Barbados Government Responds to Professor Michael Howard
Prime Minister Mia Mottley responds in quick time to Professor Michael Howard’s Sunday Sun article – David, blogmaster
Barbados Economic Recovery Team’s responses to the questions posed by Professor Michael Howard on page 26A in the Nation’s Sunday Sun for Sunday, September 9, 2018:
Ques: What are the projected dollar cuts for current expenditure over the loan period?
Ans: The loan period is for 4 years, with the last disbursement in May 2022. Projected expenditure cuts over this period amount to $571 million.
Ques: Has fiscal revenue been overestimated, given the fact that the economy is in recession, and large job cuts will occur which will further reduce tax revenue yield?
Ans: The fiscal revenues have not been overestimated. They take into account the economic business cycle and all factors impacting it, including any possible job losses.
Ques: How many workers in the public service and the SOEs are estimated to be sent home?
Ans: The program does not take the draconian and outdated approach by targeting some number for sending home workers. The objective of reform to the SOEs and to Central Government is to make the public sector fit for the challenges of the twenty first century through modernising and improving the efficiency, quality and cost effectiveness of the public sector. This will mean adjustment and rationalisation of SOEs and some Government Departments. It will also mean retooling and empowering, retraining and enfranchising some of the public sector workers to improve effectiveness. There will be job losses in some areas but there will also be employment gains in other areas where deficiencies have long set in. The net effect is likely to be a reduction in public sector employment but the number is also likely to be far smaller than the numbers bandied around and all will be offered some alternative, be it in the modernizing and digitizing program, an extensive training program, early retirement or a job in the private sector.
Ques: Is there any estimated money value of severance payments in relation to job retrenchments?
Ans: This is still being worked out at the level of the Social Partnership.
Ques: Are there any preliminary estimates to show how many SOEs will be merged, shut down or privatised, or the savings to be derived from these actions? Will user fees be charged for certain services, and if so, which ones?
Ans: The SOEs reform process began with what can be considered the most comprehensive consultation in our modern history from the Social Partnership to the leadership to the wider public, to identify potential for efficiency gains, cost recoveries, and enfranchisement through divestment of entities and/or activities. Indeed, almost 5000 persons participated in answering 93 questions in an on-line survey. There is consensus from the consultation process that 29 entities must be transformed with a savings of about $115m by end of 2019/20. It is hoped that around one third of these reductions will be felt by the end of 2018/19 with the balance in the following fiscal year. Additionally, all Government entities will benefit from stronger timelier financial accounting and oversight.
On the issue of user fees, there are currently four entities which provide an essential public service that the private beneficiaries have a capacity to pay for and where they do so in many other countries. These entities are the Vital Statistics of the Supreme Court Registry, the Land Registry, the Corporate Affairs and Intellectual Property Office, and the Financial Services Commission. The process of moving to full cost recovery of these activities through user fees will also involve an initial and ongoing independent review of the potential for greater efficiencies, for example, through the use of new technologies and approaches, to keep these fees to international norms or lower. The Transport Board and Sanitation Services are also entities where increasing user fees are being considered as part of cost-recovery process but these two entities also present opportunities to empower and enfranchise Barbadians, e.g. helping drivers and their teams own their buses and sanitation trucks, bid for work from the Government and commit to minimum standards of public service. As such, any increase in user fees for these two entities be a small part of a larger restructuring effort within these entities.
Ques: Is there an estimated target for the new bus fare?
Ans: No, as any increase will be part of a comprehensive transformation process involving improving efficiencies and reducing cost.
Ques: What are the “conditionalities” or requirements for the IMF loan?
Ans: The conditionalities of the IMF loan are the targets set by Barbados itself under the Barbados Economic Recovery and Transformation program (BERT). These are: i) achieving a 6 percent primary balance by fiscal year 2019/20 and maintaining it for the next four year; ii) no further accumulation of arrears; iii) reducing transfers to SOEs by no less than the amount identified under the BERT program; iv) any increase in public debt must be consistent with keeping the debt-to-GDP ratio on the downward trajectory to reach 60 percent by 2033; and v) maintain social spending at a level consistent with protecting the most vulnerable in society.
