Tuesday, 15 June 2010 06:15
By press release
Minister of Finance Harold Lovell announced details of the recently approved arrangement with the International Monetary Fund on Monday night. The lengthy press conference allowed the media to probe the intricacies of the government's plans for the loan, on behalf of the public.
Minister Lovell's full statement is reprinted below. Further details are to follow in subsequent coverage.
On Monday 7th June 2010, the Executive Board of the International Monetary Fund (IMF) approved a three year Stand By Arrangement (SBA) for Antigua and Barbuda. The SBA will provide Antigua and Barbuda with a loan of about US$117.8 million over a three year period to help finance the implementation of the Government’s Fiscal Consolidation Programme. The elements of this Fiscal Consolidation Programme were developed by the Government and articulated during a series public consultations and meetings with stakeholders and social partners, as well as in the 2010 Budget Statement. This programme will:
1. reduce, rationalise and streamline Government expenditure;
2. enhance revenue administration and increase revenue yield;
3. strengthen public administration though institutional and legislative reforms
Measures to Reduce Expenditure
The measures to reduce and rationalize expenditure include:
1. reducing expenditure on wages and salaries by 20 percent or $40 million by 2012. This is to be achieved by:
1. reducing expenditure on overtime;
2. pursuing a programme of attrition;
3. reallocating workers within the government service to fill vacancies and reduce the growth of the wage bill; and
4. outsourcing a number of government services, starting in 2011;
2. identifying and eliminating waste in all departments with particular focus on reducing expenditure on motor vehicles, rents and other goods and services;
3. reducing transfer payments to various statutory corporations and overseas offices. Much of this reduction will come from rationalising and consolidating the services and functions of our overseas operations.
Measures to Enhance Revenue
On the revenue side, the focus is on increasing revenue in order to meet expenditure needs. The most important revenue enhancement measure is improving the administrative systems and procedures to raise the rate of compliance by tax payers at every level. Other measures include:
1. Introducing the pass-through mechanism for fuel pricing to ensure a minimum yield of EC$2.60 per gallon of gasoline and diesel. This measure was implemented in August 2009.
2. Increasing the revenue yield from the ABST. This included reducing the basket of zero rated items from about 79 categories of goods to 29 categories. This measure took effect on March 15 2010.
3. Replacing the customs service tax (CST) in January 2010 with the Antigua and Barbuda Revenue Recovery Charge, which is levied at 10 percent on all non-oil imports and domestic production. This measure is expected to yield between $25 million and $30 million per annum.
4. Introducing an excise tax on alcohol, tobacco, ammunition and guns and to replace the current tax on luxury vehicles. The excise tax is the only new tax measure that is being imposed. This measure will be introduced in the coming months.
5. Increasing the embarkation tax to EC$50 for residents and CARICOM nationals and to US$25 or EC$70 for non-CARICOM visitors. We have also expanded the Passenger Facility Charge to include in-transit passengers.
Mutually Agreed Targets and Benchmarks
These measures are expected to generate improvement in fiscal performance so that the country can attain mutually agreed targets and benchmarks. These fiscal targets and benchmarks will have to be met on a quarterly basis in order for Antigua and Barbuda to receive disbursements under the arrangement. They include:
1. achieving a balanced budget by the end of the programme;
2. strengthening capacity in the Inland Revenue and Customs and Excise departments to improve tax administration and increase revenue collection;
3. implementing the Finance Administration Act Regulations;
4. strengthening voucher management and cash management systems in the Treasury;
5. introducing the new Procurement Act;
6. commencing work on public sector and pension reforms
Achieving Debt Sustainability
This IMF-assisted programme also focuses on tackling the debt stock. The current stock of domestic and foreign debt remains an impediment to fiscal sustainability. With Antigua and Barbuda’s reputation for not paying its debt to both domestic and external creditors, we have little or no opportunity to access funding from any bilateral, multilateral or commercial creditor unless our nation’s credibility is restored. This engagement with the IMF will therefore allow us to:
1. Establish a sustainable debt service profile in keeping with the Government’s medium-term payment capacity.
2. Make arrangements for the payment of contractual principal and interest arrears owed to both domestic and external creditors and normalise relations with these creditors.
3. Ensure payment of the Government’s contributions to Social Security, Medical Benefits and the Board of Education and restructure debts owed to these and other statutory bodies.
