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'Entrench New Culture' On Fiscal Responsibility

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The government must "entrench a new culture" within the civil service if the Fiscal Responsibility Bill is to succeed, the Inter-American Development Bank (IDB) warned yesterday.

The multilateral lender's assessment of the proposed legislation, led by its Bahamas-based economist Allan Wright, backed the bill as a "bold step" that sets out "clear, sound" deficit, debt and spending targets in line with international best practices.

Yet the IDB paper warned that the Bill's improved fiscal governance objectives, especially as it relates to greater transparency and accountability, could be endangered unless the main principles and philosophy of such a shift were ingrained in "all members of the public service".

It also emphasised that strong public sector accounting/financial management systems were essential for determining whether the Government was meeting the Bill's targets, and called for the Bahamas to "embed contingency provisions for future natural disasters" in the legislation.

And, echoing warnings by the private sector and civil society groups, the IDB agreed that the Fiscal Responsibility Bill was not a one-shot cure that will "guarantee sustainability" for the Bahamas' financial woes.

"Fiscal rules and FRFs [Fiscal Responsibility Frameworks] more broadly are not perfect and they certainly are not panaceas," the IDB paper said, urging the Bahamas to heed the examples of Jamaica and Grenada, both of whom have already implemented such legislation.

Both countries have changed their respective laws since they came into effect in 2012 and 2016, respectively, and the IDB suggested their experiences could provide "useful insights" to the Minnis administration as it readies to close consultation on the draft legislation and bring it to Parliament.

"It is crucially important that the Bahamas' FRL (Fiscal Responsibility legislation) is supported by strong public financial management (PFM) systems. Ideally, the FRL should be accompanied by, or embedded in, PFM legislation," the IDB urged.

"Strong PFM systems allow for the conversion of the intent of the FRL (especially the fiscal rules and targets) into the reality of budget policy and implementation. Of the PFM systems, sound accounting and budgeting systems that are consistent across all government ministries are particularly important to ensure timely monitoring of the fiscal responsibility objectives."

This is one area where the Government, through K P Turnquest, deputy prime minister and minister of finance, has admitted it is extremely weak. A $33 million IDB-financed project to make critical financial/accounting system improvements was described as "floundering" by Mr Turnquest in his Budget communication, although these charges were rejected by the Opposition PLP.

The Deputy Prime Minister also blamed such deficiencies for allowing the build-up of the $360 million unfunded arrears that underpinned the Government's rationale for the VAT rate hike to 12 per cent, arguing that the current cash-based accounting is inadequate to track future spending commitments and assets/liabilities. A shift to accrual-based accounting is planned by 2022.

While the Minnis administration has largely adhered to the IDB's call for wide-ranging public consultation on the Bill, the paper emphasised that obtaining complete civil service 'buy in' for its plans is essential.

"Public sector employees especially must be familiar with the requirements and provisions of the FRL if its implementation is to be smooth and efficient," the IDB warned.

"Therefore, it would be prudent for the Government of the Bahamas to hold orientation sessions for all members of the public service to promote and entrench a new culture of fiscal responsibility, transparency and accountability.

"It will also be important that orientation sessions be held for the members of the Fiscal Responsibility Council to build their capacity and adequately prepare them to discharge their legislated mandate."

The IDB also called on the Government to "seriously consider setting up a contingency fund with legislated governance arrangements" to strengthen the Bahamas' resilience to major disasters caused by hurricanes.

"Given the inherent vulnerability of the Bahamas to natural hazards, it would be important to embed contingency provisions for natural disasters in the FRL," the bank added. "The IMF, in its Article IV 2018 report, suggested that the Bahamas should create a natural disaster savings fund with a 'target size between 2 to 4 percent of GDP'.

"Indeed, explicit governance arrangements for a contingency fund for post-natural disaster rehabilitation would be a welcome addition to the Fiscal Responsibility Bill 2018. As the Bahamas' fiscal and economic situation improves over time, it would be prudent for the government to amend the FRL to include an explicit provision for a natural disaster contingency fund."

The IDB paper described the Fiscal Responsibility Bill's development as "a bold step" but necessary, as the Bahamas' financial performance in recent years has "drawn attention to the need to entrench fiscal discipline, enhance budget credibility and promote countercyclical fiscal policy".

It pointed out that the central government's debt-to-GDP ratio stood at around 55 percent in 2017-2018, some five percentage points above the Bill's medium-term target, with annual deficits having soared since the 2008-2009 global recession.

"The excessive staffing and operational inefficiencies of state-owned enterprises (SOEs) placed an excessive burden on government transfers, amounting to over 5.8 percent (versus 4.1 percent in fiscal year 2007) of overall GDP or roughly 28 percent of overall government expenditure by fiscal year 2017-2018," the IDB added.

The Fiscal Responsibility Bill's two 'rules' are a deficit that does not exceed 0.5 per cent of GDP by 2020-2021, and a 'cap' that limits the growth of nominal recurrent spending to that of nominal GDP once the deficit target is met.

"The stated objectives of the Bahamas' proposed FRF are sound, unambiguous, and accord with the typical objectives of a standard FRF," the IDB said. "The objectives are geared toward embedding medium to long-term fiscal sustainability through judicious fiscal management and a solid framework to promote and entrench good fiscal governance.

"The Bahamas' proposed FRF passes the simplicity test because the fiscal variables being constrained (public debt, overall balance, and current expenditure) are clearly defined, uncomplicated, and difficult to manipulate. The medium-term debt anchor is supported by two clear operational rules, which are designed to put public debt on a firm downward trajectory toward its sustainable target.

"The FRF meets the key requirement test because the fiscal rules and targets will be enshrined in law with an independent oversight fiscal council to monitor and report on compliance. Strict enforcement of the FRF provisions will, over time, bolster the credibility of the Bahamas' rules- based framework."

The IDB added that the Bill had sufficient flexibility by allowing for "a moratorium of the fiscal targets and objectives" in the event of a major global recession or natural disaster, while there were compliance and administrative sanctions and penalties to ensure the goals were enforced and adhered to.

"The Bahamas' proposed FRF strikes a good balance between credibility and flexibility to support the deployment of counter-cyclical fiscal policies when needed," the bank added.

"Overall, the proposed FRF is a solid one and, if implemented as stipulated in the Bill, it will help to entrench fiscal discipline, enhance budget transparency and credibility, and improve fiscal accountability and overall fiscal governance."

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