Financing Social Protection in Fragile and Conflict-Affected States: Domestic Resources Matter

The Social Protection Technical Assistance, Advice, and Resources Facility (STAAR), a joint initiative of the UK’s Foreign, Commonwealth & Development Office (FCDO) and UK Aid, has convened a High-Level Panel on Social Protection in Fragile and Conflict-Affected Settings, of which the first author is a member. The panel seeks to address the complex challenges of delivering and sustaining social protection for vulnerable populations in these contexts—not only by meeting immediate needs, but also by laying the groundwork for long-term social cohesion, recovery, and resilience.

The panel held its first meeting on May 21, 2025. In early June, it launched a public enquiry by circulating seven key questions on a broad range of issues. These questions address issues such as the need for social protection in fragile settings, financing mechanisms, and ways to ensure equitable access—particularly for women and girls, persons with disabilities, refugees, and internally displaced populations. They also consider the data and information required to establish effective social protection systems in such environments.

In this blog post, we would like to focus on the second question of the public enquiry: How can financing for social protection be enhanced through domestic sources in the medium to long term? While external financing will continue to play a critical role in fragile and conflict-affected states, two important points must be kept in mind.

First, only a small share of official development assistance (ODA)—just 3.4 percent of the total assistance to fragile and conflict-affected states in 2023—was allocated to social protection. Second, the availability of ODA has shrunk significantly over the past year, and the outlook remains uncertain. Donor countries are contending with high debt burdens, shifting geopolitical priorities, including increased defense spending, and rising age-related expenditures driven by demographic trends.

The implication is clear: Policymakers in fragile and conflict-affected states must take concrete policy actions and support institution-building to expand domestic fiscal space, even as donors support critical social protection needs in the short term. Such efforts are essential to help countries transition out of fragility and lay the foundation for sustainable development in the medium and long term.

Expanding fiscal space in fragile settings requires action on both the revenue and expenditure sides of the budget—at a time when fiscal institutions are weak and building them is a long-term endeavor.

Let us begin with tax capacity. The table below shows that revenue-to-GDP ratios in these countries range widely—from less than 5 percent to greater than 25 percent of GDP. Resource-rich fragile states such as, Chad, Democratic Republic of the Congo, Mali, and Timor-Leste tend to perform better due to substantial non-tax revenues from extractive industries. For example, natural resource revenues account for nearly two-thirds of revenue in Chad, half in the Democratic Republic of the Congo, one-fifth in Mali, and roughly two-thirds in Timor-Leste. In contrast, non-resource-rich countries typically exhibit lower revenue ratios, often below the 15 percent of GDP threshold recommended by the IMF to finance development and support economic growth.

This divergence in revenue performance highlights a critical point: the fiscal capacity of resource-rich and non-resource-rich fragile states differs significantly, with major implications for their ability to finance social protection and, ultimately, exit fragility. However, there is also a risk: research has shown that countries heavily reliant on resource revenues are often less motivated to develop or expand their domestic non-resource tax bases.

How has tax capacity evolved over time in these countries? A comparison of recent revenue ratios with those from 2010 reveals that, in most cases, revenue performance has declined somewhat, and the gap between revenues and expenditures has widened (the figure below), particularly since the Global Financial Crisis when their revenue position remained relatively strong.

The wide variation in tax capacity across fragile and conflict-affected states underscores their heterogeneity and differing ability to implement fiscal reforms. These countries are distinct from typical low-income countries, which generally have more established fiscal institutions and legal frameworks. As a result, reforms in fragile contexts must be gradual, tailored to the specific circumstances of each country, and realistic in scope.

To support the development of resilient tax systems and lay the groundwork for sustainable financing of social protection, a few guiding principles are particularly relevant in fragile settings. The IMF and donor agencies have played a key role in providing technical assistance on domestic revenue mobilization, covering both policy and administrative aspects of reforms. However, raising taxes in these contexts is especially challenging due to the small formal sector, insecurity, and limited trust in state institutions.

Therefore, beyond technical tax design, it is essential to understand the political and social dimensions of fiscal capacity. Drawing on the first author’s work at the IMF, we propose five core technical principles for tax reform in fragile states:

1. Limit the number of taxes, using a single or a few rates.
2. Avoid exemptions, which erode the tax base and complicate administration.
3. Prioritize simplicity, with tax bases that are easy to assess and enforce.
4. Focus collection efforts on large, easier-to-monitor taxpayers and high revenue points such as borders, where trade taxes have strong potential.
5. Use presumptive taxation for small taxpayers, relying on lump-sum or estimated payments based on observable indicators.

Most fragile states have IMF-supported adjustment programs that include tax-related conditionality. However, evidence suggests these conditions often fail to deliver the desired results, partly due to poor tax policy and administrative design that does not adequately consider institutional and administrative constraints in these countries.

With low revenue ratios, these countries depend more heavily on external grants than other low-income countries. Yet, their spending on social benefits, including social protection, is relatively low. About one-third of the budget is typically allocated to public sector wages, part of which can be viewed as spending on social protection to the extent it reflects the cost of absorbing combatants previously involved in the armed conflict with the military.

Clearly, progress on the revenue side must be matched by improvements in public expenditure management. Mobilizing domestic and external resources will have a limited impact if these funds are not used effectively. As with tax reform, efforts on the expenditure side should focus on strengthening core public financial management (PFM) functions, using simple, implementable measures that align with existing administrative capacity.

Fragile states frequently struggle with budget preparation and execution, cash management, expenditure control, and reporting. A crucial first step, with support from the international community, is to align a country’s policy priorities—including for social protection—with expenditure allocations. It is essential that governments avoid ad hoc fiscal decisions outside the formal budget process.

As noted earlier, many fragile states have IMF-supported programs, which also include conditionality on public expenditure management, often based on technical assistance from the IMF and other agencies. Research by the first author suggests that, under the right conditions, such conditionality can help build fiscal capacity. Notably, expenditure-related conditions have generally proven more effective than those focused on taxation.

As the high-level panel continues its work, one message is clear: fragile and conflict-affected states cannot rely indefinitely on external assistance to finance social protection. While donors will play a vital short-term role, sustainable progress demands a deliberate shift toward building domestic fiscal capacity. This includes not only strengthening tax systems but also improving the efficiency and accountability of public spending. Achieving this will require patient, context-specific reforms, supported by long-term technical assistance and a commitment to institution-building. Without greater reliance on domestic resources, fragile states risk falling into a persistent cycle of dependence, with limited prospects for recovery, resilience, and inclusive development.