4. Address the large stock of liabilities that, in some cases, have been ignored for years. This includes millions owed to local contractors and suppliers.
5. Improve the reputation of Antigua and Barbuda in the international capital markets, thereby helping the country’s efforts to rehabilitate its credit rating and increase future access to these markets.
These form the basis of the debt strategy being articulated by the Ministry of Finance and its debt advisors. This strategy will be presented to the Paris Club creditors later this year in order to solicit debt relief. The overall objective of the debt strategy is to eliminate the $1.6 billion stock of arrears, place the debt to GDP ratio on a sustained downward trajectory and reduce the amount of revenue spent on debt servicing to no more than 20 percent.
Impact of Fiscal Initiatives on Fiscal Accounts
We have already taken steps to implement the measures that will ensure attainment of the aforementioned fiscal targets and benchmarks. These actions have already begun to yield results on the fiscal accounts. In particular, there has been a 33 percent reduction in expenditure for the period January to April 2010 compared to January to April 2009. This is mainly due to:
1. 13 percent reduction in expenditure on wages and salaries
2. 44 percent reduction in expenditure on goods and services
3. 24 percent reduction in expenditure on transfers
This reduction in expenditure coupled with the revenue measures has led to a 43 percent improvement in the current account balance, a 79 percent improvement in the primary balance and a 67 percent improvement on the overall fiscal account. While this is a move in the right direction, it is imperative that the Government continue to take steps to ensure greater efficiency in expenditure management and to increase revenue through enhanced revenue administration. This means there will be sustained and significant efforts to improve tax compliance by strengthening capacity within the Inland Revenue and Customs and Excise departments to undertake tax audits, bring previously non-compliant operators into the tax net, and identify and address tax evasion and avoidance. The overall objective here is to ensure that the tax burden does not only fall on a few individuals and companies but that all taxpayers pay their fair share.
Administrative and Institutional Initiatives
In addition to these efforts on the revenue side, the Government will pursue administrative and institutional initiatives to reduce expenditure and ensure more effective use of scarce resources. These initiatives include the introduction of interim procurement procedures which require that ministries and departments receive approval from the Ministry of Finance before committing the government to any expenditure. The purpose of this arrangement is to ensure that no individual or government department acquires a good or service from a supplier or contractor without following proper procedure and without ensuring the resources are available to pay for the good or service.
The nearly $200 million in government debt to local suppliers and contractors was accumulated over many years of inappropriate acquisition of goods and services by various government departments and individuals. An essential element of the fiscal consolidation programme and the arrangement with the IMF is to ensure that, going forward, there is no accumulation of arrears to creditors or local suppliers and contractors. It is therefore critical for the government to make certain it has the resources to pay for goods and services before acquiring them. The non-accumulation of arrears is the single “conditionality” of the SBA. The Government cannot, during this engagement with the IMF, increase its stock of arrears or contract short term debt.
We have to pay promptly for goods and services contracted by the government, and we must make our contributions to Social Security, Medical Benefits and make payments due to other creditors in a timely manner. In order to ensure that we remain compliant with this requirement, the Government has adopted and announced the policy that any transaction or work undertaken by a supplier or contractor in the absence of a contract or prior authorisation from the Ministry of Finance will not be considered a legitimate obligation of the Government. Indeed, as announced in the 2010 Budget Statement, any good or service provided to a ministry or department outside of the appropriate procurement procedure will be considered a gift to the Government. Contractors and suppliers are therefore encouraged to note the procedures and, if in doubt, to contact the Office of the Financial Secretary for guidance and information.
Additional Expenditure Reduction Policies
In addition to strengthening procurement procedures, the Government will focus on pursuing a number of expenditure reduction policies. One such is the vehicle use and management policy, which we commenced by reducing the amount of fuel provided to government vehicles from ten to five gallons per week. This applies to all vehicles that are not engaged in essential services, but may be adjusted if a ministry or department presents a suitable rationale for an increase. Another element of the vehicle use and management policy will be a reduction in the fleet of Government vehicles. This will commence with the sale of vehicles to officers to whom personal vehicles are assigned. Where the officer does not wish to purchase the vehicle other government workers and the general public will have an opportunity to buy them.
