August 2019 - Number 175 EITI AS AN INSTRUMENT OF FISCAL TRANSPARENCY AND ACCOUNTABILITY IN CONTEXTS OF FRAGILITY AND VIOLENCE (FCV): A COMPARATIVE CASE STUDY OF AFGHANISTAN AND IRAQ (PART 1) Emmanuel Cuvillier, Sridar Padmanabhan Kannan1 disclosed through fiscal transparency measures is utilized effectively by public oversight I. Introduction institutions in terms of either sanctions or non- sanctions-based approaches. The enforcement of Fiscal transparency is a vital requirement for fiscal accountability is normally vested with a effective fiscal policymaking. Budgets, including country’s legislative bodies, such as the Iraqi their underlying fiscal forecasts, must provide a Council of Representatives, the Parliament of the clear statement of the government’s budgetary Kurdistan Region of Iraq, and the National objectives and policy intentions. Credible Assembly of Afghanistan. budgets also require comprehensive, timely, and reliable data about the evolution of public The Extractive Industries Transparency finances, which enables sound financial Initiative (EITI) is a global standard for projections. enhancing transparency and accountability in the governance of oil, gas and mineral resources (that is, the extractive industries). It requires periodic Box 1: What kind of data benefits fiscal public disclosures of information about a policymaking? country’s extractive industries. This includes Fiscal transparency ideally involves ensuring sector data, such as legal and regulatory that published fiscal reports: information, details about licenses and contracts, data on beneficial owners of operations, Cover a wider range of public sector production figures, as well as economic and institutions; social contributions of companies. EITI also Capture a broad range of direct and requires disclosure of financial data relating to contingent assets and liabilities; extractive industries, such as reconciled figures Take a rigorous approach to fiscal of company payments and government forecasting and risk analysis; and revenues; revenue allocations and transfers; data Present actual and forecast fiscal data on sector exports; and quantitative information on a consistent basis. about the contribution of the sector to the economy. Analyses of data disclosed through EITI, especially in countries dependent upon extractive industries, often enables the identification and delivery of key measures to Fiscal accountability concerns the accountability strengthen fiscal accountability. of the government and its civil servants to the country’s citizens and public institutions. Accountability is ensured when actionable data 1 The authors work in the World Bank’s Governance Global Practice. August 2019 · Number 176· 1 II. Why EITI? disclosed through EITI has been effectively leveraged to support transparent and The extractives industries sector, when governed accountable fiscal governance in Afghanistan well, can be an engine of economic growth and and Iraq. sustainable development. When proven geological reserves are reinforced by appropriate III. The Country Cases: Afghanistan and systems, informed and transparent decision- Iraq making, and efficient institutions, the sector can significantly boost medium-term economic The two FCV countries offer contrasting growth, foreign direct investment, governmental scenarios in terms of the potential and role of the revenues, and inclusive benefit-sharing. This is sector in their respective national contexts. especially true in resource-dependent economies, or in small-sized economies with significant Afghanistan is an International Development untapped geological resource potential. The Association (IDA) country with a small-sized sector can also be leveraged to enable economic economy, largely dependent on external aid diversification over the long-term. funding. Extractive industries’ development in Afghanistan is still at a nascent stage. As However, when mismanaged, the sector may disclosed in the latest EITI Report on become a fertile ground for rent-seeking and Afghanistan, the extractives sector in 2016 corruption. The adverse environmental, social, accounted for around 4 percent of government economic and political consequences associated revenues and 5.5 percent of exports. These with such scenarios have been well documented contributions were mainly led by the production in the literature on the resource curse. This refers and sale of coal. However, there is significant to how, under certain circumstances, countries potential in metals such as copper and lithium, with an abundance of extractive resources, often which will be required for low-carbon future. A have lower economic growth, weaker public potential large-scale copper mine in Mes Aynak, institutions, and worse development outcomes the development of which is currently under than countries without such resources. negotiation, can potentially be a turning point for the country. The nature of this sector has significant implications for FCV countries. It can either In terms of the country’s national context, the provide a fillip to peace-building efforts or fuel most useful contribution of the sector lies in its conflicts; either way, it is of paramount potential to boost governmental revenues in the importance that the efficient, transparent, and medium-term through greenfield projects, accountable governance of the sector be ensured. thereby reducing the country’s reliance on foreign aid. Currently, the civilian expenditure Transparency and accountability in sector budget of the Government is financed to the governance is a basic and essential requirement extent of about 51 per cent by development to leverage the extractives sector as an engine of partners. This is thus a clear case for Afghanistan economic growth in FCV settings. Enabling this to sustainably, transparently and accountably involves two vital steps: (i) obtaining and/or harness its extractive resources for national publishing relevant and actionable data development. The medium-term nature of the regarding sector governance (transparency); and sector’s returns also lends itself to potentially (ii) using the data to support responsible, contributing to peace-building strategies. efficient, and informed sector governance (accountability). Iraq is an International Bank for Reconstruction and Development (IBRD) country economically Though several mechanisms exist to facilitate dependent on its oil and gas sector. Iraq’s most transparent data disclosures, EITI has become the recent EITI Report, disclosing data for the year preeminent transparency initiative in the sector. 2016, revealed that the sector accounted for more This note presents two case studies on how data than 99 percent of export values, 96 percent of August 2019 · Number 176· 2 governmental revenues, and almost 30 percent of gross domestic product (GDP). These figures are representative of the country’s extractive resource revenues — despite the fact that 2016 witnessed the lowest average oil prices in more than a decade. Indeed, these figures remained more or less in the same range over the past decade, exposing the national economy to the volatility of the commodity price cycle and a weakening of fiscal resilience. The sector’s ideal contribution to Iraq would be toward increasing the country’s economic growth and investment, increasing revenues, anchoring infrastructural development, and facilitating inclusive revenue- sharing. Simultaneously, measures would also have to be taken to protect the economy from external shocks associated with the sector. Both Afghanistan and Iraq are EITI implementing countries. In providing technical assistance in addressing corrective actions for improved EITI implementation, two important links were observed: (i) at times, administrative reforms were required to facilitate effective data collection, warehousing, and disclosures, and (ii) the data collected could be used for improved administrative and developmental outcomes. August 2019 · Number 176· 3