CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE SEC O N D E D I T I O N Strengthening Domestic Revenue Mobilization to Sustain Growth in a Fragile State NOVEMBER 2019 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE SEC O N D E D I T I O N Strengthening Domestic Revenue Mobilization to Sustain Growth in a Fragile State NOVEMBER 2019 i CONTENTS Acronyms and Abbreviations iii Acknowledgments iv Key Messages 1 1 Recent Economic Developments and 4 Outlooks 1.1 Recent economic developments 6 1.1.1 A fragile security situation slowed CAR’s economic 6 growth in 2018 1.1.2 The CEMAC monetary policy needs to remain on track 9 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE 1.1.3 Fiscal discipline needs to be maintained 10 1.1.4 The external position is weak 14 1.2 Economic outlook and risks 16 2 Strengthening Domestic Revenue 20 Mobilization in a Fragile State 2.1 Status of the tax system 22 2.1.1 Tax instruments 24 2.1.2 Non-tax instruments 30 2.2 Why is domestic revenue mobilization so low in CAR? 32 2.2.1 Inefficient tax instruments 32 2.2.2 Weak tax administration effectiveness 36 2.2.3 A buoyant and complex informal sector 39 2.3 How can CAR boost domestic revenue? 40 2.3.1 Broaden the tax base 41 2.3.2 Strengthen the tax system 45 2.3.3 Establish a new social contract 48 2.3.4 Learn from peers 48 3 References 54 Photo by Wilfried Kouame ii 4 Technical Annex 56 ACRONYMS AND ABBREVIATIONS BEAC Regional Bank of Central African States (Banque des états de l’Afrique centrale) CAR Central African Republic CEMAC Central African Economic and Monetary Community (Communauté Économique et Monétaire de l’Afrique Centrale) CFAF African Financial Community Franc (Communauté Financière Africaine Franc) COBAC Central African Banking Commission (Commission Bancaire de l’Afrique Centrale) DDR Disarmament, Demobilization, and Reintegration DFID UK Department for International Development DGID General Directorate of Taxes and Land (Direction générale des impôts et des domaines) DGDDI General Directorate of Customs and Indirect Duties (Direction générale des douanes et des droits indirects) DRID Regional Directorate for Tax Administration and Lands (Direction régionale des impôts et domains) DRM Domestic Revenue Mobilization EAC East African Community ECF IMF Extended Credit Facility FCV Fragility, Conflict and Violence affected countries FDI Foreign Direct Investment GDP Gross Domestic Product ICTD International Centre for Tax and Development IMF International Monetary Funds MPO Macro Poverty Outlook NPL Nonperforming loans NRPP National Recovery and Peacebuilding Plan (Plan de relèvement et de consolidation de la paix) RRA Rwanda Revenue Authority SME Small and Medium Enterprises SSA Sub-Saharan Africa UNDP United Nations Development Programme UNU-WIDER United Nations University World Institute for Development Economics Research USAID United States Agency for International Development VAT Value Added Tax WDI World Development Indicators WEO World Economic Outlook ACRONYMS AND ABBREVIATIONS iii ACKNOWLEDGMENTS presents an overview of CAR’s reviewers Jan Loeprick (Senior evolving macroeconomic Economist), Jacques Morisset position, followed by a detailed (Program Leader), Mame Fatou exploration of a specific topic. Diagne (Senior Economist), The objectives of the series are and Tihomir Stucka (Senior to strengthen the analytical Economist). The team received underpinnings of development guidance, insightful comments, policy in CAR and contribute and encouragement from to an informed debate on Francisco Carneiro (Practice policy options to enhance Manager), Jean-Christophe Carret macroeconomic management (Country Director), Han Fraeters and accelerate progress on the (Country Manager), Chadi Bou twin goals of eliminating extreme Habib (Program Leader), Robert poverty and promoting shared Bou Jaoude (former Country prosperity in a context of state Manager), and Raju Singh (Lead CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE fragility. Economist). Claudia Rocio Manrique, Irene Sitienei, and This second edition of the Evelyne Huguette Madozein Central African Republic (Program Assistant) supported Economic Update was prepared the team during the preparation by a World Bank team led of the report. Roberta Bensky by Souleymane Coulibaly (Consultant) edited the report. (Program Leader) and Wilfried Photo by Stephan Gladieu Kouame (Young Professional). In addition, the team greatly Chapter 1 Recent Economic benefited from consultations Developments was prepared with key policymakers and by Wilfried Kouame. Chapter 2 analysts in CAR, including T his is the second edition Strengthening Domestic Revenue officials from the Monitoring in a series of Central Mobilization in a Fragile State Committee for Economic African Republic Economic was prepared by Souleymane Reforms (Cellule Chargée du Updates. The series will analyze Coulibaly, Wilfried Kouame, Suivi des Réformes Economiques evolving economic trends in and Diderot Guy D Estaing et Financières CS-REF), the CAR on an annual basis to Sandjong Tomi (Economist). Ministry of Economy, Planning assist the government and its Mamadou Lamarane Deme and International Cooperation, development partners to identify (Senior Financial Management the Ministry of Finance and emerging opportunities and Specialist) provided useful Budget, the Central African address persistent challenges. comments on the DRM chapter. Republic Institute of Statistics The editions are prepared and Economic and Social Studies for the World Bank Spring The report benefited from (ICASEES), and the Bank of Meetings in April. Each edition constructive comments of peer Central African States (BEAC). iv KEY MESSAGES Recent Economic Developments and Outlook T he Central African Republic (CAR) economy Fiscal discipline needs to be maintained as the continues on a downward path. After peaking country is still at high risk for debt distress. CAR’s at 4.8 percent in 2015, the annual Gross fiscal discipline continues to yield positive results Domestic Product (GDP) growth rate slowed to in terms of reducing the ratio of debt-to-GDP at 4.5 percent in 2016, 4.3 percent in 2017, and then 48 percent. Debt indicators are forecasted to 3.7 percent in 2018 as renewed insecurity inhibited improve gradually over the medium-term, although economic activity and delayed investment projects. the country is still at high risk of debt distress. The drop in the industrial sector, including the The overall deficit on a cash basis is estimated to diamond sector which closed many purchasing deteriorate from 1.6 percent of GDP in 2017 to 2.6 offices and the forestry sector which temporarily and 2.7 in 2018 and projected for 2019, respectively. halted log production, led to downward revision of the growth projections for 2018 and onward. There Domestic revenue remains below pre-crisis levels. was a drop in the share of GDP for the industry Domestic revenue increased from 8.3 percent of sector (manufacturing, including wood processing). GDP in 2017, to an estimated 9 percent of GDP Agriculture and services drove growth, supported in 2018. However, this is still about 2 percentage by domestic demand as the clearance of domestic points below the 2013 pre-crisis levels and average arrears continued. The service sector, which levels in comparable countries. On the expenditure represented 35 percent of GDP in 2017, is expected side, measures have been taken to monitor the to grow at 41 percent in 2018. recruitment of civil servants for more efficient management of government spending on public CAR has not experienced a sustained growth sector wages. As a result, the share of the wage episode since its independence in 1960 and poverty bill over GDP is gradually shrinking from an remains pervasive. With nearly 3.4 million people estimated 6.5 percent in 2014 to 5 percent in 2018 (71 percent of the population) living below the corresponding to a drop of 1.5 percentage points. international poverty line (US$ 1.90 per day, 2011 In addition, efforts to reduce foreign and internal PPP) in 2018, CAR remains one of the poorest debt and clear arrears have improved CAR’s countries in the world. GDP per capita dropped by fiscal position as interest payments on debt have almost half since independence, from US$ 602 in decreased. 1960 to US$ 335 in 2017. The improved security situation gives rise to a Inflation declined and the external position is positive economic outlook with real GDP growth estimated to deteriorate slightly. Inflation eased at projected to expand by 4.7 percent. The Political 1.6 percent in 2018 against 4.1 percent in 2017 due to Agreement for Peace and Reconciliation signed declining prices of food products and manufactured in February 2019 is expected to support economic goods. Downward pressures on domestic prices recovery in the medium term as security is have also been reinforced by the tightening of the progressively restored, public services are gradually regional Central Bank’s monetary policy in response redeployed to the provinces, public and private to lower reserve accumulation at the regional investments increase, arrears are cleared, and KEY MESSAGES level. The current account deficit is estimated to reforms are implemented. Increased public and deteriorate slightly from 7.8 percent of GDP in 2017 private investments, clearance of arrears, and to about 7.9 percent in 2018. increased imports of goods and services due to 1 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE a more secure Bangui-Beloko corridor should product prices continue to decline. The current continue to sustain private consumption. Inflation account deficit is expected to improve in the is projected to fall below the regional Central Bank medium term as diamond and forestry production convergence criterion as food and manufacturing pick up. Strengthening Domestic Revenue Mobilization to Sustain Growth in a Fragile State A deep structural weakness in CAR’s tax structural weaknesses in fiscal controls. Legislation system keeps government revenue among on property taxation has not been updated to the lowest in Sub-Saharan Africa. CAR’s reflect recent economic developments. As a result, domestic revenue is structurally below the potential revenue collected on property taxes is low and of the economy and the average of regional below its potential. CAR has a thriving informal peers including countries in fragile and conflict sector that negatively affects tax performance, situations. The tax gap has ranged between 4 and since it does not contribute directly to domestic tax 7 percent of GDP since 2000, representing about mobilization. Such underperformance in domestic half of total tax revenues in 2016. The tax system revenue mobilization calls for a sustained effort to is complex and characterized by substantial tax boost domestic revenues to address CAR’s daunting exemptions to private companies, many of which development needs. are not aligned to a long-term development strategy or investment code. The customs and There is substantial scope to scale-up CAR’s tax administration have failed to recover about domestic revenue mobilization. In the short- 2 CFAF 84 billion since 2010 due to low capacity and term, the government should reinforce targeted posts of Gamboula and Mongoumba to limit fraud and increase efficiency. There also potential to introduce a community tax to bring the informal sector into revenue mobilization. Finally, business- friendly reforms that focus on the justice system, protecting minority investors, and facilitating construction permit acquisition will help attract private investors and firms that are in the informal sector into the formal sector, and thereby broaden the tax base. Increasing domestic revenue will take time but lowhanging fruit can result in important “quick wins”. CAR can take advantage of "quick wins" by learning from its peers. Like CAR, Rwanda’s economy was negatively affected by a deep-rooted civil war. Rwanda’s reforms started with “low- hanging fruit” for quick wins such as increase in excise tax rate before tackling more complex issues, especially major administrative reforms. Rwandan authorities integrated tax and customs services under a single revenue authority for a clearer line of Photo by Wilfried Kouame command and accountability. Introduction of severe measures to punish wrongdoing sent a clear signal that corrupt behaviors would not be tolerated under any circumstances. New stringent codes of conduct were adopted, training opportunities audits and verifications; this should substantially were provided, and salaries of tax administration increase tax recovery. There is also scope to further employees were increased. Finally, explicit efforts improve the business environment by limiting tax were made to establish a new social contract exemptions, closely mointoring existing exemptions between taxpayers and the revenue administration and aligning them to a development strategy and to build public trust in tax authorities and investment code. An excise tax rate on telephone encourage compliance. Strong leadership and communications should also be considered. sound managerial capacity coupled with steadfast commitment to implement tax and customs reforms In the long-term, authorithies could rationalize were key to Rwanda’s success. The government and reduce the number of tax rates and exploit the of CAR should consider such measures as it revenue potential from property taxes; this could establishes its own policies and practices to increase generate about CFAF 12 billion (US$ 22 million) in domestic revenue. The new peace agreement also revenue. Additional reform options could include represents an opportunity to break the pervasive strengthening and enhancing tax policy, building cycle of instability and conflict, improve fiscal capacity in the customs and tax administration, and transparency, fight corruption, establish a new introducing computer technology in the overall tax social contract between taxpayers and the state to administration, especially at the border crossing encourage tax compliance. KEY MESSAGES 3 1 RECENT ECONOMIC DEVELOPMENTS AND OUTLOOKS KEY MESSAGES 7 With an average GDP growth per capita of -0.8 percent, CAR has not experienced an episode of sustained growth since its independence. 7 Economic growth in CAR slowed to 3.7 percent in 2018 as renewed insecurity inhibited economic activity, disrupted agricultural, forestry, and mining production, and delayed investment projects. 7 Inflation declined to 1.6 percent in 2018 and should reach the CEMAC convergence criterion in the medium- term as manufacturing and food prices dropped. 7 The debt-to-GDP ratio continues to decrease and should reach 49 percent in 2018, with an overall balance including grants of 0.4 percent of GDP. However, government revenue remains below its pre-crisis level. 7 The current account deteriorated slightly at 7.8 percent of GDP in 2018 as imports continue to soar. CAR’s external position should improve in the medium-term. 7 CAR’s economic prospect is positive with the signing of the Political Agreement for Peace and Reconciliation in the Central African Republic in February 2019 and projected to grow at 4.8 percent in the medium-term. The primary risk for CAR is the possible escalation of violence that will undermine the government’s ability to provide basic services. 4 Photo by Wilfried Kouame C AR’s economic growth slowed to 3.7 percent in 2018. Renewed insecurity inhibited economic activity in 2018 by disrupting agricultural, forestry, and mining production, and delaying investment projects. The path of economic recovery picked up to 4.8 percent in 2015 and slowed progressively to 4.5 percent in 2016 and 4.3 percent in 2017; this was mainly due to conflicts and violence that negatively affected the security and humanitarian environment. The current account deficit is estimated to deteriorate slightly from 7.8 percent of GDP in 2017 to 7.9 percent in 2018 as imports continue to soar. The CEMAC zone continues to face significant reserve issues that pushed the Regional Bank (Banque des états de l’Afrique central, BEAC) to tighten its monetary policy and increase the policy interest rate from 2.95 percent to 3.5 percent in October 2018. This, combined with a decline in manufacturing and food prices in CAR, has resulted RECENT ECONOMIC DEVELOPMENT AND OUTLOOKS in an estimated reduction in inflation to 1.6 percent in 2018. Such fiscal discipline continues to yield positive results, with a reduction in the 2018 ratio of debt-to-GDP to 48.5 percent. The fiscal outturn including grants is likely to generate an overall surplus of 0.7 percent in 2018. The signing of a peace agreement in early February 2019 brings hope for the security and conflict environment, both of which remain major downside risks for the country. Urgent attention is needed to deliver vital public services that were delayed by the conflict. Thousands of displaced people will now be seeking their way back home, thereby raising significant pressure on government expenditure. 5 Poverty incidence measured in terms of headcount CEMAC countries having benefited from the rise in averaged 75 percent in 2016, and the country is oil price and production and the dynamism of the one of the poorest and most fragile countries on non-oil sector, combined with the continuation of the continent. If these challenges are not addressed macroeconomic and structural reforms. urgently, the country risks falling into crisis again. In such a context, CAR’s economic growth slowed This Economic Update builds on the previous at 3.7 percent in 2018, due mainly to renewed Update, relying on peace and stability as a insecurity. After peaking at 4.8 percent in 2015, condition for domestic resource mobilization. annual GDP growth slowed to 4.5 percent in 2016 and The report reviews recent economic developments, 4.3 percent in 2017, as renewed insecurity disrupted assesses factors affecting domestic resources production. From about 37 percent contraction and outlines operational strategies to leverage of GDP in 2013, CAR is recovering progressively domestic resources. It also shares good practices but recovery remains fragile in light of a possible of peer countries that have or are on their way to escalation in violence. Although CAR’s GDP growth successfully mobilizing domestic revenues after rate outpaced the average of its regional peers, the long periods of political instability. country is still failing to catch up with its aspirational and structural peers2 (Figure 1.1). CAR’s aspirational peers, Rwanda and Laos, are estimated to grow at 5.5 percent in 2018, while the average GDP growth of 1.1 Recent economic its structural peers should reach 6.6 percent. developments CAR’s economic growth was driven by private consumption but remains below the average level CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE of aspirational and structural peers. The negative 1.1.1 A fragile security situation hump shape in GDP growth in 2013 was the result of a political crisis that distorted both production slowed CAR’s economic and demand leading to a nearly 30 percent drop in household consumption (Figure 1.2). In addition, growth in 2018 rising uncertainty has limited the ability of local firms to operate efficiently and has resulted in a Global economic growth slowed slightly from deterioration of the trade balance. For the period 3.1 percent in 2017 to an estimated 3 percent in 2017 to 2018, private consumption contributed 2018.1 Elevated trade tensions, progressive removal significantly to the economic recovery supported of monetary policy accommodation in advanced by the resolution of domestic payment arrears. economies, and important financial market pressures Nevertheless, the pace of economic recovery is above in several emerging and developing countries the average level of SSA and CEMAC countries. outweighed global uncertainty and slow growth. Despite the less favorable global environment, growth The dynamic services sector contributed more in low-income countries (LICs) increased slightly to to GDP growth. The service sector represented reach 5.6 percent in 2018 as oil producers benefited 35 percent of GDP in 2017 and is expected to surge from higher oil prices and output, and higher to 41 percent in 2018. The industry sector consisting agricultural production and continued infrastructure primarily of manufacturing (including wood spending supported growth in non-resource-intensive processing) witnessed a drop in its share to GDP countries. Economic growth in Sub-Saharan Africa from 22.5 to 16.8 percent of GDP. The share of the (SSA) is estimated to have picked up to 2.7 percent in agricultural sector also declined but more moderately 2018 from 2.3 percent in 2017, although at a slower from 42.4 percent of GDP in 2017 to 41.7 percent in pace than expected in April 2018, due to downward 2018 (Figure 1.3). In contrast to the industry sector, growth revisions in the three largest economies (Angola, Nigeria, and South Africa). Growth also trended up to 2.5 percent at the regional level with 2 Box A1 in Technical Appendix describes the identification of structural and aspirational peers. CAR is particularly compared to Rwanda because CAR’s authorities expressed a willing to assess how they perform and 1 World Bank. 2019. Global Economic Prospects, January 2019: Darkening learn from this country, which were also in a conflict situation but 6 Skies. Washington, DC: World Bank. managed to increase substantially its tax revenues. FIGURE 1.1 Annual Real GDP Growth Rates, CAR and Regional Averages, 2014–19 10 8 6 4 2 CEMAC 0 SSA CAR –2 Structural peers –4 Aspirational peers 2014 2015 2016 2017 2018 2019 Source: World Bank staff estimates using data from the WEO, WDI and MPO Notes. We use estimates of the real GDP growth for 2018 and projected for 2019. CEMAC and SSA samples do not include CAR. FIGURE 1.2 Contribution to real GDP growth, FIGURE 1.3 Sectoral composition of GDP 2012–18 in CAR 2010–18 30 100% 20 80% 10 0 60% –10 –20 40% –30 20% –40 –50 0% 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018 Private consumption Exports Agriculture Industry Service Government consumption Real GDP growth Gross Fixed Investment Sources: World Bank staff estimates using data from the WDI and MPO. Notes. We use estimates for 2018. the contribution of the agricultural sector to GDP to about 1.20 percent driven by factors such as RECENT ECONOMIC DEVELOPMENT AND OUTLOOKS growth was positive. The drop in the share of GDP for political instability, low of human capital (high the agricultural and industry sectors is explained by infant mortality and poor education outcomes) and renewed insecurity in 2018 that disrupted agricultural, inability to attract foreign