Government will continue to cover the cost of fuel for and maintenance of vehicles used to provide essential services and those vehicles which are typically returned to the motor pool at the end of the workday and over the weekend. A critical phase of this policy will be the development and implementation of clear and comprehensive guidelines for the use of Government vehicles. With these guidelines in place, it will be mandatory for vehicles such as school buses and vehicles used to transport staff to be returned to the motor pool at the end of the workday. These vehicles will not be allowed on the roads after working hours unless they are being used to conduct legitimate Government business.
Disbursement and Repayment of the SBA funds
The first disbursement from the US$117.8 million loan, which we have already received, amounts to about US$24.5 million. Subsequent disbursements under this arrangement will take place on a quarterly basis once Antigua and Barbuda meets the agreed fiscal targets and benchmarks. The Fund will undertake quarterly reviews of the Government’s performance in order to determine whether the targets have been realised. In preparation for these reviews, the Cabinet has established a mechanism for monitoring and reporting on fiscal performance. This includes:
1. Monthly Fiscal Reports to the Cabinet Sub-Committee on the Economy. Included in these meetings with the Cabinet Sub-Committee on the Economy will be presentations by Permanent Secretaries on their performance in respect of managing their respective budgets and submitting monthly revenue and expenditure statements to the Ministry of Finance.
2. Monthly updates to the public on the performance of Ministries in respect of submission of information that is required to ensure Antigua and Barbuda meets the fiscal targets and reporting requirements stipulated in the CDB and IMF arrangements.
3. Quarterly reports to the public and key stakeholders on Antigua and Barbuda’s performance in respect of the CDB Policy Based Loan and the Standby Arrangement with the IMF.
The repayment terms are as follows:
1. Total of 8 years to repay
2. A grace period of 3 years where only interest is paid
3. Repayment of principal in 5 years commencing in 2013
4. The interest as of June 7th 2010 was 1.25 percent
5. When principal repayments begin the interest rate will be based on the weighted average of the interest rate for the preceding three month period
6. Payments will be made quarterly in February, May, August, and November each year.
Implications of the Fund-Assisted Programme for FDI and Economic Performance:
The aim of the Fiscal Consolidation Programme (FCP) is to place the country on the path to fiscal and debt sustainability over the next three years.
The FCP is designed in such a way that if the targets are met, the Government would succeed in reducing its debt service burden while restructuring the fiscal accounts so we see larger primary surpluses on an annual basis and overall surpluses as well. The Fiscal Consolidation Programme incorporates payments to be made to all creditors going forward, including the IMF and the CDB. In fact, now that the Stand-by Arrangement has been approved by the IMF, we are in a position to negotiate with the Paris Club for much needed debt relief. This has the potential to significantly reduce the arrears and overall debt stock, which has been a burden for the economy.
Spokespersons for Her Majesty’s Loyal Opposition have suggested that the SBA from the IMF will deter foreign direct investment (FDI) and have a negative effect on growth. I firmly refute this proposition and wish to point to the importance of a healthy macroeconomic environment and the role that the government plays in facilitating FDI.
What do investors look for? The most important element is a stable macroeconomic environment. What does this mean? On the monetary side this includes a stable exchange rate, stable interest rates and the ability to move money without restrictions. Investors are also looking for a package of incentives within a framework that is fair and transparent. On the fiscal side investors are looking for stability with respect to taxes and for Government to provide support in terms of the necessary infrastructure to facilitate FDI projects.
The National Economic and Social Transformation Plan, along with the ECCB’s eight point growth plan, addresses the monetary and fiscal issues. My administration created the Antigua and Barbuda Investment Authority with an Act of Parliament to address the issue of creating an enabling environment conducive to private sector-led growth. The Authority offers a number of incentives aimed at attracting both foreign and local investment.
With respect to the SBA with the IMF, this is as transparent as the Government can be to domestic and foreign investors about the current structure of its tax regime and how it will evolve over the next three to five years. Further, the SBA also gives investors a clear indication of the amount of fiscal space the Government has, and the Government’s ability to create additional fiscal space if needed to support FDI projects.
Approval of the SBA represents a vote of confidence in the reforms being undertaken by this administration. It sends a clear signal to potential investors and the international community, that Antigua and Barbuda is on the path to fiscal and economic sustainability, and is a good place to conduct business.
