Download Enhancing the Effectiveness of Fiscal Policy for Domestic Resource

Enhancing the Effectiveness of Fiscal Policy
for Domestic Resource Mobilization
Patrick N. Osakwe
Chief, Financing Development, UNECA
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OUTLINE OF PRESENTATION
 Background
 The Case for Domestic Resource
Mobilization
 Facts on Development Finance and
Resource Mobilization
 Fiscal Policy and the Financial crisis
 Improving Domestic Resource Mobilization
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I. Background
 There is a significant gap between domestic
savings and investment requirements in Africa
 Domestic and external resources are needed to
close this financing gap.
 The global financial crisis has led to the drying up
of external finance and rekindled interest in
boosting domestic resource mobilization as a
sustainable source of financing development.
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II. The Case for Domestic Resource
Mobilization
1. Domestic finance is less volatile than external
2.
3.
4.
5.
finance
It permits country ownership of development
policies and outcomes.
Reduces reliance on external flows and the risk of
the Dutch disease.
Creates incentives for more accountability and
transparency in use of public resources
Reduces vulnerability to revenue losses from
trade reforms
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III. Some Facts on Development Finance
and Resource Mobilization
 There are four key sources of development
finance in Africa




Domestic savings
Private capital flows
Foreign aid
Remittances
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Africa has made progress in Development Finance
In US Dollars (Billions)
2002
2003
2004
2005
2006
2007
Domestic revenue
137.6
168
209.8
267.6
321.6
366.9
Private flows
17.1
20.0
28.7
45.2
51.5
81.0
ODA
21.4
27.1
29.5
35.5
43.5
38.7
Remittances
12.9
15.6
19.5
22.3
27.2
38.0
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Savings ratios in Africa are low relative to developing country
average as well as domestic investment requirements
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Africa’s low aggregate savings ratio masks wide
differences in savings pattern across countries
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Latin America & Caribbean
East Asia & Pacific
Africa
Africa’s revenue performance is similar to those of
other developing regions
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Africa has also made progress in boosting tax
revenue
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There has been a significant decrease in the share of
trade taxes in domestic revenue
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IV. Fiscal Policy and the Financial Crisis
 Fiscal policy has short and long term functions
 Stabilization of the economy
 Increasing productive capacity
 Effective discharge of the short term function
requires a counter-cyclical fiscal policy.
 But fiscal policy in Africa has been pro-cyclical




Conditions imposed by international financial institutions
Financing tends to be pro-cyclical
Fiscal rules
Political economy reasons
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Fiscal Challenges from Financial Crisis
 Global slowdown has a negative effect on growth
and government revenue in Africa.
 Governments are under pressure to increase social
spending to cushion impact of shock on vulnerable
groups.
 There are concerns that the adoption of fiscal
stimulus packages as well as pressure to bail out
financial institutions in developed countries will
reduce ODA flows to Africa.
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Issues for Discussion
 How should fiscal policy respond to cyclical
fluctuations in economic activities?
 How can fiscal policy be used more effectively in
support of the development needs and priorities of
African countries?
 How can Africa deal with the fiscal challenges
posed by the global financial crisis?
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V. Improving Domestic Resource Mobilization
 Effective mobilization of domestic resources
in Africa requires progress in three critical
areas:
 Domestic revenue
 Private savings
 Enhancing role of ODA in domestic resource
mobilization
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1. Strengthening Domestic Revenue Mobilization
 African countries have made progress in increasing
domestic revenue. However, in several countries there is a
gap between tax capacity and tax revenues.
 Economic growth is a necessary condition for success in
revenue mobilization.
 Increases pool of taxpayers
 Requires structural change
 Improved fiscal policies are needed to boost revenue.
 Reduce tax exemptions and incentives to foreign investors
 Increase rates on immobile factors (land and property) and luxury
items
 Adopt gradual approach to trade reform to ensure that it does not
erode the fiscal base
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 Good governance is crucial for revenue
mobilization
 Increase efficiency and accountability in use of public


