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The potential implications of COVID-19

Co-op bank manager Richard Duncan – the head of the team

A copy of the Fiscal Responsibility Oversight Committee (FROC) for 2019 has been tabled in the Grenada Parliament.

The report was handed over to the Clerk of Parliament, Andrew Augustine by head of the committee, Richard Duncan, the current Managing Director of the Grenada Co-operative Bank Limited (GCBL) for onpassing to House Speaker, Michael Pierre for it to be laid in the Lower House.

The current report focused on the happenings in the local economy in the months leading up to the Coronavirus pandemic and recognised that the deadly virus is impacting negatively on the island’s economy.

As a public service, THE NEW TODAY highlights from the FROC report:

OUTCOMES AND IMPLICATIONS OF IMPLEMENTATION OF THE ACT

Outcome of Implementation of the Act in 2019

To sum up 2019, Grenada’s fiscal responsibility legislation continued to be implemented amid relatively good economic conditions and the FRA maintained its influence on fiscal policy and fiscal management.

The key outcomes and actions in 2019 were:-

(i) year-on year tax collection increases through reinforcement of the compliance strategy;

(ii) primary expenditure containment through wage bill restraint and an under implemented Public Sector Investment Programme (PSIP); and

(iii) convergence to the debt target by reducing the total of Central Government debt and guaranteed debt.

There were also measures to improve implementation of the PSIP; consultation on impending reforms of the FRA; encouragement for contingency saving; and to commission an independent expenditure review in the public service.

The consequent gains in 2019 included compliance by Central Government with fiscal rules and convergence to the debt target. While these achievements are commendable, they cannot be applied to the public sector as required by the legislation.

In accordance with the FRA, fiscal responsibility and, more so, fiscal reporting frameworks need to extend beyond the Central Government to the remaining elements of the public sector namely National Insurance Scheme, SOEs and SBs. This is not only essential for greater transparency, but also to better provision or mitigate risks with contingent liabilities.

There is still uncertainty surrounding the implementation of major reforms like national health insurance and pension. The year under review ended with a series of local engagements on the impending national health insurance, with no public disclosure on the likely costs, intended policy approach, or decided financing arrangement for this project. Additionally, pension reform is contingent on legal outcomes.

The implicit contingent liabilities associated with these reforms were still not yet provisioned for by the end of 2019. These need to be planned and accounted for, and there must be a balance between implementing these developmental priorities and maintaining fiscal responsibility and debt sustainability.

Medium and Long-Term Fiscal Policy and Implications of the Act
The Medium-Term Fiscal Framework for 2020-2022 presented to Parliament in November 2019 did not incorporate the potential impact of COVID-19. The fiscal policy stance in this Framework was expansionary.

Expectations for capital expenditure from 2020 were high relative to a few preceding years, and considering the existing implementation challenges with the PSIP. Current expenditure was also projected to expand in 2020 and 2021.

This overall expansionary stance is not likely to change in the medium term as developments unfold with COVID-19, but there are likely to be budget realignments, reprioritisation and reallocation. Emergency or supplementary budgets would be required. Prioritisation of spending is important.

There are likely to be trade-offs between stabilising or stimulating output and keeping debt on a sustainable trajectory. Medium term spending priorities are likely to focus more on health care, targeted interventions of support, and investments at the national level in food, border, and internal security.

With wage increases already locked in for government workers for the next three (3) years, there may be only scope to defer expenditure on non-essential goods and services. Fiscal or debt policy may also focus on prioritised and deferred debt service payments.

The existing domestic public finance and fiscal policy frameworks and recent macroeconomic successes put Grenada in a relatively good standing to better mitigate or provision or accommodate any risks from COVID-19.

The inbuilt mechanism of the FRA, which would have called for successive years of savings and prudent expenditure and debt management, should enable the Authorities to better weather a crisis and undertake some counter fiscal policy i.e. expansionary measures in a crisis or economic downturn.

Furthermore, relevant ongoing reforms in the country (e.g. those to plan and build capacity in the public sector, improve transfers, and digitise the economy) should be supported, leveraged or quickened where there were unnecessary delays. Lessons from past crises should guide fiscal policy in the future.

