The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The IMF has urged the Government to slash the civil service wage bill by almost $70 million, as it slammed the Christie administration’s “lax spending controls” pre-general election.

The International Monetary Fund (IMF), in its full Article IV report on the Bahamas, revealed that the Government could save taxpayers more than $200 million annually through a combination of public service downsizing and pension reform, plus reduced subsidies to state-owned corporations.

It recommended reducing the civil service wage bill to 2015-2016 levels “at most”, arguing that this would result in savings equivalent to 0.8 per cent of Bahamian gross domestic product (GDP).

Highlighting just how bloated the public service became as the Christie administration removed all hiring constraints in its desperate bid for re-election, an IMF graphic showed that the civil service wage bill for the 2017-2018 fiscal year equals close 8.5 per cent of GDP - compared to a 7 per cent average for the 2005-2016 period.

The difference between the two is roughly $120.6 million, using the same $8.4 billion total GDP estimate that the IMF would have employed prior to the recent near-28 per cent upward revision from the Department of Statistics.

“The public sector wage bill increased sharply in fiscal year 2017,” the IMF’s Article IV report said. “Staff recommended reducing the wage bill to, at most, the level observed in fiscal year 2016, which would yield savings of 0.8 per cent of GDP—relative to fiscal year 2018— including by reducing non-essential temporary workers (about 30-40 per cent of public employees), enacting a hiring freeze, and capping compensation for re-hired pensioners.”

The IMF’s ‘0.8 per cent of GDP’ is, using the Department of Statistics’ former $8.4 billion figure, equivalent to a $67.2 million cut in the civil service wage bill. Using the Department’s revised $10.22 billion GDP, though, would result in a higher $81.76 million slash.

The Fund’s recommendations and data illustrate the scale of the fiscal dilemma confronting the Minnis administration, following a week in which the Deputy Prime Minister said the 2016-2017 deficit had soared to $595 million - and counting - compared to his previous $500 million estimate.

While the bloated civil service clearly needs to be reduced to a more appropriate size, cuts of the nature recommended by the IMF could have a devastating impact - both on the individuals affected and their families, plus the wider economy from the loss of income and spending power.

As a result, the Government is likely to be reluctant to cut too deeply, too quickly, and its policy approach to-date indicates it will implement a more gradual approach to reducing its wage bill by not re-hiring workers whose contracts have expired or replacing persons who have left.

Still, based on austerity measures announced so far, the Minnis administration appears to be following the IMF’s Article IV report almost to ‘the letter’. The hiring freeze, reductions in temporary workers and capping remuneration for re-hired pensioners have all been implemented, along with the 10 per cent ‘across-the-board’ cut to recurrent spending.

The IMF, meanwhile, also recommended that the Government could generate savings equivalent to 1.25 per cent of GDP if it also reduced subsidies to state-owned corporations back to the 2005-2016 average.

To achieve this, though, it suggested that Bahamians would pay the price in other ways, namely an increase in the fees charged by state-owned enterprises (SOEs) for the services they provide.

“Sizeable transfers to state-owned enterprises (SOEs)—reaching 2.1 per cent of GDP in fiscal year 2016—continue to be a drain on the budget,” the IMF’s Article IV report said. “SOEs represent also a significant contingent liability for the central government, with their combined debt reaching 18 per cent of GDP in 2016.

“Reducing subsidies and transfers to the historical average would yield savings of up to 1.25 per cent of GDP relative to fiscal year 2018. To this end, staff recommended adjusting prices of services provided by SOEs to cost recovery levels, and restructuring these corporations and other public entities to improve their efficiency. A first essential step is the establishment of effective financial oversight over these corporations.”

A key reason why the likes of Bahamas Power & Light (BPL) and the Water & Sewerage Corporation, for example, both lose between $20-$30 million per annum is because their services are priced ‘below cost’ - meaning the prices charged to consumers are insufficient to cover their operating costs.

While following the IMF’s advice would appear to make economic sense, the Government will be alive to the political implications of forcing Bahamians to pay increased service charges as opposed to funding such losses via the taxpayer. However, the end result is that those not using services from the likes of the Water & Sewerage Corporation are subsidising those who do.

Using an $8.4 billion GDP, and 1.3 per cent savings yield projected by the IMF, the Article IV report projected that following its ‘subsidy’ cut recommendation would save taxpayers $109.2 million annually.

It added that subsidies and transfer payments to state-owned corporations had increased from an average of just over 6 per cent between 2006 and 2015 to around 7.25 per cent this fiscal year. The Government confirmed in the Budget that $429 million in funding had been allocated to SOEs this fiscal year.

Finally, the IMF recommended that the Government require civil servants to share the burden of financing their own retirement income. This is currently borne 100 per cent by the Government, a position that is viewed as unsustainable and a ‘ticking timebomb’ for the country’s fiscal position.

“Civil servants have a non-contributory pension scheme. Pension payments have trended up to an estimated 1.1 per cent of GDP in fiscal year 2017, and population aging will increase them further,” the IMF warned.

“Staff recommended transforming the civil servants’ pension system into a contributory regime in the near term, with contributions commensurate with benefits, and with a view to move to a defined-contribution scheme in the medium term. Setting contributions at 5 per cent of wages for pensionable employees could yield revenues for 0.3 per cent of GDP.”

The saving would be equivalent to $25.2 million per annum, based on an $8.4 billion GDP and the IMF’s figures. The KPMG accounting firm previously estimated the unfunded, ‘pay-as-you-go’, civil service pension liabilities at around $1.5 billion. These liabilities are set to increase to $2.5 billion by 2022, and $4.1 billion by 2032, unless reforms are enacted.

Collectively, the three reforms cited by the IMF - a reduced civil service wage bill, lower subsidies and contributory civil service pension reforms - would save Bahamian taxpayers a total $201.6 million per annum, significantly narrowing the fiscal deficit.

It argued that the three initiatives would enable the Minnis administration to meet its deficit reduction targets, and help contain its recurrent or fixed-cost spending. The Fund also warned that its objective of reducing the deficit to $323 million, or 3.5 per cent of GDP, for 2017-2018, followed by further falls to 2.3 per cent and 1.1 per cent in subsequent years, were “more optimistic” than its own forecasts.

“Staff projects [direct government] debt to peak at 73.3 per cent of GDP in fiscal year 2018, reflecting the impact of [Hurricane Matthew] and lax expenditure control before the general elections in May, and only to fall by half a percentage point over the medium term under modest consolidation efforts,” the IMF said.

“Under modest consolidation efforts, which would bring the fiscal deficit down to about 2.25 per cent of GDP in the medium term, the debt would only stabilize at around 73 per cent of GDP in 2022. This baseline scenario assumes dissipation of hurricane-related spending and expiration of temporary tax relief measures, restraints in current expenditure, and revenue increases from ongoing efforts to improve tax administration and collection.

“There are significant downside risks to the fiscal outlook, with a combination of adverse shocks putting the debt on an upward trajectory. The debt sustainability heat map points to moderate to high risks to debt sustainability.”