Domestic Resource Mobilization Takes Root in El Salvador ... and Beyond?
An encouraging trend in development is gaining speed: more countries want to do more to fund their own development, and donors are on board. At the July 2015 Third International Conference on Financing for Development in Addis Ababa, Ethiopia, attended by more than 110 heads of state, ministers, and officials from 38 countries, donors pledged a doubling of assistance by 2020 for programs to increase domestic resource mobilization.
When a “poor” country improves its financial health and thus its ability to fund public services such as education and health care, it is more than just a victory for dollars and cents. Stepping up domestic resource mobilization, the Addis attendees agreed, “is core to ensuring solid financing of the Post-2015 Development Agenda. [While] domestic public resources are a more stable and sustainable source of income, they also strengthen a legitimate relationship between citizens and the state and foster good governance.”
We know from experience in El Salvador that governments can increase their cash flow, provide more essential services, and do a better job of managing domestic revenues and expenditures. But such turnarounds demand three key ingredients: time, commitment, and openness.
For more than a decade, the U.S. Agency for International Development (USAID)—in a series of projects implemented by DAI—has helped the government of El Salvador to greatly increase tax revenues. This has enabled the country to invest more in public services such as health care while promoting transparency, accountability, and efficiency. In doing so, we have demonstrated that a comprehensive and long-term fiscal reform approach can greatly assist a country in strengthening its financial standing.
Raising Revenues, Not Tax Rates
In 2005, DAI was awarded the Tax Policy and Administration Reform (TPAR) project, a five-year USAID program to modernize and improve El Salvador’s tax administration. TPAR designed and implemented a system that increased tax collections for the government without increasing tax rates while minimizing tax evasion and avoidance.
TPAR made significant strides in helping El Salvador advance its fiscal reform agenda. Importantly, it enabled the government to mobilize on average more than $300 million annually in additional tax revenue from 2004 to 2011, without raising tax rates. TPAR also:
- Increased the tax-to-gross domestic product ratio from 12.2 percent in 2004 to 14.1 percent in 2007, strengthening El Salvador’s ability to meet its financial obligations.
- Supported formation of new offices for Criminal Investigation, Fiscal Compliance, and Excise Tax, which helped secure nearly $38 million in additional tax revenues.
- Developed and launched a modernized IT infrastructure at the Dirección General de Impuestos Internos (DGII), which served as the foundation for improved operations and greater efficiency; we then assisted the DGII in implementing the fiscal reform agenda of 2009, which generated an additional $66 million in tax revenue.
Again, El Salvador accomplished these revenue gains not by raising tax rates but by improving policies and systems, training people, and being forthright with its taxpayers. The new Taxpayer Assistance Call Center provides orientation and legal guidance to taxpayers regarding their tax obligations. The Taxpayer Advocate Unit was instituted to protect taxpayers’ rights and increase accountability in tax administration. We increased the transparency, efficiency, and fairness of tax audits by developing a Case Selection and Management System (CSMS) that automates the audit selection process.
But even after five years, the job—the process—was far from over.
Long-Term Process, Sustained Results
In 2010, DAI was awarded the Fiscal Policy and Expenditure Management Program (FPEMP), a 68-month project funded by USAID. Building on the foundation laid by TPAR, USAID/DAI and the El Salvador government deepened our work in tax policy and administration, launched reforms in public expenditure management, and further energized dialogue between the government, private sector, and civil society. We have made notable advances in assisting the government to improve its financial management systems and align with international best practices. To name a few results, we:
- In coordination with the U.S. Department of Treasury, supported implementation of a Treasury Single Account, which consolidated 1,600 government bank accounts.
- Reviewed and updated 21,523 taxpayer records in the national taxpayer registry.
- Further developed the Case Selection Management System (CSMS II), which has become a powerful tool for the DGII functions of tax enforcement, tax collection, tax audit, and taxpayer outreach. Advanced data mining through CSMS II helped the government collect more than $120 million in additional resources in just eight months (0.5 percent of GDP).
The FPEMP team has also improved El Salvador’s fiscal quality, in part by revamping the government’s Chart of Accounts in compliance with International Public Sector Accounting Standards (IPSAS) and extensively training government staff on the new systems.
These tangible financial victories for El Salvador have been won because the country is doing the business of government better, and this discipline has begun to pay off for citizens as the government is gradually increasing expenditures and services. For example, by 2013, El Salvador had expanded access to basic health services to 1.9 million Salvadorans (30 percent of the population) from the poorest and rural municipalities.
As El Salvador continues to spend more money on services, it is determined to spend wisely. The Sistema de Administración Financiera Integrado (SAFI II) public expenditure management system that FPEMP helped improve will be supported by a new Public Procurement Ombudsman to guarantee transparency and adherence to the law. We are assisting in finalizing the government’s Fiscal Transparency Portal to include detailed data on national and municipal public finances, and helping the Ministry of Finance develop multiyear, results-oriented budgeting.
The FPEMP team also developed COMPRASAL II, the government’s next-generation e-procurement system, including the necessary software. Once completed, COMPRASAL II will be a fully transactional system that supports a unified registry of government vendors and facilitates validation of their information. Additionally, COMPRASAL II will allow procurement to be conducted online and linked to budget programming.
TPAR and FPEMP drew on a deep understanding of country context, in addition to a well developed network of relationships with counterparts in the Government of El Salvador and the region, USAID, and other international donors. Both TPAR and FPEMP implemented a suite of interventions that address interrelated focal areas over an extended period of time, which was necessary to advance fiscal and expenditure management substantively and sustainably.
This ongoing teamwork has enabled the El Salvador government to implement a wide range of initiatives to increase capacity, accountability, and transparency in public financial management, while also contributing to greater citizen confidence in public sector institutions. In line with the aspirations of the Addis Ababa conference, we believe other countries can produce similar results through comprehensive and long-term fiscal reform.