World Bank issues road map for fiscal sustainability

World Bank issues road map for fiscal sustainability By Gitanjali Singh
Stabroek News
March 23, 2003

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The World Bank says Guyana’s fiscal deficit is high and its macroeconomic stability is threatened by a high level of indebtedness and the emerging risks of contingent liability.

For Guyana to secure fiscal sustainability, the Bank says it has to be very selective in granting guarantees to private enterprises; remove discretionary tax exemptions that reduce fiscal revenues and strengthen revenue collection; and effect better control over the civil service wage bill.

In an assessment of public expenditure in Guyana completed last August, the Bank says while fiscal sustainability is likely to be secured with further debt relief under the enhanced HIPC initiative, this sustainability is further threatened by the civil service demand for large, ad hoc wage increases in spite of the large wage award in 1999/2000. The demand for large wage awards, the Bank says, could put pressure on the budget and perhaps lead to an increase in the fiscal deficit.

The World Bank also sees a threat to fiscal sustainability in the government offering guarantees for large private investments such as the proposed bridge over the Berbice river and heavy leakages in the tax system as well as large tax exemptions given on a discretionary basis.

The government has already committed itself to broadening the tax base and to make changes necessary to correct for any abuse in the administration of discretionary exemptions.

In August 2002, a World Bank team completed its assessment of public expenditure in Guyana which had first started in 1999 and resumed in 2001 in the face of the growing perception that such expenditure is failing to contribute to growth and poverty reduction here.

Guyana is the fourth poorest country in the Western Hemisphere with an official per capita income of US$940 in 2000, only higher than that of Nicaragua, Haiti and Honduras.

That report, the Guyana Public Expenditure Review (GPER), available on the bank’s website, signals that increased external financing for Guyana will largely depend on the government’s ability to effectively implement programmes to improve public resources management and improve the business environment to achieve sustained private sector-led growth.

“Some major donors are increasingly contemplating budgetary support as an alternative to specific project related loans; and they see sound public expenditure management as the sine qua non for such support to the government budget.”

The review sought to analyse public expenditure and assist the government to reorient policies, institutions and expenditure to achieve private sector-led growth and better services to the poor.

Aggregate public expenditure

The review notes that public expenditure has remained a large component of the local economy compared with similar countries.

Central government expenditure as a share of Gross Domestic Product (GDP) fell from an average of 57.6% during 1989-91 to 47.6% in 2001 with the bulk of the reduction coming from capital expenditure in 1998 and 1999; falling interest payments; and a decline in transfers because of privatisation. What has risen within the government expenditure are social services which now are triple the 1991 levels and the public sector investment programme (PSIP).

The PSIP is projected to increase to an average of 17.7% of GDP during 2002-5 compared to 13.5% in 2000-1. This increase, historically high, reflects in part the construction of the new sugar factory at Skeldon.

The review, however, finds project selection under the PSIP underpinned by little analysis of costs and benefits and no attempt to calculate the recurrent cost implications of projects. Nevertheless, the report sees adequate funding and implementation of the projects going a long way to revive economic growth and reducing poverty in Guyana.

Overall budget structure

In the case of institutional arrangements for public expenditure, the report highlighted the need for the national budget to be passed prior to the start of the year. It notes that in the current arrangement, the national budget is presented to parliament with significant delays, which in turn undermines overall budgetary performance.

The report also cites the perfunctory nature of the budget approval process in parliament. All of the estimates as presented were passed in the last fifteen years without any amendments.

The report cites some improvements in the budgeting process such as having elements of a multi-year budget in place as well as planning units in selected ministries and agencies.

However, the review underscores the need to set the budget within a real “forward-looking” medium-term framework.

It points out that estimates for future years are not discussed jointly with the current year’s budget and future fiscal implications of current year policy decisions are not systematically discussed during budget preparation. It also finds that the macroeconomic implications of sectors’ budget submissions, and the overall budget are not systematically known. The budget circular also does not give information on projected growth rate, exchange rate, inflation, interest rate, wage increases and other employment issues.

The GPER also highlights that the current and capital expenditure budgets are prepared separately without planning for the future recurrent costs of such investment projects. Some progress was noted within some spending agencies at integrating the planning of capital and current expenditure.

At the implementation stage, the report also says the budget suffers from a cumbersome arrangement for the release of funds.

Along with request for monthly releases, agencies have to submit a work plan and a monthly cash flow project for each programme, which are used by the Ministry of Finance as a guide for releasing funds.

The World Bank team recommends that to set the budget within a proper forward looking rolling expenditure framework, the capacity of the Ministry of Finance for undertaking economic modelling and liaising with sectoral ministries has to be strengthened.

The budget has to be prepared within a national development programme and a multi-year rolling expenditure framework where sectoral plans with output targets are developed.

To improve the structure of the budget, the Bank sees the need to integrate the processes of budgeting for current and capital expenditure and changing the frequency of fund releases from monthly to quarterly while maintaining a monthly expenditure reporting.

The Bank also advises on the need for clear rules and procedures to frame the circumstances under which contingency and other supplemental funds can be used. This is because of the heavy reliance on contingency and supplemental funds in the past and the significant deviations between voted budget and executed budget. Contingency and other supplemental funds represent an additional 27% of expenditures on average during the 1996-2001 period with a peak of 43% in 1997. And during the 1995-2001, expenditure out turns on average were lower by 3.3% than originally budgeted.

To address the budget performance, the Bank recommends that the budget circular be issued during or at the end of the first quarter of the preceding fiscal year and the budget passed prior to the start of the year.

Budget control and accountability

To strengthen budgetary control and accountability, the GPER says the executive has to be held accountable if fiscal policy and expenditure management are to be sound. While progress is noted in strengthening the audit process, the review recommends that the national assembly be equipped with adequate staff and information to undertake a through examination of the budget estimates and provide proper oversight of the budget and all economic and financial matters. This relates to the Parliamentary Committee on Economic Services which is to be operational this year as elaborated in the Country Financial and Accountability Assessment (CFAA).

The review also sees the need for deepening consultation with other stakeholders during the budget preparation process as well as dissemination of budgetary outcomes to the larger public.

The GPER also recommends the strengthening of the auditor general’s office and the public accounts committee of parliament to allow it to summon any officer before, during and after the submission of the auditor general’s report on public expenditure. The report says that this committee should have its own financial and technical resources to conduct investigations.

It also recommends the strengthening of the Accountant General Department and expansion of its functions to include the management of risks associated with resource management to provide for effective checks and balances. It says it should be this department leading in the reporting of budgetary results to parliament.