Mixed performance by government on fiscal responsibility

The Richard Duncan-led Fiscal Responsibility Committee set up by the ruling New National Party (NNP) administration of Prime Minister Dr. Keith Mitchell under the dictates of the Washington-based International Monetary Fund (IMF) has presented its first report for public scrutiny.

The committee was put in place based on act of Parliament to monitor the fiscal performance of government in the wake of its so-called homegrown 3-year Structural Adjustment Programme (SAP) to deal with a severe fiscal situation including high debts.

In its 40-page report, the group praised the efforts of the Mitchell-led government to significantly bring down the island’s debt to GDP ratio.

However, the Duncan committee expressed concerns with the failure of government to honour some of the commitments as outlined in the act that set up the FROC.

The report said that “progress is being made in a number of areas including revenue enhancement and debt reduction” but faulted the government in the area of fiscal reporting in many key areas.

According to the committee: “While the Government produces a number of Reports including annual and mid-term reviews of its performance, the FRA requires more detailed, specific information to be presented which is not being adhered to.

“Teething challenges with the introduction of the FRA have been advanced as reasons for non-compliance and the FROC has been advised that systems are being put in place to ensure that all Reports required by the FRA are generated and submitted to Parliament on time”, it said.

As a public service, THE NEW TODAY highlights some of the major findings of the committee:

“Small countries like Grenada are beginning to recognise the advantages of practicing fiscal responsibility by devoting attention not only to the maintenance of prudent fiscal policies in each budgetary period, but also seeking to build, over the medium to long term, a coherent, consistent and stable fiscal policy with specific rules and targets.

Concurrent with this is the need for fiscal responsibility legislation and to this end the Grenada Government introduced, in 2015, the Fiscal Responsibility Act No. 29 of 2015.

The objectives of this Act are “to establish a transparent and accountable rule-based fiscal responsibility framework in Grenada, to guide and anchor fiscal policy during the budget process, to ensure that government finances are sustainable over the short, medium, and long term, consistent with a sustainable level of debt, and for related matters.”

The Fiscal Responsibility Act (the Act or the FRA) created a Fiscal Responsibility Oversight Committee (FROC). This Committee is responsible, under section 14 (3) of the FRA, for monitoring compliance with the fiscal rules and targets and reporting to the House of Representatives annually on the status of implementation of the Act.

The FRA governs matters related to the management of public finances and fiscal matters relating to the Central Government and covered public entities.

The FROC comprises five persons, four of whom were nominated by the Committee of Privileges of Parliament in consultation with the Director of Audit and appointed by the Governor General on 23 August, 2017.
As required by the Act these persons possess expertise in:

(i) accounting;

(ii) businss management, having not less than ten years of experience;

(iii) public administration, having not less than ten years of experience; and

(iv) law

This Report is the first of its kind produced by the FROC. It covers the fiscal year ending December 31, 2016 and is produced in accordance with section 14(3)(b) of the Act.

Data for the preparation of the Report was provided by the Division of Economic Management and Planning (the Macroeconomic Policy Unit) in the Ministry of Finance.

The Report reviews the Government’s fiscal performance in 2016, based on available data, as compared to the rules and targets in the FRA and assesses the variances between the actual and targeted performance and Government’s overall implementation of the Act.

EXECUTIVE SUMMARY

This Report assesses Government’s compliance for 2016 with the specific fiscal rules and targets as outlined in sections 7 and 8 of the Act as well as the other duties and responsibilities outlined in sections 5, 6 and 12.

On an overall basis, the Government has begun to put measures in place to satisfy the requirements of the FRA and progress is being made in a number of areas including revenue enhancement and debt reduction.
However, a number of areas need concerted attention including fiscal reporting.

In order to ensure that Government’s fiscal and financial affairs are conducted in a fully transparent manner (unless secrecy is required for national security or economic stability) the FRA as well as the Public Finance Management Act (PFM) and the Public Debt Management Act (PDM) require the submission to Parliament of a number of Reports.

These Reports include an annual fiscal risk statement and a statement on the submission of the annual or any supplementary budget on compliance with the FRA.

While the Government produces a number of Reports including annual and mid-term reviews of its performance, the FRA requires more detailed, specific information to be presented which is not being adhered to.

Teething challenges with the introduction of the FRA have been advanced as reasons for non-compliance and the FROC has been advised that systems are being put in place to ensure that all Reports required by the FRA are generated and submitted to Parliament on time.

In addition, the Macroeconomic Policy Unit must build appropriate mechanisms to provide support relating to the supply of data and any supplementary information requested by the FROC in a timely manner in order to facilitate easy discharge of the FROC’s functions.

MACROECONOMIC CONTEXT

Grenada’s economy experienced a series of shocks during the decade 2004-2013, namely hurricanes Ivan and Emily in 2004 and 2005 respectively; high world food and fuel prices in 2007; and the global economic and financial crisis of 2007/2008.

Real GDP at market prices rose at an average annual rate of 3.1 percent in the first half of the decade, in contrast to an average annual pace of decline of 1.0 per cent in the latter half of the period.




This was accompanied by deterioration in the operations of central government, escalating public sector debt, as well as challenges in the financial and external sectors. In spite of debt restructuring efforts in 2005 and reforms implemented under IMF-supported programmes of 2006-2010 and 2010-2013, the macro-economy and public finances were on an unsustainable path.

