Barbados Economic Recovery and Transformation Plan Monitoring Committee (“BERT MC”) Public Report #2 Activities Since its first report, the BERT MC has continued to receive reports from the Government of Barbados (GOB) on its progress for each of the months of January through March 2019 towards the targets agreed in the Memorandum of Economic and Financial Policies (“MEFP”) agreed with the IMF within the Extended Arrangement under the Extended Fund Facility for Barbados (“EFF”). This report coincides with the second set of targets under the EFF on which the BERT MC now comments. 1.
Quantitative Performance Criteria under the EFF
The quantitative performance criteria required to be met compared with the actual results achieved are outlined below: Performance Criteria (BDS$ millions) Fiscal targets: Floor on the CG Primary Balance 1 Non-accumulation of CG external debt arrears Ceiling on CG Transfers and Grants to Public Institutions Ceiling on Public Debt 2 Monetary targets: Ceiling on Net Domestic Assets of the CBB Floor on Net International Reserves 2,3
End March 2019 Target
Actual
Met Yes/No
315 0 732
354 0 675
Yes Yes Yes
12,921
12,863
Yes
1,992 717
1,876 889
Yes Yes
Note 1 - Budget support grants were nil versus $28 million projected in the MEFP. As a result, the floor on the CG primary balance was decreased by the shortfall in grants, as required under the MEFP (Attachment II paragraph 5 on page 57. Note 2 – Policy based loans received from the IDB and CDB were $350 million versus $300 million projected in the MEFP. As a result, the ceiling on public debt (initially $12,871) and the floor on net international reserves (initially $707) were increased by 100% and 75% of that $50 million excess, as required under the MEFP (Attachment II paragraph 12 and 19 on page 58.) Note 3 – Budget support grants were nil versus $28 million projected in the MEFP. As a result, the floor on net international reserves ($745 after the adjustment in note 1 above), was decreased by the shortfall in grants, as required under the MEFP (Attachment II paragraph 12 on page 58.)
Floor on Central Government Primary Balance The primary balance represents total revenues and grants less all expenditure but excluding interest. While revenue collection fell short of the target under the BERT Programme (Ref to IMF Country Report No.18/290), expenditure was contained, which allowed the primary balance minimum target to be exceeded by a small margin. 1|Page
a. Revenue Collection Total revenue for the fiscal year ended March 31, 2019 was $2,994 million versus a plan of $3,062 million. This represents a decrease of $68 million or 2.2% shortfall however it represented an increase $149 million or 5.2% increase on prior year total of $2,845 million. Direct tax revenue was $1,127 million versus $1,126 million targeted and $969 million in the prior year. This performance was achieved although $79 million of income and corporation tax refunds were paid to taxpayers compared to the $52 million that was anticipated. The $158 million or 16.3% increase in direct tax revenue compared to 2018 was driven primarily by $80 million of additional corporation tax primarily from new businesses paying corporation tax for the first time, together with an additional $24 million of land tax collections encouraged by the recent amnesty. At $1,686 million indirect tax revenue was $50 million or 3% lower than the $1,736 million under the BERT target, as higher than expected VAT receipts were offset by lower than anticipated excise tax and import duties and delays in implementing other new taxes. Indirect tax was in line with the total for 2018 overall, as the $102 million loss of revenue from the elimination of NSRL was offset by an additional $54 million of VAT and the introduction of other indirect taxes such as the fuel tax. b. Expenditure Control Total expenditure was $3,024 million which was $177 million or 5.5% below the target, and $272 million or 8.3% less than the prior year period. The containment in expenditures compared to the target was spread across several expense categories with $26 million less spent on goods and services, $97 million less on interest and $17 million less on grants to individuals. Transfers to public entities (PEs) was $10 million higher, while transfers to those PEs monitored under the BERT program was $57 million below target (see below). Capital expenditure was lower than previously planned where $185 million was invested compared to $227 million originally planned. Compared to the prior year the main source of savings was on interest where $380 million less was spent, partially offset by an additional $30 million in salaries and wages and $59 million extra outlaid on transfers. The increase in the level of transfers compared to the prior year is of concern to the committee, as control of this area of expenditure will be critical to achieving the primary surplus target under the EFF in the current fiscal year (2019/20), while not increasing arrears in PEs. We note that arrears in PEs will now be a Performance Criteria and a reduction in the level of arrears will be targeted for FY 2019/20. It should be noted that the saving on interest expense has no impact on the primary balance.
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Non-accumulation of Central Government external debt arrears Under this performance metric the central government may not incur new arrears in the payment of its external (foreign) debt obligations at any point during the program. It should be noted that the definition of new arrears excludes debt where a debt restructuring is being pursued. The committee looks forward to the conclusion of the on-going external debt restructuring negotiations. Ceiling on Central Government Transfers and Grants to Public Institutions This maximum transfer target applies to a list of 33 public institutions listed in the MEFP. Transfers to these public institutions were $675 million versus the $732 million limit. While expenditure control appears to have been achieved for these specific institutions, the excess overall spending on transfers noted above, suggests that significant effort must be made to control the expenditures at the other public institutions. Ceiling on Public debt This maximum limit applies to Central Government’s domestic and external debt, Central Government’s guaranteed debt, and arrears. As of March 2019, following the successful restructuring of the domestic debt, the stock of total debt was $12,863 million versus the adjusted cap of $12,921 million under the MEFP. Ceiling on Net Domestic Assets of the Central Bank of Barbados Net Domestic Assets of the CBB were $1,876 million versus the ceiling of $1,992 million. Floor on Net International Reserves Net International Reserves (‘NIR’) were $889 million versus the $717 million adjusted minimum target. The reserves have been boosted by $350 million of loans received from the IDB and CDB. In addition, the suspension of external debt payments pending completion of the external debt restructuring negotiations also had a positive impact on the NIR. 2.
