D+C Newsletter

Dear visitors,

do you know our newsletter? It’ll keep you briefed on what we publish. Please register, and you will get it every month.

Thanks and best wishes,
the editorial team

Register

Budget support

Tax-induced independence

by Monika Hellstern

In brief

The revenue service has gained more bite: tax officers at work.

The revenue service has gained more bite: tax officers at work.

Fiscal reforms are making Mozambique less dependent on funding from international donors. The country is one of the poorest in the world.

Mozambique depends heavily on aid. One metical in public-sector spending consists of 40 cents aid and 60 cents domestic resources. Heminio Sueia, the director of Mozambique’s tax authority, takes a critical view: "The country has to live on what it produces. Mozambique’s tremendous dependence on foreign aid is unhealthy and risky."

Mozambique has been making progress towards fiscal independence, as Swiss consultant Richard Gerster points out in a recent publication. Five years ago, almost two thirds of the government’s budget was based on foreign aid. The ratio has been reversed because Mozambique is now generating more state revenues of its own.

Foreign aid is actually one of the reasons for this positive trend. Mozambique has been receiving budget support since 1996. The term means that several donors contribute funds to the national budget. Such donor spending is tied to the implementation of a jointly agreed agenda, the success of which is being evaluated systematically. In 2012, 19 donor governments contributed $ 449 million to Mozambique’s national budget. The sum makes up about 16 % of the budget. On top of that, budgets and programmes of line ministries get additional support from various international donors.

Currently, the country ranks 184 of 187 countries on UNDP’s Human Development Index. More than 35 years ago Mozambique gained independence from Portuguese colonial rule. Shortly afterwards, a decades-long civil war erupted, leading to an almost total collapse of the country’s economy and infrastructure. After a peace agreement in 1992, Mozambique became a democracy and a market economy.

Switzerland is a contributor to budget support and prioritised fiscal policy right from the start. Since 1996, it has insisted on tax and customs reforms that were designed to increase Mozambique’s domestic revenues. Denmark and Great Britain supported the measures too.

Today, Mozambique’s government collects about 22 % of the country’s GNP in taxes, customs et cetera. About 50 % of these revenues result from the value added tax, another 30 % from personal and corporate income taxes. The Swiss consultant assumes that this share will increase.

Efforts to broaden the tax base were particularly important, according to Gerster. In 2011 Mozambique had 1.8 million taxpayers. Gerster also appreciates the introduction of the value added tax (17 % flat rate with a special provision for basic needs), reforms of personal and corporate income taxes as well as institutional reforms and capacity building in the natio­nal revenue service. He points out that the Organisation for Economic Co-operation and Development (OECD) similarly considers Mozambique’s approach a success, for example in its reference book "Tax and development" of 2013.

Budget support, according to Gerster, has proven its worth in terms of im­proving Mozambique’s fiscal standing. Tax goals were defined in joint agreements, and progress was monitored diligently. Many governments of developing countries feel that such agreements interfere in their domestic affairs, and tax policy is indeed a key component of national sovereignty. In Mozambique’s policy dialogue with donors, this question mattered too, as Gerster reports.

Nothing succeeds like success, however, and the government is now planning to further increase its tax revenues. It wants to raise the share of state revenues to GNP at an annual rate of 0.5 %. Gerster reports that the International Monetary Fund assumes that the share of foreign aid to the government’s budget will continue to decrease, and Britain’s Department for International Development (DfID) reckons that Mozambique may become independent from foreign aid within 10 years.

Gerster notes, however, that economic growth has not yet translated into poverty reduction. The majority of Mozambicans living in rural areas is still extremely poor. The lesson is that fiscal progress as such does not directly reduce poverty.

Monika Hellstern