A 7-member committee appointed by the ruling National Democratic Congress (NDC) government of Prime Minister Dickon Mitchell has presented its 2022 annual report on the fiscal oversight of the island’s economic performance.
The group known as the Fiscal Responsibility Oversight Committee (FROC) is headed by retired senior employee with the Eastern Caribbean Central Bank (ECCB), Laurel Bain.
It called for fundamental changes to the manner in which the public debt is being calculated and for the targeted debt to GDP ratio to be applied to the total public sector; and that the other rules and targets should be applied to the Central Government.
“The statutory bodies and state-owned enterprises should be monitored, and reports presented to Parliament in keeping with the Public Finance Management Act,” the group said in its executive summary.
As a public serviced, THE NEW TODAY reproduces in full the Executive Summary from the Laurel Bain-led committee:
The Fiscal Responsibility Act (FRA) of 2015 and its amendments set out rules and targets to guide the conduct of fiscal policy in Grenada
The FRA together with the Public Finance Management Act (2015) and the Debt Management Act (2015) are intended to ensure fiscal discipline, transparency in government financial transactions, accountability in government operations, and fiscal and debt sustainability.
The Fiscal Responsibility Oversight Committee (FROC) was established under the FRA with the mandate to monitor and report to the House of Representatives on the compliance of Government with the provisions of the FRA.
The declaration of a state of emergency by the Governor General as a result of the Covid-19 Pandemic and the negative impact of the pandemic on economic growth led to the suspension of the fiscal rules and targets for fiscal year (FY) 2020 through to FY 2022.
Following the suspension of the fiscal rules and targets in 2022, the Government returned to the fiscal rules and targets in 2023.
In the wake of this suspension, the FROC’s report for 2022, therefore, examines compliance of the government with the requirements for the suspension of the fiscal rules and targets in 2022; the transparency of government’s fiscal operations in 2022; and the consistency of the 2023 budget and medium-term fiscal framework with the FRA.
The FROC also examined the FRA and its implementation and put forward proposals for its reform.
During the 2020-2022 suspension period, the economy began to recover from a 13.8 percent decline in GDP in 2020 brought about by the COVID-19 Pandemic.
The economy grew by 4.7 percent in 2021, even as the tourism industry contracted further, as stayover arrivals declined by 4 percent following a 73 percent contraction in 2020.
Despite the decline in stayover arrivals in 2021, the hotel sector recorded significant growth of 37 percent as it benefited from the longer length of stay required by the COVID-19 quarantine regulations.
A rebound in tourism and the acceleration of construction activity in a general election year resulted in a 6 percent expansion of the economy in 2022.
The fiscal situation improved moderately in 2021 compared with 2020 when the fiscal balances turned negative. Further improvement was recorded in 2022, as revenue outpaced the budgeted amount due to the growth in tax revenue associated with higher prices, the receipt of budgetary support in the form of grants and Citizenship by Investment (CBI) related flows.
Debt level remained elevated over 2020-2022 due to the continued disbursements of funds from loans contracted to assist with COVID-19 related expenditures and for the rehabilitation and upgrade of the Maurice Bishop International Airport.
The Central Government outstanding debt, which was 58 percent of GDP in 2019, increased to 71 percent of GDP in 2020 mainly as a result of the steep decline in GDP. This moderated, thereafter, to 64 percent in 2022.
The inclusion of the debt of statutory bodies and state-owned enterprises (excluding the Petro Caribe debt) resulted in a public sector debt to GDP ratio of 69.1 percent in 2022. The inclusion of the Petro Caribe debt pushes total public sector debt to 80.5 percent of GDP.
The Government has projected growth rates of 3.6 percent for 2023, 4.0 percent in 2024 and 4.8 percent in 2025, averaging 4.1 percent over the medium-term. The projected economic growth is achievable over the medium-term, if the economic strategy outlined by the Government is successfully implemented.
There are many downside risks associated with the achievement of the targeted growth over the medium-term with implications for fiscal and debt sustainability.
These include macroeconomic risks linked to sluggish growth in global output and persistent inflation; the uncertainty related to the possible impact of proposed legislation by the European Union and the USA to penalise nations offering Citizenship-by-Investment (CBI) programmes; the impact of climate change; and threat of cyber-attacks in an electronically dominated environment.
