Promoting Transparency and Efficiency in Central America

Programme description

Title: Good Financial Governance within the System of the Countries of the Central American Integration System (SICA)
Commissioned by: German Federal Ministry of Economic Cooperation and Development (BMZ)
Countries: Belize, Costa Rica, Dominican Republic, Guatemala, Honduras, Nicaragua, Panama, El Salvador
Lead executing agency: Central American Integration System (SICA)
Overall term: 2018 to 2021

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Context

With their interstate organisation of the Central American Integration System (Sistema de la Integration Centroamericana (SICA)), the countries of Central America have the common goal of creating a region of peace, freedom, democracy and development. Good financial governance also plays an important role here.

However, the SICA countries currently have some shortfalls. These relate to the exploitation of the national tax potential, the functionality of the budget system and the transparency of the collection, use and monitoring of public funds. The tax administrations are losing potential income. They are not sufficiently equipped to adequately tax economic activities and enforce fixed taxes. Around two thirds of tax revenues are generated by indirect tax, mainly from value-added tax. This places a greater burden on the poor than on rich income classes, meaning the disparity between the poor and rich cannot be alleviated through tax policies, but rather only by social programmes. However, there is hardly any financial scope for such programmes due to tight budgets.

Objective

The member states of the Central American Integration System have a lawful and transparent public finance system. Governance has improved, especially in terms of resources mobilisation, quality of expenditure and fiscal transparency.

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Approach

The project is helping the Central American Council of Ministers of Finance COSEFIN (Consejo de Ministros de Hacienda o Finanzas de Centroamérica, Panama y la República Dominicana) put its reform agenda into practice. A sub-organisation of SICA, COSEFIN plays a central role in the development and coordination of countries’ fiscal policies. The project supports COSEFIN’s reform agenda with input on tax incentives, fiscal risks, resource mobilisation, the handling of transfer prices, budget reforms, efficient public administration in tax authorities and good practices for fiscal transparency.

The project is being implemented as a pilot with the finance ministries and tax administrations in Guatemala and El Salvador, with other Central American countries set to be added in the future. 

COSEFIN’s cross-border working groups are made up of high-ranking finance officials from the budget and revenue departments of member states’ finance ministries. This cooperation encourages communication about positive experiences and allows joint policy proposals to be developed. 

The Executive Secretariat of COSEFIN (Secretaría Ejecutiva (SE-COSEFIN)) coordinates the agenda of the Council of Ministers of Finance and the cooperation with member states.

When advising the countries on the action plan to put an end to base erosion and profit shifting (BEPS), the experiences already gained in Costa Rica as part of the rapprochement to the Organisation for Economic Co-Operation and Development (OECD), for example, can be built upon.

The project also offers advice on budget reforms. A central monitoring and evaluation system to draw up the budget is being developed in El Salvador with the Finance Ministry. The Ministry will bring this experience to the table when communicating with colleagues from other member states. In Guatemala, Nicaragua and the Dominican Republic, work is underway to gather experience with allocating the public budget by topic so that it can be shared with the other countries. This will allow countries to draw up their budgets according to specific priorities, such as gender, poverty and/or results-oriented budgeting.

The project will boost the HR skills of specialists and managers at finance ministries and tax administrations through training and further development courses.