Country Reports
2014
May 21, 2014
Islamic Republic of Afghanistan: Staff Report for the 2014 Article IV Consultation
Description: KEY ISSUES Context. Over the past decade, Afghanistan has made enormous progress in reconstruction, development and lifting per capita income. Security and political uncertainties, and weak institutions have constrained growth and weighed on social outcomes. With significant reform efforts and donor support, Afghanistan has maintained macroeconomic stability, implemented important structural reforms, and built policy buffers, but significant vulnerabilities remain. The IMF has been supporting Afghanistan through technical assistance and a three-year Extended Credit Facility (ECF) arrangement. Reviews under the ECF arrangement have been delayed. Outlook and risks. 2014 is a crucial year in the political and security transitions and the run-up to the “transformation decade” (2015–24). Assuming smooth political and security transitions, continued reform and donor financing, the outlook should be positive. Large security and development expenditure needs and a limited domestic revenue capacity mean that Afghanistan will remain dependent on donor financing for an extended period. Macroeconomic stability, structural reforms, and political and security stability are needed to ensure inclusive growth. Risks, mostly on the downside, are related to adverse domestic or regional security developments, political instability, inadequate implementation of economic policies, and donor fatigue. Policy recommendations. The authorities’ economic strategy (maintaining macroeconomic stability, strengthening the financial sector, improving economic governance, and moving toward fiscal sustainability) remains appropriate and needs strengthened implementation. Sustained implementation of this strategy will safeguard growth and build buffers to help manage shocks. Policies should continue to aim at strengthening revenue collection, managing money growth to control inflation while preserving exchange rate flexibility, strengthening bank supervision, and quickly enacting anti-money laundering (AML), countering financing of terrorism (CFT), banking, central bank, and value-added tax legislation.
May 20, 2014
Republic of Korea: Financial System Stability Assessment
Description: This Financial System Stability Assessment report on the Republic of Korea highlights that the Korean economy is experiencing a modest recovery, helped by supportive monetary and fiscal policies and buoyant exports. GDP growth is expected to rebound to 2.8 percent in 2013, and strengthen further to 3.7 percent in 2014, in view of the projected global recovery and a gradual pickup in domestic demand. Inflation has fallen to 0.7 percent in October 2013 from 4.2 percent in 2011. With stronger exports and muted domestic demand, the current account surplus has widened and is expected to reach about 5.5 percent of GDP in 2013.
May 20, 2014
Republic of Korea: Report on the Observance of Standards and Codes
Description: This paper discusses key findings of the Report on the Observance of Standards and Codes for the Republic of Korea. Responsibilities, objectives, and powers related to banking supervision are clearly defined in the Republic of Korea. The legal framework currently in place reasonably provides the necessary powers to authorize the establishment of banks, conduct ongoing supervision, address compliance with laws and regulations, as well as undertake corrective actions to address safety and soundness concerns. Authorization processes are generally thorough but there is room to require formal approval for certain activities.
May 19, 2014
Republic of Croatia: Staff Report for the 2014 Article IV Consultation
Description: This 2014 Article IV Consultation highlights that Croatia remains stuck in an unusually drawn out recession. In 2013, real GDP contracted for the 5th consecutive year, and stands now at less than 90 percent of the end-2008 level. Unemployment has risen to 17 percent. Domestic demand remains depressed as corporations and households focus on reducing excessive debts accumulated in the 2000s. Exports and foreign direct investment are also feeble. The outlook is for an additional contraction in 2014 of almost 1 percent. Real domestic demand would remain feeble, reflecting both weak private sector demand and fiscal consolidation.
