Mixed performance by government on fiscal responsibility

Under pressure from the Washington-based International Monetary Fund (IMF), Grenada has been forced to put in place a committee to monitor spending by the Keith Mitchell-led government under the Structural Adjustment Programme (SAP) that has just ended but with its austerity measures still in place.
The Fiscal Responsibility Oversight Committee (FROC) is headed by former senior employee at the Ministry of Finance, Richard Duncan who is now the Managing Director of the Grenada Co-operative Bank Limited (GCBL).

In its first report on the government’s performance under the IMF-approved SAP, the committee praised government in some areas but expressed concerns in some key aspects especially the management of the national debt.

The committee was not able to give a precise figure about the size of the national debt based on the limited information submitted by the relevant department in the Ministry of Finance.

FROC was also not satisfied with the release of information from government quarters to assist it fully in carrying out its task.

This week THE NEW TODAY reproduces the second part of some of the key aspects of the report submitted to Parliament by FROC for consideration:

 

It is perplexing that a Debt to GDP ratio target was not set in 2016, having regard for the crucial importance of Debt Management in enhancing the viability of the public finances.

The FROC has not been provided with Government’s debt reduction strategy in order to assess compliance with same or the efficacy of its implementation.

The reason proffered by the Macroeconomic Policy Unit was “The Medium-Term Debt Strategy for 2016 is not finalised”.

This the FROC considers as unacceptable given that the Government is into the 10th month of the 2017 fiscal year.
On Public Sector Debt to GDP Ratio, the report said that the FROC was unable to reconcile the figure provided by the Macroeconomic Policy Unit in the “Grenada Fiscal Data 2014-2016” for Public Debt as at December 31, 2016 of $2,295.63 million versus the higher figure of $2,613.37 million published in the “Quarterly Public Debt Bulletin” for December 2016 which was provided to the FROC also by the Macroeconomic Policy Unit.

The FROC was not provided with a schedule of Public Sector Debt as requested.

Given that the management of the Public Debt is vitally critical to the viability of the public finances, the FROC cannot over emphasise the importance of having a very firm handle on the debt stock and a comprehensive understanding of its dynamics.

The issue of Contingent Liabilities Arising from Public- Private Partnerships was also touched by the Duncan committee.

It said the following:

Legal Requirement – Sub-section 8(2): contingent liabilities arising from, as a result of, or in connection with public private partnerships shall not exceed five percent of GDP.

FROC is of the considered opinion that the Ministry of Finance should, as a matter of high priority, scrutinise all relationships between public entities and private entities to determine whether they are Public Private Partnerships as defined by the FRA.

In particular the FROC calls attention to the arrangements for land reclamation and development on Melville Street, St. George’s in which the Grenada Ports Authority and the National Insurance Scheme are involved; the Tyrell Bay land reclamation and development in Carriacou in which the Grenada Ports Authority is involved; and arrangements for the provision of postal and related services in which Grenada Postal Corporation is involved.

Contingent Liabilities Arising from Public- Private Partnerships:

FROC further strongly recommends the establishment of a registry or database of all PPPs and that a system be developed to monitor their performance primarily in respect of acquisition of debt and debt servicing.
Wage Bill to GDP Ratio:

Legal Requirement – Sub-section 7(3): The Minister shall take appropriate measures to ensure that the ratio of expenditure on the wage bill shall not exceed nine percent to GDP.

This has been assessed as compliant, with strong reservations. The FROC has received oral and written explanations as to the application of the definition of “wage bill” in the FRA in bringing to account, payments to employees on contract in central government.

Both explanations lead the FROC to conclude that the application of the definition of wage bill has resulted 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’.

Growth in Primary Expenditure (in real terms)

Legal Requirement – Paragraph 7(1)(a): the rate of growth of the primary expenditure of the Central Government, and of every covered public entity, shall not exceed two percent in real terms in any fiscal year, when adjusted by the preceding year’s inflation rate.

The FROC confirms full compliance and commends the Fiscal Authorities for commendable advances made in respect of this target.

Primary Balance

Legal Requirement – Paragraph 8(3)(a): Where the ratio of public debt to GDP for the preceding year reaches fifty-five percent, the Minister shall take appropriate steps to ensure that the targeted primary balance shall be a minimum of three point five percent of GDP.

Legal Requirement – Paragraph 8(3)(c): as a transitional arrangement, the targeted primary balance shall be at a minimum one point three percent of GDP in the fiscal year ending in December 2015.

The FROC confirms full compliance and commends the Fiscal Authorities for commendable advances made in respect of this target. Apart from being compliant and surpassing target in 2016, 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.

FROC has not been provided with the Medium Term Fiscal Framework required under section 12(2) of the Public Finance Management Act; or any other documentation to allow an assessment.

The Macroeconomic Policy Unit assured the FROC that “the Medium Term Fiscal Framework will be shared once approved by cabinet.”




For purposes of subsection 1(b) the Minister must establish compensation negotiation cycles that allow for settlements for government employees to be included in estimates of revenue and expenditure for the financial year to which settlement relates.