direct investment. As a forestry, and mining production and investments result, the economy never experienced a growth spell, defined as a period during which the growth CAR has not experienced a sustained growth trend changes significantly up or down followed by episode since its independence. For the period a period of at least 2 percent average per capita GDP 1960 to 2017, economic growth was constrained by growth (Box 1.1). Lessons from previous periods of a succession of recessions due to armed conflicts economic growth indicate that the increase of crude and coups d’état, the most important of which was oil prices and the U.S. interest rate pose further risks in 2013. The average real GDP growth was limited to growth in CAR. 7 BOX 1.1 Economic Growth in CAR since Independence CAR has not experienced an episode BOX FIGURE 1.1 Real GDP per capita in CAR since independence of sustained growtha since its independence in 1960. A sustained 900 growth period, also known as a growth spell, is a period during which the growth trend changes significantly followed by a 600 period of at least 2 percent average per capita GDP growth. For comparison, the 300 median length of growth spells is 6 years in CAR Sub-Saharan African countries, 8 years in RWA emerging market economies, and 10 years 0 Structural peers for other developing countries.b Regional 1960 1968 1976 1984 1992 2000 2008 2016 comparators in the CEMAC zone show one Source: World Bank staff calculation using WDI data episode of sustained growth each country, except Chad, which experienced two growth spells. The average economic growth in CAR assistance through grants and external Breaking the cycle of insecurity and since independence is barely 1.2 percent, debt; and relative political stability over violence, securing political stability, characterized by persistent fluctuations due the three periods of growth acceleration. building human capital, and attracting mainly to conflict and political instability Public infrastructure capacity, including private investments are key to (Box Figure 1.1). Since independence, an increase in access to electricity, also accelerating and sustaining growth. As CAR has experienced three episodes of enabled growth in CAR by improving the discussed above, variation in economic growth acceleration and five periods of business environment, and increasing growth since independence is one of the growth deceleration. The two first episodes production, and productivity. These factors main characteristics of CAR’s economy, of growth acceleration were experienced should be considered as authorities look for a factor that significantly hinders its during the 1970s with an average growth of ways to create periods of sustained growth. development. The current pace of economic 2.3 percent from 1970–74 and 1.8 percent recovery and the recent peace agreement from 1975–1979. The recent episode However, significant weaknesses in represent significant opportunities to of growth acceleration occurred from CAR’s economy minimize chances for implement reforms and secure a period of 2007–2012, just before the recent crisis, sustained growth. Recurrent conflict sustained growth. Authorities should focus with an average growth of 3.1 percent. The and violence represent the main their efforts on building capacity through period after the recent crisis is the strongest challenges for CAR. These were the continuous investment in education and in terms of GDP growth with average real primary cause of the five episodes of health with the support of the international GDP growth at 3.7 percent. The authorities growth deceleration, with the highest community. They should continue to tackle should maximize efforts to sustain the decline of close to 37 percent in 2013. the infrastructure bottlenecks. The authorities current path of economic recovery and Other factors affecting CAR’s ability to should also implement business-friendly increase the likelihood of a growth spell sustain growth include its vulnerability reforms, since, according to the World for improved development outcomes and to external shocks such as an increase Bank Ease of Doing Business index, CAR reduced poverty. in crude oil prices and changes in the is among the worst performing countries. US policy interest rate; changes in the These reforms should focus on the justice CAR could learn from factors that US policy interest rate that result in a system, protecting minority investors, and facilitate episodes of accelerated deterioration of government revenues facilitating the acquisition of construction growth. These factors include improvement and CAR’s external position through the permits. The capacity of the Cadre Mixte de in human capital outcomes such as imports bill; and poor export performance. Concertation pour l’Amélioration du Climat reduction of infant mortality and increased The new peace agreement and the current des Affaires (CMCAA), a public-private average number of years of schooling; good pace of economic recovery represent dialogue framework, should be reinforced ability to attract foreign direct investment real opportunities for the country to secure in order to be able to work actively on inflow as well as official development its first episode of sustained growth. improving the business environment. (a) The box draws on the background paper “Episode of Sustained Growth in Central African Countries: Myth or Reality?” by Karakulah and Kouame (2019). Sustained growth periods are identified under two conditions: (1) the existence of structural breaks that occur when a country time series abruptly changes at a point in time. The changes might be identified as “growth upbreaks” if they result in a period of higher growth than before the structural break. The opposite situation refers to “down-breaks”, a situation in which growth is lower than before the structural break; and (2) periods of time that begin with a growth upbreak followed by a period of at least 2 percent average per capita income growth. Such periods are identified as growth spells. See Karakulah and Kouame (2019) for extensive discussion on growth spells analysis in the Central African Republic, the Democratic Republic of Congo, and the Republic of Congo. (b) See Arizala, F., Gonzalez-Garcia, M. J. R., Tsangarides, M. C. G., & Yenice, M. (2017). Growth Breaks and Growth Spells in Sub-Saharan Africa. International Monetary Fund for extensive discussion on growth spells episode in developing and emerging countries. The civil war in 2013 reshaped the sectoral from 86.1 to 85.6 percent and 6.8 to 6.4 percent composition of CAR’s economy. Since 1995, the in 2010 and 2017 , respectively, while the share agricultural sector has accounted for an average of the services sector increased by 15.6 over the of 50.9 percent of GDP. However, the civil war same period (Figure 1.4). This situation raises resulted in a decline in the share of the agricultural concerns about productivity growth in the CAR sector compensated by an increase in the share economy in general, and more specifically, in the of the services sector. The contribution of the agricultural sector. CAR experienced a relative labor agricultural sector dropped from 50.7 percent of productivity drop that exceeded 2.5 percent per GDP in 2012 to 39.6 percent in 2017 while the share year over the period 1970–2015, one of the worst of services increased from 30.4 to 39.3 percent of performances among SSA countries.3 GDP over the same period (Figure 1.4). The increase in the contribution of the services sector to GDP can be explained by the presence since 2013 of 1.1.2 The CEMAC monetary several humanitarian agencies, especially the UN Multidimensional Integrated Stabilization Mission policy needs to remain in the Central African Republic (MINUSCA). The reason for the decline of activity in the agricultural on track sector may be attributed to the deteriorating security situation in 2013 and after, especially in CEMAC’s monetary policy continues to tighten in the rural areas where the population suffered the response to the lower reserve accumulation. Despite worst of the violence from armed groups. The the improvements in the CEMAC regional growth agricultural sector in CAR is clearly vulnerable to and the implementation of policy commitments, war, with similar evidence found during previous net foreign assets were below projections at the end episodes of violence and coups in the country since of September 2018; this, due to delays in external independence in 1960. financing, mixed program performance, and slow repatriation of exports proceeds. In response, the Despite the reshape in sectoral contributions to BEAC tightened its monetary policy by increasing its GDP, there has been no significant reallocation policy rate from 2.9 percent to 3.55 percent at the end of the labor force in CAR. Even though the of October 2018. contribution of the agricultural sector to GDP dropped by 20 percent between 2012 and 2017, Inflation in CAR is estimated to ease at 1.6 percent the sector still employs more than 85 percent of in 2018, reaching the CEMAC convergence the labor force. The share of the agricultural and criterion for inflation. In response to the recent industrial sectors in the labor force decreased economic crisis in the region, CEMAC tightened its monetary policy which contributed to a decline of the inflation rate in the region. The inflation rate FIGURE 1.4 Sectoral composition of is expected to decline from 4.1 percent in 2017 to about 1.6 percent in 2018 as manufacturing and employment in CAR 2007–2017 food prices decline. Inflation is projected to fall below the CEMAC convergence level over the 100 medium term. RECENT ECONOMIC DEVELOPMENT AND OUTLOOKS 95 Credit to the economy is rebounding despite 90 a tightening of the regional monetary policy, indicating a weak transmission mechanism in 85 the CEMAC zone. In CAR, credit to the economy 80 is estimated to increase by 5.5 percent in 2018 after a 0.1 percent decrease in 2017. The rebound 75 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Agriculture Services Industry 3 World Bank Group. 2018. Africa’s Pulse, No. 18, October 2018: An Analysis Sources: World Bank staff estimates using data from the WDI. of Issues Shaping Africa’s Economic Future. Washington, DC: World Bank. 9 is driven primarily by the increase in credit to the FIGURE 1.5 Overall deficit in CAR, private sector, although still at a very low level. 2006–2018 Nevertheless, the credit to the economy remains at about 13 percent of GDP. 6 Nonperforming loans (NPLs), while declining 4 gradually, remain above their pre-crisis level. NPLs 2 reached their highest level in 2015 at about 31 percent 0 of total gross loans. Since then, NPL has declined –2 and is estimated to reach 22 percent in 2018, with –4 substantial sectoral disparities. Critical sectors for the –6 economy such as mining, manufacturing, and real –8 –10 estate appear to have the highest NPL ratios, reaching –12 more than 50 percent of total gross loans. NPLs 2010 2011 2012 2013 2014 2015 2016 2017 2018 are due primarily to the large stock of outstanding CEMAC SSA government payment arrears and government arrears CAR Structural peers to its suppliers. Key recommendations of the Central Aspirational peers African Banking Commission (COBAC) have been implemented, although delays have been observed in Source: CAR Ministry of Finance and Budget and World Bank staff calculations. recommendations on internal control and anti-money laundering. peers. Improvement of the fiscal situation may be attributed to efforts to rationalize government Financial soundness indicators suggest that banks expenditure through sound management of the CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE are moderately resilient although the ratio of wage bill since 2014, and an expected increase in NPL declines. Banks in CAR remain adequately grants as a share of GDP in 2018. However, the capitalized. In the latest estimation, average fiscal situation in cash-based deteriorated in the capital adequacy remains high at about 32 percent, period 2017–2018 as the pace of economic recovery liquidity assets at 27.1 percent of total assets and slowed. After an overall surplus in cash-based of 186 percent of short-term liability. Deposits are 1.3 percent of GDP 2016, the overall balance in estimated to have increased by 17 percent over the cash-based declined at 1.7 percent in 2017 and is period 2016–2018. estimated to reach a deficit of 2.6 percent in 2018. “Streamlining government expenditure” is 1.1.3 Fiscal discipline needs the new motto of CAR’s Ministry of Finance and Budget. Efforts to rationalize government to be maintained expenditure entail sound management of the wage bill. In this regard, measures have been taken to The fiscal situation improved in 2018 due monitor the recruitment of civil servants for more primarily to an increase in grants and efficient management of the wage bill. As a result, streamlining of government expenditure. After the share of the wage bill over GDP is gradually an overall deficit in 2017, the fiscal position of the shrinking from 6.5 percent in 2014 to an estimated country continues to improve and is estimated 5 percent in 2018; this corresponds to a drop of to generate an overall surplus of 0.7 of GDP 1.5 percentage points (Figure 1.6). In addition, 2018–2019. The situation is better relative to efforts to reduce foreign and internal debt and to other countries in SSA but behind the estimated clear arrears contribute to improvement of the fiscal fiscal surplus of about 2 percent in the CEMAC position as interest payments on debt are decreasing. zone (Figure 1.5). In the midst of the civil war, CAR’s overall deficit reached 6.5 percent of GDP, Government revenue continues to increase far behind the fiscal outcomes in aspirational, gradually but remained below its pre-crisis regional, and structural peers. The fiscal situation level in 2018. Government revenue fell by about improved over time and the performance of CAR 50 percent during the recent civil war as state 10 outpaced its regional, structural and aspirational institutions collapsed. The fall in revenue in 2013 FIGURE 1.6 Expenditure composition in CAR about 16.6 of GDP, more than 500 points below the average level in aspirational, regional, and (% GDP), 2010–2019 structural peers (Figure 1.7). 25 While grants continue to represent a substantial share of government revenue, their contribution 20 is declining. During the period 2014–2018, the share of grants as a percentage of GDP gradually 15 shrunk, despite a positive trend between 2017 and 2018 (Figure 1.8). This downward trend has been 10 mitigated by a gradual increase in tax revenue that surged to 8.4 percent of total GDP in 2018 5 corresponding to an upward push of nearly 0 4 percentage points. It is worth noting the 2010 2011 2012 2013 2014 2015 2016 2017 2018 significant impact of the 2013 political crisis that Wages and salaries Interest dragged back government tax revenue from 9.9 Goods and services Goods and services percent in 2012 to 5.2 percent in 2013, even though Transfers and subsidies Capital expenditure the opposite trend in grants balanced the impact. Source: CAR Ministry of Finance and Budget and World Bank staff calculations. In the short run, tax revenue is expected to keep its upward trend to average around 8.7 percent of GDP even though it will remain below the level prior to was driven by a decline in both domestic revenue the crisis. This trend is expected to continue with and grants. Since then, government revenue has the implementation of ongoing reforms and efforts. caught up due to gradual economic recovery, support of the international community through Dynamic private consumption has boosted grants, and implementation of reforms to strengthen the collection of indirect taxes. Indirect taxes, tax revenue collection. Despite these efforts, the level including VAT and excises petrol taxes, increased of government revenues in 2018 as a percentage from 3.6 percent of GDP in 2017 to 4.2 in 2018 of GDP remains below its pre-crisis level and also (Figure 1.9). The improvement was due primarily below the average government revenue of regional, to dynamic private consumption that boosted structural and aspirational peers. It is worth noting VAT collection and revenues from petrol taxes. that the average government revenue in CAR is The recent streamlining of petroleum price FIGURE 1.7 Government revenue in CAR, FIGURE 1.8 Revenue composition in CAR 2010–18 (% GDP), 2010–2019 35 18 30 16 RECENT ECONOMIC DEVELOPMENT AND OUTLOOKS 25 14 20 12 15 10 10 8 5 6 0 4 2010 2011 2012 2013 2014 2015 2016 2017 2018 2 CAR CEMAC 0 SSA Structural peers 2010 2011 2012 2013 2014 2015 2016 2017 2018 Aspirational peers Tax revenues Non tax revenues Grants Source: World Bank staff calculations using WEO and World Bank data. Source: World Bank staff calculations based on CAR authorities, IMF and World Bank data. 11 FIGURE 1.9 Composition of CAR tax revenues FIGURE 1.10 Public debt in CAR, 2006–2019 (% GDP), 2016–2018 (% of GDP) 5 80 4 60 3 40 2 20 1 0 0 Direct tax Indirect tax Tax on international trade 2010 2011 2012 2013 2014 2015 2016 2017 2018 CEMAC Structural peers 2016 2017 2018 SSA Aspirational peers Source: World Bank staff calculations based on data from CAR authorities, IMF and World Bank. CAR Source: World Bank staff calculations using WEO data (October 2018). structure might have played a role in generating additional tax revenues. Conversely, tax revenues constant,4 CAR needs to generate a primary surplus from international trade as a percentage of GDP of at least 1.4 percent of GDP from the end of 2017 decreased slightly in 2018 due mainly to a decline in and onward. The fiscal effort is among the lowest the export of wood products. in SSA (Figure 1.11) and Latin American countries.5 However, the fiscal effort is above the estimated CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE Fiscal consolidation efforts continue to yield primary deficit excluding grants and externally positive results in reducing the ratio of debt- financed capital spending of about 1.4 percent in to-GDP. The ratio of public debt-to-GDP 2018 and 0.7 percent in the medium term (2019–24). dropped from 69.2 in 2014 to about 48.5 in 2018 CAR is among those SSA countries requiring a corresponding to a 42.5 percent decrease in the relatively lower primary balance to maintain its stock of debt. The resolution of domestic arrears debt-to-GDP constant over time. As a comparison, and streamlining of public expenditures contributed the fiscal effort needed to maintain the ratio of to reducing the stock of debt-to-GDP that has been debt-to-GDP constant is estimated at 5.5 percent decreasing since 2014. Domestic debt declined from of GDP for the Republic of Congo and 0.3 percent 25.1 percent of GDP in 2017 to 22.5 percent in 2018 for the Democratic Republic of Congo. Since CAR with the payment of domestic arrears. The country’s is already at high risk of debt distress, fiscal efforts external debt also decreased from 27.8 percent of should emphasize domestic revenue mobilization to GDP in 2017 to about 26 percent in 2018. As shown avoid further deterioration of the public debt. in Figure 1.10, CAR is outpacing its peers regarding the path of public debt thanks to fiscal consolidation CAR is caught in the procyclicality trap6. efforts. The ratio of public debt-to-GDP is estimated Procyclicality of public spending means that to reach the average level of structural peers in government spending and GDP growth move 2018 but will remain below the average level of in the same direction. Since 2009, CAR is the aspirational and regional peers, all of which are most procyclical country in SSA, far beyond on an increasing path, except in the CEMAC zone the procyclicality level of regional peers in the where the ratio of debt-to-GDP has been decreasing CEMAC zone. For comparison, Laos and Rwanda, since 2016. Overall, the gross debt-per-capita ratio is 4 See Vegh Gramont, Carlos Alberto; Vuletin, Guillermo Javier; Riera- estimated to reach CFAF 107,030 (US$ 187) in 2018 Crichton, Daniel; Friedheim, Diego; Morano Germani, Luis Francisco; after a pick up at CFAF 123,868 (US$ 216) in 2014. Camarena Fonseca, Jose Andree. 2018. Fiscal adjustment in Latin America and the Caribbean: short-run pain, long-run gain? - semiannual report (English). Washington, D.C.: World Bank Group, for extensive discussion on the debt As a result of good performance in public debt stabilizing primary balance. accumulation, CAR needs a small fiscal primary 5 See Vegh Gramont et. al. (2018) for extensive discussion on efforts needed to maintain the ratio of debt-to-GDP constant. surplus to maintain the current ratio of debt-to- 6 This section draws on Herrera, Kouame, Mandon (2019) “Why some 12 GDP. To maintain its current ratio of debt-to-GDP Countries can escape the fiscal procyclicality trap and others can’t?” FIGURE 1.11 Primary surplus needed to maintain the current ratio of debt-to-GDP, at the end of 2017 9 8 7 6 5 4 3 2 1 0 SWZ ZWE BDI KEN SDN MWI AGO NGA ZMB COG ZAF NAM GNQ GMB UGA CAF COD Source: World Bank staff calculations using WEO and World Bank methodologies (2018). both aspirational peers of CAR, maintain a A procyclical fiscal policy has consequences countercyclical fiscal stance (Figure 1.12). The for macroeconomic stability and growth experience from Rwanda is highly relevant for CAR, sustainability. The procyclical nature of fiscal since Rwanda managed to escape the procyclicality policy, by which countries stimulate the economy trap after being highly procyclical during the 2000s during a boom and cool down the economy (Figure 1.13). CAR can also learn from Rwanda during a recession, has been associated with on the peacebuilding process, the collection of macroeconomic instability and amplification of domestic revenue, and fiscal policy management. economic fluctuations. Such fluctuations discourage While CAR structural peers are all procyclical new investment and undermine human capital countries, the magnitude of procyclicality is through high employment, generating volatile relatively lower compared to CAR. Although the government revenues and terms of trade, and contraction of CAR’s economy of about 37 percent undermining debt sustainability.7 As discussed in in 2013 might explain the high procyclicality of the Herrera, Kouame, and Mandon (2019), several other fiscal stance, CAR authorities should take action to factors such as corruption in political and public reduce procyclicality. services spheres and limited credit to the private sector increase the procyclicality of the public FIGURE 1.12 The procyclicality of the fiscal stance and weaken growth acceleration. There is stance in CAR vs. peer countries, significant evidence from around the world that procyclical fiscal policies deteriorate welfare and 2009–2016 poverty outcomes.8 The current situation of CAR’s economy highlights some of these consequences, 1.00 underlining the critical need for the country to shift RECENT ECONOMIC DEVELOPMENT AND OUTLOOKS 0.80 its fiscal stance. 