May 19, 2014
Israel: Technical Assistance Report-Reviewing the Fiscal Regime for Mining
Description: EXECUTIVE SUMMARY This report is provided to support the work of the ‘Sheshinski II’ committee in reviewing the fiscal regime for mining. Mining is, and will remain, relatively minor both as a source of government revenue and within the wider economy. Nonetheless, it is important that the fiscal regime deliver to the public an appropriate share of the return to the exploitation of resources that they own while also providing investors with a sufficiently attractive and stable environment. To that end, this report reviews principles, experience and tools in mining taxation, bringing them to bear on the analysis of, and suggesting potential improvements to, the current regime. The current use of royalties as the sole and in some cases quite burdensome special fiscal instrument for mining is problematic. One of the primary benefits of royalties—that they ensure some revenue from the start of production—is of limited relevance in Israel, where production is highly mature and exploration minimal. More to the fore is their ineffectiveness in achieving one of the primary goals that warrants a special fiscal regime in the extractive industries: the prospect of designing a charge on rents—returns, that is, in excess of the minimum required by the investor—that can raise revenue without distorting commercial decisions. Their insensitivity to profitability means that royalties not only fail to do this, but, perversely, imply that the government actually takes a smaller share of rents when commodity prices are high; and, conversely, that the company faces a very high effective tax on its profits when those profits are low. Simulations reported here show that these undesirable effects are very marked under the current fiscal regimes. Indeed cutting top marginal royalties-even in the absence of any other reform—would in some cases almost certainly increase both government revenue and after-tax profits. Alternative fiscal regimes—combining a modest mineral-specific royalty with a common profit-based tax—would resolve this structural weakness. The focus of the report is not on the level of the ‘government take’ from minerals—ultimately a political choice—but on how that take varies with the profitability of the underlying investment. To that end, it reports illustrative simulations (for a hypothetical but not unrealistic project) of alternative fiscal regimes that imply the same government take in a benchmark case but respond very different to project profitability. These alternatives combine a relatively low royalty—which may have some merit in protecting the base against tax avoidance through cost manipulation—with four alternative forms of profit-based tax (retaining, in all but one, the current corporate income tax); and consider too the possibility of converting the royalty into, in effect, prepayment of a profit-based tax. These options differ in important ways—in the required statutory rate of the profit tax, transitional issues, and the time path of government revenues. But they all address the key structural problem, providing structures in which the effective tax rate is lower, not higher, for less profitable outcomes. Fiscal regimes of broadly this kind are (increasingly) commonplace in mining, including in major mineral producing countries. The treatment they provide would be similar to, but could be simpler than, that adopted for oil and gas following ‘Sheshinski I.’
May 19, 2014
Tunisia: Third Review Under the Stand-by Arrangement, Request for Modification of Performance Criteria and Waivers of Applicability
Description: EXECUTIVE SUMMARY Context. On June 7, 2013, the Executive Board approved a 24-month SBA in an amount equivalent to 400 percent of quota (SDR 1.15 billion or about $1.75 billion). To date, SDR 427.92 equivalent to $659 million has been disbursed. The pillars of the program are to: (i) achieve short-term macroeconomic stability; (ii) lay the foundation for stronger and more inclusive growth; and (iii) protect the most vulnerable. Background. The adoption of a new constitution and the formation of a new technocratic government in January 2014 led to greater confidence on political prospects and economic reforms. Growth has been moderate and remains insufficient to bring down unemployment significantly in the short term. At the same time, external and fiscal imbalances remain high, while demands for higher wages and additional jobs are rising. The program is broadly on track. Two out of three 2013 end-December quantitative performance criteria (QPC) targets have been missed, but by a smaller margin than originally envisaged, and all end-March 2014 QPCs are expected to be met. Progress on the structural reform agenda has been slowed by last year’s political crisis and the transition between governments. Program strategy. Containing current expenditures, and pursuing prudent monetary policy and greater exchange rate flexibility are essential to contain high external and fiscal deficits and to build investors’ confidence. Improved banking regulation, a strategic orientation of public banks, and strengthened supervision will help reduce banking sector fragilities, which are currently hampering private sector development. Scaling up public investments, reforming tax policy and revenue administration, accelerating public enterprise reform, and protecting the most vulnerable will help lay the foundations for more inclusive growth and level the playing field for investors. Risks to program implementation are important. Main risks relate to regional and domestic security tensions, set-backs in the political transition, and weaker economic activity in major trading partners. Successful implementation of the Fund-supported program will be contingent on the government’s ability to garner consensus among political parties backing it and on its capacity to push reforms through vested interests. The completion of the third review will make SDR 145.08 million (about $225 million) available.
