IMF: Progress made but major concerns still remain

Despite the reported success of its Structural Adjustment Programme to arrest a severe fiscal situation, the Washington-based International Monetary Fund (IMF) has warned the Keith Mitchell-led government in St. George’s that it needs to tackle some critical issues including the high wage bill.

THE NEW TODAY has obtained the copy of an IMF document, dated December 3, 2015 that highlights some of the concerns of the lending institution with the Grenadian economy.

According to the document, reform of the public service is also needed to ensure a sustainable reduction in the public sector wage bill.

Government reportedly spends EC$30 million a month to meet its payroll to civil servants and pensioners.

The ruling New National Party (NNP) government of Prime Minister Mitchell was forced to enter into an IMF-supported programme after it defaulted on payments to US bondholders in 2013.

The fund has helped the island to broker a deal in which the creditors are due to start receiving payments of millions of dollars from the middle of the year.

The IMF notes that the objective of the government is to contain public sector wage expenditure to nine percent of GDP, in line with the 2015 Fiscal Responsibility (FR) Act but hinted that this could be in jeopardy due to expected demands from public sector trade unions in upcoming salary negotiations.

The document pointed out that the savings achieved on the public sector wage bill to date have been driven by the prevailing nominal wage freeze and government’s attrition policy, under which no more than three of every ten employees departing the public service are being replaced.

The IMF said: “Recent indications suggest that wage and labour-related pressures are rising. For instance, the public sector labor unions had acceded informally to the current wage freeze, but they recently indicated that no agreement (tacit or formal) was ever reached on the payment of increments (change in career grade) over the period 2014-2016 and are seeking payment of these.

“(IMF) Staff indicated that any solution on increments would need to be absorbed within the parameters set under the program for the wage bill and debt targets, as well as those set by the FR Act.

The three public sector unions on the island are the Public Workers Union (PWU), the Grenada Union of Teachers (GUT) and the Technical & Allied Workers Union (PWU).

Of the three, TAWU is now considered to be pro-Mitchell due to its President-General, Chester Humphrey who was expelled from the main opposition National Democratic Congress (NDC) and forged a political alliance with NNP under the so-called “Project Grenada” bandwagon.

As part of the deal, Humphrey was brought back to serve in the upper House of Parliament as President of the Senate along with another prominent expelled Congress member, former Foreign Affairs Minister, Peter David.

THE NEW TODAY understands that PWU and GUT are preparing their packages for proposed salary negotiations against the backdrop of the EC$1000.00 a month salary increase given to Keisha Grant, the Press Secretary in the Office of the Prime Minister.

A glimmer of hope for Grenada in the IMF report was its prognosis that the comprehensive reforms put in place by government since the program began two years ago have strengthened Grenada’s fiscal policy framework.

The IMF said the challenge is now to steadfastly implement the new framework to ensure that it provides a solid anchor for policy-making in support of fiscal sustainability.

It states that the legislative reform underpinning the new policy framework is comprehensive, covering public finance management, public debt management, and tax administration and incentives, and includes new fiscal rules to anchor medium-term fiscal sustainability.

However, it was quick to point out that the framework is not fully operational as some elements have not yet entered into force, notably the 2015 Fiscal Responsibility (FR) Act, the 2015 Public Debt Management (PDM) Act, the 2015 National Transformation Fund Regulations, and the tax incentive reform.

“These critical components should be immediately brought into force and, where required, supporting regulations finalised and brought into force”, the IMF told the Mitchell government.

“Completing the tax incentive reform will help safeguard the fiscal position while improving the transparency of the investment environment”, it said.

Another grey area alluded to by the Washington institution was the incentive regime for private sector investment.

The IMF report said: “While major reforms to the tax incentive regime were approved by Parliament, they have not become effective pending completion of the full package of reforms.

“In particular, the amendments to the property tax act and the list of conditional duty exemptions to remove discretion remain pending, with the latter requiring coordination with CARICOM given the regional commitment on external tariffs.

“Excluding the reform of custom duty exemptions, the authorities have committed to bringing the rest of the tax incentive regime into full force by end-December 2015 (proposed new structural benchmark).

“The authorities’ efforts to strengthen tax administration should support achievement of the program’s fiscal targets .

“The new Tax Administration Act is expected to be finalized in line with the end-November 2015 structural benchmark.

“Once in place, the act will provide a critical complement to the already enacted Customs Act and complete the core elements of the legislative framework for tax administration.

“In consultation with CARICOM, regulations for the Customs Act are being finalized to support implementation of the new Act.

The IMF notes that the restructuring of the Inland Revenue Department (IRD) to establish separate Large and Medium Taxpayer Service (LMTS) and Small Taxpayers Service (STS) units is progressing.

It observed that making these units operational was a proposed new structural benchmark for end of December 2015.

The IMF alluded to the fact that Tax administration should also be supported by the installation of “a peripatetic revenue administration advisor”.

The fund also touched on the continued implementation by the Mitchell-led government of the strategic plan to reform State-owned enterprises and statutory bodies.

These changes, the report said are expected to contribute to improve performance of these institutions and reduce fiscal risks.

It notes that a committee has been established to oversee implementation of the strategy, while oversight responsibility has been centralised within the Ministry of Finance.

A plus, the IMF said is that these state-run bodies have started to report under the new performance monitoring framework and the government has issued a guidance note on salary negotiations to ensure sustainable wage bill practices.

“A dividend policy for commercial SOEs (state bodies) is being finalised. Restructuring of individual institutions is commencing with the focus currently on completing the restructuring of two of the largest SOEs, with financial support from the World Bank likely”, the report said.

One of these is the Grenada Postal Corporation in which a large percentage of its workforce will be severed.

Looking ahead, the IMF warned the Mitchell government that revamping the tariff-setting regime of some large commercial state bodies will be critical to strengthening their financial positions, reducing associated fiscal risks, and improving resource allocation in the economy.

It added that public sector modernisation is a key pillar of fiscal policy reforms over the medium term.

The IMF report went on: “Progress to initiate the planned strategic review of the public sector and develop a strategy to address costs and efficiency (end-March 2016 structural benchmark) has been slow.

The authorities have been working on a corporate planning exercise, review of the new employment arrangement framework, and the attrition policy.

They are now focusing on the key priorities that will deliver the highest impact in terms of strengthening public sector effectiveness.

They intend to enact a new Public Service Bill by mid-2016 and aim to finalise the strategic plan in line with the March structural benchmark, although they indicated that, given capacity constraints, mid or end-2016 appears to be a more realistic timeframe”.

Speculation is rife that the Mitchell-led administration is reluctant to push ahead with deepening the attrition policy to cut back on salaries in light of 2016 being considered as a possible election year.

Prime Minister Mitchell has often stated that he does not intend to do anything that will affect him politically among the electorate.

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