The purpose of this mission was to assist the General Directorate of Taxes (GDT) in taking stock of reform efforts and provide advice on future efforts. In recent years, the GDT made solid progress in realizing its reform agenda. The mission took stock of the reform achievements and identifies areas which require further improvement.
Mr. Nadeem Ilahi, Mrs. Armine Khachatryan, William Lindquist, Ms. Nhu Nguyen, Ms. Faezeh Raei, and Jesmin Rahman
In the past 25 years, exports have contributed strongly to growth and economic convergence in many small open economies. However, the Western Balkan (WB) region, consisting of small emerging market economies, has not fully availed itself of this driver of growth and convergence. A lack of openness, reliance on low value products, and weak competitiveness largely explain the insignificant role of trade and exports in the region’s economic performance. This paper focuses on how the countries in the WB could lift exports through stronger integration with global value chains (GVCs) and broadening of services exports.
The experience of countries that joined the European Union in or after 2004 shows that participation in GVCs can help small economies accelerate export and income growth. WB countries are not well integrated into Europe’s vibrant GVCs. Trade within the region is also limited—it tends to be bilateral and not cluster-like. Our analysis shows that by improving infrastructure and labor skills and adopting trade policies that ensure investor protection and harmonize regulations and legal provisions, the region can greatly enhance its engagement with GVCs.
Services exports are an increasingly important part of global trade, and they offer an untapped source of growth. The magnitude of services exports from the WB region compares favorably with that of peers in Europe, particularly in travel services where several of these countries have a revealed comparative advantage. But there is significant room for growth in tourism exports and an untapped potential in business and information technology services exports that these countries can materialize through policy efforts that increase openness and enhance connectivity and labor skills. Serbia offers a good example of how decisive efforts, including education policies to ensure a sustained supply of skilled labor, can help information technology services exports to take off.
International Monetary Fund. Western Hemisphere Dept.
This Selected Issues paper looks at revenue mobilization efforts in Honduras. The country has made considerable progress over the last years, helping to stabilize its fiscal position. Although tax revenue collection ratios in Honduras are high, the statutory rates are aligned with regional peers. A formal benchmarking exercise supports the evidence pointing to Honduras’s relatively good collection performance. The authorities’ future revenue mobilization strategy should prioritize reforms aiming at increasing efficiency and compliance. The cost-benefit assessment of existing tax exemptions in terms of their policy objectives may offer guiding principles to prioritize reforms going forward. Compared to peers, statutory tax rates are similar and tax collection ratios are generally higher—a benchmarking exercise suggests that the current revenue envelope is close to its frontier. Going forward, there is a need to sustain revenue mobilization efforts, which will be instrumental to maintaining a sound fiscal position, reducing the infrastructure gap, and increasing social spending. Rationalizing large tax expenditures could contribute to these efforts.
This Technical Assistance Report discusses several tax administration issues and high-level recommendations for the reform agenda. The General Directorate of Taxes (GDT) continues to make good progress in modernizing its administration of the taxation system. A program to consolidate some core functions into fewer regional locations, beginning with the arrears collection function, should be accelerated. The GDT’s increased use of electronic services and telephone contact centers reduces the need for face-to-face contact with taxpayers. The GDT must have access to a broader range of third-party information, and data-warehouse facilities to manage the risk assessment with automated analytical tools. There are some positive developments in the audit function; however, further capacity building is necessary. A new comprehensive desk audit manual has been developed, which will help to standardize operations and provide more appropriate case allocation based on auditor experience and skills.
KEY ISSUES Background: On February 28, the Executive Board approved a three-year Extended Arrangement with access of SDR 295.42 million (492.4 percent of quota). A purchase of SDR 23.55 million (about EUR 26.4 million) was made in April 2014, and another will be made in the same amount upon completion of the first review. Recent Economic Developments: Growth in 2013 was the lowest in more than 15 years. The economy is showing tentative signs of recovery, but remains below potential. Successive monetary easing has not prevented credit contraction. The banking system remains stable, but asset quality is a concern. Program Performance and Risks: The program is on track. All end-March quantitative performance criteria and structural benchmarks were met, except for the structural benchmark on contracting an external auditor to conduct risk-based audits of arrears payments, which was not met but the government expects to complete in the coming weeks. An indicative target on accumulation of new arrears was not met although by a small margin and inflation has been slightly below the inner band prescribed under the inflation consultation clause. Program risks emanate from the complexity of reforms, particularly in electricity sector, and the need for sustained political commitment over the medium term. Policy Recommendations: No new fiscal measures will be needed in 2014, but the authorities should tackle emerging fiscal risks. Arrears clearance can be accelerated once external audits have progressed sufficiently. Addressing high NPLs will require continued efforts to clean bank and private sector balance sheets. Preparatory work related to the 2015 budget and structural reforms should start soon.
This Selected Issues paper on the Republic of Kosovo’s 2013 Article IV Consultation highlights growth and Kosovo’s external environment. In the wake of the global financial crisis, Kosovo’s economic growth slowed but remained positive, while most other Western Balkans slipped into recession. Moreover, the annual average growth rate has been among the highest in the Western Balkans since the onset of the financial crisis in 2007. Kosovo’s tax-to-GDP ratio is comparable to the average of Southeastern Europe, although its tax system relies significantly more on indirect taxation—including a high share of trade taxes. Kosovo’s reliance on trade taxes may create budgetary pressures in the event of further trade liberalization.
This 2008 Article IV Consultation highlights that over the last decade, Albania’s macroeconomic performance has generally been strong and per capita GDP in U.S. dollar terms more than doubled. Strong fiscal policy, largely based on major improvements in tax administration, lowered public debt from 66 percent of GDP in 2001 to 53 percent in 2007. Risks to domestic and external stability have receded somewhat. Domestic credit growth, though still elevated, has decelerated from past highs. The authorities have adapted regulatory and supervisory regimes to keep abreast with the rapidly developing financial system.
The paper provides quantitative estimates of the impact of the European trade agreements on trade flows. It applies both static and dynamic panel estimation techniques. The results are useful to policymakers because new intra-European trade agreements are being negotiated. In the absence of a further expansion of the European Union, estimates of alternative policies may help to clarify the policy debate. The paper also illustrates that the performance of individual countries under the trade agreements can be explained in terms of their macroeconomic environment. The conclusions are likely to be relevant to the western Balkan countries and Ukraine.
This Selected Issues and Statistical Appendix paper examines the scope for improving the effectiveness of fiscal policy of Serbia and Montenegro in containing the persistently large external imbalance. The paper discusses the causes of the current problems and presents preliminary results of the projected finances of the Fund for Employees (FE). It suggests options for reducing the cost of pension outlays, and provides preliminary estimates of the impact of the authorities’ recent reform package on the FE finances. The paper also provides a description of the main parameters of the Serbian pension system.