Additional Support for the NEST Plan:
The donor community has pledged support for the NEST Plan by providing financing for technical experts as well as grants for budgetary support. In particular I would like to mention the financing approved by the European Commission, in support of our fiscal consolidation programme, through the Vulnerability Flex Facility. The financing provided through this facility will provide much needed budgetary support, particularly as we strive to maintain our social programmes. This grant of EURO10 million has already been approved and we expect that we will receive disbursement later this year. The EU has also approved EURO3 million to support the Government’s “Public Finance Action Plan”, which will be launched later this year.
In support of our reforms in the area of public finance management and revenue reforms, the Government is currently utilizing technical assistance funded by the United Kingdom’s Department for International Development (DFID) totaling 1.5 million pounds. With these resources, the Government has been receiving and will continue to receive significant technical assistance from the Caribbean Regional Technical Assistance Centre (CARTAC) to enhance revenue administration and improve systems for expenditure management.
The World Bank has provided a grant of US350 thousand to fund the public service transformation programme, and will also provide financing for streamlining the social programmes introduced by this administration to protect the most vulnerable members of society. The Caribbean Development Bank continues to partner with the Government in the area of statistical reform and the development of our poverty reduction strategy. They will also provide funding in the amount of US363 thousand for an office to manage the implementation of the Economic Partnership Agreement in Antigua and Barbuda.
We also received approval from the CDB for concessional financing of USD30 million, under their Policy Based Loan (PBL) facility. The PBL acknowledges and will support the Government’s policy focus in the area of strategic actions to eliminate fiscal deficits, reduce public sector debt to more manageable levels, expand social programmes and encourage private sector development.
The PBL will be released in three annual tranches of USD10 million each, subject to Government’s progress in enhancing macroeconomic management and implementing fiscal and structural measures between the years 2010 to 2012.
The loan is to be repaid in 17 years, inclusive of a grace period of 5 years, at a variable rate (reviewable semi-annually). The current interest rate is 4.8% per annum.
As I indicated earlier, we have already received the first disbursement under the SBA of US$24.5 million or approximately EC$66.15 million. Whilst within the overall context of our fiscal situation this amount might appear modest, it is significant enough that if used strategically, it can begin to unlock the domestic financial system and become a catalyst for a revitalized Antigua and Barbuda economy.
The purpose of these resources is not to pay wages and salaries and meet the day to day operational expenses of Government. Indeed, we have indicated that the purpose of the Fiscal Consolidation Programme is to ensure the Government can generate the revenue needed to cover its expenditure and to deliver the various services to the population. The resources provided through the SBA and the CDB Policy Based Loan will allow the Government to start addressing its arrears to creditors. In particular, the disbursements from the Fund and CDB will allow us to “unlock” the domestic system by starting to liquidate amounts owed to domestic creditors such as suppliers and contractors.
In this regard, the Cabinet will meet as a matter of urgency to agree on exactly how this first disbursement shall be utilized to create the most opportunity, generate the greatest benefit and afford the maximum relief. It will be necessary, as we contemplate on how these funds are to be deployed, to make and take some tough decisions. It will be critical that we plan and prioritize carefully, and then execute in a sustained and disciplined manner so as to achieve the optimal result.
I wish at this time to issue a special “thank you” to local suppliers and contractors for the forbearance which they have exercised over the past months. The government is most appreciative of their patience and gives the assurance that we shall begin to address our indebtedness to them as a matter of priority. Of course, our indebtedness cannot be extinguished at one fell swoop, but the anticipated scheduled disbursements from the International Monetary Fund and the Caribbean Development Bank will go a significant way toward assisting us in liquidating our debt to you through regular and timely payments.
Citizens and residents of Antigua and Barbuda, we are in a challenging situation, but by no means a hopeless one; however, as we face the most severe economic period of our recent history, we must unite in our determination, in our effort, in our commitment, to see this phase through. In this connection, all individuals, all families, all communities; all proprietors, all partnerships, all corporations; all groups, all clubs, all associations; ALL have a stake in an Antigua and Barbuda that is fiscally sound, has sustainable levels of debt, and is on a growth path that will ensure the sustained development and improvement in the economic and social spheres of our lives. Let us therefore work together to secure not only our future, but the futures of the generations to follow.