However, there is scope for expansion in the economy, and with an aggressive transformation programme the projected economic growth over the medium-term could be achieved.
Suspension of the fiscal rules and targets for 2022
The suspension of the fiscal rules and targets in 2022 was in compliance with the Escape Clause of the FRA.
The Suspension Order Memorandum was made and dated November 2021 in accordance with Section 10(2-3) of the FRA. In this, the Minister explained the rationale for the Order as: “… the existence of a State of Emergency declared by the Governor General pursuant to Section 17(1) of the Constitution and the cumulative decline in real GDP over the last two consecutive fiscal years of equal or greater than three percent.”
These reasons advanced for the suspension were consistent with Section 10 (1) a – b of the FRA.
As required by Section 10 (4-5) of the FRA, a Recovery Plan Memorandum was made and dated November 2021 for the fiscal years 2022 and 2023 with further details on the medium-term fiscal and economic strategies outlined in the Medium-Term Fiscal Framework 2022-2023.
It is therefore the view of the FROC that the Government complied with its statutory obligations such as they arose consequent on the Order for the suspension of Sections 7 and 8 of the FRA.
In 2022, the Government sought to comply with the provisions for fiscal transparency through the dissemination of information on radio and social platforms, convening ‘town hall’ meetings, holding consultations for the preparation of the 2023 national budget and by the publication of fiscal and debt reports.
There is scope for improving the timeliness and comprehensiveness of the fiscal reports. The published fiscal reports do not include information on the performance of covered entities and other statutory bodies and state-owned enterprises, and hence there is not a consolidated public sector accounts.
The legislation governing public finance in Grenada does not require the publication of an ‘End-of-year’ Fiscal Report’. To provide timely information on the actual performance of the Government during the fiscal year, the FROC recommends that an end-of-year fiscal report be published.
The FROC notes that the audited public sector accounts have not been presented to Parliament since 2016. Therefore, oversight and accountability are absent from the management of the public finances.
Consistency of 2023 Budget and the MFF with Fiscal Rules and Targets
The absence of comprehensive data on covered entities and that of other statutory bodies and state-owned enterprises limits the analysis of the compliance of the Government with the FRA to that of the Central Government. This is an area that needs to be addressed to assess full compliance of the Government with the FRA.
The 2023 budget of the Central Government was in accordance with the fiscal rules for the real growth in primary expenditure, the wage bill, the primary balance and liabilities of the public-private partnerships.
The projected debt to GDP ratio for Central Government of 64 percent and the estimated 77 percent for the public sector debt require corrective actions.
Similarly, over the medium-term, Central Government operations are in accordance with the fiscal rules for the real growth in primary expenditure, the wage bill, the primary balance and liabilities of the public-private partnerships. The public sector debt is consistently above the targeted 55 percent of GDP.
The public sector debt is an important target in the FRA. The reporting on the public debt has been primarily related to the Central Government. It is therefore necessary to report consistently on the total public sector debt which includes the debt of Central Government, statutory bodies and state-owned enterprises.
Based on data provided by the MOF, the FROC modified the Compliance Matrix presented for the 2023 budget to be in line with guidance given in the FRA on the calculation of the fiscal rules and targets.
The wage bill was adjusted to take account of the estimated wage bill of the covered entities and the estimated total stock of public sector debt was taken into account. The results of the modified Compliance Matrix show that the Government could be in breach of the wage rule and the debt target.
The available information was not adequate to incorporate the expenditure of the covered entities in order to assess the fiscal rule for the growth of primary expenditure.
However, with the steep decline in real primary expenditure in 2023, it is most likely that the Government estimates were in compliance with the primary expenditure rule.
The FROC attempted to modify the Compliance Matrix for the medium-term fiscal framework to be consistent with the fiscal rules and targets as defined in the FRA.
However, there were some fundamental conceptual, theoretical, and practical challenges which made it impossible to assess compliance with the fiscal rules and targets over the medium-term.
Reform of the FRA
There are a number of shortcomings in the FRA and in its implementation which have affected full compliance with the rules and targets, and which also have implications for effective oversight by the FROC.