0.60 0.40 Although ongoing fiscal efforts are yielding 0.20 positive results, the procyclicality of the fiscal 0.00 –0.20 –0.40 –0.60 7 See Bernanke (1983), Eichengreen and Hausmann (2004), Martin and Central Rwanda Laos Burkina Faso Mali Niger Rogers (1997), Hercowitz and Strawczynski (2004) and Brueckner and African Carneiro (2017) for extensive discussion on the impact of the procyclicality Republic of fiscal stance. 8 See Woo, J. (2005). Social polarization, fiscal instability, and growth. Source: Adapted from Herrera, Kouame, and Mandon (2019). European Economic Review, 49(6), 1451–1477. 13 FIGURE 1.13 Public spending procyclicality, 2000–2008 vs. 2009–2016 1 Back to procyclicality CAF Still procyclical GHA SDN CIV SWZ MLI MOZ UGA ERI MDG 0.50 TCD BFA GAB BDI BEN AGO NER ZMB NAM ETH NGA TZA Corr(G,GDP) 09-16 MUS SLE CMR TGO COG SEN GNB KEN 0 GMB COD LBR RWA –0.50 LSO GIN MWI BWA ZAF Established countercyclical Recent countercyclical –1 –1 –0.50 0 0.50 1 Corr(G, GDP) 00-08 Source: Adapted from Herrera, Kouame, and Mandon (2019). CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE stance should not be ignored. In the medium exports of goods are estimated to decrease slightly term, CAR authorities should move toward a more by 2.6 percent driven by the exports of wood countercyclical fiscal stance by (i) maintaining products. On the other hand, a partial lift of the the pace of ongoing fiscal efforts to bring public embargo on diamond exports from CAR continues debt back to a sustainable level, since high debt to foster an increase in diamond exports, although fosters procyclicality; (ii) mobilize tax revenues the pace remains low compared to the current to minimize dependence on ODA, which is stock of diamonds. Overall, the terms of trade of often unpredictable and unstable; and (iii) scale the country should continue to deteriorate, but at a up domestic revenues to support and sustain slower pace. economic recovery. FIGURE 1.14 Current account composition, 1.1.4 The external position is weak 2016–2019 CAR’s external position worsens as imports continue to soar. The current account deficit rose 10 from 8.3 in 2017 to an estimated 8.6 percent of 0 GDP in 2018, driven by the deterioration of the merchandise trade deficit (Figure 1.14). CAR’s –10 imports deficit rose from 22.7 to 24.5 percent –20 of GDP as imports of petroleum products soared. The increase in the oil import bill is due –30 to a combination of higher prices, U.S. dollar 2016 2017 2018 2019 appreciation, and a gradual economic recovery Diamonds Wood Products and clearance of arrears. The latter boosts the Other exports Imports of pretrolium products demand for oil products with a direct impact on Other imports Merchandise trade (%GDP) 14 the merchandise trade balance. On the one hand, Source: World Bank staff calculations using data from CAR authorities, World Bank and IMF. Since 2017, CAR’s current account deficit has and income account balance by 32 and 50 percent, remained above the average level of regional respectively. peers but relatively lower than its aspirational and structural peers. The current account deficit Recent reforms affecting regulation, entry, exit, rose from 8.3 of GDP in 2017 to an estimated and competition in the business environment 8.6 percent in 2018 driven by the deterioration of are already yielding positive results. CAR’s the merchandise trade deficit (Table 1.1). The latter foreign direct investment is estimated to double is higher than the average level in CEMAC and SSA in 2017 from 0.4 percent of GDP to 0.8. Significant countries (Figure 1.15). However, CAR’s external reforms in the business environment, continued position is relatively stronger than its aspirational economic recovery and an improved security and structural peers. The current account deficit is situation, especially in Bangui, are attracting more expected to decline gradually over the medium term foreign investment. CAR made it easier to start a to 6.3 percent on average, as forestry exports pick-up. business by reducing the paid-in minimum capital requirement for business incorporation. As a The balances of transfers, service, and income are result, the country’s Ease of Doing Business score improving. Policy programs implemented by the for starting a business increased from 37 to 60.9 in IMF and World Bank are driving budget support 2018 compared to 2017 (a score of 100 represents to the public sector. Program transfers should best international practice). The minimum paid-in rise by 63 percent from 1.9 to 3.1 percent of GDP, capital decreased from 446.7 percent to 40.7 percent supporting an increase in net transfers. Project- of per capita income. Supported by the reforms related transfers remain constant at 1.5 percent of and positive outlooks, foreign direct investment is GDP. Private transfers are on a decreasing path projected to reach 1.1 percent of GDP in 2019. and estimated to reach 5.7 percent of GDP in 2018. The deterioration of the current account balance Non-debt creating flows fall behind the current is dampened by an improvement in the services account deficit, resulting in a decline of official TABLE 1.1 Central African Republic Current Account Balance, 2012–19   2012 2013 2014 2015 2016 2017 2018 2019               Projections Current account –71.6 –24.5 –124.8 –91.2 –5.5 –8.3 –8.6 –7.4 Balance on goods –61.4 –40.6 –170.9 –188.2 –16.5 –15.1 –17.0 –16.5 Exports, f.o.b. 103.6 61.6 48.5 50.5 6.5 7.6 7.4 7.6 of which: Diamonds – – – – 0.1 0.5 0.6 0.7 of which: Wood products – – – – 3.8 4.8 4.6 4.6 Imports, f.o.b. –165.0 –102.2 –219.4 –238.7 –23.1 –22.7 –24.4 –24.1 of which: Petroleum products –5.6 –6.1 –7.5 –7.5 RECENT ECONOMIC DEVELOPMENT AND OUTLOOKS Services (net) –66.1 –30.1 –13.9 –2.5 –0.5 –2.5 –1.7 –0.4 Credit 44.4 63.4 107.5 120.4 12.2 9.4 9.6 9.3 Debit –110.5 –93.5 –121.4 –122.9 –12.6 –11.9 –11.3 –9.7 Income (net) –5.5 1.8 –2.5 –7.6 –0.3 –0.2 –0.1 0.0 Credit 8.3 7.6 8.6 11.5 1.2 1.1 1.0 1.0 Debit –13.8 –5.8 –11.1 –19.1 –1.5 –1.3 –1.2 –1.2 Transfers (net) 61.4 44.4 62.5 107.1 11.8 9.4 10.3 9.5 Private 23.3 8.9 56.8 61.0 6.6 6.0 5.7 5.3 Official 38.1 35.5 5.7 46.1 5.2 3.4 4.6 4.2 of which: Program 11.0 9.7 12.3 31.0 3.7 1.9 3.1 2.8 Sources: CAR. authorities and IMF staff estimates and projections. 15 FIGURE 1.15 Current account balance, 2010–2019 (% of GDP) 10 5 0 –5 –10 CEMAC –15 SSA CAR –20 Structural peers –25 Aspirational peers 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: World Bank staff calculations using WEO data. foreign reserves. The overall balance of payments environment are expected to support higher is estimated to be in deficit in 2018 due mainly to agricultural and industry outputs from 2019 the deterioration of the current account balance. onward. Despite the reshape in the sectoral Non-debt creating flows such as foreign direct composition of GDP, the agricultural sector investment fail to compensate for the deficit of the continues to contribute close to 37 percent of current account, resulting in a decline in foreign GDP in CAR. The cotton sector is expected to CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE reserves. The latter are estimated to stabilize at pick up as authorities continue to clear arrears 4 months of imports of goods and services in 2018, and forestry activities are expected to expand in above the CEMAC average of 2.6 months. the medium term and contribute to the decline of the current account deficit. The industry sector dropped in 2018 due primarily to shrinking production in the mining sector. However, 1.2 Economic outlook the sector is expected to pick up from 2019 onward. Wood processing products are likely to and risks The economic outlook for CAR is positive, assuming there is steadfast agreement to FIGURE 1.16 Central African Republic actual implement the peace agreement. Economic and projected poverty rates and growth is projected to expand by 4.8 percent in real GDP per capita 2019 and 5 percent in the medium term due to progressive restoration of security with the peace Poverty rate (%) GDP per capita constant (LCU) agreement, gradual redeployment of public 78 250000 services to the provinces, increase in public 76 and private investments, arrears clearance, and 74 200000 72 steadfast implementation of reforms. Inflation 70 is projected to reach the CEMAC convergence 150000 68 criterion as food and manufacturing product prices 66 100000 continue to decline. In parallel, the current account 64 62 deficit is expected to decrease progressively in the 50000 60 medium term as diamond and forestry products 58 pick up (Table 1.2). 56 0 2008 2010 2012 2014 2016 2018 2020 International poverty rate GDP pc On the supply side, the clearance of arrears 16 combined with a more favorable security Source: World Bank, Macro Poverty Outlook. TABLE 1.2 Central African Republic/Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 4.5 4.3 3.7 4.8 4.9 4.9 Private Consumption 96.0 95.9 95.0 91.9 90.9 90.3 90.3 Government Consumption 7.3 7.0 7.7 7.6 7.8 7.9 7.9 Gross Fixed Capital Investment 13.7 13.5 15.1 16.6 16.5 15.9 15.9 Exports, Goods, and Services 12.9 12.3 12.2 12.5 12.6 12.5 12.5 Imports, Goods, and Services 31.3 31.5 33.4 25.3 24.4 23.5 23.5 Real GDP growth, at constant factor prices 4.5 4.4 3.4 3.2 4.8 4.9 4.9 Agriculture 4.6 3.0 7.1 3.5 2.0 1.9 4.6 Industry 1.9 –0.4 –5.0 2.9 1.7 1.7 1.9 Services 5.1 4.8 3.3 6.2 7.5 7.5 5.1 Inflation (Consumer Price Index) 4.6 4.6 4.1 1.6 3.5 2.6 2.5 Current Account Balance (% of GDP) –8.5 –5.6 –7.7 –7.8 –6.1 –4.6 –4.7 Fiscal Balance (% of GDP) 1.5 1.6 –1.1 0.4 2.6 0.6 –0.3 Debt (% of GDP) 56.6 54.3 49.4 49.0 45.2 37.3 34.7 Primary Balance (% of GDP) 2.1 –1.1 –2.0 –1.7 –2.5 2.3 –2.0 International poverty rate ($1.9 in 2011 PPP) a,b 72.9 72.9 72.2 71.4 70.5 69.8 69.3 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices and IMF data. Notes: e = estimate, f = forecast. (a) Calculations based on 2008-ECASEB. Actual data: 2008. Nowcast: 2009–2018. Forecast are from 2019 to 2021. (b) Projection using neutral distribution (2008) with pass-through = 0.7 based on GDP per capita in constant LCU. benefit from the peace agreement and grow at a Dynamic private consumption will continue to dynamic pace in the medium term. Recent critical support economic recovery as the authorities have reforms affecting the regulation, entry, and exit adopted a comprehensive and time-bound plan competition in the business environment are to clear domestic arrears. On the investment side, expected to stimulate foreign direct investment recent business environment reforms affecting inflows in CAR for a positive impact on economic the regulation, entry, and exit of competition are growth, job creation, and poverty reduction. expected to stimulate investment after a slight decline in 2018. The authorities should implement Growth in the services sector is projected to business-friendly reforms, with a special focus on continue. The services sector is projected to grow the justice system, protecting minority investors, at an average rate of 7.1 percent over the medium and facilitating acquisition of construction permits term. A dynamic services sector is supported to attract more investments. RECENT ECONOMIC DEVELOPMENT AND OUTLOOKS by non-merchant services (administration and international cooperation), transport, trade and Fiscal policy is expected to continue to yield good telecommunications; and progressive redeployment performance with a progressive decline of the ratio of public services especially in Bangui and of debt-to-GDP in the medium term. The overall secondary cities due to the improved security fiscal balance surplus, including grants, is expected situation. The presence of humanitarian actors, to reach 0.6 percent of GDP in the medium term especially MINUSCA, also contributes to growth in as CAR authorities streamline public expenditure this sector. and push the domestic resource collection agenda. Improvements in the fiscal position should help On the demand side, private consumption and reduce the ratio of debt-to-GDP, and ultimately investments should continue to spur growth. reduce the cost of servicing debt. Integrating 17 revenues from the most important public agencies affect CAR’s economic recovery with deterioration and funds, in addition, to reducing parafiscal taxes in the fiscal and external positions and reduction as highlighted in the draft 2019 budget should in private consumption. As estimated by the IMF, generate additional tax revenues. a US$ 10 increase in international oil prices would reduce CAR’s domestic revenues by about CFAF The current account is projected to improve in 4 billion (US$ 7 million), thereby reducing its the medium term as the import bill declines ability to sustain economic recovery and invest progressively. Exports of goods and services are in development. Although CEMAC countries expected to grow in the medium term as forestry committed to implementing appropriate policies and cotton products pick up. Higher timber in response to the recent crisis, the CEMAC exports and the sale of stockpiled diamonds will economic situation remains challenging due to improve the trade balance. A progressive decline shortfalls in reserves accumulation and low path of imports bill in the medium term will improve of recovery. Additional delays in the regional CAR’s external position with a gradual decline of economic adjustments represent a downside crude oil prices. risk for the region, including CAR. CEMAC countries need to implement appropriate fiscal Extreme poverty is projected to decrease by and monetary adjustments and reforms to reduce 2 percentage points by 2021. Implementation downside risks. of the 2019 peace agreement is a critical step to economic recovery and poverty reduction. With CAR could take advantage of its reforms agenda an average economic growth at about 5 percent in to sustain growth and reduce poverty. A steadfast the medium term, progressive provision of basic implementation of the National Recovery and services, expansion of social protection extreme Peacebuilding Plan 2017–21 NRPP) and the CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE poverty is projected to decrease by 2 percentage process of Disarmament, Demobilization, and points in the medium term. Dynamic private Reintegration (DDR) will minimize security risks consumption and investments are expected to and stimulate growth. In 2018, project execution reduce poverty through economic growth and under the NRPP was estimated to represent job creation. about 3 percent of GDP, focused primarily on education, health, and infrastructure. Timely The possibility of renewed violence is a implementation of both the NRPP and DDR will significant downside risk for the country. As support the peacebuilding process, facilitate witnessed by slow economic growth in 2016– redeployment of security forces, reinstate public 2017 followed by stabilization in 2018, CAR’s services in the provinces, and reduce violence and economic recovery remains highly vulnerable to insecurity-related vulnerability of the primary violence. Escalation of violence will deteriorate sector. The peacebuilding process will facilitate the humanitarian situation, curb the increase in lifting of the ban on diamond exports imposed investments, and slow the rise in the production by the Kimberley Process Certification Scheme. and exports of wood products and diamonds as The scheme was set up in 2003 by the UN General well as agricultural products. Increased insecurity Assembly to prevent conflict diamonds from could also result in a decline in both private entering mainstream rough diamond markets. and public investments and international trade and could undermine government efforts to CAR’s dependence on international aid represents consolidate its fiscal position. Renewed violence a downside risk. External resources are critical to will increase inflation due to potential disruption the stability and economic recovery in CAR. In 2018, of imports of goods and services through the grants were estimated to represent 45 percent of Bangui-Beloko corridor, undermining the gradual government revenue after two consecutive years redeployment of public administration and of a drop of their share in government revenues. In services and stifle confidence. such a context, even a slight disruption in the flow of international assistance will weaken CAR’s fiscal CAR is also vulnerable to commodity price shocks and external position and economic growth. To and delays in CEMAC economic recovery. An reduce its vulnerability to international aid flows, 18 increase in international oil prices would negatively CAR should dedicate efforts to strengthen domestic revenue collection, improve management of natural and keep reforms on track to reduce vulnerabilities resources, and invest in development. associated with low reserves accumulation and weaknesses in the financial sector. Domestic Fiscal and structural reforms should stay the revenue remains below pre-crisis levels, and course. As noted above, CAR’s fiscal efforts are additional efforts will be needed in this area. The yielding positive outcomes. Authorities need to next chapter of this report analyzes the issue of maintain these efforts and structural reforms to domestic revenue collection in CAR and proposes secure fiscal stability and sustain growth. The BEAC policy options and reforms to strengthen tax and COBAC should implement their commitments revenue in a fragile context. RECENT ECONOMIC DEVELOPMENT AND OUTLOOKS 19 2 STRENGTHENING DOMESTIC REVENUE MOBILIZATION IN A FRAGILE STATE KEY MESSAGES 7 CAR’s domestic revenue remains among the lowest in Sub-Saharan Africa, reflecting a deep structural weakness in the tax system. 7 Inefficient tax instruments, weak tax administration and control systems, high tax exemptions, and persistent limited capacity are the reasons for CAR’s domestic revenues underperformance. 7 CAR can strengthen its domestic revenues by broadening its tax base, simplifying and reinforcing its tax system, taking advantage of the new peace agreement to establish a new social contract, and learning from peers. 7 Specific measures include modernizing the tax administration, curbing and monitoring closely tax exemption, and improving verification measures. 7 Improved implementation of property taxes could generate about CFAF 12 billion in tax revenues 7 Strengthening revenue mobilization in CAR will require strong political leadership and support to drive change. 20 Photo by Wilfried Kouame I t is urgent to address rising poverty and inequality in CAR. The country has come out of a long period of violence and political instability that significantly undermined economic conditions, negatively impacted government revenue, and eroded the effective delivery of public services. Poverty and inequality are rising, and the country ranks 188 out of 189 countries in human development, with a Human Development Index (HDI) of 0.36 in 2017 (UNDP, 2018). The country’s Human Inequality Coefficient is respectively 11.1 percentage points and 11.3 percentage points below the average in SSA and low-HDI countries, while income inequality remains higher at 49.2 percent. There are 27,406 refugees in STRENGTHENING DOMESTIC REVENUE MOBILIZATION IN A FRAGILE STATE neighboring states—of which 20 percent are under the age of five—and 655,956 people remain internally displaced (UNHCR, 2019). Addressing these issues in a sustainable way will require implementation of a set of mutually reinforcing measures and policies designed to: (i) strengthen DRM; (ii) ensure peace and security; (iii) strengthen the social contract between the population and the government; (iv) strengthen sustainable growth; and (v) fight poverty and promote shared prosperity. Mobilizing domestic resources is critical, not just as a way of raising government revenue but also as a means of shifting the country into a virtuous cycle of peace and security. Peace and security are essential pillars of a long-term development agenda. A peaceful and secure economic environment is essential to increasing capital inflows that contribute to raising government revenue. Increased government revenues can, in turn, be used to protect people and 21 their assets, creating a social contract that lays the education sector, for example, as of 2016, public foundation for taxpayer willingness to pay taxes spending in education represents only 1.3% of to a government that safeguards them. This social GDP. This is far below the Global Partnership for contract also extends to businesses and households Education’s recommended best practice levels of 4% by generating confidence in their ability to produce to 6% of GDP. Although tax revenues have increased and consume. Sustained growth can generate a shift gradually since 2013—and are expected to reach in government spending to policies and programs 8.4 percent of GDP in 2018—this is still not enough that lift people from poverty and promote shared to meet the growing needs of the population. prosperity. This may in turn lead to an increase of domestic revenues within the channel of improved There is a potential to increase tax revenues, tax compliance, therefore reinforcing the virtuous especially now that a peace agreement has been cycle of domestic revenue mobilization (Figure 2.1). signed. Tax revenues are about 4 percent of GDP below the potential of the country and under their 2012 CAR has some catching up to do in using domestic level mainly due to the low tax base, inefficient tax resource mobilization to invest in social sectors administrations, and a large and active informal sector. to reduce poverty. Compared with other countries in the region, CAR performs poorly in generating domestic resource mobilization; this affects government’s ability to invest in infrastructure goods and social and pro-poor programs. Domestic 2.1 Status of the tax revenues in CAR are composed primarily of tax revenues, which reached 8.4 percent of GDP in 2018 system against 0.8 percent of GDP for non-tax revenues. CAR’s government revenue, although on the CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE This is below the average of Sub-Saharan Africa increase since 2013, remains among the lowest in low-income and fragile countries. According to SSA, reflecting a deep structural weakness in the recent data, an estimated 71 percent of people in the tax system. CAR’s domestic revenues