IMF raises concerns with programme

Prime Minister Dr. Keith Mitchell has told civil society groupings in Grenada that his planned Structural Adjustment Programme (SAP) to deal with the severe economic and financial problems facing the island has run into problems with the Washington-based International Monetary Fund (IMF).

The Grenadian leader met last week with several private sector executives, trade unionists, church leaders and officials of the non-Governmental Organisations to brief them on IMF concerns about the revenue enhancing measures in the programme.

According to a well-placed source, the Prime Minister looked very uneasy during the session and hardly raised his head while speaking to those in the room.

He spoke of Dr. Mitchell informing the group about the IMF’s concerns over where government will get the additional revenue for placing the income tax threshold at the level of persons earning $3000.00 a month and not the suggestion from the fund that it should be imposed on persons earning $2000.00 a month.

The source said that there was no pronouncement in the meeting from Prime Minister Mitchell on how he intends to address the IMF concerns on the issue.

Officials from the fund have already stated that the financial institution reserves the right to withhold

funds earmarked for Grenada’s programme if the administration fails to implement the things agreed upon in order to fix the fiscal problems plaguing the island’s economy.

THE NEW TODAY has no information on whether the problem cited with the fund is responsible for the decision of the Mitchell government to push back Budget Day from December 6 to December 10 in light of the fact that the signing of the much-talked about “letter of intent” between the two sides is a critical component of the SAP.

However, this newspaper has oversight of some of the measures before the nine-month old government in order to arrest the deteriorating fiscal situation in the country.

As a public service, THE NEW TODAY has decided to highlight a draft document prepared by the Ministry of Finance to be presented to the Cabinet of Ministers on the critical question of Restoring Fiscal Sustainability.

 

It reads:

 

1. A lasting reduction in the debt level is needed to restore fiscal sustainability and create a stable macroeconomic environment for growth.

The Government aims to reduce debt from the current 110 percent of GDP towards the ECCU-wide target of 60 percent of GDP by 2020, which would require a combination of fiscal adjustment, debt restructuring, and fiscal structural reforms to ensure durable fiscal discipline going forward.

 

1. Fiscal Consolidation

 

1. The first pillar of our fiscal program is a significant fiscal consolidation effort aimed at putting debt on a downward path. An adjustment of 7 percent of GDP will bring the primary balance into a surplus of 3½ percent of GDP by 2016, which will put debt on a declining path even under reasonable shocks.

The adjustment will be somewhat front-loaded, to help meet the higher financing requirements early in the program, with 5 percentage points of GDP undertaken during the first two years. To mitigate the impact of this adjustment on the nascent economic recovery and the most vulnerable, the Government will strengthen the social safety net, establish a floor on social spending for targeted programs, and safeguard critical infrastructure programs by allocating about 7 percent of GDP to the public sector investment program on average during the next three years.

The fiscal consolidation will rely on measures that ensure a broader and a more equitable participation in the tax effort, as well as reductions in less productive spending.

These will include:

 

• *A reduction in the personal income tax threshold – which is among the highest in the world and excludes most income earners from the tax net – from the current EC$60,000 to EC$30,000, with a lower rate of 15 percent applying to those in the lower brackets.

*Boosting income and withholding tax collection by extending the income tax base to interest (excluding government securities), and lottery and games of chance winnings.

*An increase in property tax collections through a revaluation of assessed property values to reflect market valuations and an increase in the property tax rate on buildings and land to 0.5 percent in 2014 (which will require approval of revised legislation by end-November 2013), and to 1 percent in 2016.

Once the primary balance targeted under the program has been achieved, the Government intends to reduce the currently high property transfer taxes to encourage the development of a more vibrant real estate market.

*Streamlining tax exemptions to ensure equitable burden-sharing through:

(i) a 50 percent reduction in tax exemptions to at least Grenlec, the largest beneficiary of exemptions (the relevant legislation will be revised as needed);

(ii) foregoing the accumulated but unused balances of exemptions that were granted under the Manufacturer’s Competitiveness Program (MCP) of 2010-12;

(iii) foregoing the exemptions envisaged under the revised MCP for 2013-16; and

(iv) reforming the tax incentive regime to ensure the integrity of the tax base going forward

*The base of the VAT will be expanded by (i) applying VAT to exempt and zero-rated items other than basic staples and agricultural inputs; and (ii) applying the full 15 percent rate to construction inputs (from 2014) and utilities provided to St. George’s University (from 2016).

*Broadening the base and yield of excises by: (i) introducing an excise on luxury goods and on vehicle parts, tires, batteries, and motor oil; (ii) introducing an annual tax on movable luxury property (boats, yachts, and luxury cars).

*Other revenue-enhancing measures will include the introduction of: (i) a US$5 per night room tax to finance the cost of the airlift subsidy; (ii) a small business tax regime for firms with sales between 30,000 and the VAT threshold, charging a flat rate of 5 percent on gross sales; (iii) a 10 percent tax on financial activities; (iv) increased fees on motor vehicle, professional and gun licenses; and (v) fees for new government guarantees on the debt of statutory bodies.

*The Government also intends to undertake a revenue-neutral simplification of the tax system by way of overcoming resource constraints and improving compliance. Technical assistance on this, and on the introduction of the small business tax regime, was requested from the IMF.