resources
Linking tax collection to service delivery and better public
financial management are needed
Eradicate tax havens and address issue of stolen assets
 Success in mobilizing revenue also requires
dealing with the external debt problem of Africa.
 High debt results in capital outflows and debt servicing
difficulties
 Increases vulnerability to external shocks with
consequences for output and revenue mobilization
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Issues for Discussion
 What are the channels through which fiscal policy affects
mobilization of domestic revenue in Africa?
 What should governments do to increase efficiency in use of
government revenue?
 How can African governments integrate into the multilateral
trading system without eroding their fiscal base?
 How can foreign investment be promoted without
jeopardizing domestic revenue mobilization objectives?
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2.
Boosting private savings
 Private sector has an important role in boosting domestic
savings in the region.
 But increasing private savings requires increasing capacity
of households and firms to generate income.
 Governments can affect this capacity through creating an
enabling environment for private sector development.
 Requires reducing cost of doing business
 Need for public investment in infrastructure
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 Boosting private sector savings requires building domestic
financial systems.
 Weak financial infrastructure
 Dominated by banks with a focus on short-term lending
 Financing of deposit insurance schemes will boost confidence
and encourage people to save in banks.
 Strengthening domestic financial systems also require:
 Market incentives to encourage banks to mobilize savings and


channel them into productive investment
Promotion of linkages between formal and informal financial
institutions
Rebuilding public financial institutions such as development
and agricultural banks
 Capital markets can play an important role in mobilizing savings
in the region. But African countries have not exploited this
potential .
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Obstacles to the use of capital markets for savings mobilization (% of
respondents to ECA survey)
Limited
Investment
Instruments
25.6%
Lack of Access to
Information
15.2%
M acroeconomic
Instability
8.0%
High M arket Risk
4.0%
Weak Cap ital
M arket
Infrastructure
23.2%
Poor Legal and
Regulatory
Framework
5.6%
Low Exp ected
Returns
9.6%
Corruption and
Governance
8.8%
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 Capital flight inhibits effective resource mobilization in Africa.
It manifests itself in two ways:
 Legal financial outflows in response to yield
differentials. Macroeconomic and political stability
as well as better governance and capital market
development can reduce this type of outflow.
 Off-shore movement of stolen public assets.
Dealing with this type of capital flight requires
better governance and law enforcement
 Microfinance institutions can also play an important role in
improving access of the poor to financial services and also
boost rural savings. There is the need for more efforts to
exploit this potential.
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Issues for Discussion
 What factors militate against effective mobilization
of private savings in Africa?
 How can capital markets contribute more effectively
to resource mobilization?
 What national and international policy actions are
needed to stem capital flight?
 How can African countries exploit the potential of
microfinance for domestic resource mobilization?
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3. Enhancing Role of ODA in Resource Mobilization
 In the long-run, domestic resource mobilization should be
the basis for financing growth and development.
 But Africa needs aid in the short to medium term.
Consequently, the key issue facing recipients and donors is
how to make aid more effective and ensure that it supports
the overall development goals of African countries.
 Aid is more likely to support long-run development
objectives of African countries if it is directed towards
boosting capacity for domestic resource mobilization
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 Why has aid not made a significant contribution to
domestic resource mobilization?
 Existing aid allocation mechanisms focus on closing a
financial gap-----Undermines incentives for tax
collection and savings.
 There has been a shift in aid allocation from economic
infrastructure and production to the social sectors with
implications for increasing productive capacity and
growth.
 Historically, ODA flows to Africa have financed more of
domestic consumption and capital outflows rather than
investment----which is an engine of growth.
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ODA finances more of capital outflows and consumption
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 Enhancing contribution of ODA to domestic
resource mobilization requires actions in four key
areas:
 Directing ODA to building capacities to mobilize
domestic savings
 Placing more emphasis on economic infrastructure
and public investments aimed at boosting productive
capacities.
 Management of the capital account when necessary.
 Donors adopting a matching-funds approach to aid
allocation
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Issues for Discussion
 What is the impact of foreign aid on
development financing in Africa?
 Should African countries have an explicit
strategy to exit aid-dependence?
 How can ODA be directed towards boosting
capacity for domestic resource mobilization
in Africa?
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THANK
YOU
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