including Central African Republic live in extreme poverty both tax and non-tax revenues represent 8.2 percent on less than US$ 1.90 per day. Inadequate funding of GDP in 2016 (most recent data available), the in social sectors means that the government has third lowest in SSA after Somalia and Nigeria limited capacity to deliver basic services, many (Figure 2.2). The country’s level of domestic of which rely heavily on donor funding. In the revenues remains well below that of regional peers in CEMAC and countries affected by fragility, FIGURE 2.1 A conceptual framework of conflict and violence (FCV) in SSA. In 2016, average the virtuous cycle of domestic government revenues in FCV countries surged at resource mobilization 19.4 percent of GDP, which is about 2.4 times higher than in CAR. Domestic revenues in CAR were on an increasing path before dropping sharply from 11 percent in 2012 to 5.6 percent in 2013. Despite Strengthen increases since 2013 and estimates that government DRM revenues will reach 9.2 percent in 2018, the level remains structurally below the average of regional peers and FCV countries in SSA (Figure 2.3). Tax administration shortfalls, institutional arrangements, Fight against poverty and promote Ensure peace and and the inefficiency of the tax system are critical in security share prosperity explaining CAR structural weaknesses. Tax revenues continue to outweigh total government revenue, with an estimated share of 91 percent in 2018. Tax revenues are the primary Strengthen source of domestic revenue in CAR and, since Strengthen sustainable growth and sound PFM social contract 2010, have represented on average 88 percent 22 of government revenues (Figure 2.4). Non-tax FIGURE 2.2 CAR domestic revenue (% of GDP) FIGURE 2.3 CAR domestic revenue (% of GDP) compared to select Sub-Saharan vs. group of countries in Africa countries in 2016 Sub-Saharan Africa, 2008–2016 Lesotho 35 South Africa Seychelles 30 Namibia Congo, Rep. 25 Mauritania Swaziland Mozambique 20 Senegal Togo 15 Zimbabwe Liberia 10 Burkina Faso Mauritius 5 FCV SSA 0 Equatorial Guinea 2008 2009 2010 2011 2012 2013 2014 2015 2016 Cote d'Ivoire Gambia, The Zambia Central African Republic CEMAC CEMAC SSA FCV Kenya Gabon Source: World Bank staff calculations using data from the UNU-WIDER, ‘Government Revenue Dataset’. Rwanda Mali Ghana revenues dropped from 1.3 percent of GDP during Malawi Cameroon the period 2005–2012 to about 0.6 percent of GDP Guinea Uganda since 2013 as the mining sector collapsed during Tanzania the crisis. Production in the mining sector dropped, Guinea-Bissau Madagascar especially diamonds which were banned from Sudan Chad export following in the context of the Kimberley Central African Republic Process. The restrictions were partially lifted in Nigeria Somalia June 2015 and there is hope for a total lift of the 0 5 10 15 20 25 30 35 40 45 ban with the new peace agreement. However, Source: World Bank staff calculations using data from the UNU-WIDER, ‘Government Revenue Dataset’. the contribution of non-tax revenue to domestic revenues in CAR is low compared to regional peers and FCV countries in SSA (Figure 2.5). FIGURE 2.4 Tax and non-tax revenues in CAR, FIGURE 2.5 Tax and non-tax revenues in CAR 2010–2018 (% of GDP) vs. comparable countries, 2005– 2012 and 2013–2016 (% of GDP) STRENGTHENING DOMESTIC REVENUE MOBILIZATION IN A FRAGILE STATE 14 12 30 10 25 8 20 6 15 4 10 2 5 0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2005–2012 2013–2016 2005–2012 2013–2016 2005–2012 2013–2016 2005–2012 2013–2016 2005–2012 2013–2016 (es) Tax revenues Non tax revenues Domestic revenue CAF RWA FCV CEMAC SSA Source: World Bank staff calculations using data from the Ministry of Budget and Finance, IMF and World Bank. Tax revenue Non tax revenue Source: UNU-WIDER, ‘Government Revenue Dataset’. 23 the performance of comparable countries such as 2.1.1 Tax instruments Rwanda, FCV countries and regional peers in the SSA region. CAR’s tax instrument is broadly similar to most peer countries, although the overall revenue collected is CAR tax revenue remains below its pre-crisis significantly lower, and CAR was underperforming level and structurally below the average level before the crisis. In 2016, CAR was the fifth lowest of comparable countries. Since 2010, CAR has performing country in collection of tax revenue as a underperformed in collection of tax revenue with percentage of GDP (Figure 2.6). CAR underperforms an average of about 7.5 percent of GDP, while the even compared to FCV countries in SSA, which collect average level of SSA countries is about 17 percent on average 13.2 percent of GDP in tax revenues, for structural peers and 14 percent for aspirational almost double the performance of CAR. Similarly, peers (Figure 2.7). Total tax revenue collected in tax revenues collected in CAR are well below the CAR is more than 1.75 times below the average level average level of CEMAC and SSA countries, which collected on average 10.4 and 16.2 percent in GDP in in aspirational, regional and structural peers in 2017 2016, respectively (Figure 2.7). It is worth noting that and this is expected to remain the same in 2018. CAR was underperforming in tax revenue collection The recent crisis resulted in a significant drop in the before the civil war in 2013 (Figure 2.7). At that time, ratio of tax revenue-to-GDP from 9.9 percent in 2012 CAR tax and non-tax revenues were already below to 5.2 and 4.4 percent in 2013 and 2014, respectively. CAR underperforms in both direct and indirect FIGURE 2.6 CAR tax revenue (% of GDP) taxes, although its weakness is more pronounced for direct taxes. Direct tax revenue collected on compared to selected SSA CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE personal and corporate income accounted for on countries in 2016 average 2.1 percent of GDP between 2005 and 2012, before declining to 1.34 percent of CAR’s GDP after Lesotho 2013. This is at least 2 times lower than direct taxes Seychelles collected in Rwanda, FCV countries and regional South Africa Togo peers in SSA. The collapse of CAR’s economy in 2013 Botswana widened the gap between CAR and its comparable Senegal Mozambique peers and the private sector paid a considerable Zimbabwe Cabo Verde price as a result of the crisis (Figure 2.7). Liberia Djibouti Mauritius Congo, Rep. Gambia, The FIGURE 2.7 CAR tax revenue (% of GDP) Mauritania SSA vs. group of countries in SSA Kenya countries, 2010–2018 Ghana Malawi Burkina Faso Rwanda 20 Mali Cameroon Guinea 15 FCV Zambia Benin 10 Uganda Tanzania Madagascar CEMAC 5 Guinea-Bissau Central African Republic Equatorial Guinea 0 Sudan 2010 2011 2012 2013 2014 2015 2016 2017 2018 Chad Somalia CAR Structural peers 0 5 10 15 20 25 30 35 40 SSA Aspirational peers CEMAC Source: World Bank staff calculations using data from WDI, ICTD/UNU-WIDER, ‘Government Revenue 24 Dataset’, 2018. World Bank staff calculations using GFS, IMF and World Bank data. FIGURE 2.8 CAR tax revenue (% of GDP) FIGURE 2.9 Composition of tax revenues composition vs. group of countries in CAR 25 20 1.0 15 0.8 10 5 0.6 0 0.4 2005–2012 2013–2016 2005–2012 2013–2016 2005–2012 2013–2016 2005–2012 2013–2016 2005–2012 2013–2016 0.2 CAF RWA FCV CEMAC SSA 0.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 Indirect tax Direct tax Direct tax Indirect tax Source: World Bank staff calculations from WDI, ICTD/UNU-WIDER, ‘Government Revenue Dataset’, Tax on international trade 2018. Source: World Bank staff calculations using data from CAR authorities. As in comparable countries, indirect tax revenues are the primary source of tax revenues in CAR tax revenues in CAR, although they represent (Figure 2.9). Indirect taxes, including taxes on less than one-fourth of total tax revenues. As in international trade, contribute to at least 75 percent comparable countries in SSA, direct taxes in CAR to the overall tax revenue in CAR. The contribution are composed of CIT, PIT and other incomes taxes. of indirect tax to tax revenues is relatively high However, the contribution of CIT and PIT to total compared to Rwanda with 59 percent, CEMAC tax revenues in CAR has been about 19 percent with 62 percent and SSA countries with 52 percent on average since 2013. The is low compared to (Figure 2.7 and 2.8). Comparable countries tend to Rwanda, an aspirational peer, where CIT and PIT have a more balanced contribution of direct and represent on average 41 percent of tax revenue indirect tax to revenues relative to CAR, which during the same period. Also, CAR underperforms relies heavily on indirect taxes. relative to FCV countries in SSA, and regional peers in CEMAC and SSA (Figure 2.11). Direct taxation Corporate Income Tax (CIT) and Personal Income Direct tax increased gradually from 2013–2016, Tax (PIT) are the main components of direct before declining in 2017 as economic recovery slowed. With the collapse of the economy in 2013, FIGURE 2.10 Composition of income tax in CAR vs. comparable countries in SSA FIGURE 2.11 Composition of income tax in CAR, (% of GDP) 2010–18 (% of GDP) 8 2.5 STRENGTHENING DOMESTIC REVENUE MOBILIZATION IN A FRAGILE STATE 7 6 2 5 4 1.5 3 2 1 1 0 0.5 2005–2012 2013–2016 2005–2012 2013–2016 2005–2012 2013–2016 2005–2012 2013–2016 2005–2012 2013–2016 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 CAF RWA FCV CEMAC SSA Corporate Income Tax Personal Income Tax CIT PIT Other income taxes Other direct taxes Source: World Bank staff calculation using data from WDI and ICTD/UNU-WIDER ‘Government Source: World Bank staff calculations using data from CAR authorities. Revenue Dataset’, 2018. 25 direct tax revenues declined to 0.9 percent of TABLE 2.1 Statutory personal income GDP; this due primarily to the collapse of the tax rates and brackets in private sector and a drop in CIT revenue from CAR and Rwanda 1.1 percent of GDP in 2012 to 0.18 percent of GDP in 2013. The pace of economic recovery supported a gradual increase until 2016, when renewed Central African Republic Rwanda insecurity slowed growth and collection of direct Net Annual Income Rate Net Annual Income Rate taxes dropped to 0.7 percent of GDP in 2017 from (in CFAF) (%) (in RWF) (%) 1 percent in 2016. Revenues from direct taxes are 0–378,000 0 0–360,000 0 estimated to increase to 0.92 percent in 2018. 378,001–1, 680, 000 8 360,001–1,200,000 20 1,680001–3,360, 000 15 1,200,001 and more 30 CAR’s personal income tax rate increases with 3,360,001–5,040,000 28 — — level of income but does not account for taxpayer’s 5,040,000 and more 40 — — family charges. The average statutory tax rate Source: CAR’s DGID and Rwanda Ministry of Finance and Economic Planning. paid by wealthy households correlates positively to taxable income. Households earning more than CFAF 5,040,000 (US$8,631) are subject to a 40 percent than in CAR, where the maximum PIT rate is PIT rate, while the income of households earning 40 percent (Figure 2.12). Although this rate is less than CFAF 378,000 (US$650.3) is free from tax. slightly below the average in CEMAC (40.8 percent) While CAR’s tax policy on personal income shifts and other FCV countries (43.4 percent), the marginal the direct tax incidence from poor households rate in CAR appears to be higher than the rate to those with a greater ability to pay, it does not applied in 69.8 percent of others SSA countries account for taxpayer family charges. This reduces CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE (Figure 2.12). Almost a quarter of SSA countries the ability to assess whether the tax system is fully applied a marginal rate of 30 percent—DRC, Kenya, progressive. The effects of positive redistribution Malawi, Rwanda, and Tanzania—while a rate of from wealthy to poor households means that government spending should also be progressive, 35 percent is applied in one-fifth of countries— with transfers to poor households and a social safety Cameroon, Ethiopia, Equatorial Guinea, and net. In addition, progressive taxation with a higher Sierra Leone. tax rate for the upper end of the earning distribution does not necessarily imply a reduction in income The contribution of personal income tax to inequality in the sense that, a higher tax rate can CAR’s tax revenue is low and reflects structural trigger a free-rider effect and nourish the cycle of tax weaknesses in the personal income tax system. evasion. In this regard, the impact of progressive tax CAR’s effective PIT rate is estimated to be 0.8 percent policy may be muted. of GDP in 2016, nearly 5.7 percentage points below the value in Rwanda (6.5 percent) (Figure 2.13). CAR’s personal income tax system is relatively South Africa (14.8 percent), Burkina Faso (9.7 percent) complex. However, compared to Rwanda, with and Kenya (8.4 percent) outperform countries in only 3 tax brackets, CAR’s PIT system is complex. raising PIT revenue, while Nigeria (0.3 percent), (Table 2.1). This is reflected in the number and CAR (0.8 percent) and Burundi (1.3 percent) lag application of tax rates. For labor and capital income, behind, CAR’s performance is 3.6 percentage the tax rate applied depends on the job status of points below the average in SSA countries, where workers. Self-employed households working in the the contribution of PIT revenue was estimated to agricultural sector are subject to a minimum rate of be 4.4 percent of GDP (Figure 2.14). CAR authorities 0.3 percent, while the rate is 1.8 percent for workers in could increase the contribution of PIT to levels in FCV the diamond industry, services and other industrial countries (3.6 percent) and CEMAC (3.8 percent) by sectors. Harmonizing these rates would significantly (i) reducing the number of brackets, (ii) harmonizing improve PIT revenue collection. tax rates for self-employed workers across sectors, (iii) simplifying and digitalizing PIT declaration The marginal statutory personal income tax rate procedures, and (iv) strengthening capacity of the in CAR is among the highest in SSA. The average tax administration to monitor and undertake fiscal 26 marginal rate in SSA is 6 percentage points lower controls on formally registered firms (enterprises). FIGURE 2.12 Statutory PIT rates in CAR and SSA 30 50 27.3 45 43.4 40.8 40.0 25 40 21.2 34.0 35 20 18.2 30 % of SSA Max rate 15 25 20 10 9.1 15 6.1 6.1 6.1 10 5 3.0 3.0 5 0 0 [0,20[ [20,25[ [25,30[ [30,35[ [35,40[ [40,45[ [45,50[ [50,55[ [55,more[ FCV CEMAC SSA CAR Max rate Source: World Bank staff calculations based on data from CAR’s Ministry of Finance and Budget, KPMG, and TheGlobalEconomy.com FIGURE 2.13 PIT effective rate in SSA and CAR FIGURE 2.14 PIT effective rate (% of GDP) in 2016 (% of GDP) by country group in 2016 South Africa 14.8 5.0 Burkina Faso 4.4 4.5 Kenya Congo 4.0 3.8 Rwanda 6.5 3.6 Cabo Verde 3.5 Lesotho Senegal 3.0 Effective Rate Togo Mauritius 2.5 Ghana Uganda 2.0 Zimbabwe 1.5 Seychelles Malawi 1.0 0.8 Cameroon Swaziland 0.5 Mozambique Mali 0.0 STRENGTHENING DOMESTIC REVENUE MOBILIZATION IN A FRAGILE STATE Niger FCV CEMAC SSA CAR Botswana Source: World Bank staff calculations based on data from CAR’s Ministry of Finance and Budget, Zambia KPMG, and TheGlobalEconomy.com. Liberia Tanzania DRC Côte d’Ivoire Gambia Benin Angola Burundi Central African Republic 0.8 Nigeria 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 Source: World Bank staff calculations based on data from CAR’s Ministry of Finance and Budget, KPMG, and TheGlobalEconomy.com. 27 Corporate income tax CAR will need to restore the confidence of investors and businesses in order to improve CAR’s statutory corporate income tax rate is performance in CIT collection. Attracting foreign aligned with the average rate in SSA and fragile direct investment (FDI) is one way in which CAR countries in the region. As with 39 percent of can mobilize corporate tax revenue. However, SSA countries, CAR’s statutory CIT rate is fixed since CAR’s ability to attract and maintain foreign at 30 percent. The frequent alternative rates are direct investment (FDI) is highly correlated with 25 percent and 35 percent adopted by 15.2 of political stability, this has been a challenge for SSA countries in each case (Figure 2.15). The the country. The recent peace agreement should average CIT tax rates in the CEMAC region and increase business confidence to attract and fragile countries are slightly higher at 33.3 and maintain foreign capital. CAR’s system has also 30.3 percent, respectively. However, CIT is levied been vulnerable to tax exemption and evasion. on only a small number of companies due to With nearly 60 percent of the country under the significant tax exemptions and a large informal control of armed groups, the government’s sector that does not contribute directly to CIT ability to track or control financial flows in these revenues. Both factors are a source of inequality areas is limited. Government reforms should and distortion among taxpayers. focus on improving the business environment, rebuilding peace and security to attract foreign The contribution of CAR’s corporate income tax capital, curtailing tax evasion and increasing to GDP remains the lowest compared to many the contribution of corporate tax revenue African countries. The country’s corporate tax to GDP. revenue averaged 0.4 percent of GDP in 2016, two years after the 2013–2014 political crisis that Indirect taxes CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE forced many companies and firms to leave the country (Figure 2.17). Although CAR is gradually The main source of tax revenue for CAR is value- recovering from instability, the contribution of CIT added tax (VAT) yet revenues are low and remain revenue to GDP remains below the average below pre-crisis levels. Since 2013, VAT revenues in Rwanda, where this rate surged to nearly have, on average, amounted to 2.1 percent of GDP 2.6 percent of GDP. Catching up to rates in FCV and account for the primary source of indirect countries (2.5 percent), SSA (2.5 percent) and the taxes and total tax revenues in CAR (Figure 2.19). CEMAC region (2.1 percent) could generate an This is lower than the average level of 3.18 percent additional CFAF 21 billion (US$36 million) in total of GDP for the pre-crisis period 2010 to 2013. The government revenue (Figure 2.18). contribution of VAT to tax revenues represented FIGURE 2.15 CIT statutory rate in SSA FIGURE 2.16 CIT statutory rate by country and CAR grouping 60 54.5 34 33.0 50 33 32 40 % of SSA 31 Max Rate 30 30.3 30.0 21.2 30 29.2 20 15.2 29 10 6.1 28 3.0 0 27 [0,20[ [20,25[ [25,30[ [30,35[ [35,40[ FCV CEMAC SSA CAR Max Rate 28 Source: World Bank staff calculations based on data from CAR’s Ministry of Finance and Budget, KPMG, and TheGlobalEconomy.com. FIGURE 2.17 Effective CIT rate (% of GDP) FIGURE 2.18 CIT effective rate (% of GDP) in CAR, 2016 by country grouping in 2016 Mozambique 3.0 Botwana 2.5 2.5 South Africa 2.5 Seychelles 2.1 Togo 2.0 Lesotho Effective rate Congo Burkina Faso 1.5 Mauritius Swaziland 1.0 Niger Rwanda 0.5 0.4 Ghana Zimbabwe 0.0 Mali FCV CEMAC SSA CAR Cameroon Niger Source: World Bank staff calculations based on data from CAR’s Ministry of Finance and Budget, Kenya KPMG, and TheGlobalEconomy.com Cabo Verde Liberia Gambia Burundi on average 35 percent of total tax revenues in 2010, Zambia with no critical difference before and after the civil Senegal war. However, the outturn of VAT revenues remains Nigeria Côte d'Ivoire far below the average level collected in Rwanda, Tanzania FCV countries, and regional peers in the CEMAC DRC Malawi and SSA region, where VAT revenues collected Benin amount to at least 4 percent of GDP (Figure 2.20). Angola Uganda VAT revenues in CAR are estimated to increase CAR slightly to 2.7 percent from 2.6 in 2017. 0 1 2 3 4 5 6 Tax on international trade, the second source of tax Source: World Bank staff calculations based on data from CAR’s Ministry of Finance and Budget, KPMG, and TheGlobalEconomy.com. revenues in CAR, is low and estimated to decline in FIGURE 2.20 Composition of indirect tax in CAR FIGURE 2.19 Composition of indirect taxes vs. comparable countries in SSA in CAR, 2010–2018 (% of GDP) (% of GDP) STRENGTHENING DOMESTIC REVENUE MOBILIZATION IN A FRAGILE STATE 12 25 10 20 15 8 10 6 5 4 0 2005–2012 2013–2016 2005–2012 2013–2016 2005–2012 2013–2016 2005–2012 2013–2016 2005–2012 2013–2016 2 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 CAF RWA FCV CEMAC SSA Value-Added Tax Petrol taxes Excises Other taxes on goods VAT Excise taxes Tax on international trade and services Other taxes on goods and services Taxes on Intl. trade Tax revenue Total tax revenues Source: World Bank staff calculations using data from CAR authorities. Source: World Bank staff calculations using data from CAR authorities and the ICTD/UNU-WIDER ‘Government Revenue Dataset’, 2018. 