*Increased efforts to collect taxes that are due will also be critical in supporting the fiscal consolidation. The Parliament has recently passed a revised Integrity in Public Life law, intended to strengthen governance and facilitate higher levels of integrity throughout the government, including in revenue collecting agencies.




Going forward, efforts will focus on fully implementing the reform agenda that has already been developed with support from CARTAC that includes:

(i) completing institutional reforms to focus on risk management and large tax payers;

(ii) eliminating the bonus for tax collectors on interest from tax arrears, with a view to correcting the disincentives to collect on the large stock of existing arrears (structural benchmark for end-December 2013);

(iii) introducing a strict sanction regime for late payment of taxes due (we intend to revise the respective tax laws accordingly before end-March 2014);

(iv) integrating the customs and inland revenue information systems;

(v) enacting the newly drafted Customs Bill that will modernise the existing legislation and introduce penalties for noncompliance, among other things (by March 2014);

(vi) establishing an internal audit unit at customs; and

(vii) improving controls and monitoring of customs bonding warehouse, by increasing audits and closing repeated non-compliant warehouses.

The Government also intends to publish a name-and-shame list of the largest taxpayers that are in arrears to the Treasury before end-2013.

*A reduction in central government’s nominal wage bill to 9 percent by 2016, from a projected 10.4 percent in 2013 (excluding retroactive payments).

This will be achieved by:

(i) at the minimum, a cap on the nominal wage bill during 2014-16 (including allowances) at May-December 2013 levels (this will bring the wage bill to a projected 9½ percent of GDP by 2016);

(ii) a further reduction in the wage bill through attrition, with only 3 out of 10 departing employees replaced, and through the streamlining in the public sector following the planned public service review;

(iii) the elimination of 497 vacancies (previously used to grant higher salaries to existing staff); and

(iv) a 20 percent reduction in benefits and allowances from their 2013 levels.

 

Agreement with the public sector Trade Unions on wage increases for the 2013-16 period consistent with at least a cap in the nominal wage bill at May-December 2013 levels will be a prior action.

To facilitate the achievement of the wage targets, we will not award performance increments for 2013-16 period, while continuing the performance appraisal system, and will offset any 1 percentage point increase in wages with a reduction of 80 civil service positions through the discontinuation of an equivalent number of contracts (the non-renewal of these positions between September-December 2013 will be a prior action).

*A 20 percent reduction in spending on goods and services, focused especially on savings in the utilities bill, rental costs, and communication costs.

Healthcare costs will also be streamlined by:

(i) updating the schedule of user fees for healthcare services, and designing fees to exempt only targeted groups (poor, infectious diseases); and

(ii) increasing incentives for the collection and payment of user fees in advance (lowering the budget allocations to increase reliance on fees).

Other spending on goods and services will be frozen at 2013 levels.

*Other spending will also be streamlined, including untargeted transfers, investments of lower social return, and reforms of statutory bodies to reduce their drag on public finances

1. Most measures required for the consolidation will be secured upfront in order to impart additional credibility to the adjustment effort.

The Government will obtain parliamentary approval of the adjustment measures that require legislative amendments as a prior action, although the implementation of the measures will be staggered in line with the agreed pace of consolidation.

Similarly, Cabinet approval of the 2014 budget in line with the agreed primary deficit target of 2½ percent of GDP (equivalent to a 1½ primary deficit excluding one-off retroactive wage payments granted by the previous Government) will be a prior action for the program, while its parliamentary approval a structural benchmark for end-December.

To ensure that our consolidation efforts remain on track in the face of unanticipated events, such as natural disasters, the Government will put in place a number of measures.

In particular:

• *It will seek donor assistance to support the program by purchasing additional natural disaster insurance, if available, for the duration of the program to ensure that Government policies are not derailed by natural disaster shocks.

The Government estimates that the cost of this supplementary insurance would be (US$3 to 5 million), providing a substantial level of coverage for Grenada and representing 20 to 30 percent of the estimated average annualised loss for the covered perils.

*The Government has also identified several contingent measures that will be implemented in case the fiscal consolidation falls short of the target. These include a 10 day furlough (unpaid leave) for civil servants, and reduced expenditure allocations in the first three quarters of the year compared to the budget, with the remaining allocations released once we have evidence that the fiscal program is on track. Each of these contingency measures could yield about 0.4 percent of GDP in savings.

*As a contingency financing source, the Government will use the receipts from the recently introduced citizenship-by-investment program. Given the uncertain and potentially transitory nature of these receipts, the Government will use these receipts as financing items, rather than revenue.

As such, they would contribute towards reducing the financing requirements and debt, without undermining the underlying fiscal adjustment.

1. The Government plans to clear its current arrears no later than end-2014. The existing stock of external arrears will be cleared following the debt restructuring, and we will not incur additional external arrears during the duration of the program.

Arrears to domestic creditors will be repaid either through the issuance of Government paper or in cash according to a clear payment plan we will establish as a part of the 2014 budget.

In the context of public financial management reforms, we will also strengthen the monitoring of expenditure commitments to prevent future accumulation of arrears.

 

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