A report from the European Court of Auditors highlighted weaknesses in both the way schemes are implemented and the conditions attached to payments. Policy dialogue between the European Commission and recipient countries was often absent.
Supporting poorer nations to increase the amount of revenue they raise from domestic sources is a key plank of global development policy as it helps reduce reliance on international aid and improves transparency and public governance.
Tax-to-GDP ratios in lower-income countries range from 10-20%, compared with 25-40% in developed nations. Weak administrative capacity, high levels of corruption and lack of respect for the rule of law, as well as poverty and illiteracy, all hamper the efficient collection of taxes.
The ECA study reviewed 15 EU-funded budget support contracts in nine low and lower-middle-income African countries: Cape Verde; the Central African Republic; Mali; Mauritania; Mozambique; Niger; Rwanda; Senegal; and Sierra Leone.
Auditors found that the European Commission assessments of recipient countries’ revenue policies not always comprehensive, while key risks relating to tax exemptions were not always properly evaluated.
Disbursement of EU funds was made a condition of specific reforms in five of the 15 contracts audited. However, the ECA found the conditions did not always promote reform as the changes had already been achieved, were too easily achieved or were unenforceable.
Auditors also highlighted the lack of policy dialogue between the commission and recipient countries. A dialogue strategy is “essential” to track progress, the ECA stated, but no such strategy was ever developed even in countries where domestic revenue mobilisation had been identified as a specific issue.
“Domestic revenue mobilisation is a priority for the international development community,” said Daniele Lamarque, ECA member responsible for the report
“But the EU’s support is being undermined by design and implementation weaknesses and challenging local circumstances.”
Lamarque told Public Finance International that the European Commission’s approach to domestic revenue mobilisation in sub-Saharan African countries was too general and could be made more precise, especially as it is a major donor.
She suggested guidelines relating to domestic revenue mobilisation, last drawn up in 2012, could be reviewed.
Some good practice was identified, Lamarque said. “We could find positive features in Niger, Sierra Leone and Mali but this is mixed with some negative aspects. In Niger, for example, the contract didn’t consider that one of the conditions was unenforceable because they had to change the mining code… that was a huge issue. Asking for conditions that are not achievable is a weakness.”
It was also important to strengthen dialogue and co-operation between donors, she added.