EU support to help countries in sub-Saharan Africa generate more domestic revenue is not yet effective because of weaknesses in the way it is implemented, according to a new report from the European Court of Auditors (ECA). The auditors found room for improvement in the design of support operations, the conditions attached to payments and the policy dialogue with the countries concerned.
Mark Rogerson, Wednesday, March 2, 2017
Generating government revenue from domestic tax or other sources (“domestic revenue mobilisation”) is crucial for sustainable development; as such, it has become a priority of EU development policy. The EU supports revenue mobilisation in a variety of ways, including budget support. Between 2012 and April 2016, this support totalled €4.9 billion, of which €1.7 billion went to sub-Saharan Africa.
The auditors examined the European Commission’s use of budget support contracts to support revenue mobilisation in nine low- and lower-middle-income countries in sub-Saharan Africa: Cape Verde, the Central African Republic, Mali, Mauritania, Mozambique, Niger, Rwanda, Senegal and Sierra Leone . They found that while the Commission’s approach led to better needs assessment requirements, weaknesses in implementation prevented the support contracts’ potential from being fully exploited and the Commission had not used them effectively.
“Domestic revenue mobilisation is a priority for the international development community,” said Danièle Lamarque, the Member of the European Court of Auditors responsible for the report. “But the EU’s support is being undermined by design and implementation weaknesses and challenging local circumstances.”
The Commission gave insufficient consideration to revenue mobilisation when designing its budget support operations, say the auditors. While it carried out systematic assessments of countries’ revenue policies and administration in coordination with other donors, these assessments were not always comprehensive: they did not cover some essential aspects of each country’s fiscal policy and administration, while key risks relating to tax exemptions and collection and revenues from natural resources were not evaluated.
The Commission made the disbursement of budget support funds conditional on specific reforms in only five of the 15 contracts audited. The conditions did not always promote reforms effectively, as they had already been achieved, were too easily achievable or unenforceable. Insufficient use was made of revenue mobilisation conditions in all types of budget support contracts.
One of the core elements of budget support is policy dialogue between the Commission and the countries concerned, which should, according to the Commission itself, focus on domestic revenue issues. A dialogue strategy with clearly listed objectives is essential to track progress and issues of significant importance. However, no such strategy was ever developed, even in countries where the Commission had identified specific domestic revenue issues to be tackled. This made monitoring results much more difficult. The audited EU budget support contracts included very little funding to address capacity needs, despite this being crucial in order to ensure effective revenue mobilisation in sub-Saharan Africa. Finally, the audit revealed a lack of appropriate monitoring tools to provide evidence that EU budget support had contributed to improving the mobilisation of domestic revenue. The auditors recommend that the Commission:
• strengthen domestic revenue mobilisation assessments and risk analysis;
• take greater account of domestic revenue mobilisation when setting up specific disbursement conditions;
• strengthen reporting on the use of budget support to improve domestic revenue mobilisation;
• strengthen the policy dialogue in this area;
• strengthen the use of capacity development for domestic revenue mobilisation;
• better evaluate how budget support operations could have contributed to improve the mobilisation of domestic resources.
Notes to Editors
Increased domestic revenue mobilisation reduces dependence on development aid, leads to improvements in public governance (since taxpayers tend to hold their governments accountable) and is central to state-building.
Yet developing countries, especially low- and lower-middle-income economies, face significant challenges in revenue mobilisation. Their tax-to-GDP ratios range from 10 to 20 %, compared with 25 to 40 % in developed countries. They face particular challenges that affect the feasibility of raising taxes and other revenue: widespread poverty and illiteracy, hard-to-tax groups in subsistence agriculture and the informal sector, problematic accounting in the private sector, deficient rule of law, a high incidence of corruption and weak administrative capacity.
Special Report No 35/2016 “The use of budget support to improve domestic revenue mobilisation in sub-Saharan Africa” is available on eca.europa.eu in 23 EU languages.