May 15, 2014
United Republic of Tanzania: Selected Issues
Description: This Selected Issues paper discusses the potential fiscal impact of a large-scale gas project and explores aspects of macro-fiscal management of the associated revenue flow. The chapter also provides background and context focusing on recent offshore natural gas discoveries. The paper also describes features of the current petroleum fiscal regime in Tanzania and will present tentative simulations of the fiscal impact of a potential gas project. A string of natural gas discoveries in Tanzania’s deep offshore waters have generated considerable expectations. The outlook for natural gas in Tanzania is positive, albeit still highly uncertain. If major revenues are obtained and put to fruitful use, they could have a transformational impact on the economy. At the same time, expectations need to be tempered by the remaining uncertainty about the eventual size of the gas resources; no company has yet made a final investment decision involving the deep offshore gas reserves. This uncertainty will hopefully diminish in the next few years.
May 15, 2014
United Republic of Tanzania: Staff Report on the 2014 Article IV Consultation, the Third Review Under the Standby Credit Facilty Arrangement, Request for a Waiver for Nonobservance of a Performance Criterion, and Financing Assurances Review
Description: KEY ISSUES Background, outlook, and risks. Economic growth is projected to remain strong at 7 percent next year and in the medium term. Inflation is at 6 percent, gradually converging to the authorities’ 5 percent medium term objective. The external current account deficit remains among the largest in the region, at 14 percent of GDP this year. Fiscal revenue shortfalls and overruns in domestically-financed spending led the deficit to rise to 6.8 percent of GDP in 2012/13. Revenue shortfalls in 2013/14 compared to the budget approved by parliament have prompted the authorities to undertake expenditure cuts during the fiscal year in an effort to meet their 5 percent of GDP target. Based on the debt sustainability analysis, Tanzania remains at low risk of debt distress. A major upside risk for the long term, not yet incorporated in the baseline projections, relates to sizable finds of offshore natural gas that, if confirmed as commercially viable, could bring in large revenues during the next decade. Program implementation. All performance criteria under the program were met, except a sizable breach of the performance criterion on net domestic financing at end-June 2013. The structural benchmark on submission to parliament of the VAT reform for November 2013 was missed. The authorities have taken corrective measures. Macroeconomic and structural policies. Preparations for the draft 2014/15 budget are under way. A VAT reform aimed at improving efficiency and reducing exemptions is ready for submission to parliament prior to the beginning of the new fiscal year. A priority in the next few years is to establish the institutional and policy framework to ensure that, if natural gas revenues materialize, they will bring benefits to all Tanzanians. Staff recommends completion of the third (and final) review under the SCF arrangement and approval of the authorities’ requests for a waiver for nonobservance of a performance criterion and for completion of the financing assurances review.
May 9, 2014
Luxembourg: Staff Report for the 2014 Article IV Consultation
Description: This 2014 Article IV Consultation highlights that with a strong policy framework, Luxembourg has weathered the crisis well and the economy is rebounding. The fiscal position remains sound, and the large financial sector has been resilient. After a shallow recession in 2012, growth reached 2.1 percent in 2013. The improving economic and financial environment in Europe drove the recovery in services exports. The outlook is for growth to firm up but without returning to its pre-crisis trend. Output is forecast to grow broadly in line with potential (2 to 2½ percent) during 2014–2019.
May 9, 2014
Luxembourg: Selected Issues
Description: This Selected Issues Paper analyzes the fiscal position and significant challenges for Luxembourg. Luxembourg’s fiscal position is currently sound, however, fiscal safety buffers are being eroded. The country’s healthy fiscal position will be challenged by forthcoming revenue losses as well as rapid trend growth in expenditures. An overall strategy to address this coming deterioration is needed. Beyond the planned value-added tax increase, recurrent property taxes are a possible additional source of revenue. On expenditures, social benefits should be an area of focus, and reforms of these benefits should also aim to reduce disincentives to work.