Ques: What will be the nature and perceived impact of debt restructuring?
Ans: The public debt was deemed unsustainable by every possible measure and every international institution (as reflected in the numerous downgrades to the very bottom of the rank of rated countries), including the IMF. Not only the stock of debt but the servicing of the debt was also choking the life out of the economy. Indeed, the gross financing needs of Government reached 41 percent of GDP in 2017 as highlighted in the IMF 2017 Article IV Report on Barbados. As such, the Government announced a comprehensive debt restructuring, including external debt to commercial creditors and treasury bills, on June 1, 2018. Significant progress has been made in discussions with both domestic and external creditors and an exchange offer for Barbados dollar-denominated debt was issued on September 7, and the plan is to table an exchange offer external (US dollar-denominated) debt to commercial creditors shortly. Government debt held by the Central Bank of Barbados and by the NIS will also be restructured. The successful restructuring of the debt will put the debt on a sustainable path to reach 60 percent by 2033 and free up much needed fiscal space for keep infrastructural and development spending.
Ques: Was an increase in public sector salaries and pensions, as well as removal of UWI fees an appropriate economic policy, given that the stated goal of annual IMF briefings, as well as the present programme, is to reduce current expenditure?
Ans: This was absolutely an appropriate policy and one which received zero push back from the IMF. The design of economic policy must not only consider the current circumstances but also what has gone before. In doing so, it is clear that the appropriate policy is an increase in salaries and pension, given that the public workers in Barbados have not had a salary increase in over a decade and because of inflation the cost of living has increased considerably. This (the increase in salaries) then becomes the baseline on which the forwarding looking polices can be designed. Similarly, the imposition of UWI fees had created hardship for many Barbadian students, even more so in an environment of a prolonged economic recession. The removal of fees had to be dealt with immediately and be incorporated in the baseline. The same can be said of the additional expenditures to address the sewage and sanitation problem, which required immediate attention.
Ques: Is the flat tax (a modified poll tax) printed on the water bill an unfair or inequitable levy, which will impact proportionately heavier on the poor than on higher income groups??
Ans: We have protected the poorest and most vulnerable with higher pensions and welfare payments. The adjustment is skewed to the most fortunate in our society by raising the top tax rate and corporate tax rates, but we also believe that we are all in this together and everyone should make a contribution even if it is as small as $1.50 per household per day or 30 cents for everyone in the average-sized household.
Ques: Is the IMF loan of US$290 million too small for an extended Fund programme, given our very low level of reserves, and our extremely high level of debt?
Ans: No it is not too small for an Extended Fund Facility (EFF) as it represents 220 percent of quota and any amount above 100 percent of quota is considered ‘high access’. Yes, Barbados could have benefited from even higher access to build reserves buffers, given our vulnerability to external shocks and natural disasters. However, we must also be mindful that the greatest benefit of the endorsement by the IMF of our economic recovery and transformation program is the catalytic role such an endorsement plays. Our development partners, the Inter-American Development Bank and the Caribbean Development Bank have both pledged significant amounts of financing, approaching BDS$300m for Barbados once our program is approved by the IMF Executive Board, which is likely to be in a few weeks. Together we are likely to receive BDS$1bn of support to our reserve from our multilateral partners as a result of the IMF supporting BERT .
Ques: Is a previous detailed report by the IMF on the SOEs available, which would offer some guidance in our monetary and financial situation, rather than having to depend on a qualitative consumer survey?
Ans: While a report by the IMF on the SOEs is available and can be sourced from the Ministry of Economic Affairs, we opted to rely on the comprehensive survey of the Barbadian public which reflects the wishes and views of Barbadians. Not only is this consistent with the principle of us – Barbadians – developing the Barbados Economic and Transformation program, but all the research show that where the public has a say in the design of economic policy, the implementation of said policy is more likely to be successful.
Ques: Are loans from financial institutions like the Inter-American Development Bank, where we can tap funds, also not subject to conditionalities?
Ans: No and this is because many institutions and institutional investors rely on the IMF endorsement, which is taken to imply that the country’s program is based on a coherent and consistent set of policies that are highly likely to be successfully implemented and with the desired outcome. This is the catalytic role of IMF support we referred to above.