29 2018. Since 2013, tax on international trade amounted TABLE 2.2 Emport and import taxes on average to 1.8 percent of GDP; this, from an (% of tax on international trade) average level of 2.9 percent during the three years before the crisis. This rate remains below the average in CAR, 2017–2019(p) of Rwanda and regional peers. Taxes on international trade represent about 35 percent of total tax revenues 2017 2018 2019(p) since 2013. Taxes on international trade revenue Import taxes 96.64 95.33 95.28 are estimated to decrease to 2.4 percent of GDP in Imports value added tax (VAT) 41.96 27.62 30.89 2018, after peaking at 2.6 percent of GDP in 2017, Excise duty 1.63 1.96 2.00 as total exports decline. This is mainly due to the drop in production of diamonds and a freeze on log Customs tax 37.28 35.60 37.97 production by forestry companies. Customs tax on hydrocarbons 6.15 7.68 8.79 Anti-pollution tax 0.67 1.17 1.70 Import taxes are the main source of taxes on Petroleum duty 6.86 18.68 11.78 international trade. Since 2017, import taxes Other 2.09 2.61 2.14 have accounted for more than 95 percent of taxes Export Taxes 3.36 4.67 4.72 on international trade, supported by VAT on Exit duties on diamonds and gold 0.24 0.92 1.31 imported goods and custom duties (Table 2.2). Exit duties on wood 2.34 3.09 3.24 The contribution of import taxes is expected to Others 0.78 0.66 0.17 decline slightly from 96.6 percent to 95.3 percent Source: CAR Ministry of Finance and Budget. due to the drop of imports VAT revenues at 27.6 percent of total taxes on international trade in 2018 from 42 percent in 2017. The increase in CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE revenues from petroleum duty from 6.9 percent (Figure 2.21). The lowest statutory rates are applied in 2017 to 18.7 percent in 2018 limited the drop in in Eritrea (4 percent), Nigeria (5 percent) and Liberia import taxes. (7 percent). The highest statutory rates are applied in Madagascar (20 percent), Cameroon (19 percent), CAR is in the upper bracket of African countries CAR (19 percent) and Congo (19 percent). with a higher VAT statutory rate. The country’s statutory rate of 19 percent is higher than the average rate in CEMAC (18 percent), FCV countries 2.1.2 Non-tax instruments (16.3 percent) and SSA countries (15.9 percent). More than 36 percent of SSA countries apply a Non-tax revenues have declined over time and VAT statutory rate of 18 percent, and 24.4 percent remain only a marginal source of revenue in CAR of countries apply a 15 percent statutory rate (Figure 2.22). For 2018, non-tax revenue in CAR FIGURE 2.21 VAT statutory rate in Sub-Saharan Africa and CAR 40 20.0 36.6 35 19.0 19.0 30 18.0 24.4 18.0 25 % of SSA 20 17.0 16.3 15 15.9 16.0 9.8 10 4.9 15.0 5 2.4 0 14.0 4 5 7 12 14 15 16 16.5 17 18 18.9 19 19.3 20 FCV CEMAC SSA CAR 30 Source: World Bank staff calculations based on data from CAR’s Ministry of Finance and Budget, KPMG, and TheGlobalEconomy.com. FIGURE 2.22 Composition of non-tax revenue in 2018 26% 24% Registration fees of stamps and curatorship Domanial revenues 0% Revenues from forestry, hunting, fishing, and water Mining 17% Revenues from parafiscal agencies and special affectation accounts 13% Autorisation fees and mandatory regulatory payment Public administrations 18% Social security and pensions 1% Other non-tax revenues Source: World Bank staff calculations based on data from CAR’s Ministry of Finance and Budget. comprised primarily registration fees on stamps (24 non-tax revenues. The sustained effort of the percent); state-owned forest and land use fees or government to reform parafiscal agencies and charges revenues (17 percent); and revenues from taxes will change the composition of CAR non- water, forestry, hunting and fishing (17.8 percent). tax revenues. In 2019, revenues from parafiscal Other non-tax revenues including other withhold agencies and special affectation accounts are on salary and products account for about one-fourth expected to be at 59 percent of non-tax revenues of CAR non-tax revenues. Total non-tax revenues (Table 2.3). Registration fees of stamps and dropped from 1.34 percent of GDP on average over curatorship; state-owned forest and land use fees the period 2005 to 2012 to 0.55 percent of GDP on or charges revenues; and revenues from forestry, average since 2013. This downward trend is in line hunting, fishing, and water, as well as other non- with that observed in the CEMAC zone, where non- tax revenues will be reduced by more than half. tax revenues fell from 15 percent to 9.3 percent of GDP due to crisis in the region that affected primarily revenue from the oil sector. Fragile countries in the region experienced a drop from 5 percent to 3.5 TABLE 2.3 Contribution to non-tax percent of GDP, while in the SSA region, non-tax revenue, 2017–19 revenues dropped slightly from 6.6 to 6.3 of GDP. STRENGTHENING DOMESTIC REVENUE MOBILIZATION IN A FRAGILE STATE Mining revenues dropped sharply in 2018 as 2017 2018 2019(p) production in the sector shrunk. The production Registration fees of stamps and 21.7 23.9 10.4 curatorship in the mining sector dropped from 59,780 tons in State-owned forest and land use fees 21.5 16.9 4.6 2017 to 12,530 in 2018 resulting in a collapse of or charges revenues non-tax revenues from the sector. Mining revenues Revenues from forestry, hunting, 13.2 17.8 7.2 dropped from 5.2 percent of total non-tax revenues fishing, and water to 0.6 percent in 2018, amounting to about CFAF 62 Mining 5.2 0.6 2.4 million (US$ 106,303) revenues collected. The mining Revenues from parafiscal agencies and 59 special affectation accounts production is should increase in 2019, stimulating Authorization fees and mandatory 4.8 13.5 5.3 thereby an increase in associated tax revenues from regulatory payment 0.6 to 2.4 percent of total non-tax revenues. Public administrations 1.2 1.1 2.7 Social security and pensions 0.2 0 5.5 Efforts to streamline parafiscal agencies and Other non-tax revenues 32 26.1 3.1 transfer their revenues to the Single Treasury Account will reshuffle the composition of Source: World Bank staff calculations using data from CAR authorities. 31 2.2 Why is domestic FIGURE 2.23 Tax potential and Tax revenues in CAR, 2000–2016 (% of GDP) revenue mobilization 16 14 so low in CAR? 12 10 CAR has untapped potential for mobilizing 8 domestic revenues. Key factors that inhibit CAR 6 from reaching its potential for domestic revenue 4 mobilization include a large informal sector, 2 weak tax instruments, low tax compliance and poor tax-customs administration performances 0 2000 2004 2008 2012 2016 weakened by a fragile security condition. Tapping into its full potential will require (i) a revised Tax revenues Tax potential tax policy aligned with those of best performers Source: World Bank staff estimations using data from GFS data and WDI. in the CEMAC region; (ii) a strengthened tax administration with the capacity to recover tax arrears and fight against tax evasion; and 7 percent of GDP. For 2016, the tax gap is estimated (iii) digitalized tax and customs administration to be 4 percent of GDP after picking up to 7 percent procedures to promote transparency and reduce of GDP in 2014 (Figure 2.23). The difference CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE tax misreporting. Government commitments between tax revenue collected and its potential underpinned by a transformative leadership level might be explained by tax administration that places peace and stability at the center for shortfalls, institutional arrangements, and sustainable development are also key ingredients the inefficiency of the tax system, including to leveraging domestic resources. inappropriate tax exemptions and parafiscal taxes that represent a significant shortfall for the country. A large informal sector also adds to 2.2.1 Inefficient tax instruments CAR’s tax gap. 2.2.1.1 Large tax gap Ineffective collection of VAT revenue might explain the CAR tax gap. Collection of tax revenue Collection of tax revenues in CAR is consistently in CAR dropped to less than 15 percent in 2014 below the country’s potential. One way to assess before a gradual increase to 21.5 percent in 2018. the efficiency of a tax system is to evaluate the size The C-efficiency score10 of CAR is relatively low of the tax gap, measured as the difference between at 18.3 percent compared to Rwanda, one of its tax potential and tax revenue effectively collected aspirational peers. For the latest year of data in the country. Accounting for the structure of the available (2017), the C-efficiency score for Rwanda economy, the level of social development, and the was on average about 43 percent, more than twice quality of its institutions, an estimate of the tax the efficiency score in CAR (Figure 2.24). CAR potential for CAR9 highlights a structural tax gap. authorities should increase the efficiency of VAT The tax potential for CAR has remained above tax tax collection by improving the capacity of tax revenues since at least 2000 by between 4 and administrations to fight VAT fraud, strengthen controls, and minimize tax exemptions on goods and services. 9 Tax potential is estimated using a simple macroeconomic model on the determinants of domestic tax collection. The estimation accounts for the structure of the economy (level of development, the importance of the agricultural sector, and the participation in international trade), 10 The C-efficiency score is computed as the share of tax revenues on goods the level of social development (education, inequality of revenue), and and services in total consumption over the VAT tax rate. The score is 32 governance. computed for the latest data available for Rwanda. FIGURE 2.24 VAT C-efficiency score— GDP and 1.3 percent in the CEMAC zone. Since 2013, excise tax revenues in CAR are more than 3.5 times CAR and Rwanda, 2010–2018 lower than the average level collected in Rwanda (percent) and SSA countries. Although inefficiencies in the customs administration plays an important role in 50 CAR’s underperformance, the low excise tax rate and coverage undermine the total revenue collected. 40 30 2.2.1.3 Significant number of 20 tax exemptions 10 Tax exemptions represent a considerable loss in tax revenue for CAR. Total tax exemption 0 amounted CFAF 2,387 million in 2016, representing 2010 2011 2012 2013 2014 2015 2016 2017 2018 about 3 percent of government’s revenues. On CAR - VAT C-Efficiency Rwanda - VAT C-Efficiency the total tax exemption, 43 percent was granted to Source: World Bank staff calculations using data from CAR authorities, GFS, and WEO. the private sector and the remaining 57 percent to NGOs, UN institutions, and international forces (MINUCSA) (Figure 2.25). Tax exemptions to the 2.2.1.2 Lower excise rate private sector are mainly in the form of VAT, which accounted for 70 percent of total tax exemption, Excise revenues in CAR are low and remain far while exemptions in the form of corporate income below the average level in comparable countries. tax accounted for nearly 19 percent (Figure 2.26). From 2005 to 2012, excise tax revenues represented In theory, tax exemptions to the private sector on average 0.2 percent of GDP. After peaking at may be used as an instrument to reduce the cost 0.6 percent of GDP in 2016, revenues from excise of newly established SMEs and to increase their taxes declined at 0.5 and 0.4 percent of GDP in 2017 competitiveness. However, those benefiting most and 2018, respectively. Despite a relative increase from these exemptions are foreign companies who in revenues collected after the civil war, excise taxes account for 90 percent of firms in CAR. Most foreign remain far below the average level of 1.8 percent of companies are net importers and operate primarily FIGURE 2.25 Tax exemptions from tax FIGURE 2.26 Composition of tax exemptions administration by entities in 2016, (%) by type of taxes in CAR, in millions of CFAF 2016 Private companies 1017.1 STRENGTHENING DOMESTIC REVENUE MOBILIZATION IN A FRAGILE STATE Associations 233.4 11% UN institutions 232.1 International Forces 223.9 NGOs 223.0 19% International Agencies 146.6 EU 107.6 SOEs 102.4 IFI 43.1 Embassies 70% 28.7 VAT Others 29.2 CIT 0 200 400 600 800 1000 1200 Others Source: World Bank staff calculations using data from DGID, IMF and World Bank. 33 FIGURE 2.27 Composition of tax and customs exemptions (%), 2016–18 100 80 60 Other exemptions Exceptional exemptions Private sector 40 Headquarter agreements Government projects externally funded Diplomatic franchises 20 NGOs and others International organizations International forces 0 2018 2017 2016 Source: World Bank staff calculations using data derived from DGID and DGDDI. in the service sectors (distribution, hotels); only a few organizations remain high but reflect the continued of them produce locally. In this context, exemptions support of the international community for the could not stimulate the development of the private peace effort in CAR. sector, especially the manufacturing sector which is CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE critically needed in CAR. It is therefore essential to align CAR’s private sector tax policy to medium- and 2.2.1.4 Higher VAT erosion index long-term development strategies and to identify for exemption priority sectors that create jobs. These and weak VAT productivity measures should be monitored for effectiveness. Despite a decreasing trend, CAR’s VAT erosion index remains extremely high. The erosion The adoption of the new investment charter index highlights the extent to which a tax system has significantly contributed to reducing the can be weakened by measures that hamper the exemptions granted to the private sector, but performance of collected tax revenue in relation efforts must be maintained. The authoritaies to its potential. These measures include tax credit continue to pursue the implementation of the and tax exemption, fiscal incentives, temporary policy of rationalizing exemptions in a context of tax exemption, and other preferential measures increased shortfalls in domestic resources. Thus, that significantly erode the fiscal base. The erosion the adoption of the new investment charter in index is the discrepancy between the effective tax 2017 made it possible to establish a framework rate and the statutory rate. The higher the index, for allocating and regulating exemptions granted the higher the loss in tax revenue. Analysis for to private companies. Total tax and customs the period 2012–2017 shows that the VAT erosion exemptions granted to private companies have index for CAR averaged 0.8711 (Figure 2.28). This more than halved, from CFAF 2.7 billion in 2016 to means that nearly 87 percent of potential VAT was CFAF 1.6 billion in 2018 (Figure 2.27). It is crucial lost due to exemption or other preferential tax to continue efforts to streamline exemptions and, measures. Most of these exemptions were granted above all, to minimize the emergence of new forms to the private sector in the form of VAT, amounting of exemptions for the private sector outside the to CFAF 1.02 billion, or 43 percent of total tax framework of the Investment Charter. In particular, exemption in 2016. This represents a tremendous the emergence of exceptional tax exemptions for loss in tax revenue. In addition, analysis of tax the customs cordon in 2018 amounting to about CFAF 1.3 billion. Estimates for the first quarter of 11 The higher value of the erosion index that picked at 0.93 in 2014, one 2019 indicated an increase of about CFAF 1.5 billion. year after the 2013 political crisis, can be interpreted as the result of fiscal 34 Tax exemptions granted to international forces and incentives to the private sector to create jobs. FIGURE 2.28 Evolution of the VAT erosion index, FIGURE 2.29 Productivity of VAT in selected 2012–2017 countries 0.95 0.93 0.50 0.40 0.90 0.89 0.88 0.30 0.85 0.85 0.84 0.20 0.80 0.10 0.80 0.00 Cameroon Central African Gabon Rwanda 0.75 Republic 2010 2012 2014 2016 0.70 2012 2013 2014 2015 2016 2017 2011 2013 2015 Source: World Bank staff calculations based on data from CAR DGID, IMF and World Bank. exemption in 2016 reveals that 70 percent of total to economic growth or output (GDP). However, tax exemption was granted in terms of VAT, the slight difference stems from the fact that tax supporting the argument that CAR is losing a fair buoyancy is a crude measure capturing discretionary amount of tax revenue through tax exemption. policy as well as real economic conditions affecting Reducing the levels of these exemptions is, tax revenue. Elasticity, a measure used more therefore, a critical way forward to improve VAT frequently, controls for the automatic switch in erosion. The adoption of the new investment revenue. The difference between the two measures charter in 2017 is expected to play a significant role may, therefore, be “interpreted” as the impact of the in this regard. discretionary policy rule. Improving VAT productivity is critical to increasing For the period 1981–2016, CAR’s government tax CAR’s tax revenues through the VAT. In 2016, revenue was inelastic while tax revenue on goods CAR’s VAT productivity12 was estimated at 0.2, and services was highly elastic. For this period, the structurally below the level in Rwanda of 0.43, and elasticity of tax revenue is estimated at 0.65, meaning Cameroon (0.37) (Figure 2.29). While there has that a one percent increase in output (GDP) will been some improvement since 2014, CAR’s VAT translate into a 0.65 percent increase in tax revenue productivity remains low. Reforms to increase tax (Figure 2.30). The elasticity of non-tax revenue is compliance and reduce the size of the informal sector estimated at 0.75, almost ten percentage points can significantly improve CAR’s VAT productivity. higher than the elasticity of tax revenue. However, the elasticity of tax revenue on goods and services is estimated at 1.33 (Figure 2.31). This implies that one STRENGTHENING DOMESTIC REVENUE MOBILIZATION IN A FRAGILE STATE 2.2.1.5 Lower tax buoyancy of the main reasons for CAR’s revenue gap is low tax capacity: the government can raise revenue even and elasticity more only by working towards increasing the size of the economy without raising the tax rate. CAR has implemented a set of measures for the period 2003–2016 to raise domestic revenue. Discretionary policies have only slightly affected Assessing the impact of such measures and reforms CAR’s government tax revenue for the period is a daunting exercise and requires a long time series. 1981–2016. The impact of discretionary policies is Given limited data; tax buoyancy and elasticity may estimated at 0.02 for tax revenue and zero for non- provide insights on the size and responsiveness of tax revenue (Figure 2.31). The same pattern holds each tax to changes in policy. Indeed, tax buoyancy for direct and indirect tax revenue; tax revenue on and elasticity are two sides of the same coin. They income, profit and capital gain; and tax revenue both measure the responsiveness of tax revenue on goods and services. The meager impact of such policies on tax revenue can be associated with weak 12 VAT Productivity = VAT/GDP*t Where t is the VAT statutory rate. political and economic conditions in the country over 35 FIGURE 2.30 CAR’s Tax buoyancy and elasticity, FIGURE 2.31 CAR’s Tax buoyancy and elasticity 1981–2016 by sub-component, 1981–2016 0.74 1.6 1.4 0.72 1.2 0.7 1 0.8 0.68 0.6 0.66 0.4 0.64 0.2 0 0.62 Direct tax Indirect Tax Taxes on Taxes on Taxes on revenue revenue Income goods and international 0.6 Profite and services trade Tax revenue Non Tax-revenue Capital gains Tax Buoyancy Elasticity Tax Buoyancy Elasticity Source: World Bank staff estimates from the ICTD/UNU-WIDER, ‘Government Revenue Dataset’, 2018. the period. Poor public financial management and a revenue have been estimated at 9.1 percent of GDP. buoyant size of informality coupled with government However, only 6.6 percent was effectively collected, inability to undertake and implement reforms are corresponding to a negative tax revenue gap of 2.6 CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE some of the key features that have significantly percentage points (Figure 2.32). Nevertheless, this dragged the country’s domestic revenue mobilization gap has declined sharply from 9.7 percentage points performance. Government reforms, including tax in 2013 to 2.9 percentage points in 2017, as tax reform measures such as changes in tax legislation administration performance improves gradually. and curtailing tax evasion, are designed primarily Hence, tax revenue ranged from 5.2 percent of GDP to restore tax buoyancy to output, broaden the in 2013 to 8.5 percent in 2018, corresponding to an tax base, and strengthen modern taxes in order to average annual increase of 8.5 percent. This upward maximize the impact of discretionary measures. tax revenue trend was driven by the performance CAR needs to accelerate implementation of agreed of the Fiscal Department of Big Enterprises (DFGE) measures with its financial technical partners in which amounted CFAF 23.6 billion — 74 percent order to foster domestic revenue mobilization and of total tax revenue in 2016 — while revenues from generate higher discretionary policy impacts on domain (CFAF 2.8 billion) and other fiscal agencies government tax revenue. (CFAF 5.5 billion) only accounted for 26 percent of total revenues (Figure 2.33). However, revenues collected from each tax administration was below 2.2.2 Weak tax administration the forecast reflecting endogenous and structural weaknesses, preventing CAR to mobilize domestic effectiveness resources. 2.2.2.1 Weak Tax and customs Political instability and insecurity affect CAR’s tax performance. CAR’s general tax performance administration performances reveals two key patterns: the strong correlation between tax administration performance and CAR’s tax administration performance13 is political stability, between implementation of improving gradually but remains below the pre- reforms to raise tax revenue in the aftermath of 2013 level. Since 2013, forecasts for average tax the crisis and tax administration performance. The virtuous cycle of DRM discussed above has stressed Administration performance in this context is measure as the ability to 13 the need for a peaceful and secure economic 36 meet the previsions. environment as a pledge to leverage domestic FIGURE 2.32 Evolution of CAR’s tax FIGURE 2.33 Prevision and realization in administration performance, cash by tax administration 2010–2018 in 2016 (in billion CFAF) 20 35 30.4 15 30 23.6 10 25 Tax revenue % of GDP 5 20 0 15 –5 10 –10 3.0 2.6 3.0 2.8 3.5 2.8 5 1.4 1.5 –15 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 DFGE DFME DFPE DRID 1-6 Domains Previsions Collected Gaps Prevision Realization Source: Staff calculations based on data from CAR’s DGID. Note: DFGE= Direction de la fiscalité des grandes entreprises; DFME= Direction de la fiscalité des moyennes entreprises; DFPE= Direction de la fiscalité des petites entreprises; DRID1-6= Direction régionale des impôts et domaines. resources. The political crisis that emerged in 2013 performance. And, regarding government has undermined the ability of the tax administration reforms to raise tax revenues, the increase of tax to operate efficiently. Ensuring peace should be a administration performance is expected to continue, key focus for the central government to restore the especially in light of the new peace agreement. effectiveness and efficiency of tax administration. Furthermore, weaknesses of tax administration There are structural weaknesses in CAR’s fiscal performance are also associated with endogenous control. Of the total amount of CFAF 14.3 billion factors, including ineffective recovery of tax of tax notified by the tax administration in 2017, arrears, outdated tax legislation, limited human only CFAF 3.1 billion was effectively confirmed, resource capabilities, and excessive use of manual of which 2.4 billion was payment of principal procedures for tax declarations. Addressing these and 0.7 billion was payment of taxpayer fines for could significantly improve tax administration non-compliance (Figures 2.34 and 2.35). Such gaps FIGURE 2.34 CAR fiscal control (in billions FIGURE 2.35 Arrears to recover in CAR by STRENGTHENING DOMESTIC REVENUE MOBILIZATION IN A FRAGILE STATE of CFAF), 2017 sector (in billions of CFAF), 2015 12.0 9.9 Fines 0.7 4.3 10.0 7.7 7.5 8.0 6.2 Principal 2.4 6.9 6.0 3.5 4.0 2.4 2.5 Total 3.1 11.2 1.5 2.0 1.1 0.3 0.2 0.1 0.