Indicative Targets under the EFF
The two indicative targets required to be met compared with the actual results achieved are outlined below: Performance Criteria (BDS$ millions) Fiscal targets: Ceiling on CG Domestic Arrears Floor on Social Spending
End March 2019 Target 1,246 50
Actual 309 101
Met Yes/No Yes Yes
Ceiling on Central Government Domestic Arrears Central government domestic arrears include overdue trade payable for goods and services, overdue contributions, rents and loan payments to the NIS and overdue tax refunds. This significant reduction compared to the ceiling was achieved through arrears owing to NIS being 3|Page
converted to bonds (series B and F) and as such these amounts have now been included in the Public Debt stock. Additionally, arrears that were owed between the various government agencies have been written off effective December 31, 2018. Floor on Social Spending This minimum limit on social spending applies to programmes intended to have a positive impact on education, health, social protection, housing, community services and recreational activities. Spending on social programs includes the salaries and wages of employees administering the programs. Overall spending at $101 million was well in excess of the minimum limit of $50 million. Structural Benchmarks under the EFF There are a number of structural benchmarks that are also required to be achieved under the EFF. An update on the structural benchmarks that were due to be achieved by the end of December 2018 that were still in progress then are outlined below: Benchmark from December 2018 Parliament to adopt a revised Financial Management and Audit (FMA) Act conferring greater autonomy to the Ministry of Finance and Economic Affairs to oversee SOEs, including prior approval of all borrowings and assumptions of other liabilities. Revisions to the FMA Act will also establish clear definitions for the classification of public entities, and their related roles and responsibilities; and establish tighter and more precise reporting requirements for SOEs, and sanctions for noncompliance.
Current status The Public Finance Management Act, 2019 was passed by the House and Senate in January 2019 but has not been proclaimed as yet.
Government to launch a training and outplacement Partially implemented as the mitigation programme to help mitigate effects on the unit was launched. The training element has not commenced; however, we vulnerable from the restructuring of SOEs. understand this will be starting shortly. Parliament to adopt new Town and Country The Planning and Development Bill 2019 Planning legislation, aimed at streamlining and was passed in the House and Senate accelerating the process for providing permits. during January 2019 but has not been proclaimed as yet. Government to table a revised Financial The Public Finance Management Act, Management and Audit (FMA) Act to establish a 2019 was passed by the House and permanent binding budget calendar, envisaging Senate in January 2019 but has not been budget approval prior to the fiscal year. proclaimed as yet. The structural benchmarks that were due to be achieved by the end of March 2019 and their current status are outlined below: Benchmark from March 2019 Government to submit to Parliament a consolidated report on the performance of SOEs, together with budget estimates. 4|Page
Current status The report was laid, and a Ministerial Statement made to parliament on April 2, 2019.
Government to introduce a system for monitoring SOE arrears on an ongoing basis. Government to adopt a new business plan and staffing strategy for the Corporate Affairs and Intellectual Property Office (CAIPO), with a view of streamlining the registration of new business and strengthening maintenance of commercial records of existing business.
Completed The business plan was laid, and a Ministerial Statement made to parliament on April 2, 2019.
Key considerations to future performance criteria and structural benchmarks Increasing the primary balance to a surplus of 6% of GDP in 2019/20 versus a minimum of 3.3% in 2018/19 is a significant adjustment. The monitoring committee continues to see this as central to the success of the program, requiring revenues to perform and expenditure control to be achieved. As previously mentioned in this report, the continued increase in the level of expenditure on transfers is an area of significant concern to the committee given the size of this expenditure item and its impact on the primary balance target. The measurement of GDP is another issue to which some attention should be directed as it is counterintuitive that although there was no increase in the VAT rate in 2018, VAT revenues would be up by 6% compared to 2017, while real growth was reported to be slightly down in 2018. Overall the GOB has been successful in achieving the targets agreed under the EFF for the first six months. The Monitoring committee however would also like to see the full implementation of the Retooling, Empowering, Retraining and Enfranchising (RERE) programme, which is critical for retrenched employees, and many of those currently employed in the public service, to function efficiently in a transformed economy. Additionally, implementation of initiatives outlined in the Growth & Business Climate elements of the structural benchmarks must be realized in order to improve the efficiency of doing business in Barbados and to facilitate much needed growth in the island’s economy. These include effecting new town and country planning processes, implementing the new business plan and staffing strategy for CAIPO, and improving efficiency of Customs operations at the Bridgetown Port.
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