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Call for Fiscal Responsibility Act to be scrapped

Dr. Angus Friday – the new man in charge of the committee

The Keith Mitchell-led government in St. George’s has appointed one of its former diplomats, Ambassador Dr. Angus Friday to head the Fiscal Responsibility Oversight Committee (FROC) to monitor the spending of the Central Government.

Dr. Friday has taken over from the outgoing Managing Director of the Grenada Co-operative Bank Limited (GCBL), Richard Duncan who was the first head of the body.

The newlook FROC has submitted its first report which covered the year 2020.

In the report, the group said “the time has come to repeal and replace the Fiscal Responsibility Act” and for the ruling New National Party (NNP) regime to commit “to a phased and targeted approach” to attaining full compliance with the dictates of the act.

As a public service, THE NEW TODAY reproduces in full the EXECUTIVE SUMMARY of the Dr. Friday group on the island’s fiscal performance in 2020:

Overview

Covid-19 has had a detrimental impact on the global economy and on Grenada with the economy estimated to have declined by 12.2% in 2020.

The Grenada authorities took corrective measures by implementing necessary public health measures and by invoking Section 10 of the Fiscal Responsibility Act, also known as the Escape Clause.

The Escape Clause was properly invoked. Only one criterion needs to be satisfied for the activation of the Escape Clause and only one was satisfied, that being, FRA (10(1)(a) that a “public health epidemic” resulted in a “state of emergency” being “declared by the Governor General”.

However, Covid-19 has exposed a number of shortcomings of the Act which necessitates an urgent and comprehensive review.

Ensuring a green, resilient and inclusive recovery is critical given the need to ensure social cohesion and stability during this fragile time where 14,000 jobs have been lost in Grenada in the second quarter of 2020 relative to the fourth quarter in 2019. Government measures in 2020, though costly, should help to reduce the extent of the economic damage caused by the pandemic, and ultimately lead to economic recovery in 2021 which is essential for fiscal and debt sustainability.

Job-rich growth that prepares Grenada for the new post-pandemic realities, must be prioritized which will help to reduce unemployment and improve the debt to GDP ratio. Indeed, St. Vincent’s April 2021 volcanic eruptions is a reminder that Grenada must prepare for double jeopardy risks that may arise in the future.

To do so, it is vital to maintain sound fiscal management to effectively buffer future shocks. In this vein, other Sections of the FRA are still in effect and this means that public finance should be managed in such a way that it is transparent, accountable, and involves prudent management of debt and fiscal risks.

Efficient public finance management systems are critical in shaping improved fiscal and debt outcomes in the medium term. Otherwise, the Government could face significant challenges in the medium term even if the economy grows in 2021.

For example, public sector finances remain under-reported, and the comprehensive data requirements of the FRA are still not being met.

Data limitations precludes comprehensive assessments by the FROC of outturns, the impact of fiscal policy, and potential risks.

Moving Forward
In addition to filling the information and data gaps, it is vital to take cognisance of Grenada’s heavy reliance on tourism which has been hit hard by the pandemic.

The World Travel and Tourism Council (WTTC) highlighted that travel and tourism contributed 40.5% of total GDP, 42.9% of total employment, and 79.3% of total exports in 2019.

Since tourism is unlikely to recover before 2023, other economic industries or sectors should be explored to lift growth. However, Grenada’s economy is concentrated in four sectors which have also been affected by the pandemic namely, Education, Real Estate Renting and Business Activities, Transport Storage and Communications, and Construction.

These sectors, out of a total of sixteen, accounted for about 54.6% of total GDP in 2020.

Therefore, diversification of the economy must be a priority. The growth potential in the 2021 Budget focused mainly on large private sector tourism projects, and there was not enough indication of the diversity of income to assist with the growth of the economy, given the impact of Covid-19 on the tourism industry.

Due to the uncertainty in tourism, the Government should consider the following to secure medium-term growth and contribute to long-term competitiveness:

  • Strengthening the enabling policy environment for Health, ICT, Agriculture, and Manufacturing;
  • Jump-starting investments in Healthcare, ICT, CBI and Agriculture to create jobs and resilience;
  • Examining the future of Travel & Tourism and adapting accordingly;
  • Accelerating the PSIP as planned, while also prioritizing programmes that are green, resilient, inclusive and job-rich;
  • Strengthening support for vital tourism related business to adapt and navigate;
  • More aggressively pursuing renewable energy, including solar PV, battery storage and geothermal;
  • Quickening transformation in the public sector, and provide the enabling environment for adaptation to ICT in the private sector;
  • Promoting innovation and entrepreneurial spirit among the youth to boost their self-employment; and
  • Continuing to improve data and use it to inform policy.

Recommendations
The unprecedented impact of Covid-19 on government’s revenues and the government’s ability to buffer this traumatic shock have proven the case for robust fiscal rules underpinned by a comprehensive legislative framework.

Covid-19 has also exposed shortcomings in this framework many of which were anticipated in range of recommended amendments put forward by the FROC in recent years.

The FROC recommends that the time has come to repeal and replace the Fiscal Responsibility Act.

As the government undertakes efforts to ensure a smooth recovery, the FROC encourages that it be green, resilient and inclusive, while continuing to exercise fiscal prudence.

In summary, the key recommendations are:

(1) Commit to a phased and targeted approach to attaining full compliance with the Fiscal Responsibility Act;

(2) Repeal and replace the Fiscal Responsibility Act;

(3) Ensure a green, resilient and inclusive recovery with continued fiscal prudence; and

(4) Diversify, Decentralise and Digitise to grow the economy, focusing on:

(a) Health, Wellness and Medical Services and Technologies, underpinned by aNational Health Insurance;

(b) Agri-Tech and the Agricultural Sector;

(c) Info-Tech and Digital Nomads underpinned by a Digital Transformation; and

(d) Manufacturing

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