FROC has not been provided with the negative resolution, to confirm the establishment of compensation negotiating cycles that allow for compensation settlement for persons employed by the Government to be incorporated into the Estimates of Revenue and Expenditure for the financial year to which such settlement relates.

The Minister “shall prepare and submit to Parliament, along with the presentation of the annual and any supplementary budget, a statement showing the progress made towards compliance with the fiscal rules and targets under sections 7 and 8, in the relevant financial year”.

These compliance and fiscal risk statements were not fully done in 2016.

The 2016 Budget presented in 2015, contained only a summary of fiscal risks as part of each Budget Framework Paper.

The FROC expects the fiscal authorities to fully complete these statements in the 2018 Budget prepared in 2017.

The Minister also has to “prepare and submit to Parliament, with the annual Budget Bill, a fiscal risk statement that shall reflect all decisions by Cabinet and the Minister and circumstances that may have a material effect on the economic and fiscal outlook.

These compliance and fiscal risk statements were not fully done in 2016.

The 2016 Budget presented in 2015 contained only a summary of fiscal risks as part of each Budget Framework Paper.

The FROC expects the authorities to fully complete these statements in the 2018 Budget prepared in 2017.
One of the Objects of the Act, “is to ensure that Fiscal and financial affairs are conducted in a transparent manner.”

The FROC observed that some documents have been published, in order to improve transparency. These include online quarterly Citizen by Investment (CBI) statistics. Additionally, the Quarterly Debt Bulletin for December 2016 is available on the official website of the government: however, the Medium-term Debt Strategy for 2016 is not.

Going forward, the FROC expects to receive a full listing of all official documents (including debt sustainability analyses) required to be presented in Cabinet and/or Parliament and published as required by the Public Finance Management Act, Public Debt Management Act and Fiscal Responsibility Act.

The listing should provide, for each document, the date required in law and the actual date presented or published in the relevant financial year.

Further FROC asserts that its work in promoting transparency cannot be achieved if it is provided only with information already in the public domain; or if it received responses to its questions, rather than answers.

One of the Objects of the Act “is to ensure that Debt is reduced to, and then maintained at, a prudent and sustainable level by maintaining primary surpluses that are consistent with this object.”

The Division of Economic Management and Planning reported that primary surpluses are projected to average 6.1% over the medium-term.

The FROC noted that if these primary balances were to materialise, this should keep the public debt on a downward trajectory.

Going forward, the FROC expects a final copy of the debt management strategy for the year under review as well as medium to long term fiscal and debt projections with supporting assumptions, to comprehensively assess compliance with the FRA.

One of the Objects of the Act “is to ensure Prudent management of fiscal risks.

Furthermore, paragraph 6(d) of the act stipulates that “management of fiscal risks is in accordance with regulations and guidelines to be issued by the Minister”.

The FROC observed that in the 2016 Budget, fiscal reforms such as implementation of the FRA were cited as mitigating measures against the impact of risks related to external shocks.

The FROC also noted the status of oversight of State Owned Enterprises (SOE) and Statutory Bodies which can pose fiscal risks.

The Debt Unit monitors guaranteed debt as well as liabilities arising from judgments of the Court. Regarding SOEs, they are subject to the same financial practices that bind the Government, as stipulated in the Public Finance Management Act No. 17 of 2015.

Further, in order to ensure prudent management, there are set expenditure ceilings for statutory bodies. In addition, a statutory body shall not incur any liability or make commitments exceeding the recommended ceiling without the Minister’s approval; plus the Minister also has the right to override the financial decisions or commitments made by a statutory body.

Though these methods of guidance will assist in ensuring control and prudent management, there has been non-compliance in reporting. It is noted that out of the 24 of these organisations, only 21% of them have shown 100% compliance in delivering their reports on time each quarter; while 21% of them have shown 100% non-compliance having not delivered any of their reports on time in any given quarter.

The FROC was unable to assess the efficacy and comprehensiveness of the existing regime for data capturing and reporting on covered public entities.

FROC expects to be provided with information requested to assess the implementation status of these initiatives and to corroborate representations and assertion made.

Paragraph 6(c): Stipulates that “no announcements or implementation of any new policy initiative, unless measures that offset the impact of the policy initiative on the primary balance or overall level of spending have been identified”.

The FROC noted that in 2016, the 2017 Budget announced a number of relief measures to be implemented in 2017.

These measures included: tax registration amnesty; the tax filing amnesty for annual stamp tax; reduction in the price of the 20-pound cylinder; reduction of the lower rate for the personal income tax rate from 15% to 10%; and removal of all income tax on pension income. It was pointed out that the fiscal space was sufficient to accommodate revenue loss from the income tax change, without the introduction of offsetting measures.

The FROC noted that the impact of these relief measures would be offset by strengthened primary expenditure management systems and improved tax collections.

In terms of the latter, VAT receipts were bolstered by the full application of this tax on bank service charges from 01 August 2016.

The FROC commends the efforts by the fiscal authorities in this area of the FRA.

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