ODA for domestic revenue mobilisation

This discussion paper looks at how ODA for DRM can be more effective for developing countries through steps taken by both donors and developing country governments. It is almost three years since the Addis Ababa Action Agenda (AAAA) set out a global framework for financing development in the era of the Sustainable Development Goals (SDGs). The AAAA outcome document of 2015 outlined a broad spectrum of financing options: domestic and international, public and private. This was a shift from the focus of the Millennium Development Goals, which, at least initially, focused on official development assistance (ODA) in financing development.

Of all the financial resource types identified, domestic public resources were identified as central. Domestic revenue mobilisation (DRM) strengthens country ownership of development. By raising revenue and choosing how to spend it, governments (national or subnational) can directly shape development in their own contexts. In addition, the AAAA emphasises that, whether through economic growth or by strengthening DRM, there is potential to increase domestic public resources significantly to finance the SDGs. International assistance could support this.

In 2018, belief remains in the potential of domestic public resources to provide increased funding and to shape sustainable development with a focus on reducing poverty. However, progress has been mixed.

International development partners have generally understood the importance of using ODA to support DRM, especially given the potential catalytic role of DRM and its alignment with principles of development effectiveness. This is exemplified by the creation of the Addis Tax Initiative and other initiatives such as the Platform for Collaboration on Tax.

International policy and assistance have increasingly focused on not only the quantity but also the quality of domestic revenue. Shaping sustainable development is a consideration, including the role of tax regimes on poverty, inequality, health, gender and the environment.

However, these strategic priorities are not always translating into significant progress at country level. Overall, progress on DRM has been limited in both low- and middle-income countries. While this can be attributed partly to lower commodity prices for oil and other mineral resources, the International Monetary Fund (IMF) indicates the pattern is broader in nature:

“While lower commodity prices since 2014 have dragged on revenue in commodity exporters, the broader pattern across low-income countries of worsening fiscal positions suggests that domestic revenue mobilisation efforts have generally fallen short."

This paper seeks to understand this seeming lack of progress in more detail in the context of developing countries and the development partners that support them. Using best practice examples it offers recommendations for how ODA for DRM can be more effective through steps taken by both donors and developing country governments. The paper is divided into two sections. Section 1 provides an overview of progress on DRM from the perspective of recipient government and development partners, outlining areas where progress has been made and challenges have been faced and identifying what key areas need greater understanding for more effective ODA for DRM. Section 2 looks towards the future, highlighting a number of ways recipient government and development partners can have more effective policies, structures and process to lead to more effective use of ODA for DRM and ultimately make broader progress in raising national public revenues.