In Tunisia, the reforms supported by budget support contributed directly to the country’s opening to international trade and coincided with a period of economic growth and stability. Budget support contributed to tax reforms and tariff dismantling as well as to the improvement of economic governance and the business environment, which was essential to improve Tunisia’s international competitiveness (Box 3.6). It clearly also contributed to the Tunisian government’s wider strategic agenda.
Box 3.6. Contribution of Budget Support to the Liberalization of the Tunisian Economy
Budget support in Tunisia supported a set of reforms aimed at liberalizing the domestic market, strengthening the competitiveness of the economy, reform secondary and technical education with a view to reduce youth unemployment. During the period of budget support, macroeconomic growth accelerated, the trade volume with the EU more than doubled in real terms between 1995 and 2006, the trade deficit decreased to near zero by 2008, private investment grew an average by 7.5% a year, labour productivity increased, and the number of apprentices in vocational training and higher education graduates increased dramatically, although they could only partially be absorbed in the labor market where high levels of unemployment persisted.
In the other seven countries, budget support represented a significant share of public expenditure. In tandem with support provided by the IMF, budget support was instrumental in providing essential resources for the maintenance of macroeconomic stability, strengthening the capacity to manage external shocks, and to ensure high economic growth rates. The evaluations confirmed that the eight countries had improved their macroeconomic performance, attaining generally higher growth rates than neighbouring countries that did not receive budget support (although Ghana’s performance declined strongly over the evaluation period). The main reasons for these positive trends were the governments’ overall prudent macroeconomic management and national and sector policies, as well as a number of favourable external factors, including debt relief. Within this conducive context, budget support helped stabilize the fiscal deficit and allowed higher spending without governments having to tap into domestic savings. This spending was often used for public investments, including public infrastructure, helping to stimulate domestic activity and productivity. 24
In Ghana, when development partners stopped providing budget support in 2013–2014 this was an important factor in the government’s decision to accept an IMF stabilization program.
Macroeconomic gains were particularly strong in countries that successfully managed to raise domestic revenues (a priority concern for the EU) and to increase social expenditure. Apart from Uganda, in all of the countries evaluated, domestic revenue mobilization (DRM) increased during the periods of EU budget support. By contrast, in Uganda DRM remained low, and, at the end of the evaluated period (i.e., after 2010) when budget support contributions declined, the government was unable to provide sufficient funding for public services and could no longer sustain social services. The Uganda evaluation suggested that the sheer volumes of budget support received probably crowded out local revenue mobilization. With a low DRM, the sustainability of gains was seriously compromised. In Mozambique and Tanzania, extensive revenue reforms to trigger higher DRM were implemented during periods of budget support provision.
With the improvement of social performance indicators, non-income poverty also decreased significantly in all eight countries over the period. The Human Development Index increased by 11%–14% between 2004 and 2010 in Mali, Mozambique, Tanzania, and Zambia. The period of budget support coincided with a sharp drop in poverty rates in some countries. Significant reductions in income poverty were achieved in Mali (from 61% of the population in 2000 to 51% in 2005) and Ghana (from 17% in 2006 to 8% in 2013). Moderate poverty reduction was seen in Tanzania and Mozambique, but reductions were limited to the cities in Zambia.
The contribution of budget support to these improvements is not quantifiable and none of the gains made can be directly attributable to budget support. However, most evaluations found indirect positive links between budget support and poverty reduction.
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In Mali, budget support was used at the beginning of the period to reduces domestic debt and thus had a direct impact upon economic activity.