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 Forestry Gold and Diamond Oil ITC Confirmed Unconfirmed Arrears Arrears Recovered Gap Source: World Bank staff calculations based on data from CAR’s DGID. 37 FIGURE 2.36 Customs administration FIGURE 2.37 Customs administration performances, 2016–2017 performance by sector in 2017, (in billion CFAF) in millions of CFAF 60 54.0 Diamond and 52.2 Gold Taxation 26 50 46.9 65 41.5 40 Petroleum 30 Taxation 16,929 17,638 20 Forestry 10 1,064 Taxation 1,474 0 2016 2017 –5,000 0 5,000 10,000 15,000 20,000 Previsions Realizations Gap Realizations Previsions Source: World Bank staff calculation based on data from CAR’s DGDDI. between notifications and confirmations are the primary source of customs administration revenue result of internal weaknesses in CAR’s tax system, (Figure 2.37). Estimates for 2018 are for CFAF CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE ranging from limited human resources to weak 52.5 billion and it is expected that this trend will tax administration productivity that results in a continue in the short- and medium terms as the low level of cases closed during the fiscal year. security and political conditions improve. Addressing these weaknesses can potentially generate more than CFAF 10 billion every year. Reforms in this area should focus on strengthening 2.2.2.2 Inefficient property tax the capacity of the tax administration to overcome collection system emerging challenges and speed up the process of tax verification to close cases. An incentive such There is potential for CAR to more than double as a special bonus program for staff with a higher its domestic property tax revenue. Less than CFAF number of cases closed per year could lessen the 1 billion was collected from land conservation gap between notifications and confirmations. between 2016–2018; this remains far below the country’s potential (Figures 2.38 and 2.39) and Customs administration performance was is due to structural weaknesses in the property mitigated over the period 2016–2017. In 2017, tax system. Although recording of land titles is revenue from customs administration was to increasing, a large number are still not recorded CFAF 52.2 billion against a forecast of CFAF due to (i) outdated property tax legislation; 54.0 billion, corresponding to a negative gap of (ii) poor tax compliance; (iii) lack of public nearly CFAF 1.8 billion (Figure 2.36). The opposite awareness on the value of obtaining a land title; pattern was observed in 2016, where the forecast and (iv) limited human and financial resources in was outpaced by CFAF 5.4 billion, with revenue of the tax administration to undertake field activities. CFAF 46.9 billion. Overall, there is a positive trend Current property tax legislation is outdated (August in realizations. From CFAF 46.9 billion in 2016, 1926 and May 1960) and fails to account for recent customs revenue rose to CFAF 52.2 billion in 2017, economic developments. For example, article 169 corresponding to an increase of CFAF 5.3 billion in (12) of the 201714 General Tax Code states that the one year. Such good performance was underpinned first house of a household used for non-commercial by contributions from the oil sector (CFAF 16 billion), purposes is exempted from property taxes. In addition, the forestry sector (CFAF 1 billion), and gold and 38 diamonds (CFAF 26 million), which represent the 14 The code captures some articles of outdated legislation. FIGURE 2.38 Land conservation performance FIGURE 2.39 Land conservation of developed in CAR properties 450 600 1600 400 1400 500 350 1200 300 400 in Million of FCFA 1000 250 300 800 200 600 150 200 100 400 100 50 200 0 0 0 2016 2017 2018 2016 2017 2018 Previsions Realizations Land Records Previsions Realizations Source: World Bank staff calculations based on data from the CAR DGID. article 169 (11) of the same code states that houses economy that makes up between 40 and 60 percent15 located outside urban areas and which belong to nonprofit of GDP. The size of the informal sector in CAR was associations or physical persons are exempted from estimated to be 41.1 percent, nearly 3.3 percentage property taxes. These articles are inefficient and points below the average in FCV countries, and socially inequitable. For two households with two 1.3 percentage points below the average in SSA properties each. The first household that we assume and the CEMAC region between 1991–1999 to be rich has two villas while the second household (Figure 2.40). The size of CAR’s informal sector that we assume to be poor has two small houses. surged 15 years later to 42.3 percent of GDP, the The two households are assumed to live in an urban highest compared to FCV countries (41.7 percent), area (like Bangui for example) to make it consistent CEMAC (39.6 percent) and SSA (38.6 percent). with article 169(11). Hence, according to article 169 And, although the challenge of informality is not (12) the two households are subject to a property specific to CAR, improvements have been recorded tax on their second house while their first house is in Mauritius (21.1 percent), South Africa (23.9 property tax-free. The question therefore is will that percent) and Rwanda (34.0 percent). Zimbabwe be fair? Revising this text to reflect on the country’s (62.8 percent), Nigeria (54.4 percent) and Benin social inequality will be a good way forward to (52.7 percent) still lead the distribution. CAR can increase the contribution of property tax into total learn from the experience of good performers on government revenue and improving the declarative how to design sound policies to effectively address STRENGTHENING DOMESTIC REVENUE MOBILIZATION IN A FRAGILE STATE nature of property tax system should be a priority. this challenge. A shadow economy is usually associated with 2.2.3 A buoyant and complex poor economic performance, weak government management, and unstable political conditions. informal sector Evidence also tends to support a strong correlation To broaden the tax base, CAR will need to tackle the issue of informality (including in the mining 15 This number might be even higher, if accurate and relevant data on sector) to maximize government revenue collection this matter was up to date. Informal discussion with government officials without jeopardizing the development of newly and CAR’s National Institute for Statistics (ICASEES) indicates that there has been no survey carried out to assess the effective size of the informal established SMEs. A common feature in low-income economy over the last 10 years. Hence, there is room for donors to support and FCV countries is the large size of their informal CAR’s government to track down the effective size of the informal economy and design sound policies tailored to country specificities economies. Recent estimates show that CAR is in to better channel resources from the informal sector to financing its the upper tail of SSA countries with an informal development agenda. 39 FIGURE 2.40 Informal economy (% of GDP) FIGURE 2.41 Correlation between tax revenue in SSA, 1991–2015 and the informal sector in CAR, 1991–2015 46 44.4 10 44 42.3 42.4 42.4 41.7 42 Tax revenue (% of GDP) 41.1 8 39.6 40 38.6 6 38 36 4 34 35 40 45 50 55 CAR SSA CEMAC FCV Informal sector (% of GDP) 1991–99 2000–15 Source: Staffs’ calculations from CAR’s Institute of Statistics (ICASEES) and Medina et al (2017) between a growing informal economy and factor the need to design sound policies to gauge and CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE allocation from the formal to the informal sector asses the size of such a sector and measure during downturns. In this regard, the informal the extent to which uplifting local firms from sector serves as a safety net and buffer against informality may generate additional resources poverty for households seeking to reduce the without putting more burden on their ability to impact of exogenous shocks on their consumption operate efficiently. behavior over time. These households are more often located in the agricultural sector, which accounted for nearly 56 percent of CAR’s informal sector over the period 2005–2012. Moreover, firms 2.3 How can CAR boost operating in the informal sector are hard to reach, and most financial transactions are made in cash. domestic revenue? As a result, a significant number of economic In a country like CAR, revenue gaps persist activities escape the tax authorities’ control, for three main reasons: a narrow tax base, lack eroding government tax revenue collection. of a sound tax system and low tax effort, and Even though firms operating in this sector pay low tax compliance due to a deteriorated social VAT and cannot claim it back because of their contract. With regards to the limited tax base, the informal nature, their potential contribution to prevailing level of economic growth and structural government revenue can increase significantly characteristics of the economy affect the feasibility if they are clearly identified and formalized. and costs of collecting taxes. A sound tax system Indeed, countries that exhibit a higher share of the is expected to feature four basic elements: equity, informal sector over GDP fail to mobilize domestic economic efficiency, technical efficiency, and revenues. Hence, the growing size of CAR’s revenue stability. A low tax effort points to a weak informal sector over the period 1991–2015 has tax administration and a low level of compliance on significantly undermined the country’s capacity to the part of domestic taxpayers, generally reflecting a collect tax revenue (Figure 2.41). The same pattern weak social contract. In a fragile context as in CAR, also holds at the SSA level with, however, a less all three drivers of revenue gaps are exacerbated, pronounced slope. It turns out that, the elasticity making it a daunting task to achieve the World of curtailing the informal sector on government Bank twin goals of poverty reduction and shared 40 revenue is higher in SSA than CAR, underscoring prosperity. These reasons are clearly highlighted in the previous section that looked at factors affecting estimated 50.2 percent16 for ITC and 41.5 percent for domestic revenue mobilization in CAR. This last the forestry sector these shares reflect weaknesses in section systematically uses them to explore how domestic revenue mobilization for CAR. Such poor to boost domestic revenue mobilization in CAR, performance is rooted in three key factors: (i) limited and concludes by looking at the experience of human and financial resource capabilities for tax Rwanda, one of CAR’s aspirational peers. The last recovery services; (ii) a lack of clear methodology and section shares also the experience of Georgia, which risk analysis to implement tax recovery activities; did remarkable progress in domestic revenues and (iii) the use of manual procedures to undertake collection after an important crisis. tax revenue recovery. CAR’s tax administration should take measures to address these issues by improving the efficiency of the recovery services to 2.3.1 Broaden the tax base design a sound methodology for tax recovery rather than the use of ad hoc and outdated procedures; and strengthening capacity to use the SYSTEMIF software Short-term solutions for improved productivity. To broaden the tax base, CAR should consider the following measures in the short term: Effective audits and verification measures should be implemented. These include implementing the � Reinforce targeted audits and verification rules established by the law to reduce costs for firms measures; and ensuring they are fair and announced ahead of time. Also, the rotation of civil servants (auditors) � Curb and closely monitor tax exemptions; and in charge of conducing the audits might be critical � Increase the application scope of the excise tax rate. to reduce potential corruption. Authorities should also consider abandoning prior liquidation of taxes declared and paid spontaneously and promoting Reinforce targeted audits and verification measures the use of new technology for payment of bills Increase the recovery rate of taxes through and taxes to minimize fraud— the introduction of targeted audits and other verification measures. Electronic Billing Machine (EBM) like in Rwanda is A key feature of CAR’s tax system is the huge gap a very good example. between tax forecasts and realization, which, since 2010, have amounted to about CFAF 84.4 billion in CAR should also reinforce legislation on tax both customs and fiscal administrations. Although recovery and coercive measures. Government the fragile economic environment might continue authorities should reinforce CAR’s tax recovery to affect tax revenue administration performance, by enacting laws to set a threshold for payment in additional tax revenues can be collected through cash, and by facilitating criminal actions against targeted audits and more verification measures. retention of withholding taxes, especially for These targeted audits and verification measures VAT tax. Coercive measures, such as seizure of STRENGTHENING DOMESTIC REVENUE MOBILIZATION IN A FRAGILE STATE should be conducted in a fair way so that they do goods through their passage at the customs and not represent an additional cost for firms. interdiction to participate in public procurement should also be enforced. CAR’s low tax efficiency could be addressed by strengthening fiscal controls and improving tax Curb and closely monitor tax exemptions recover capabilities. Data from DGID shows that 53.3 percent of CAR’s tax revenue was not recovered CAR should curb and monitor tax exemptions in 2015, while nearly 90 percent of expected tax closely. Tax exemptions in CAR are high; in revenue to recover in 2016 has not been effectively 2016, they represented about 3 percent of CAR’s collected. Moreover, in 2015, CFAF 14.9 billion, tax revenues and about 21 percent of domestic or 6.3 percent of the 2019 government budget, primary deficit. About half of all tax exemptions and 1.6 percent of 2015 GDP were not recovered. are for private companies. To broaden its tax base, Sectors covering ITC (CFAF 7.5 billion CFAF) and CAR’s authorities need to curb tax exemption, forestry (CFAF 6.2 billion) have both accumulated the highest share of uncollected tax revenue. At an 16 As a percentage of total amount to recover. 41 especially on VAT, CIT, and taxes on goods and Excise taxes are easy to implement and can be services. This will require a long-term political an immediate source of revenue. The current commitment. More than half of similar low-income excise rate for alcohol products in CAR is 45 countries have been successful at eliminating tax percentage points below that of Rwanda, where exemptions by reducing statutory and discretionary alcohol products are subject to a 70 percent excise exemptions (Guyana and Solomon Islands), ending rate. Even though rates have been added to the tax holidays (Burkina Faso), ending CIT exemptions 2019 budget law for specific products such as (Mauritania), and eliminating VAT exemptions champagne (CFAF 1,000 per liter), red and white (Uganda). wine (CFAF 600 per liter) and whiskey (CFAF 1,500 per liter), the total excise rate of under 40 percent CAR should revise policies governing tax leaves room to increase. Increases on alcohol exemptions. CAR authorities could benefit from an products could be based on alcohol content, with in-depth revision of tax exemptions to minimize the a threshold (e.g., 5 percent) that would exempt negative impacts on domestic revenue collection. low-alcohol products such as beer,but would apply The current tax exemption framework in CAR to liquor with a high alcohol content. For tobacco might be completely ineffective in attracting private, products, the excise rate is 35 percentage points domestic and foreign investment and growth. For below the level in Rwanda, where a rate of 60 fragile countries such as CAR, private investments, percent is applied. CAR should consider using a especially foreign investments, are driven primarily similar rate. In addition to those currently applied by security, availability and quality of public in the 2019 budget law, CAR could review the infrastructure, a skilled labor force, and a credible excise tax on tobacco products that contain nicotine and fair legal system. Advantages related to taxation levels beyond a specific threshold. By increasing seem to play a minor role compared to these factors. the excise tax on alcohol and tobacco products, CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE CAR should focus efforts on improving the business CAR could increase revenue by an estimated CFAF environment by securing property rights; investing 0.6 billion per year. in infrastructure, such as electricity access and reliability; and simplifying administrative processes Excise rates on telecommunications can generate for tax payment, permits acquisition, and other additional resources. The current excise rate on related processes. phone calls in Rwanda is 10 percent while this rate is zero in CAR and Cameroon (Figure 2.42). In addition to Rwanda, other low-income countries Increase the application scope of the excise tax rate such as Guyana and The Gambia increased imposed CAR should review the application of excise excise taxes on the telecommunications sector. tax rates on alcohol and tobacco products to Based on experience from these countries, the excise increase domestic resource mobilization. Excise rate on telecommunications represents an option to tax revenues in CAR amounted to 0.36 percent of leverage additional domestic revenues. In order to GDP, well below the average level in comparable minimize the impacts of such new taxes on the poor, countries. CAR has the potential to increase tax authorities could consider applying excise taxes revenues through its excise tax rate and coverage. of 10 percent on foreign calls beyond 10 minutes, FIGURE 2.42 Excise rates on selected products in Cameroon, CAR, and Rwanda Wines, liquor and whiskey 25 70 25 Telecommunication 0 10 0 Tobacco products 25 36 25 CAR Soft drink 10 39 25 Rwanda Alcoholic beverages (beer) 25 60 25 Cameroon 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 42 Source: Data from CAR’s Ministry of Finance and Budget, Rwanda’s Revenue Agency and Cameroon’s Ministry of Finance. daytime domestic calls beyond 20 minutes and each TABLE 2.4 Scenario of adapting CAR’s PIT MB of data usage above 3 GB. It is estimated that brackets as in Rwanda. this could leverage an additional CFAF 1.3 billion per year. Central African Republic Rwanda Net Annual Income Rate Net Annual Income Rate Long-term solutions (in CFAF) (%) (in RWF) (%) 0–234,000 1 0–360,000 0 To broaden the tax base, CAR should consider the 234,001–781,000 15 360,001–1,200,000 20 following measures in the long term: 781,001 and more 35 1,200,001 and more 30 � Rationalize the number of tax rates; Source: World Bank staff calculation . Note: The maximum income in each bracket would be equivalent to those in Rwanda, although � Tap the informal sector; and the maximum tax rate is different. � Exploit the potential of property taxation. Rationalize the number of tax rates could be considered: CAR’s tax system is complex, with a proliferation of tax rates in each tax field, numerous tax bases, a � Apply a minimum tax rate of 1 percent on multiplicity of tax brackets, and a strong tendency the lower range of personal income bands toward taxation on a forfeit basis. This complexity while maintaining the current income bracket. creates distortions and inequities and provides Broadening the tax base in CAR might involve few incentives to formalize economic activities, to associating all taxpayers as in regional peer extend the tax base. The World Bank Ease of Doing country such as the Republic of Congo. A Business 2016 report shows that a typical firm in minimum tax rate will broaden the tax base and CAR makes 56 tax payments in a year, significantly to include all households. more than the average of 38 payments in Sub- � Apply a minimum tax rate of 1 percent on Saharan Africa. the lower range of personal income bracket. CAR could reduce the number of PIT tax rate Simplifying the tax systems and reducing the brackets from 5 to 3, as in Rwanda, and reduce number of tax rates. CAR has 5 brackets for the maximum income in each range of personal personal income taxes (PIT) while Rwanda, an income bands. In addition to simplifying aspirational peer, has only 3. Yet PIT revenues the current tax system, this would reduce collected in Rwanda are on average 9 times higher the average tax rate on personal income. The than in CAR. A similar difference in PIT revenue current average PIT rate in CAR is 18.2 against performance can be found in the Republic of 16.7 percent in Rwanda. A high marginal income Congo, which has 4 PIT brackets. CAR should tax on wealthy households of 40 percent creates STRENGTHENING DOMESTIC REVENUE MOBILIZATION IN A FRAGILE STATE consider reducing the number of tax brackets to a potential for tax evasion. In comparison, simplify the system for the taxpayers. CAR can more than two-thirds of SSA countries have a learn from countries where reforms have been marginal rate on wealthy households below successfully implemented. Georgia simplified 40 percent. The suggested scenario will reduce its tax system by reducing the number of taxes the average tax rate from 18.2 to 17 percent to be paid from 21 to 7. Morocco targeted its tax (Table 2.4). base more directly by reducing the number of VAT special regimes., Jamaica introduced VAT on Tap the informal sector residential electricity consumption, and Seychelles converted the narrowly applied 7 percent Goods Tapping the informal sector and implementing and Services Tax (GST) into a broad-based 12 business-friendly reforms will attract private percent GST. investment, support economic recovery and sustainable growth. As noted earlier, there are major Reducing the number of tax rates can be supported challenges to development of the private sector by reorganizing income brackets. Two scenarios in CAR, including lack of access to infrastructure 43 FIGURE 2.43 Land conservation of undeveloped FIGURE 2.44 State taxes in CAR (in million properties (in million CFAF) CFAF) 2018 2018 2017 2017 2016 2016 0.0 100.0 200.0 300.0 0.0 200.0 400.0 600.0 800.0 Forecast Realization Forecast Realization Source: World Bank staff calculations using data from the DGID. and finance, and an ineffective judiciary sector. To associations and cooperatives. Including these promote business-friendly reforms, CAR authorities in a community tax would broaden the tax base could consider the following: for CAR. In addition to increasing the tax base, community taxation encourages partnership � Simplify procedures and reduce costs between government and communities to and constraints that limit the creation and develop solutions together. This, in turn, could development of business. In the 2019 World increase trust in the tax system. Bank Doing Business report, CAR was ranked CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE 183 out of 190 countries in terms of ease of Exploit the potential of property taxation doing business. The private sector in CAR requires bold reforms in almost all aspects. The declarative nature of CAR’s property tax Short-term solutions include (i) simplifying system should be complemented with an outreach tax declarative procedures, (ii) reducing the campaign to raise awareness on duties and the number of days it takes to start a business, benefits of land titles. Land titles are assets that register property, and get a construction can be traded for access to bank loans and financial permit, and (iii) enforce contracts. In addition capital. In a country where nearly, 75 percent of to attracting new private investors, such people do not have a bank account, holding a reforms should encourage formalization of land title represents an opportunity to present a activities currently in the informal sector. collateral and increase thereby their participation � Tapping into the informal sector through of households to the capital market. CAR should community taxation. CAR’s low domestic consider (i) carrying out campaigns in urban and revenue mobilization is also due to a large rural areas and in local language to raise awareness informal sector that represents about on the benefits of holding land titles and the need 42.3 percent17 of the economy. CAR can tap into to pay property tax (a corresponding budget line the informal sector by introducing a community should be provided for such campaigns) and tax.18 As in several other SSA countries, economic (ii) simplifying declarative procedures and reducing activities are structured in organizations, delays for obtaining a land title. Strengthening the declarative nature of CAR’s 17 This is the average over the period 2000–2015 property tax system will entail a series of measures. 