Economic growth (real GDP at market prices) recovered by 2013, peaking at 7.3 percent in 2014, and decelerating to 3.7 percent in 2016 (See Figure 1). The performance in 2016 was heavily influenced by declines in agriculture and wholesale and retail trade which were offset by improved performances mainly from construction, tourism, and education.

Against this backdrop, the consumer price level remained stable, rising by 0.9 percent in 2016 relative to 1.1 percent in 2015, after two consecutive years of deflation in 2014 and 2015.

COMPLIANCE WITH FISCAL RULES AND TARGETS: 2016

Summary

The extent of compliance with the Fiscal Rules and the attainment of targets are pivotal to the sustainability of Grenada’s public sector finances.

Much of the improvements in Grenada’s public finances have been, by design, from structural reforms and adjustments.

However, medium to long term sustainability rests on improved job-inclusive growth and enhanced tax administration.

In this Report the following keys are used to assist (persons) to easily understand the FROC’s assessment of Compliance with the Rules and Targets:-

*The FROC is not convinced that all elements of the public sector debt as defined in Section 8(1)(a) of the FRA are comprehensively captured and fully accounted for.

Of particular concern are (a) contingent liabilities assumed by the Government, (b) the debt and contingent liabilities of statutory bodies and state- owned enterprises.

Given that the ratio was above 55% in 2015, corrective measures ought to have been taken to bring the ratio down to 55% within 3 years (by 2018) with 1/3 of the adjustment taking place in the first year 2016.

Accordingly, as real GDP per capita grew progressively from 2013, the unemployment situation improved.

The average Grenadian was richer in 2016 than in 2013 – the average annual income per person grew by 23.1 percent to roughly EC$25,786 in 2016 relative to the amount in 2013.

The unemployment which peaked at 32.2 percent in 2013, dropped to 28.2 percent in 2016, aided by the economic upturn.

The country’s fiscal and debt performance improved remarkably since the introduction of its three-year Fiscal Homegrown Structural Adjustment Programme in January 2014, which was supported by a formal IMF arrangement and other development policy-based loans from external partners.

Fiscal adjustment measures were undertaken, structural reforms progressed and negotiations on public debt restructuring advanced during the three years of the Programme.

In 2015, the country recorded its first primary surplus after grants ($52.3m or 2.0 percent of GDP) in a decade. In the following year, the first overall surplus after grants ($66.0m or 2.3 percent of GDP) was registered in a decade.

Aided by debt restructuring efforts, the debt to GDP ratio contracted from a high of 103.4 percent in 2013 to 80.5 percent at the end of 2016. Consistent with the growth and fiscal gains, there have been improvements in the external and financial sectors.

Current account deficits narrowed and the reserve position remained positive from 2014.

In the financial sector, overall banking sector performance improved but private sector credit remained weak at the end of 2016.

On the issue of Contingent liabilities arising from public-private partnerships, the Richard Duncan Committee said:

“FROC is not satisfied the Macroeconomic Policy Unit has a firm handle on this subject. The Fiscal Authorities have not thoroughly, or at all, scrutinised the relationships between Government, government agencies and private entities.

In reference to the Wage Bill to GDP Ratio, the report said that FROC is concerned that the application of the definition of wage bill since this can potentially result in under reporting of actual wages in the central government. “Such under reporting results in the ratio being lower than it should be, thus implying availability of ‘fiscal space’ that can encourage heightened union ‘pushfulness”, said the report.

The Mitchell-led administration was given a “commendable performance” on the area of Growth in Primary Expenditure (in real terms).

Apart from being compliant and surpassing Target in 2016, the Duncan group said that the transitional 2015 target of 1.3% was also surpassed.

“At a high level this broadly confirms the soundness of the expenditure and revenue strategies of the Fiscal Authorities”, it added.

The group said the following in the report on Public Sector Debt to GDP Ratio:

Legal Requirement – Sub-section 8(1): the total stock of public sector debt from domestic or external sources for any purpose, including the total sum of debt guaranteed by the Government including contingent liabilities assumed by the Government, but excluding contingent liabilities arising from, as a result of, or in connection with public-private partnerships;(b) the debt and contingent liabilities of statutory bodies and state-owned enterprises; and(c) such sums as may be necessary to defray expenses in connection with such liabilities, to the GDP shall not exceed fifty-five percent of GDP.

Legal Requirement – Sub-section 8(5): If in a fiscal year the debt level exceeds sixty percent of GDP, the Minister shall undertake appropriate corrective revenue and expenditure measures to reduce the public debt to fifty-five percent of GDP over a period of three fiscal years, with at least one-third of the adjustment in the first year.

The Fiscal Authorities have achieved strong and highly commendable downward movement in the Debt to GDP Ratio from 86.9% in 2015 to 80.5% in 2016.

Given that the ratio was above 55% in 2015, corrective measures ought to have been taken to bring the ratio down to 55% within 3 years (by 2018) with 1/3 of the adjustment taking place in the first year, 2016. This implies that the ratio should have declined 10.3 percentage points in 2016 i.e. 1/3 of (86.9% -55%). Actual decline is 6.4 percentage points.

(To be continued)

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