The potential implications of COVID-19 can still not be overstated for a small, vulnerable and middle-income country like Grenada, with gaps in its health system and which is still transitioning from a large fiscal adjustment and debt overhang.

The medium to long term would be unlike the last four (4) years – it would involve implementing the FRA during “bad economic times” rather than during economic growth.

The international and local public policy responses to the pandemic threatens to disrupt the continuation of consecutive years of growth, price stability, fiscal surpluses, and debt reduction.

If it were not for its flexibility in offering suspension of rules and targets, FRA implementation would also be under threat. Authorities must, however, be prudent in adhering to the stipulated time frame, procedures, short-term planning and other requirements for any suspension, if it were to maintain the integrity of the fiscal legislation.

Otherwise, fiscal credibility and governance may be at stake and expenditures and public debt can be pushed up, thus imperiling the gains of the last seven (7) years which could fuel a call for austerity. Fiscal risk management must be intensified. Short to medium term planning within the context of the national development plan, should help mitigate risks associated with any prolonged economic and social instability.

Managerial capacity, anticipation, and vision will be key in risk management.

Notwithstanding the monetary policy-like measures that can be taken to respond to shocks, the pandemic will put additional focus on the role of fiscal policy, especially within the context of the FRA.

A multi-faceted fiscal response would be required for COVID-19 which is likely to have broad based impacts across sectors.

The Authorities will have to first quantify fiscal space available to undertake countercyclical fiscal policies, and update estimates of fiscal multipliers. Then identify when and to what extent they would want to implement such policies. There is capacity to provide a stimulus but this capacity is limited.

The responsibility of business cycle stabilisation would have to start with the Fiscal Authorities, with support from regional and international agencies, as well as from domestic institutions. There will be trade-offs that the Fiscal Medium and Long-Term Fiscal Policy and Implications of the Act.

The potential implications of COVID-19 can still not be overstated for a small, vulnerable and middle-income country like Grenada, with gaps in its health system and which is still transitioning from a large fiscal adjustment and debt overhang.

The medium to long-term would be unlike the last four (4) years – it would involve implementing the FRA during “bad economic times” rather than during economic growth.

The international and local public policy responses to the pandemic threatens to disrupt the continuation of consecutive years of growth, price stability, fiscal surpluses, and debt reduction. If it were not for its flexibility in offering suspension of rules and targets, FRA implementation would also be under threat.

Authorities must, however, be prudent in adhering to the stipulated time frame, procedures, short-term planning and other requirements for any suspension, if it were to maintain the integrity of the fiscal legislation.

Otherwise, fiscal credibility and governance may be at stake and expenditures and public debt can be pushed up, thus imperiling the gains of the last seven (7) years which could fuel a call for austerity.

Fiscal risk management must be intensified. Short to medium term planning within the context of the national development plan, should help mitigate risks associated with any prolonged economic and social instability. Managerial capacity, anticipation, and vision will be key in risk management.

Notwithstanding the monetary policy-like measures that can be taken to respond to shocks, the pandemic will put additional focus on the role of fiscal policy, especially within the context of the FRA. A multi-faceted fiscal response would be required for COVID-19 which is likely to have broad based impacts across sectors.

The Authorities will have to first quantify fiscal space available to undertake countercyclical fiscal policies, and update estimates of fiscal multipliers. Then identify when and to what extent they would want to implement such policies. There is capacity to provide a stimulus but this capacity is limited.

The responsibility of business cycle stabilisation would have to start with the Fiscal Authorities, with support from regional and international agencies, as well as from domestic institutions. There will be trade-offs that the Authorities would face between stabilising output and keeping debt on a sustainable trajectory. Any stimulus has to be of the right form, size, targeted, timely and sustainable.

While stabilisation policies and stimulus measures can be rolled out to cushion the effects of any shocks and revitalise the economy, new structural reforms may be necessary to reorient the economy in a new environment.

Transformative policies are needed to reduce the concentration of the economy on too few sectors; and to remove over dependence of government spending on previously escalating expenditure items like transfers and goods and services. The effectiveness of fiscal policy can be influenced by how adaptable Grenada is to any new world order.

