Management of the World Bank thanks the Independent Evaluation Group for the report World Bank Support for Domestic Revenue Mobilization. The multiple crises in recent years have placed considerable stress on domestic revenues in several countries, and domestic revenue mobilization (DRM) remains a priority area for World Bank support during the crisis recovery period. The World Bank’s growing commitment to support DRM over the past years has manifested through increased financial and technical assistance operations, decentralization of staff to strengthen client dialogue, and streamlining of the knowledge and partnership agenda supporting DRM. The World Bank Group evolution process reiterates the commitment to further strengthen the World Bank’s DRM engagement. This report will inform those efforts. Management thanks the Independent Evaluation Group for the constructive cooperation throughout this evaluation.

World Bank Management Comments

Overall

Management welcomes the report’s recognition of the World Bank’s increasing support to DRM, better targeting of countries with lower tax-to-GDP ratios, and collaborating effectively with the International Monetary Fund (IMF). The report notes that during FY16–19, the World Bank supported 116 countries to improve DRM through lending and analytics, with an increased focus on countries with less than 15 percent tax-to-GDP ratio, and it was underpinned by country-level analytics, including through the Global Tax Program (GTP). The report also notes a 25 percent increase in the number of development policy operations (DPOs) with at least one DRM-related prior action. Management welcomes the report’s recognition that such heightened support was provided though good collaboration with the IMF, exemplified by the cross-attendance in meetings of the governing bodies of the respective DRM trust funds, and through information sharing that gives World Bank staff access to IMF technical assistance reports whenever needed.

Management is pleased to highlight that the scale of World Bank’s DRM engagement continues beyond the evaluation period. At the end of fiscal year (FY)22, World Bank project financing commitments for DRM stood at $3.4 billion ($1.6 billion for International Development Association [IDA] and blend and $1.8 billion for International Bank for Reconstruction and Development). The 2021 Development Policy Financing Retrospective: Facing Crises, Fostering Recovery shows that in countries affected by fragility, conflict and violence (FCV), the share of DPO prior actions related to revenue management and tax policy doubled between FY11–15 and FY16–21, from 11 percent to 22 percent. In non-FCV IDA countries, this share increased from 17 percent to 25 percent between the two periods. Over the past decade, on average, 88 percent of revenue-DPO mobilization targets have been achieved or partially achieved. DPOs have targeted a variety of country outcomes, such as increases in tax revenue, either in nominal terms or as a share of GDP, for specific tax types, such as value-added taxes, corporate or personal income taxes, excise taxes, or resource revenues.

Management underscores that World Bank support to DRM is broad-based, with 14 of the 18 Global Practices involved. The report places a strong focus on resource mobilization through fiscal efficiency measures but considers only taxes, not subsidies (a negative tax). The report emphasizes the effective use of green and health taxation as prior actions, given they appear to be the third-largest type of policy areas supported by World Bank DPOs. While welcoming this acknowledgment, management notes that this is only one aspect of the broader World Bank strategy that combines traditional and nontraditional approaches to DRM. Management thus regrets that World Bank support for subsidy reforms, utility reforms, and innovative financing instruments that support resource mobilization fell outside the scope of this evaluation. Repurposing subsidy spending in natural resource sectors, such as fossil fuels, fisheries, and agriculture can free up substantial domestic revenues to spend with productive purposes (for example, infrastructure, public services). World Bank support for utility reforms in energy and other sectors helps avoid unproductive depletion of public resources. Management notes that the Bank Group also has a record of supporting client countries with the development of non-debt financing instruments that help mobilize resources and strengthen resilience to shocks. Disaster risk financing and insurance, catastrophe bonds, or derivatives are part of the financing instruments supported by the World Bank to finance prevention, preparedness, or recovery associated with shocks (including climatic ones).

While reaffirming the centrality of DPF in World Bank’s support to DRM, management emphasizes that the World Bank’s programs supporting DRM include a mix of financing, knowledge, and convening services. The report analyzes mainly prior actions related to tax policy in DPOs but misses the contributions of Program-for-Results (PforRs), investment project financing (IPF), diagnostics, and technical assistance deployed in country programs to engage simultaneously on tax policy and administration reforms in client countries. IPF and PforR are particularly important in addressing underlying tax and customs administration challenges, which impact the effectiveness of tax policy changes supported by DPOs. Delivering effectively on all aspects of the theory of change for DRM presented in this report, which comprises tax revenues, tax efficiency, tax equity, and royalty management, requires a mix of carefully sequenced instruments over the long term. The 2022 GTP annual report illustrates how the World Bank follows a comprehensive approach to DRM that goes beyond DPOs, and includes advisory services and analytics (ASA), technical assistance, PforRs, and IPF. In one technical note, the use of PforR is specifically identified alongside technical assistance and IPF to strengthen tax and revenue administration, and the Sustainable Development Finance Policy incentivizes DRM in IDA countries. Finally, the World Bank’s convening power provides a foundation for partners in the public and private sectors to work together on DRM issues, for example, to advocate for developing countries in global and regional forums such as the Platform for Collaboration on Tax. The Independent Evaluation Group Evaluation Insights Note on DRM offers a more holistic account of World Bank approach to DRM than this evaluation and is therefore a good complement to it (World Bank 2023).

