Macroeconomic framework conditions like a reliable monetary policy, stable financial markets, a fair taxation system and a pro-competitive administration are prerequisites for economic growth and sustainable prosperity.
In developing countries such framework conditions often exist to a limited extent only, making them dependent on external financing. Public services such as education and healthcare as well as social prosperity remain at low levels.
A strong capital market is the backbone of the economy
A stable, diversified and competitive capital market provides resources for entrepreneurial initiatives. This is crucial for the development of economies. SECO supports central banks and supervisory bodies. It contributes to a financial market supervision that favours innovation, seizes the opportunities of digitalisation and minimises risks such as money laundering. At the same time, it promotes capital market development and better access to long-term financing in the respective domestic currency. This boosts the effectiveness of monetary policy, reinforces pension systems and reduces the risk of excessive public debt.
SECO strengthens public finances in its partner countries and contributes to fair taxation systems and stable state revenues.
The Bilateral Assistance and Capacity Building for Central Banks (BCC) Programme has been supporting central banks in SECO partner countries since 2011 (currently Albania, Azerbaijan, Bosnia and Herzegovina, Columbia, Morocco, Peru, Tunisia and the Ukraine). In collaboration with the Graduate Institute of International and Development Studies in Geneva it trains around 500 experts a year, a third of which are women. They deepen their knowledge in monetary policy and strengthening financial stability through financial market development, bank supervision and risk management. In addition to this, the BCC Programme provides technical support and holds conferences and peer-learning events.
Many developing countries are heavily indebted. This can trigger financial crises, undermine the trust of investors and savers and lead to tax increases, currency devaluation, unemployment and poverty. SECO helps its partner countries to manage their debt sustainably, plan spending and budgets responsibly and generally handle public funds carefully, for instance by means of reforms in the procurement system.
Investment in infrastructure plays a central role in economic development, particularly in developing countries. That is why SECO supports its partner countries on all levels of administration, helping them to plan relevant investments more carefully, to implement these more efficiently, and to take decisive action against corruption.
Earthquakes destroy cities, droughts lead to failed harvests and pandemics bring the economy and social lives of entire countries to a standstill. Catastrophes like these generally require state intervention to help the people affected. Through the Disaster Risk Finance and Insurance (DRFI) Programme SECO helps its partner countries protect their public finances from disasters. This involves identifying and quantifying risks, and drafting and implementing risk management strategies, for instance using insurance solutions or reserve funds for disaster cases. Thanks to the programme, Peru was paid out 60 million US dollars from its earthquake insurance fund just a few days after the devastating earthquake of May 2019. Similarly, triggered by the COVID-19 crisis, Morocco benefited from a loan of over 275 million US dollars, creating essential liquidity for the country.
Financial crises, economic shocks and pandemics test the resilience of countries and demand a rapid response. SECO thus supports its partner countries in becoming more resilient so that they can stand by their citizens and businesses during times of crisis. This requires, for example, that countries have sufficient financial leeway by boosting tax revenue and managing expenses in a more sustainable manner.
Better state institutions thanks to higher tax revenues
In order for the state to fulfil its role, it must be able to generate revenue. However, in many developing countries tax revenues are too low for them to be able to offer good services and framework conditions. Tax administrations often operate inefficiently. There is a lack of transparency with regard to the use of revenues from taxes and commodity exports. Unfair and inefficient tax regimes undermine society’s trust in institutions and weaken the willingness to pay. SECO helps authorities to establish efficient, fair and transparent taxation systems which reduce the administrative burden on citizens and companies and create incentives for sustainable economic activity. It does so by seizing on opportunities presented by digitalisation.
The World Bank’s Global Tax Programme strengthens the tax systems of developing countries with co-financing from SECO. Within this framework, SECO provides its partner countries with direct support. For instance, it ran a project for the reform of Azerbaijan’s tax authorities from 2018 to 2020. In the second phase, the project will seek to improve the legal framework, the risk management system and services for taxpayers. This will allow Azerbaijan to improve the effectiveness of its tax system and create positive conditions for economic growth and the development of the private sector.