On 6 July 2022 the IMF published a departmental paper entitled Revenue Mobilization for a Resilient and Inclusive Recovery in the Middle East and Central Asia. The paper looks at strategies to improve revenue collection in countries of the region.

In countries of the Middle East and Central Asia public finances have been weakened by revenue losses during the pandemic, arising from the need to support businesses and households, and from measures to support growth. Domestic revenue mobilization is therefore a policy priority, especially in view of the rising commodity prices resulting from the Ukraine war and the sanctions.

The pandemic and other crises have led to greater inequalities within society and increased the need to raise revenues efficiently and equitably. Greater efficiency in the tax system can increase revenue, promote growth and reduce the inequalities. Higher economic growth can in turn further increase tax revenue. Greater equity within the tax system can reduce differences in income and wealth among the population. A balance must be achieved between efficiency and equity to boost domestic revenue mobilisation.

The IMF paper notes that the average tax collection in the region is lower than other regions, if hydrocarbon revenues are disregarded. The countries therefore need to assess the scope for further tax revenue mobilisation while supporting growth and equity. Although the policy in each country needs to reflect the local circumstances and broader government objectives, some general policy strategies can be set out for the region.

There is considerable scope in the region for raising more tax revenue. The tax revenue gaps, defined as the difference between the tax that could potentially be collected and the actual non-hydrocarbon tax collected, are estimated to be more than 14% of non-hydrocarbon GDP on average for the region. The tax gaps in Central Asia and the Caucasus are smaller as there has been progress on reducing them in recent years. Where countries of the region rely on consumption taxes for most of their revenue the collections have remained low. In many of the countries the scope of personal and corporate income taxes is small.

The shortfalls in tax revenue are partly caused by low tax rates and numerous exemptions. In the hydrocarbon-exporting countries such as the member countries of the Gulf Cooperation Council there are particularly low rates for corporate and personal income tax and for consumption taxes, with numerous exemptions, including concessions for state-owned enterprises. The result is erosion of the tax base and complications for tax administration.

In addition to problems arising from the design of taxes the revenue collection is also reduced by weak tax compliance. Countries in the region often have a large informal sector and the tax systems are complex. The tax administrations often lack autonomy and are in need of reorganization, including more progress in digitalisation. These problems can be exploited for tax avoidance and evasion.

The paper recommends that the design of taxes should be updated to broaden the tax base and increase progressivity. This could be done by eliminating the numerous exemptions and tax incentives and revising tax rates. Strengthening personal income tax and value-added tax can increase revenue collection and more use of property taxes would also contribute to domestic resource mobilisation.

Countries need to strengthen their revenue administration to increase compliance and tax collection. Revenue administrations should be restructured on a functional basis with greater autonomy and should develop digital technologies to improve taxpayer services, reduce the cost of compliance and strengthen enforcement. Greater international cooperation and exchange of information could also increase tax collections.

In view of the existence of large informal economies in many of the countries they should take measures to promote financial inclusion and discourage the use of cash, improving access to financial services and reducing the cost of digital payments. Reforms should be introduced to fight corruption, improve governance and increase transparency. The reform efforts should continue over a long period to ensure improvement in tax collections and reduction of tax gaps. The timing and design of reforms are important, as well as clear communication of aims to ensure public support and political commitment for reforms.