Since my last published article, General Election was held, and the National Democratic Congress has formed the Government. I place on record my congratulations to the Prime Minister and the executive and wish them success in transforming Grenada’s economy.
In keeping with my frequent calls for transparency and accountability in the governance of the affairs of the state, it would be necessary for the Government to undertake a comprehensive assessment of the state of the public finances.
The National Democratic Congress Government has, in adherence to the Constitution, committed to the payment of the Court’s judgement on pension and gratuity. This is a huge fiscal cost, but there could be positive outcomes that should be maximised.
This article on ‘Financing the Payment of Pension and gratuity’ is presented in three parts. Part 1 is a summary of an approach to financing the payment of pension and gratuity, the details of which would be presented in Part 2 and Part 3 of the subsequent articles.
In a previous article on ‘Payment of Pension and Gratuity’, the cost of the Court ruling was not yet publicly released, and the proposal for the payment of pension and gratuity was indicative.
The information provided to the public by the then political directorate on Tuesday 26 April 2022 is the basis for the following summary of an approach to honoring the Court’s judgement on pension and gratuity.
(1). The information on the cost of the Court ruling on pension and gratuity, as presented, is summarized as follows:
(i). The arrears of pension and gratuity to already retired public officers is $465M; and
(ii). The annual cost for new retirees and the ongoing payment for the previously retired officers averages $120M for the next thirty-seven years.
The $120M is interpreted to mean that the total annual pension and gratuity, inclusive of the approximately $70M that is currently being paid, would average $120M beginning from 2023.
(2). The payment of the $465M in arrears of pension and gratuity to the already retired public officers could be through a combination of debt, inflows from the Citizenship by Investment Programme and the use of reserves.
(3). The proposal is for the debt of $465M to be paid in two tranches, that is, a tranche of $115M in 2022, to be financed from the operational surplus, inflows from the Citizenship by Investment Programme and reserves; and a tranche of $350M in 2023 to be financed by debt.
(4). The criteria for the receipt of payment could be the date of retirement, commencing with the earliest retirees and those that are ailing and are in urgent need of their cash.
(5). The proposal for sourcing the $115M in 2022 is as follows: i. $45M from government current operations, ii. $45M from the National Transformation Fund or the Citizenship by Investment Programme, and iii. $25M from the reserves.
(6). The Government should settle the other part of the debt liability of $350M of the $465M by either contracting a long-term loan or by issuing bonds or a combination of loans and bonds.
(7). A long term highly concessionary loan is the best option. However, few institutions, notably the World Bank, provide long-term concessionary loans. Also, the amount of the loan may be limited and linked to specific projects rather than reduction in debt.
(8). The alternative approach to the concessionary loan would be to issue bonds with different dates of maturity. The Government would need to aggressively market the bonds with national, regional, and international financial institutions and entities to achieve attractive interest rates.
(9). The annual average expenditure of $120M could be incorporated in government annual current operations.
(10). The Estimates of Revenue and Expenditure for 2022 provides the forecast of government operations for 2023 and 2024 which shows an operational surplus of $108.7M in 2023 and $238.3M in 2024; and the overall surplus, after grants, of $56.3M in 2023 and $188M in 2024.
(11). The cost of the Court ruling is then incorporated in the forecasted Government finances. For 2023 and 2024, there would be an annual pension and gratuity payment of $120M for each year; an annual interest payment of $10.5M on the debt of $350M, based on an interest rate of three (3) percent; and an annual contribution to the sinking fund of $5M, which is invested with accumulated interest at approximately 3 percent.
(12). The results of the adjustments show that the Government finances would be within budget in 2022; it would tighten in 2023 with a reduced current account surplus and a smaller overall surplus; but recover in 2024.
(13). Despite the payment of the $115M in 2022, government finances would remain within the budgeted overall deficit, after grants, of $97.9M, as the deficit is projected at $ 61.1M in the revised budget. This improvement in the Government finances is due primarily to the receipt of unbudgeted financial inflows in the first quarter of 2022.
(14). In 2023, the current account or operational surplus, would be reduced from $108.7M excluding the payment of the additional pension and gratuity and interest on the debt, to $56.1M with the inclusion of the additional payment for pension and gratuity and the interest on the debt. The overall surplus after grants would move from $56.3M to $3.7M. The inclusion of the sinking fund contribution results in an overall deficit of $1.3M in 2023.
(15). The Government may wish to supplement the financial resources in 2023. To increase the fiscal space, the Government could seek budgetary support which it has been receiving over the years. Alternatively, additional resources could be utilized from the National Transformation Fund.
(16). The fiscal position, with the inclusion of the payment of pension and gratuity and the interest on the debt, recovers in 2024. The forecast shows a current account or operational surplus of $188.7M and an overall surplus (after grants) of $138.4M. The inclusion of the sinking fund contribution reduces the overall surplus to $133.4M.
(17). The Court ruling on pension and gratuity must be honoured. However, the issue of pension and pension reform would continue to be a national issue. The debates on pension and gratuity for public officers should be guided by the Constitution which is the supreme law of the land.
(18). If the Pension Solution and Strategy Committee becomes operational, the Terms of Reference of the Committee should be a public document, and the structure of the Committee should be representative of society.
The payment of pension and gratuity is good for the Government, better for the population and best for the economy.
Knowledge is power and experience is the greatest teacher.
Laurel Bain is a Grenadian-born former economist with the St. Kitts-based Eastern Caribbean Central Bank.