by the two IMF advisors based in Ljubljana have, since May 2010, been financed by the generous support of the government of Japan for the IMF’s program for strengthening fiscal management for South East Europe.