18 The community taxation system can promote organizational strategies by supporting the use of systematic partnerships and problem-solving From a forecast of CFAF 445 million in potential methodologies with associations and cooperatives of firms in the informal revenue from undeveloped property between 2016 sector. The partnership will allow on one hand that firms in the informal and 2018, only CFAF 44 million was realized (or sectors are registered to one association and cooperative then establish the base of a system of taxation at a minimal rate and/or at a flat rate. The 9.7 percent) (Figure 2.43). Collection of state taxes collaborative framework could extend taxation to firms in the informal was 63.6 percentage points below forecast over sector while developing in parallel solutions to the issues facing those firms to ensure the continuity of the partnership, and progressively help the same period (Figure 2.44). The government 44 these firms to formalize. should address structural weaknesses in the system BOX 2.1 The potential gain of reforming property tax system in CAR Leveraging domestic resources from BOX FIGURE 2.1 The potential of CAR’s tax revenue (% of GDP) property tax is a daunting exercise in SSA given the complexity and tremendous 2.5 size of informality. Property tax represent 2.0 on average less than 1 percent of GDP in Property Tax revenue (% of GDP) 2.0 developing countries while in many African countries it only contributes to a meager 1.5 0.5 percent—and 0.1 percent in CAR in 1.1 2017—hereby raising the question of why 1.0 1.0 is such contribution so low? Is there any other factor preventing countries from 0.5 raising revenue from property tax? Could 0.5 corruption explain this stylized fact? The 0.1 answer to these questions goes beyond 0.0 the scope and objective of the present box CAR Lower Income Developing CAR closed to High Income Countries Countries Potential Countries which mainly aims at estimating how much CAR can leverage from property tax. A quick Source: World Bank staff calculations using data from CAR’s DGID and Ali, Fjeldstad, and Katera (2017). and basic estimation of the contribution of property tax to government revenue shows that, CAR can mobilize a minimum as firm incentive on their ability to produce. of CFAF 12 billion ($22 million) in a yearly In addition, it can help to improve the basis, corresponding to a nearly 1.1 percent optimization of land in urban arears where of GDP, only by reforming its tax system. access to land is an issue. (ii) equitable, This estimate can be revised upward if since it’s imposed on wealth rather than we account for property tax revenue from production and can serve as an instrument business and state taxes. to reduce inequality between the owners of capital (land and building) and the lenders The need to rely on property tax as a key (tenants). (iii) a secure revenue source to component to leverage domestic resources local and central government, because is theoretically grounded by the fact that it properties are physically immovable and is: (i) efficient, in the sense that it does not relatively easy to identify and tax even in the affect the allocation of resources as well case of a limited administrative capacity. by (i) carrying out a national land and property census, (ii) digitalizing declarative procedures, 2.3.2 Strengthen the tax system STRENGTHENING DOMESTIC REVENUE MOBILIZATION IN A FRAGILE STATE and (iii) increasing capacity for recording and monitoring. A national land and property census Enhancing tax policy and administration should be carried out (including developed and CAR cannot strengthen its tax revenues without undeveloped property) to provide a complete reinforcing tax policy and administration. picture for authorities to enforce compliance. Discussions with staff in charge of land conservation Improving performance of the tax administration in the DGID reveal that efforts are being made is critical to leveraging additional resource and but there are challenges to find a technical partner urgent reforms are needed in this area. CAR able to undertake such activities and allocate the authorities should standardize working methods necessary financial resources for such a large-scale by (i) establishing a manual of administrative and activity. The government should also increase the financial procedures; (ii) strengthening internal number of staffs for recording and monitoring. The control and introducing risk-based management; authorities can exploit the potential of property and (iii) strengthening inspections of services taxation which can generate a minimum of CFAF 12 through the implementation risk-based audit and billion ($22 million) in a yearly basis (Box 2.1). control programs. 45 Building capacity of the tax administration is key � introduce the use of a computer system for to strengthening the tax system. CAR should build electronic tracking and control of movement of capacity of tax auditors by identifying needs and goods in transit (electronic seals); ensuring training in the collection and use of fiscal � ensure the interconnection of DGDDI computer information. systems with those of Cameroon; and CAR should pursue efforts to eliminate parafiscal � introduce the use of a computer system for taxes without economic justification and transfer management of VAT. other revenues into the Treasury Single Account. Tax revenues increases in 2018 reflect mainly Invest in computerization of Berbérati, Gamboula, the progressive integration of parafiscal taxes in and Mongoumba customs posts and non-intrusive the Treasury Single Account (TSA). Authorities inspection (NII) systems. To date, only Bangui should inventory parafiscal levies and audit public and Beloko customs posts are computerized. With agencies related to parafiscal taxation in CAR. the significant traffic at Berbérati, Gamboula, Actions have been taken in this direction, but there and Mongoumba, computerization of these posts would result in increased efficiency and significant has been a significant delay in the implementation customs revenue. Use of computer systems will of these critical reforms. Completing these reforms eliminate the need for manual transactions that will require steadfast commitment and strong are vulnerable to fraud and corruption. CAR political leadership. The authorities should authorities should also consider investing in non- continue to audit public agencies to which these intrusive inspection (NII) technologies that allows revenues are assigned. customs authorities to inspect and screen vehicles and personal items through x-ray or gamma-ray CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE Modernize CAR’s tax system imaging. Use of such systems will require an investment in human capital. Extend computerization of public administrations and maximize the use of existing software. In Move progressively toward electronic methods for addition to improving the efficiency of the tax registration, tax payment, and controls to increase system, use of computerized systems could limit efficiency in tax collection. CAR authorities could abuse and corruption and facilitate the sharing take advantage of new technologies to boost the of information between the various bodies of performance of the tax system. Current plans the tax administration. The adoption of the for household and enterprise surveys present SYSTEMIF software in the fiscal administration opportunities to establish a single taxpayer and ASYCUDA for the customs administration identification number. This would facilitate is a step in the right direction. However, these identification and monitoring of taxpayers. systems are not being used to their potential: Electronic payment of bills and taxes should be several functionalities of SYSTEMIF, such as the promoted to facilitate fiscal control, collection, and control of tax recovery and the registration of enforcement. Efforts for electronic payment systems declarations are not being used; and actualization could initially be rolled out for large taxpayers of tariffs in ASYCUDA is not systematic. There and foreign firms, since they are likely to be more is scope to maximize use and interconnection familiar with new technologies. of these systems. With the peace agreement in place, customs offices may also be progressively Take advantage of the peace agreement to computerized. The government should also reestablish nonfunctioning custom posts. prioritize the following: CAR revenue underperformance is also related to nonoperational customs posts as a result of � purchase equipment to computerize relevant the conflict. The peace agreement should allow administrative services of the Ministry of authorities to progressively re-open nonoperational Finance and Budget (including the DFGE, DFME custom posts and to introduce the use of ASYCUDA and DFPE, DRID and DGDDI); to limit fraud and increase the efficiency of � create a back-up site for customs and tax data to collection. Table 2.5 summarizes the main policy 46 limit the risk of loss of information; recommendations. TABLE 2.5 Summary of policy recommendations Objectives Measures to be realized in the short term Measure to be achieved in the medium and long term Administrative measures • Strengthen human resource capacities and tax collection • Streamline the number of tax rates and avoid the proliferation services through training and technical assistance; of tax rates for a better understanding of taxpayers and • Pursue efforts to eliminate parafiscal taxes without economic improve efficiency in tax collection; justification and ensure the transfer of revenue to the Single • Reflect on the possibility to establish a system of community Treasury Account; taxation of the informal sector; • Strengthen the capacity of tax auditors and provide training on • Standardize working methods and procedures by establishing the collection and use of tax information; a manual of administrative and financial procedures at the • Strengthen public awareness on the advantages of land titles DGDDI and DGID; to encourage reporting of land property and stimulate property • Simplify reporting procedures and reduce delays in obtaining tax collection; land titles to stimulate property tax collection; • Strengthen tax payment procedures and reduce the cost for • Conduct a national survey of land properties to ensure optimal businesses to assume their tax responsibilities, particularly in and efficient taxation of property taxes; terms of VAT. Intensify communication with reporters around • Increase the capacities of the property tax department, this measure in the context of the agreement signed with the particularly in terms of land property identification, controls, operators; and verifications, the ability to enforce tax rules; • Plan and ensure the revision of the property tax legislation; Streamline exemptions and • Delete in the budget law (at the level of general provisions • Create a joint structure at DGDDI and DGID for the derogations relating to resources and charges), regulatory authorization management of tax and customs exemptions from the for all holders of public authority to grant an exemption or legislation. This structure could also be competent for the exemption from duties, taxes or duties or to create or modify a two levels of management identified above, namely (i) tax, duty or taxes or parafiscal charges; studies and opinions before taking any action containing • Adopt a law setting out the conditions for granting, the nature clauses exempting, abating or reducing taxes and duties and scope of exemptions from tax and customs legislation; (ii) implementation of the benefit of the exemption: study • Render obsolete, repeal and outlaw derogations outside the of applications for tax exemptions, liquidation of exempted codes such as (i) exemptions and franchises granted by rights, issue of the means of assumption of responsibility, and decrees, (ii) exemptions and franchises granted by letters;  payment of liquidated duties and monitoring of the use made • Have requests for tax exemption examined by the competent this means of payment; structures in this field, namely the DGDDI and the DGID; • Involve DGDDI and DGID in the preliminary work of the drafting of agreements containing franchise and exemption clauses; • Review and bring the legal derogations into line with tax and customs legislation; Controls and verification • Establish a targeted control and verification mechanism at the • Establish a transparent risk analysis methodology for measures customs and / or tax level; collection activities and apply existing legal rules to make them more equitable; • Rotating the officials (controllers) responsible for conducting the checks could be a key factor in reducing the risk of corruption; Modernize the tax • Maximize the potential and use of SYSTEMIF and ASYCUDA • Ensure the interconnection of the computer systems of the system: digitization and software. This involves, for example, ensuring the control of DGDDI with those of Cameroon; computerization tax collection and the registration of declarations in SYSTEMIF • Introduce the use of IT systems for VAT management; and guaranteeing a systematic update of tariffs in ASYCUDA; • Ensure the digitization of land declaration procedures for • Invest in the computerization of customs posts in Berbérati, better tracking; Gamboula and Mongoumba and non-intrusive inspection • Strengthen and promote the use of new technologies STRENGTHENING DOMESTIC REVENUE MOBILIZATION IN A FRAGILE STATE systems; for payment of invoices and taxes in order to reduce • Acquire the necessary equipment for the computerization administrative burdens and fraud; of the competent administrative services of the Ministry of • Accelerate the implementation of the interconnection of Finance and Budget (notably the DFGE, DFME and DFPE, DRID financial boards for greater efficiency and transparency. and DGDDI). • Create a customs and tax data backup site to limit the risk of information loss; • Introduce the use of computerized electronic tracking and control systems for the movement of goods in transit (electronic seals); • Gradually move to electronic methods of recording, paying taxes, and monitoring to increase the efficiency of tax collection. Source: World Bank staff Notes: Some of the reforms mentioned above have already been initiated but need to be continued and strengthened. 47 by the absence of a clear social contract between 2.3.3 Establish a new social authorities and citizens. Progress on security sector contract reform and reconciliation has been very slow due to weak human and financial capacities and a lack of Building a strong social contract is essential to consensus among political leaders, security actors increase trust and compliance. Evidence from and armed groups. several countries in Africa (see Ali et al., 2014)19 point out that tax attitudes are positively associated The recent peace agreement provides a unique with the provision of public goods in Kenya, opportunity to develop a new social contract in Tanzania, Uganda, and South Africa. Social capital CAR. Introducing a social contract in CAR will be a plays a critical role in the government’s ability to challenge, given the current situation in which local collect domestic revenue (see Kouame, 2019)20 and strongmen use violence, extraction and identity other related studies). Kouame (2019) argues that politics to serve their objectives. A social contract the relationship between taxpayers and the state requires a commitment by the state to achieve can be assimilated as a contract based on trust. growth by delivering stability and providing The level of trust reflects the level of satisfaction services to its citizens. Elections were an essential with the contract and taxpayers’ willingness to pay step in the peacebuilding process, but they are their taxes. While we are not able to assess the link not a quick fix, and the more challenging issues of between the social contract and tax collection in the reconciliation, power sharing, and state building CAR directly, due to lack of available data, evidence need to be addressed. Delivering services is not points to the importance of trust in authorities’ only about reinstalling services and institutions, as ability to leverage domestic revenues. CAR they often never existed locally, nor is it only about CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE authorities should work on reinforcing the social patiently building capacities in line ministries, as contract by providing essential public goods and it would result in a continued focus on Bangui. It services to the population and building taxpayers’ is about being innovative, agile, and sufficiently trust by establishing a more inclusive economy aware of the political and security context. Capacity and institutions that will stimulate the collection of building and technical assistance are important, but domestic revenues. the internal political processes and the progressive appropriation of institutions by communities and The social contract in CAR is constrained by a society are even more so. This is the condition on low level of security. At the time of independence which a social contract between the state and its in August 1960, CAR was an emerging state with citizens can be rebuilt, a key ingredient to leverage no experience of the social contract between the domestic revenues for the development of the government and citizens to pay taxes in exchange country. The new peace agreement brings hope for security. In fact, the colonial regime established for stability, recovery, and the new social contract. in CAR was extractive and exploited violently the However, implementation of the agreement will population living under its rule.21 This situation require a steadfast commitment from each side to continued after the independence until the major succeed. crisis in 2013, with every new violent clash between armed groups leading to additional displacement, looting, destruction of facilities providing services, and departure of staff (private sector, state, and 2.3.4 Learn from peers NGO staff). The ability of an ill-equipped and trained security apparatus in need of reform to Official development assistance funds a large bring armed groups under control was limited, proportion of public spending in CAR, as is the while the legitimacy of the state was undermined case in many low-income developing countries recovering from conflict. Donors almost entirely fund the CAR public investment budget. To 19 Ali, M., Fjeldstad, O.-H., and Sjursen, I. (2014). To pay or not to pay? effectively meet its long-term development goals, Citizens’ Attitudes toward Taxation in Kenya, Tanzania, Uganda, and the government needs to mobilize more domestic South Africa. World Development, 64:828–842. 