Domestic Public Resources in the Arab Region

Niranjan Sarangi

Economic Development and Integration Division

Beirut, 8 May 2019

Expert Group Meeting - “From plan to implementation for

achievement of the Sustainable Development Goals: Budgeting in

support of effective institutions”

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Mobilizing domestic public resources

Financial

• Revenues (Tax revenues, oil & gas revenues, other non-

tax revenues)

• Illicit financial flows

• Debt

• ODA

Non-Financial (Technology, Trade, Capacity building,

Systemic issues)

This presentation focuses on financial resources.

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Revenues, as a share of GDP, widely differ across regions:

Arab oil-rich countries noted significant decline in revenues in recent

years; Arab oil-poor countries are among low performers

0

10

20

30

40

50

60

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Pe

rce

nt

GD

P

Arab countries

Arab oil-rich countries

Arab oil-poor countries

Advanced economies

European Union

Emerging market anddeveloping economies

Latin America and theCaribbean

Sub-Saharan Africa

Source: Sarangi (2016). Data updated from IMF WoRLD 2019 & WEO database 2019.

Total revenue (% GDP) across regions in the world

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Tax revenues, as a share of total income, remain far below

potential across most Arab States

Oil-poor countries (Tax/GDP) %

Public budgets are largely reliant on tax resources

Oil-rich countries (Tax/GDP) %

Public budgets are largely reliant on oil and gas rents

Source: ESCWA (2017). Rethinking Fiscal Policy for the Arab Region. E/ESCWA/EDID/2017/4. Updated data based on IMF WoRLD.

0

5

10

15

20

25

30

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Comoros Djibouti

Egypt Jordan

Lebanon Mauritania

Morocco Sudan

Syrian Arab Republic Tunisia

Yemen Arab oil-poor countries

0

5

10

15

20

25

30

35

40

45

50

2005200620072008200920102011201220132014201520162017

Algeria Bahrain

Iraq Kuwait

Libya Oman

Qatar Saudi Arabia

United Arab Emirates Arab oil-rich countries

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Mobilization of tax revenues remain inequitable;Increase in tax collections relied mostly on tax reforms in goods and services, which

imposes a greater burden on the poor and middle-class

Composition of tax revenue (% share) Burden of direct tax on income deciles in

Jordan (an example)

Source: ESCWA (2017). Rethinking Fiscal Policy for the Arab Region. E/ESCWA/EDID/2017/4.

Updated data based on IMF WoRLD.Source: Sarangi et al. (2015), based on HEIS data from

ERF’s Open Access Micro Data Initiative (2014).

0

1

2

3

4

5

6

1 2 3 4 5 6 7 8 9 10

Direct taxes and contributions 2008

Direct taxes and contributions 2010

Direct taxes and contributions 2013

31.0 35.9 31.0

9.8 14.8 17.1 17.2 19.4 21.2 16.7 18.5

40.5

13.012.6

12.9

4.33.7

4.5

20.3 16.1 16.618.7 20.5

1.01.6

1.2

2.22.5

2.5

3.5 7.4 7.40.1

0.3

10.87.1

7.4

17.4 7.97.0

12.2 3.8 3.7

9.08.6 3.5

44.2 42.8 47.6

66.3 71.1 68.9

46.853.3 51.1 55.4 52.1 56

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2014 2015 2005 2014 2017 2005 2014 2017 2005 2012 2017

Egypt Jordan Morocco Tunisia

Corporate income Individual income Property Trade Goods and services

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Public finance is under pressure across the region

-40

-20

0

20

40

60

80

100

120

140

160

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

% G

DP

Oil-rich (Fiscal balance)

Oil-rich (Current Account balance)

Oil-rich countries

-12

-10

-8

-6

-4

-2

0

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

Oil-poor (Fiscal balance)

Oil-poor (Current Account balance)

Both fiscal and current account balances

show worsening trends;

Oil revenues remained unpredictable

Debt increased significantly in some parts of

GCC, such as in Bahrain

Oil-poor middle income countries

Worsening fiscal balances

High public debt

Increasing non-concessional external debt

Source: UNESCWA (2017). Rethinking Fiscal Policy for the Arab Region

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ODA to critical sectors that matter for the SDGs is shrinking; but

increased to conflict affected countries for humanitarian aid;

in-country refugee costs

91.7%

55.1%

46.0%38.8%

34.8%29.4%

16.1%

0.6% 0.4% 0.4%0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Syrian

Arab

Republic

Iraq Yemen Somalia Lebanon Palestine Jordan Egypt Morocco Tunisia

2010 2013 2016

12.3%

13.0%11.4%

8.1% 8.3%

7.2% 6.6%6.9%

5.8%5.9%

3.2% 5.1%

5.8% 4.3%4.2%

3.7%3.4%

2.9% 3.1%2.8% 2.2%

0%

20%

40%

60%

80%

100%

2010 2011 2012 2013 2014 2015 2016

Humanitarian aid Commodity Aid Education EnergyTransport & Storage Water Supply & Sanitation Production sectors Multi-sectorHealth Other

Source: UNESCWA 2018b

Source: OECD 2018b

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Illicit financial flows constitute a significant

drain of resource

-

10

20

30

40

50

60

70

80

90

2010 2011 2012 2013 2014 2015

Bil

lion

s of

U.S

. D

oll

ars

Trade

Misinvoicing

Outflows

Illicit Hot

Money Narrow

Outflows

Foreign Direct

Investment

Inflows

Official

Development

Assistance

Inflows

FDI & ODA

Inflows

ILLICIT FINANCIAL FLOWS VS. FDI & ODA INFLOWS TO THE ARAB

REGION

Increase in trade misinvoicing

in non-oil trade amounting to

USD 482.7 billion (aggregate

between 2008 and 2015).