The shortcomings of the FRA are related to its lack of clarity, inconsistencies, and omissions in key parts of the Act and the complexities of some of its provisions which have affected the interpretation of key provisions and the implementation of the rules and targets.
Reporting and data challenges have limited the application of the FRA to the Central Government. Previous FROC, the MOF and the International Monetary Fund (IMF) recognised the issues and have recommended the reform of the FRA.
The FRA is in need of a comprehensive reform, requiring not only clarification of the many ambiguities in its provisions, but also a re-examination of the fiscal rules and targets and other requirements.
Specifically, the provisions in Section 8 which pertain to the debt target, and are core for achieving fiscal and debt sustainability, lack clarity and some of these are inconsistent.
Other issues include: the appropriate budget balance indicator to be used for reducing public sector debt; the appropriateness, determination of and impact of the binding rules for the real growth in primary expenditure and the wage bill; ambiguities with respect to the use of the Escape Clause over successive years and the burdensome reporting requirements; and ambiguities in the provision relating to the tenure and revocation of members of the FROC.
The repeal of the FRA is therefore warranted given the many issues surrounding the interpretation of some of its key provisions and the difficulties encountered in its practical application.
The Government has commenced the process of reforming the FRA. A legislated fiscal responsibility framework is considered key in the pursuit of fiscal discipline and maintaining fiscal and debt sustainability. Such a framework also contributes to fiscal transparency and accountability.
However, the fiscal rules and targets must be designed to give the Executive some flexibility to manage the economy and provide for fiscal and debt sustainability without placing undue burden on the administrative system to implement and to assess and monitor compliance with the provisions.
Sustained economic growth is necessary for fiscal and debt sustainability. The FROC recommends an examination of the causes of the low public sector project implementation rate and adopt measures to improve project implementation.
This should be combined with the development of indicators for measuring productivity and the ease of doing business with a view to improving efficiency in both the private and public sectors.
The medium-term fiscal and debt strategies must be pursued within a stronger framework for fiscal transparency. There is scope for improving the timeliness and comprehensiveness of fiscal reports. The public sector accounts must be audited and submitted to Parliament in accordance with the relevant Acts of Parliament.
Although the Public Finance Management Act does not stipulate the preparation of an ‘End-of-Year Fiscal Report’, for timely information on the actual outturn of Government operations for the fiscal year, it is recommended that an ‘End-of-Year Fiscal’ Report be published.
The institutional arrangement for the management of public debt should be strengthened through the operationalisation of the Public Debt Co-ordinating Committee as provided for in the Debt Management Act.
The design of public policies, the assessment of the impact of such policies and the assessment of the performance of the economy must be based on timely and comprehensive information.
The FROC identified the challenges with the current data systems and outlined opportunities for improving the data.
The FROC urges the reform of the FRA as follows:
(1).Eliminate the fiscal rules of real growth of two percent in primary expenditure, and the wage bill of nine percent of GDP. If an expenditure rule is considered necessary, amend the rule to conform with best practice which is based on a technical rationale for an appropriate numerical value for the growth in primary expenditure, the variable that should be used to adjust the growth in primary expenditure, and the elimination of capital expenditure from the primary expenditure rule. Alternatively, a simple intermediate target is a current account balance that ensures that the government generates adequate savings.
(2).Introduce a target related to an overall fiscal balance which results in a reduction in Central Government debt until the debt to GDP ratio is achieved and then maintain an overall balance that constrains the rapid accumulation of debt. This would be in the context of a targeted debt for the rest of the public sector.
(3). Review the targeted debt to GDP ratio of 55 percent and establish a revised targeted debt to GDP ratio and determine a timeline for the attainment of the revised debt to GDP ratio.
(4). The targeted debt to GDP ratio should be applied to the total public sector; and the other rules and targets should be applied to Central Government. The statutory bodies and state-owned enterprises should be monitored, and reports presented to Parliament in keeping with the Public Finance Management Act.
The fiscal rules and targets should be accompanied by the requirement for a well-developed medium-term fiscal framework, that is approved by Parliament, for achieving fiscal and debt sustainability. In this framework, indicators for revenue, expenditure and primary balance could be included and monitored annually or as determined by the Executive.