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FROC: NNP regime needs to diversify the economy

Dr. Angus Friday – the pro-government head of FROC

The Fiscal Responsibility Oversight Committee (FROC) has warned the Keith Mitchell-government in the Botanical Gardens that it is relying too heavily on a limited number of sectors in the Grenadian economy.

The Dr. Angus Friday-led group has suggested that the economy should be diversified away from only Education, Real Estate Renting and Business Activities, Transport Storage and Communications, and Construction.

Over the years, the ruling New National Party (NNP) government of Prime Minister Mitchell has looked towards the passport-selling scheme known as Citizenship By Investment (CBI) to attract foreign investors to push the tourism sector on the island.

Covid-19 has exposed the failure of the government to concentrate on agriculture especially to feed the nation when the island was forced to close its borders at the start of the Coronavirus pandemic in March 2020.

In his first national address after the crisis, Dr. Mitchell disclosed that greater emphasis would be placed on the resuscitation of agriculture which was once the backbone of the Grenadian economy.

However, in recent address, the Prime Minister has not made any pronouncement on agriculture which now falls in the hands of former Foreign Affairs Minister, Peter David.

As a public service, THE NEW TODAY highlights the FROC comments on some aspects of the local economy.

Reflections on the Economy
Grenada is heavily reliant on tourism which has been hit hard by the pandemic.

The World Travel and Tourism Council (WTTC) highlighted that Travel & 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 to 2019 levels before 2023, then other economic industries or sectors should be explored to lift growth.

Our country’s economy is too concentrated in four sectors which were hit hard 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.

Way Forward
Diversification of the economy must be a priority. The 2021 Budget focused mainly on large private sector tourism projects, and there was not enough indication of measures to diversify income and growth, given the impact of COVID-19 on the tourism and travel industry.

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

  • Strengthening the enabling policy environment for Agriculture, Manufacturing and Fishing;
  • Jumpstarting investments in Healthcare, ICT, CBI and Agriculture to create jobs and resilience;
  • Examining the future of Travel & Tourism and how we can adapt;
  • Accelerating the PSIP as planned;
  • Strengthening support for vital tourism related business to adapt and navigate;
  • Continuing exploration of alternative energy like geothermal and solar power;
  • Quickening transformation in the public sector, and provide the enabling environment for adaptation to ICT in the private sector;
  • Promoting innovation and entrepreneurship among the youth to boost their self-employment; and
  • Continuing to improve data and further use it to inform policy.

At the beginning of 2020, Grenada’s economy was in relatively good standing to deal with a shock.

The inbuilt mechanism of the FRA, which encourages savings and prudent fiscal and debt management, helps in undertaking counter fiscal policy (e.g. undertake additional expenditure and provide tax relief) during an economic downturn.

By March 2020, the Government launched an Economic Stimulus Plan to deal with the economic hardships brought on by the Covid-19 pandemic. By April 2020, a Supplementary Budget, with an accompanying Statement of Compliance, was passed to activate this Plan.

Complete data is available and reported on the revenue, expenditure and debt of Central Government for 2020 and preceding years.

Complete fiscal and debt data, however, is unavailable for the fifteen (15) covered public entities. Therefore, the fiscal and debt outturns reported are only Central Government only, and could be a serious underestimation of the entire operations of the public sector in 2020.

The limited data and information on these entities prevents a comprehensive assessment of the potential fiscal risks and contingent liabilities that they may pose to the Central Government in the medium term.

Fiscal and debt performance in 2020
Grenada’s five-year record of solid primary fiscal surpluses and declining public debt was broken by the end of 2020.

The Covid-19 pandemic, which began affecting the country during the first quarter of the year, negatively impacted Central Government’s fiscal performance through both expenditure and revenue, consequently leading to a primary deficit and driving up the level of debt.

The domestic and international measures to contain the spread of the virus (including curfews and lockdowns) as well as those to support and stimulate the domestic economy, weighed on public finances.

The fiscal stance for 2020
The fiscal stance for 2020 was dominated by efforts to contain the impact of the pandemic.

The Government rolled out fourteen (14) strategies in the Economic Stimulus Plan comprising payroll support especially for hospitality workers; business loan facilities; unemployment benefits; deferred tax payments; business incentives; loan moratoria; an electricity subsidy; and stimulus measures in agriculture and through public investment.

The Plan intended to provide at least $42m worth of support. Some of the strategies were not costed, as a few cannot be easily quantified, but those involving tax deferments did not specify revenue forgone/losses.

Specifically, the expansionary fiscal stance involved tax relief as well as actual expenditure being above the budget on items such as transfers, and goods & services. Additionally, one-off expenditure would have also been associated with the purchase of Grenlec shares.

The relaxation of fiscal rules and targets in 2020 helped to facilitate a timely response to the Covid-19 pandemic by the Government.

The FROC welcomed the use of the Supplementary Budget in 2020, and the accompanying Statement of Compliance, to cope with additional costs brought on by Covid-19.

The public sector support, was substantial and warranted in order to contain adverse effects on lives and livelihoods.

Assessment of medium-term (2021-2023) fiscal and debt forecasts
The fiscal and debt forecasts presented in the Medium-Term Framework of November 2020 generally have a similar trend with the IMF projections of October 2020.

