Fiscal Decentralisation in the MENA Region: Challenges and Solutions for Stronger Local Governance 

Increasingly, national governments recognise that fiscal decentralisation is needed to foster economic and social development in their countries. But how can this be done in countries where local governments have limited ability to raise, manage, and spend resources according to local needs? The Hague Academy expert on decentralisation, Alfonso Garcia and two participants from the Shiraka Local Governance course, Lanja Karim from the Directorate of Migration and Crisis response at the Slemani Governorate in Iraq, and Mounsif Hachemi from the Algerian Ministry of Interior share what is needed for successful decentralisation.

Alfonso Garcia Salaues in discussion with a group of participants.

What makes fiscal decentralisation challenging for local authorities?

Fiscal decentralisation means transferring taxation, spending, and decision-making powers from central to subnational governments. But in practice, local governments in the MENA-region still depend heavily on funds from their central government. “If fiscal transfers are subject to constant approval from the central government, the fiscal autonomy and flexibility of local authorities is reduced”, says Alfonso Garcia. “This does not motivate them to generate local revenue themselves or to innovate service delivery.”

Moreover, local governments often lack own-source revenues, meaning they raise only a small share of their income themselves. Other fiscal constraints for local authorities are:

• Low creditworthiness: lenders consider them risky and thus avoid giving out funds

• Stringent regulatory barriers limit competitiveness in financial markets

• A lack of private-sector financing through Public-Private Partnerships

For Lanja Karim, Manager of Planning and Preparations for the Directorate of Migration and Crisis response in the Slemani Governorate, the challenge is also political:

“A key challenge is the political power struggle between central and regional authorities, like in Iraq, which can hinder effective fiscal autonomy. To overcome this, political agreements on roles and equitable resource distribution are essential”.

Mounsif Hachemi, Chief Administrative Officer of the Training Department and Project Manager for the Algerian Ministry of Interior, paints a similar picture in Algeria. The country has achieved some fiscal decentralisation through taxes, such as the professional activity tax, corporate profit tax, as well as property, housing, and environmental taxes. However, one of the main challenges remains the strong tendency of the central state to maintain fiscal control and oversight over local revenues and expenditures.

Melissa van de Bank, The Hague Academy trainer on fiscal decentralisation, recognises this from other countries:

“In decentralisation processes, governments often start with administrative decentralisation followed by fiscal decentralisation, while political decentralisation is often overlooked. However, political decentralisation is needed to create accountability between different tiers of government, and more importantly, from the government to the citizens.”

How to strengthen local finance?

Despite the major challenges, experts and practitioners agree that fiscal decentralisation is achievable. Alfonso Garcia underscores that a national legal and regulatory framework is needed that clearly defines responsibilities for local authorities and gives them the authority to raise and manage part of their own revenues. At the local level, revenue systems are required, including property taxes, user fees, service charges, and land-based financing, so that local governments can build more stable funding, improve their financial credibility, and invest in local services and development. Furthermore, fiscal equalisation is needed to accommodate for the wide variety of local governments, both demographically and geographically. Not all local governments are able to levy sufficient taxes and generate additional sources of income.

Mounsif highlights that Algeria already implemented several measures: “The Algerian state has established financial equalisation and compensation mechanisms to support local budgets and reduce inequalities between municipalities and regions.”

Would you like to learn more about strengthening fiscal decentralisation processes in your country? Are you curious to learn more about possibilities to increase local revenue? Register for our course on Fiscal Decentralisation and Local Finance.