# **_External constraints: the devolved system of finance_**

The technical system for devolved government should prevent island governments from large increases in staffing, either through financial constraints or direct control by the Union over hiring. The statistics from 2010 suggest that such a system of external constraints is not successfully applied. Along with the ineffective internal checks to hiring, Union and Island governments maintain a disjointed devolved system of finance and of civil service recruitment. Such a system emerged due to a process of re-centralization that followed several years after the legal structure of devolution was established.

The Constitution of 2001 created a devolved system of finance to support the extensive responsibilities being transferred to the autonomous island governments. The system selected is a fixed quota division of revenue, to be shared by the Union and the Islands, according to the 2005 Act Fixing the Quota Parts of Shared Public Revenues between the Union and the Autonomous Islands.

Beginning in 2005, the system began to function as follows. All government revenue from customs duties, income tax, land tax and VAT passed into an account in the central bank, entitled Shared Public Revenue Account. From this sum, the Central Bank processed deductions for public debt, pensions, services and contributions to international organizations. The Central Bank would then distribute the remaining balance according to the quota division into the accounts of the Union and Island Governments at the Central Bank.<sup>21</sup>

**_Chart 7.3  Revenue sharing breakdown by government entity_**

|Union|37.5%|
|---|---|
|Ngazidja|27.4%|
|Anjouan|25.7%|
|Mohéli|9.4%|

Source: Government of Comoros, 2005 Act Fixing the Quota Parts of Shared Public Revenues Between the Union and the Autonomous Islands.

Chart 7.3 exhibits the fixed percentages by which the Shared Public Revenue Account would be divided. Moreover, the Constitution affords Island Governments the right to establish and collect their own taxes.

In interviews with officials in both the Island and Union governments, a commonly held view regarding spending was that the revenue gained via the quota system should be utilized by island governments to cover salary expenses, which form the majority of island expenses. Meanwhile, own source revenues, which were comparatively small, would cover operating costs. This view clearly fails to conceptualize any type of remaining revenue that would be used for capital investment, particularly by the island government.

According to the Finance Act of 2011, the following is an example of the breakdown of budgets by entity. While suggestive of spending, according to interviews, the actual spending follows quite different patterns:

> 21 According to officials, early on in the system, the transfer of funds would take place at the end of every business day. However, in later years, this transfer of funds would not be released immediately to the accounts of the islands, but rather remain blocked until enough funds had been accumulated to pay for civil servants’ salaries, at the discretion of the Minister of Finance of the Union Government.

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