Over the medium term, the primary balance to GDP ratio is expected to gradually improve, leading to projected declines in the Central Government debt to GDP ratios.

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The forecasts in the Medium-Term Framework are slightly more optimistic than the IMF. Overall, the FROC is satisfied that the forecasts of the Framework align with that of other well-known regional and international agencies, including the way the Covid-19 shock were factored into the projections.

There are still gaps in the forecasts presented:

(1). The projections, and in general fiscal reporting, need to be more robust and cover the broader public sector.

The Medium-Term Fiscal Framework circumvents and ignores the comprehensive scope or coverage of the FRA, and focuses only on Central Government which could lead to serious underestimation of public finances in the medium term.

While the FROC notes existing challenges in improving the data coverage of the public sector, little progress has been achieved in the last four years in overcoming the problem.

Efforts should therefore be accelerated to expand debt forecasts to include covered public entities that pose a significant fiscal risk.

(2). Given the exceptional uncertainty surrounding the forecasts, a rich medium term fiscal framework would contain fiscal scenarios in addition to the debt scenarios presented.

Fiscal scenarios could be based on different assumptions for revenue; the capital expenditure programme; and the wage bill.

(3). More detailed and transparent notes and assumptions need to be set for the three-year budgetary forecasts.

It is difficult to assess how much of spending in 2020 will be temporary, by how much the budgeted rise in levels of public investment in the medium term will drive the economic recovery, and which commitments are unaccounted for in the forecasts.

Assessment of Medium-Term fiscal stance and debt strategy
The FROC assessed the Medium-Term Fiscal Strategy as being broadly appropriate.

The Strategy seems rightly aligned with the National Sustainable Development Plan (2020-2035) and comprises revenue, expenditure and debt management measures. Also, having studied the Medium-Term Debt Strategy for 2021-2023, the FROC assessed the most feasible option for a debt strategy – meeting Government’s financing needs through external concessional debt and the Regional Government Securities Market – as broadly adequate.

The fiscal savings over the last five years, along with enhanced practices in public finance management have improved the credibility of fiscal policy in Grenada and helped to increase the availability of external concessional financing.

While financing is available, the Government, though, should not encourage any persistent increase in debt in the coming years.

There is a need to continue to build buffers to accommodate shocks without having to increase debt in an unsustainable way, or make abrupt fiscal adjustments.

The Government can deliver more effectively and efficiently on its Fiscal and Debt Strategies if certain factors were acted upon.

With debt surging in 2020, and substantial pressures to return to the fiscal rules and targets by 2022, there is a need for careful and thorough planning.

It is critical to carefully plan how to manage competing fiscal pressures that may arise from any adjustment needs, demands for wage bill increases, climate change, public investment stimulus and digitization.

Also, important, is that the other requirements of the FRA be met.

Potential fiscal and debt challenges in the medium term
The Government could face significant challenges in the medium term even if economic growth returns in 2021. As long as a recovery from Covid-19 is underway, there is a need for fiscal adjustment.

While the Fiscal Strategy has ruled out tax increases and the introduction of new taxes, spending reductions, which will be undertaken based on the results of the 2019/2020 Public Expenditure Review, are imminent.

Effective and efficient expenditure management and budget execution will thus be critical in the medium term.

There are long standing fiscal and budget challenges. One weakness is in the structure of public finances whereby domestic revenues used to finance the capital programme are dominated by CBI receipts.

Volatility in these receipts will impact the predictability of resources to spending programmes in the longer term.

Furthermore, standing commitments have not yet been fully costed such as national health insurance, pension, geothermal energy, and a formal contributory unemployment benefit programme.

All of these can contribute to budgetary pressures over the medium to long term. In addition, there is a risk that some of the estimated temporary spending increases in 2020 for example in transfers and goods & services, end up becoming permanent rather than temporary.

The Government should clarify how the larger spending items in 2020 (e.g. the purchase of Grenlec shares) will be managed sustainably.

The Government has made clear their plans to reduce discretionary spending on goods and services and to streamline transfers.

It should also set out how medium-term budgetary plans would be modified if the economic recovery does not take hold by June 2021, and expenditure and/or revenues by then significantly deviate from expectations.

It is worthwhile that medium-term priorities are focused on capital spending, but challenges threaten implementation and value added from public spending. Moreover, further adverse developments with Covid-19 and an active upcoming hurricane season can pose significant downside risks.

Public finance management has to be strengthened based on the context of the people and the economy.

Conclusion
The FRA offered the Government flexibility in dealing with the unfolding shock of the public health pandemic. This flexibility allowed the Government to increase spending and contract more debt in 2020.

This means that fiscal adjustment is necessary to return to compliance by 2022 which is the maximum time that is provided by the FRA.

The FROC reiterates from its 2019 Annual Report that the shock of Covid-19 requires “the regeneration of the home-grown recovery, with internal and external dynamism, innovation across sectors, engagement internally and externally, strong leadership, and shared sacrifices”.

Fiscal responsibility, debt management as well as fiscal and debt transparency are also of paramount importance. Lessons from the fiscal adjustment under the HSAP should guide fiscal policy in the medium term.

Additionally, any fiscal structural reforms under the HSAP which have not been completely implemented, and are deemed appropriate, should be steadfastly pursued.

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