Nearly three quarters of illicit

outflows (IIFs) are associated

with trade misinvoicing.

Since 2014, IIFs have

outstripped the combined

aggregate of total ODA and

FDI inflows into the region.

Source: UNESCWA 2018b

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-

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

2010 2011 2012 2013 2014 2015

Bil

lio

ns

of

USD

Predicted Realized

- 2.00 4.00 6.00 8.00

10.00 12.00 14.00 16.00 18.00

2010 2011 2012 2013 2014 2015

Bil

lio

n o

f U

SD

Predicted Realized

-

5.00

10.00

15.00

2010 2011 2012 2013 2014 2015

Bil

lio

ns

of

US

do

llar

s

Predicted Realized

-

10.00

20.00

30.00

40.00

50.00

2010 2011 2012 2013 2014 2015

Bil

lio

n o

f U

SD

Predicted Realized

Iraq Syria

Yemen Libya

Conflict-affected countries lost significant revenues

ESCWA (2017). Rethinking Fiscal Policy for the Arab Region. E/ESCWA/EDID/2017/4.

Page 10 © Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission

In the Arab region, greater income has not meant better

governance

Algeria BahrainComoros

DjiboutiEgypt

Iraq

JordanKuwait

Lebanon

LibyaMauritania

Morocco

Oman

Qatar

Saudi ArabiaSudan Syrian Arab …

Tunisia

United Arab EmiratesState of Palestine

Yemen

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00

Go

vern

ance

Ind

ex

(Ru

le o

f la

w, V

oic

e an

d A

cco

un

tab

ility

)

GNI Index

Source: K. Abu-Ismail, A. Kuncic and N. Sarangi (2016). Governance-adjusted Human Development Index: The case for a broader

index and its implications for Arab States. ESCWA Working Paper. E/ESCWA/EDID/2016/WP3.

Note: Data pertain to year 2013

ESCWA (2017). Rethinking Fiscal Policy for the Arab Region. E/ESCWA/EDID/2017/4.

Page 11 © Copyright 2014 ESCWA. All rights reserved. No part of this presentation in all its property may be used or reproduced in any form without a written permission

Fiscal policy response to rising debt in the oil-poor countries is

insignificant, indicating lack of adherence to fiscal rules

-6-4

-20

2

Pri

mary

ba

lan

ce to

gdp

40 50 60 70 80 90 100 110 120 130 140 150 160 170 180

Fitted line: mean Fitted line: median

mean primary balance median primary balance

Lagged debt to gdp

The fiscal reaction function, a measure of overall fiscal policy response

to public debt, shows that primary balances continue to decline until

about 90 percent of debt to GDP ratio in the previous year

Source: N. Sarangi and L. El-Ahmadieh (2017).

ESCWA (2017). Rethinking Fiscal Policy for the Arab Region. E/ESCWA/EDID/2017/4.

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Projected fiscal adjustments largely rely on cutting

expenditure, revenues share in GDP is sluggish

10

30

50

70

90

110

2016 2017 2018 2019 2020

Jordan

Debt/gdp Rev/gdp Exp/gdp

10

30

50

70

90

110

130

150

2016 2017 2018 2019 2020 2021

Lebanon

Debt/gdp Rev/gdp Exp/gdp

10

30

50

70

90

2017 2018 2019 2020 2021 2022

Tunisia

Debt/gdp Rev/gdp Exp/gdp

10

30

50

70

90

110

2017 2018 2019 2020 2021

Egypt

Debt/gdp Rev/gdp Exp/gdp

10

30

50

70

2016 2017 2018 2019 2020 2021

Morocco

Debt/gdp Rev/gdp Exp/gdp

Source: IMF Article IV reports, latest years of respective countries.

ESCWA (2017). Rethinking Fiscal Policy for the Arab Region. E/ESCWA/EDID/2017/4

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Expand and sustain fiscal space by putting

systematic efforts on raising tax revenues

• Harnessing the potential of tax revenues is key to mobilize domestic resources

(Setting short and medium term fiscal rules can help)

• Improving tax fairness – Increase progressivity especially in direct tax collection,

harness potential tax base (property tax/wealth tax, non-wage incomes)

• Improving effectiveness of tax systems -- Administrative reforms to control tax

evasion, mandatory filing of tax (at residents’/businesses’ end)

• Controlling illicit financial flows necessitates strengthened international cooperation

(also adjusting domestic tax laws)

• Oil-rich countries need to diversify revenues through promoting economic

diversification and better public finance management, including debt and SWFs

• Improving expenditure efficiency is essential to meeting greater social expenditure

needs toward achieving the SDGs

• Enhancing progressivity in fiscal redistribution and better targeting public budgets

to social development priorities

• Monitoring social expenditure and reprioritizing: ESCWA tool on Social

Expenditure Monitor (SEM) is currently being developed

Thank you