Credible fiscal policy and maintained integrity of the FRA, during and after any crisis, should be essential priorities for long-term development. A stable and solid fiscal framework would be important to underpin the efficient implementation of the long-term policy objectives of the National Plan launched in 2019.

Prospects for the economy of Grenada were positive by the end of 2019, as they had not factored in the potential impact of COVID-19.

The Medium-Term Fiscal Framework showed all fiscal rules and targets would be met, per annum, during 2020-2022.

Specifically, throughout the forecasting period, Central Government operations were projected to result in the wage bill falling below its ceiling; real growth in primary expenditure at or below its cap; primary balances exceeding target; no contingent liabilities related to PPPs; and the public debt (Central Government and guaranteed debt) to GDP ratio reducing consistently from 53.7 per cent in 2020 to 50. 6 per cent in 2022.

The Fiscal Framework was based on an average rate of real GDP growth of 4.1 per cent during the medium term.

The FROC made the following observations in its analysis of these forecasts:

(i) The projected nominal amounts for the total wage bill in the outer years of the medium term, i.e. 2021-2022, were too flat considering that salary increases of 4.0 per cent for government employees would be granted per annum and that there would be no major cuts to employment in the public sector.

(ii) The inflation forecasts used to inform the real primary expenditure projections were reasonable in light of historical trend of domestic prices and prevailing global developments. In 2019 and prior years, inflation was over-predicted. As alluded to in the 2018 Report of the FROC, pessimistic inflation expectations contribute to underestimated budgeted growth in real primary expenditure (less grant related expenditure).

(iii) The capital expenditure estimates used to inform the real primary expenditure projections are optimistic and do not seem feasible amid the high probability of implementation challenges, administrative bottlenecks, and cash flow management issues relating to projects. Capital expenditure estimates as a percentage of GDP are forecasted to average unprecedented levels in the next three (3) years. That is, 5.2 per cent of GDP annually in the medium term, compared with an actual average rate of 2.7 per cent of GDP per annum during 2017-2019. The amount allocated for capital outlays in 2020 is more than double the amount spent in 2019.

(iv). Even with an ambitious medium term PSIP, there is either no policy intention to engage in new PPPs and/or assume any contingent liabilities in any PPPs. If PPP arrangements for certain projects can be leveraged in a cost effective manner without diverging from the objectives of the FRA, then they should be explored.

(v) Close attention needs to be paid to the revenue projections considering the budget variances in 2019.

(vi). Compliance is being forecasted in the medium term for the debt target when public sector debt is under-reported. Authorities should make every effort to have comprehensive and timely debt statistics to ensure that the target is truly met.

(vii) Since the forecasts assume that that there would be compliance with the debt target in 2020, then in this scenario a debt-stabilising primary balance should have been recalibrated for 2021-2022, resulting in a new primary balance floor other than 3.5 per cent of GDP presented in the Framework.

Accordingly, as stated in Paragraph 11 (1) (5) of the FRA, the debt-stabilising primary balance should be recalibrated for 2021 and every five (5) fiscal years thereafter with suspension of the expenditure rule during the transition to the lower primary balance. Based on the impressions given by the Framework for the public sector debt to GDP ratio in 2020, projections for 2021 and 2022 could have been prepared within the context of relaxing/suspending existing fiscal rules – the floor for the primary balance and the cap/ceiling for real primary expenditure.

(viii) There are potential liabilities that are unaccounted for in the forecasts, and if they are all correctly quantified and ideally factored in the medium-term could cause deviation from the fiscal rules and targets. The liabilities that can materialise and add up include those associated with pension reform; national health insurance; the transition in ownership of at least three (3) entities (i.e. Petro Caribe, GRENLEC, and the Grenville Commercial Complex Limited); and the outcome of the possible PPP turnkey dialysis operation.

Further analyzes of the forecasts showed that those in the Medium-Term Framework were generally similar with those published by the IMF in October 2019. The two (2) sets of forecasts for inflation, the primary balance and Central Government debt over the period 2020-2022 were generally alike. A major exception was that the primary surplus to GDP forecast for 2022 in the Framework was more optimistic than that of the IMF.

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