20 Kouame (2019) “Trust to Pay? Tax Morale and Trust in Africa”. revenues by optimizing its tax policy and tax 48 21 CAR Systematic Country Diagnostics, Report No. 125268-CF. administration. With regards to tax policy, one key issue is broadening the tax base, focusing on the Over the past two decades, Rwanda’s tax system has wide divergence between effective and statutory undergone major policy and administrative reforms, tax rates. There is considerable scope to raise tax which have contributed to widespread improvements revenues without increasing tax rates by reinforcing across the revenue system. tax and customs administration, reducing tax exemptions, and fighting fraud and corruption In the immediate aftermath of the genocide, (including with the tax authorities themselves). Rwanda sought to quickly stabilize the economy. With regards to tax administration, building During this time, the government implemented a institutional capacity is an important component series of tax policy reforms to increase domestic in the reform agenda. First, the government revenues. In 1997, it also established the Rwanda should provide a governance framework within Revenue Authority (RRA), which is a joint tax- which the revenue authorities can perform customs semi-autonomous revenue authority effectively. Second, the government needs to train responsible for revenue collection and enforcement. and provide incentives for staff within revenue Since 2000, the government’s development program collection services to maximize their performance. “Vision 2020” has provided Rwanda with a Third, organizational improvement, IT-related strong impetus to improve its capacity to mobilize procedures, and manpower upgrading need to domestic resources. Many of the reforms have be complemented with sufficient attention to helped the tax system align with the objectives of accountability and anti-corruption institution Vision 2020, including macroeconomic stability building and cost-effectiveness of administration. and reduced dependence on foreign assistance In this last section, we revisit the experiences of (Table 2.6). Tax policy reforms since the early 2000s Rwanda and Georgia. have focused on widening the tax base, including the establishment of a Value-Added Tax (VAT) in 2001, as well as encouraging foreign direct DRM Lessons from Rwanda: investment and strengthening tax compliance. In Policy and Administrative Reforms 2000, Rwanda also began to roll out its National in a Post-Conflict Context22 Decentralization Policy, which involved fiscal decentralization. Rwanda’s tax system dates back to colonial rule (1885–1962), when the first tax legislation was passed. As part of this process, Rwanda began to channel This included a graduated tax, a tax on real property, resources collected through local tax sources, and a profits tax. In 1968, six years after independence, such as taxes on property, directly to districts. In the country enacted laws to introduce customs and 2009, Rwanda joined the East African Community excise duties, but otherwise made few changes to the (EAC) Customs Union, which led to a number colonial era tax system. Additionally, the tax system of new measures to harmonize Rwanda’s tax suffered from weak administration and enforcement, policies with those of the EAC in order to facilitate which led to poor tax collection and low tax revenue intraregional trade. Meanwhile, Rwanda also STRENGTHENING DOMESTIC REVENUE MOBILIZATION IN A FRAGILE STATE ratios, as characterized by the IMF.23 This issue was introduced reforms to modernize and improve further exacerbated during the genocide, when the the efficiency of its tax administration system average tax revenue ratio fell from 8.2 percent to (Figure 2.45). In 2003, the RRA restructured its 3.6 percent of GDP.24 In comparison, Burundi, which organization along functional lines (e.g. human had a similar GDP per capita and neighbors Rwanda, resources, information technology, domestic had an average tax revenue ratio of approximately taxes) rather than around specific taxes (e.g. 15 percent of GDP during the same time period. income tax, VAT). Around the same time, the RRA began to adopt new technologies to computerize 22 This section draws from the USAID funded report “Government administrative processes, such as tax returns Health Spending and Tax Reform in Rwanda, 2000–2013 – A Case Study”, processing, taxpayer audits, and tax filing. Efforts by Yoriko Nakamura and April Williamson, Results for Development to modernize the RRA are ongoing. Institute. 23 IMF (2000) “Rwanda: Recent Economic Developments.” Washington, DC: International Monetary Fund http://www.imf.org/external/pubs/ft/ These reforms were heavily supported by bilateral scr/2000/cr0004.pdf. 24 Macro Framework Public Dataset. Rwanda Ministry of Finance and and multilateral organizations. Most notably, the Economic Planning, 2015 UK Department for International Development 49 TABLE 2.6 Overview of key tax policy and administrative reforms in Rwanda Time Period Policy Reforms Administrative Reforms Mid-90s to 2000 Rapid revenue • Enactment of temporary export tax on coffee Developing tax • Creation of large enterprise unit to collect tax generation • Standardization of sales tax for domestically administration from 150 largest taxpayers – precursor to RRA produced goods and imports capacity • Establishment of Rwanda Revenue Authority • Increased excise tax for alcohol, soft drink and (1997) petroleum Early to mid-2000s Widening the tax • Introduction of VAT replacing sales tax (2001) Structural reforms • Reorganization along functional lines rather base • Enactment of new income tax legislation than tax categories (2003–4) (2005) • Establishment of new excise taxes (2006) Aligning • Districts given local tax from taxes on trade Modernization • Implementation of the Standardized Integrated with national licenses, property and rental income (2002) Government Tax Administration Systems decentralization (SYGTAS) (2003) policy • Introduction of other software to support customs operations. HR management, financial management, taxpayers’ audits • Launch of Revenue Authorities Digital Data Exchange (RADDEX) to coordinate the flow of goods with Revenue Authorities of other EAC countries Bolstering tax • Implementation of laws to improve tax compliance collection, create audits and appeals protocols, and institute penalties for tax evasion (2005–6) Late 2000s to 2011 Synchronize • Joint EAC Custom Union (2009) Modernization • Collection of social security funds (2010) policies with • Enactment of policies to comply with EAC (cont’d) • Introduction of electronic filing (2010–11) CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE East African practices -i.e. elimination of internal tariffs, • Implementation of electronic tax registration Communities establishment of common external tariff Customs Union Source: African Development Bank (2010); Land (2004); IMF (2000). FIGURE 2.45 Steps of administrative reform in Rwanda PRA toll-free hotline for taxpayer inquiries established; RRA VAT introduced at 15%; ASYCUDA++ Implementation assigned more administrative Excise duty levied per new law, VAT department established to collect non-tax revenue fees & charges to be collected replacing 2006 law 2003 2005 2009 2011–2012 2001 2004 2007 2010 Rwanda Revenue Authority CIT rate lowered from 35%: Rwanda signatory to EAC RRA introduces e-filing (RRA) reorganized along Dividend withholding tax Customs Union protocol; RRA and e-payment functions; implimentation of introduced PIT rate categorized assumes responsibility for SIGTAS begins into 3 brackets with marginal audity, collection, & rates of 0%, 20% and 30% enforcement of social security contributions from employers 50 Source: Adapted from Nakamura and Williamson (2015) (DFID) provided long-term technical assistance from tax base by eliminating several exemptions (VAT 1998 to 2010 and invested approximately £24 million exemptions on agricultural products, supply/import in the RRA over this period. DFID’s support to the of wheat, energy products, tourism, movies, and RRA included guidance on the creation of laws sporting events) and preferential rates. Tax offsets and regulations for its establishment, technical were also eliminated while excise stamps on cigarettes assistance across all aspects of its mandate, and and alcohol were introduced in 1999. However, providing physical infrastructure, human resources the impact of these measures has been somewhat and information technology systems. The IMF also limited by slow progress in implementation. provided a resident adviser between 1997 and 1998 to help establish and develop the capacity of the RRA. From 2000 to 2004, the Government of Georgia broadened its tax base and sped up reform of its Rwanda’s efforts to improve revenue generation tax administration. Fiscal policy measures led to a through tax policy and administrative reforms decline in the number of tax instruments from 21 to 8, appear to be largely successful. Between 2000 and the reduction of exemptions on VAT and profit tax, 2013, Rwanda’s tax revenue ratio increased by four the cancelation of cuts in land taxes and car fees, and percentage points from 9.6 to 13.4 percent of GDP, the increase of excise rates. Furthermore, in line with despite declining tax revenues from international recommendations from the Georgia Anti-Corruption trade, due to trade liberalization and integration Council, the government reduced the number of with neighboring countries through the EAC. ministries and staff, and increased wages of the However, this decline in revenues from import remaining public servants. Measures to strengthen duties was offset by increases from domestic tax the tax administration included: adopting a code revenues, particularly from taxes on income, profits, of conduct for tax and customs official; increasing and capital gains. Furthermore, Rwanda has made coverage of the large taxpayers’ inspectorate; training improvements to facilitate the process of filing taxes customs officials on shipment inspections; adopting in recent years. CAR could learn from this concrete a new regulation on the registration of taxpayers experience as the country strives to break the cycle and revising the associated taxpayers database; of instability and conflict. and implementing measures to reduce smuggling of tobacco and petroleum products (Table 2.7). Moreover, with the increased importance of excise DRM Lessons from Georgia: taxes, the government established an Excise Tax Tax and Customs Reforms in a Inspectorate. A financial police office was also created. Context of Fight Against Corruption25 During the period 2005–2017, tax revenue Following independence and years of political increases were supported by the computerization instability, Georgia quickly reformed its tax policy of the administration, measures to improve the and administration from 1994 to 1997. Tax policy tracking of funds, and the increase of taxes. The reforms aimed to broaden, the tax base, and to a government completed the transition to a Treasury STRENGTHENING DOMESTIC REVENUE MOBILIZATION IN A FRAGILE STATE lesser extent, increase tax rates. Additional measures Single Account for revenues and expenditures and included computerizing the tax administration updated its database of taxpayers. Moreover, some and the VAT form, improving tax assessment tax entities were merged, and taxpayers were given methods, reorganizing the tax administration along the right to appeal taxation orders at a faster pace. functional lines, and increasing collection efforts by Increases in excise taxes were introduced in 2010, introducing penalties on non-filling or increasing 2015 and 2017 to reduce the fiscal deficit (after the interest charged for under-reporting. 2008–2009 fiscal stimulus). In 1998–1999, Georgia strived to further its Government leaders shared a vision of the centrality mobilization of domestic revenues by approving of increasing tax revenues to restore the state. several fiscal measures. Georgia broadened its the Government leaders in Georgia understood that to boost revenues, the tax system needed to be much simpler and enforceable. They wanted a system 25 This section draws on the Directions in Developments series 66449 titled “Fighting Corruption in Public Services Chronicling Georgia’s Reforms”, that both provided revenues and was conducive to World Bank (2012). business development and economic growth. They 51 TABLE 2.7 Overview of key tax policy and administrative reforms in Georgia Time Period Tax Reforms Customs Reforms The state • Government’s ability to collect taxes steadily deteriorated after the • Borders were very porous and unprotected of affairs in collapse of the Soviet regime • Bribery and smuggling were the rules, not the exception 2003 • Increasingly sophisticated corruption schemes involving tax evasion, • There was no competitive recruitment or test of qualification to illegal tax credits, and outright theft of tax revenues become a customs officer • Weak enforcement of the Customs code Post-2003 Altering the • Introduce and enforce a policy of zero tolerance Strengthening and • A new law on customs tariffs with 3 rates Reforms mindset for corruption Simplifying the (0, 5 and 12 percent) was introduced (2006) • New laws were quickly adopted to reinforce the Legal Framework • Simplification of the import licensing system zero-tolerance policy for Customs (2005), limiting them to protecting public health, the environment, and national security • Establishment of a single revenue service that unified the tax and customs agencies (2010) • Introduction of a risk-management system, with inspections on less than 10 percent of all cargo Changing staff • Arrests and harsh sentences for corrupt tax Replacing and • Newly recruited staff received an extensive incentives collectors and inspectors Motivating six-month training • Cameras installed in tax offices to deter Personnel • Salaries for customs officials increased from GEL corruption 30 to roughly GEL 800 a month over 2003–05 • Target volumes of collections were set and carefully monitored Simplifying the • A new simplified tax code reducing rates, and Changing the • Renovation of the infrastructure at customs Tax Code and eliminating some taxes (pollution, property Environment points Broadening the Tax transfer, gambling, tourism, advertisement, and • Information on bribery in multiple languages at Base other minor local taxes) was passed (2005) customs points • Shutting down the operations of unlicensed CENTRAL AFRICAN REPUBLIC ECONOMIC UPDATE: STRENGTHENING DOMESTIC REVENUE MOBILIZATION TO SUSTAIN GROWTH IN A FRAGILE STATE small street vendors • The requirement that every commercial establishment purchase and operate electronic cash registers to record the VAT collected on each transaction Streamlining tax • Change in the filing dates on monthly Reforming • Reduction of the number of services at the administration declarations to the 15th of each month institutions border to just two: the border (passport) control • Elimination of independent audit on annual and the customs service filings • A one-stop shop to minimize the physical • Introduction of e-filing interaction between customs officers and traders • Introduction of risk-based management of tax • Implementation of an automated risk- audits management system classifying importers into • Introduction of a two-stage administrative risk categories based on 15 criteria dispute resolution mechanism to deal with • Electronic declaration and advanced declaration taxpayer appeals were also introduced Source: “Fighting Corruption in Public Services Chronicling Georgia’s Reforms”, Directions in Development 66449, World Bank (2012). established credibility early on, both through highly viewed as aggressive and sometimes arbitrary. New publicized arrests and by getting formerly corrupt institutional arrangements to address these concerns, tax officials to mend their ways. Foreign donor- including an appeal process and a dispute resolution financed tax advisers helped modernize the tax board that includes a member of civil society, are services, but many of the innovations and technology steps toward strengthening the accountability solutions adopted were homegrown. As elsewhere in framework. Doggedness in maintaining zero government, technology was used to both improve tolerance of corruption was key to the success of efficiency and reduce opportunities for corruption. customs reform, which included simplification of the import regime, modernization of procedures, and Sustaining improvements in tax collection transformation of the customs service. The struggle remains a continuing challenge. Policy makers to establish credibility took longer than in other need to further strengthen revenue administration areas, but the government’s persistence eventually and deepen the new culture of public service to paid off. Recruiting and training new staff, raising generate trust in rules-based, objective enforcement salaries, and heavily investing in new technologies 52 of tax laws. At times, tax administration has been and facilities were all critical. But at the heart of the success were the institutional changes that goods; and (iv) simplifying the tax system. Removing changed the incentives and the rules of the game and exemptions enhances the tax base and increases tax strengthened the accountability framework, essential revenues while reducing complexity (to enable more for the sustainability of these reforms. CAR could efficient tax administration). Reforming indirect taxes learn from this vigorous experience as it struggles to on goods and services has proved to be an efficient root out corruption in an economy that dearly needs and strong revenue booster. The Gambia replaced public finance to scale up poverty-reducing and a general sales tax with a VAT in 2013 to broaden growth-sustaining expenditures. its tax base and lift indirect taxes by 1–1.5 percent of GDP. Mauritania implemented VAT reforms (e.g., covering the mining sector, increasing the VAT Revenue Mobilization in Low-Income registries) and improved VAT C-efficiency from Countries: Lessons from Successful 37 percent in 2009 to 72 percent in 2013. Increasing excise taxes for specific goods is one of the simplest Country Cases 26 and straightforward measures can raise revenue The experiences of nine successful low-income rather quickly without fundamental changes to the countries (LICs) in tax revenue mobilization tax system. For example, The Gambia introduced highlight three key lessons. an excise tax on cigarettes and collected the revenue equivalent to 1.1 percent of GDP in 2013. Burkina First, tax reforms require high-level political Faso increased the excise tax for alcoholic beverages, commitment and buy-in from all stakeholders. as did Mauritania on tobacco. Simplifying the tax A high-level political commitment facilitates system is critical to fostering taxpayer compliance, coordination of all relevant agencies and encourages as seen in the reform examples in Burkina Faso. A implementation of tax reforms. Notably, in LICs simplified tax system with simplified legislation where institutions are fragile and large taxpayers may makes tax administration more efficient in weak use their political connections to avoid compliance, a states that lack basic institutions such as security and high-level political commitment is critical to contain a well-functioning judicial system. resistance of vested interests. In Burkina Faso, Mauritania, and Uganda, tax reform was driven by In addition to tax reforms, successful revenue a high-level political commitment, even though the mobilization rests on broad-based strategies institutional environment was weak. Many of the that recognize that what and whom to tax (tax country cases started their revenue reforms with policy) go hand-in-hand with how to tax (revenue weak administrative capacity and institutions. (e.g., customs administration). Such changes take time, Burkina Faso, Cambodia, Rwanda). A buy-in from all however, and should be seen in a longer-term stakeholders helps secure political and social support perspective. In most of these case studies, revenue for tax reforms. Effective communication with administration reforms figured prominently stakeholders that emphasizes the intended benefits and covered a broad spectrum of legal, technical of reforms—or the cost of maintaining the status and administrative measures. These included STRENGTHENING DOMESTIC REVENUE MOBILIZATION IN A FRAGILE STATE quo—can help mitigate resistance to reforms. strengthened management, governance, and human resource capacity; establishment of large Second, countries that pursue both revenue taxpayer office; use of information management administration and tax policy reforms tend to see systems for registration, filing and management of much larger and more persistent gains. Looking payment obligations, and an enhanced audit and at the experience of the nine successful LICs, four verification program. main tax policy reforms can be highlighted as levers to enhance tax revenue: (i) removing tax Lastly, a successful strategy often starts with low- exemption; (ii) reforming indirect taxes on goods hanging fruit to build momentum. These include and services; (iii) increasing excise taxes for specific simplifying the tax system and curbing exemptions; reforming indirect taxes on good and services (e.g., excises, VAT); strengthening segmentation 26 This section builds on Akitoby, M. B., Baum, M. A., Hackney, C., (e.g., the establishment of large taxpayer offices); Harrison, O., Primus, K., & Salins, M. V. (2018). Tax Revenue Mobilization Episodes in Emerging Markets and Low-Income Countries: Lessons from taking advantage of IT systems to improve a New Dataset. 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European Economic Review, 49(6), Washington, DC. 1451–1477; 55 4 TECHNICAL ANNEX 56 Photo by Wilfried Kouame 57 TECHNICAL ANNEX BOX 4.1 Identification of Structural and Aspirational Peers Structural peers conditions is assumed. – For the case of CAR, the identification of The underlying assumptions of structural comparators is that the structural peers is limited to a set of countries having a GDP per economic performance of CAR can be compared to other countries capita within a +/-10 percent range during the initial period of with similar structural characteristics as follows: analysis. 1.  Similarities in key socio-economic characteristics – Based on Empirically, employing the above conditions, the comparators are the economic literature, it is well known that characteristics such identified using the uniform and objectives formula below: as geographic constraints, demographic factors and exporter status play an important role in the structure of the economy and Average ( xpot;t ) (100 − D) ≤ development outcomes. CAR’s economy is characterized by three Average ( x cin;t ) of these: it is a commodities exporter, it is landlocked, and the Tbl ≤ (100 + D) ; pour x ∈ X et Tbi ≤ t < (1) population size, real GDP per capita. 2 2.  Similarities in economic growth trends – The identification limits Average ( xpot;t ) (100 − D) ≤ the comparators to countries with a median GDP growth of 2 Average ( x cin;t ) percentage points higher than the GDP growth of CAR over the Tbl period of analysis but grew much faster over time. ≤ (100 + D) ; pour x ∈ X et ≤ t < Tbl (2) 2 Using this methodology, structural peers for CAR have been identified Where, Tbi is the initial period of comparison; Tbl the final period of as Burkina Faso, Mali, Malawi, Niger, Rwanda, and Uganda. comparison; X the set of criteria/conditions defined above; D the distance between the potential comparators and CAR; xpot;t : Aspirational peers variables/conditions for the potential comparators at time t; xcin;t The underlying assumptions of the structural comparators is values of the criteria defined for the country of interest; CAR in that at some point in time, CAR used to share similar structural this case. characteristics with one or more countries. However, over time those countries managed to grow faster, creating a gap between After identification and validation with the authorities, Rwanda and them and CAR. The structural characteristics of the economy and Laos were identified as aspirational peers for CAR. Georgia is added identification formula are similar to the ones discussed above with as an aspirational peer in Chapter 2 to learn from its successful the important difference that real GDP per capita is the main variable reforms and domestic resource collection as the country increased used to choose the aspirational peers. Also, similarities in the initial significantly its domestic revenues after a major conflict.