Speech

Building a Virtuous Cycle

June 7, 2017

Introduction

Thank you, Zain, for the kind introduction.

I would like to thank the European Commission for inviting me to take part in European Development Days and for allowing us to host this panel together with Oxfam.

I know it will be a productive conversation — you have excellent participants — including the IMF’s very own Abe Selassie.

I must say I am impressed by the creative energy bubbling in the hallways and infusing every session.

Earlier this morning, I spoke about women’s empowerment and our ability to change the economic landscape through policy reforms such as childcare and maternity leave. This afternoon, we are here to discuss an equally powerful tool for global growth — domestic resource mobilization.

I was considering the connection between the two topics and was reminded of a wonderful line from Margaret Mitchell, the author of Gone with the Wind, who wrote, “Death, taxes, and childbirth. There’s never any convenient time for any of them!”

Well, Ms. Mitchell was right, of course — but all three are central to our lives, and in fact taxes, and the improvement of tax systems, can boost development in incredible ways — from health care to education to security.

So today, allow me first to explain the IMF’s commitment to capacity development and second, to outline strategies governments can use to generate stable sources of revenue and build inclusive economies in the process.

1. IMF Commitment to Capacity Development

You may be most familiar with the IMF through our lending programs and assessment of global economic health.

You might know us as well through our crisis response — including 380 million dollars in financial assistance delivered during the Ebola outbreak.

But the IMF has a third important development mission — capacity development.

The IMF works with governments around the world to modernize their economic policies and institutions.

These projects help countries unleash growth, create jobs, and build durable economies.

Our capacity development programs cover a range of areas. From working with the Central Bank of Kosovo to modernize its financial system, to training nearly 30,000 individuals through free online economics courses, to the focus of our event today — enabling countries to raise public tax revenues efficiently.

Resource mobilization can, if pursued wisely, become a key pillar of strong economy, and can help meet critical needs without jeopardizing debt sustainability.

New investment strengthens communities through schools, hospitals, and roads. These enhancements to physical infrastructure and human well-being boost economic capacity and make private investment attractive.

As cities and towns are galvanized, citizens experience the benefits of their tax dollars at work; creating a virtuous cycle of improved infrastructure, better compliance, and stronger growth.

For many developing countries, increased revenue is a necessary catalyst to reach the 2030 Sustainable Development Goals, and can be a driver of inclusive growth.

Yet in some countries revenue remains stagnant, as the resources needed to enhance economic and civic life sit on the sidelines.

This is where the IMF comes in.

2. Stable Sources of Revenue

In 2016, we worked with more than 130 countries to improve public revenue collection.

Demand from our members is rising steadily. In 2016, 50 percent our capacity development in public finance focused on revenue administration and tax policy. We plan to intensify our efforts in the coming year, with a concentration on developing countries.

None of this would be possible without financial support. Our cooperation with the EU has allowed the IMF to meet the needs of our members — and we are grateful the EU has become our second largest capacity development partner.

How significant is the resource problem?

Developing countries typically collect between 10 to 20 percent of GDP in taxes, while the average for advanced economies is closer to 40 percent.

IMF staff research shows that developing countries should aim to collect 15 percent of GDP to improve the likelihood of achieving stable and sustainable growth.

But some nations are falling short.

In Somalia, tax revenue amounts to less than 2 percent of GDP; in the Democratic Republic of Congo, about 6 percent; in Afghanistan and Myanmar only 7 to 8 percent.

But here is the good news: We know what works.

• In Senegal, the IMF launched a targeted program to help the government transform tax collection via electronic payments. This program helped increase the tax ratio and reduce the scope for fraud. But we did not stop there. In 2016, the IMF and Senegal organized a “hackathon” in Dakar, where we workshopped creative ways to simplify taxpayer obligations.
• In Mongolia, 430 large companies account for approximately 50 percent of tax revenue. The government asked the IMF for assistance in strengthening its tax system. Together we worked to increase transparency and improve compliance. After implementation, a nearly 100 percent on-time filing rate was achieved in the large taxpayer office and taxpayers expressed renewed confidence in the system.

There are many tools that can be utilized — depending on specific country needs — including reducing tariffs, cracking down on tax evasion, and incorporating value added taxes (VAT).

The idea is not simply to collect “more” — but rather to be “smart,” both about how revenue is collected and how spending is managed and organized.

I trust this comprehensive approach — from capacity for revenue collection to spending — will be part of your conversation.

Conclusion

Let me conclude by emphasizing the spirit of collaboration I have seen throughout this conference.

All of us have come to Development Days with the same mindset — a willingness to learn from one another and a commitment to build a more peaceful and prosperous future together.

I am pleased to join you in this effort, and the IMF is honored to be your partner. I wish the panel an engaging and enlightening discussion.

Thank you.