Technical Expertise

Management continues enhancing World Bank technical skills for DRM through an approach that combines global and country-level expertise. Global teams and programs such as the GTP are meant to support operational teams, and therefore, efforts to strengthen staff capacity at the frontlines are central to improving World Bank effectiveness on DRM. GTP is an important platform to pool resources and knowledge in support of DRM and has financed ASAs in 64 countries in support of lending operations. The Macroeconomics, Trade, and Investment Global Practice and the and Governance Global Practice are increasingly supporting staff in country offices to enhance their technical skills through more systematic training. Local staff expertise ensures that the World Bank uses country-level knowledge in DRM discussions with clients for more effective policy dialogue. The mix of staff and consultants engaged in DRM on interrelated topics (from fiscal and tax policy to tax and customs administration) reflects the need for combined global, regional, and country-level expertise.

Recommendations

Management agrees with the recommendation to regularly take stock of the findings of the various tax diagnostics tools and is introducing a new core ASA. The World Bank is introducing Public Finance Reviews (PFRs; to replace Public Expenditure Reviews) as core ASA. Because of this, country teams will update PFRs each Country Partnership Framework cycle to provide strategic guidance for DRM by offering policy recommendations on how fiscal space can be better generated. The new core ASA will also integrate existing tools of more specific technical scope, such as TADAT [Tax administration Diagnostic Assessment Tool]; helpful for diagnostics of the strengths and weaknesses in tax administrations; Tax DIAMOND, to generate evidence on distribution effects, and the Commitment to Equity (CEQ), to supplement household survey data, among others. Management will complement the new core ASA with a knowledge program for staff and additional learning resources managed by the Macroeconomics, Trade, and Investment Global Practice. This includes the World Bank Tax Revenue Dashboard, the World Bank Revenue Academy PFR Guidance, and a Resource Center with tools and databases of focal points and publications to ensure relevant, high quality, and impactful PFRs. With GTP support, the World Bank developed the VAT Digital Toolkit for the Asia-Pacific Region, providing customized tools to task team leaders.

Management agrees with recommendation 2 to assess the effectiveness and efficiency of tax exemptions in achieving country-specific policy objectives. As part of the evolution process, management is exploring proposals to support client countries in their DRM efforts to pursue development outcomes. The new PFR will support this goal by systematically assessing various tax policies, including tax exemptions and their impact, supplemented by microsimulations that would cover all major taxes (personal income tax, company income tax, and value-added tax). These assessments, complemented by other relevant core ASA, will inform Country Partnership Framework priorities.

Management agrees with recommendation 3 that reversals of policy reforms require continuous attention, yet notes that they are less widespread than indicated in the report. Management believes that the report understates the role of DPOs in advancing fiscal reforms and overemphasizes policy reversals based on a few case studies (covering 7 of 54 countries where DPOs had DRM-related prior actions during the evaluation period). Management closely monitors policy reversals and takes corrective action as needed, yet this is not reflected in the report. The DPF retrospective did recognize the challenge of policy reversals in the context of worsening policy environments in FCV countries that received DPFs during the FY16–21. However, as pointed out earlier, focusing exclusively on DPOs discounts the longer-term country-level results achieved through the mix of financing, knowledge, and convening instruments deployed in country programs to support both tax policy and administrative reforms.

Management agrees with recommendation 4 to provide clearer guidance to staff on the choice of results indicators to measure. Management recognizes the need for more robust indicators to measure DRM efforts, and notes that it is conducting further work as part of the new Bank Group Corporate Scorecards, after recent improvements in Results Measurement Systems on DRM indicators in the 19th and 20th Replenishments of IDA. Specifically, management is exploring the introduction of two new indicators for corporate reporting and alignment in operational results frameworks: (i) countries with increased tax fairness and progressivity and (ii) unweighted average increases in the tax-to-GDP ratio in countries with tax revenues below 15 percent of their GDP for three consecutive years. Developing project-level indicators that can be aggregated across countries is particularly relevant because this agenda is scaled-up as part of the World Bank Evolution process. The Equitable Growth, Finance, and Institutions Practice Group is leading an initiative to strengthen monitoring and evaluation capacity among staff, especially country economists. These efforts are informed by other recent evaluations, such as the external midterm evaluations of the GTP and the IMF’s Revenue Mobilization Thematic Fund, which have shown that the measurement of DRM efforts is a widespread challenge.