The government faces medium term threats to macroeconomic stability and has asked the Inter-American Development Bank (IDB) for financial and technical support to implement financial reforms to ensure fiscal sustainability.

But releases from the US$35.3M Fiscal and Finan-cial Management Reform Programme (pending approval) will be tied to further reforms to strengthen the revenue base of the government to bolster its fiscal position and to rationalise public spending, currently out of line with revenue flows.

Guyana's fiscal deficit has been growing and could jeopardize the country's macroeconomic stability when debt relief flows start to diminish over time. As such, international financial institutions see the reduction of the fiscal deficit and keeping public finances under control by limiting public borrowings as the most urgent macroeconomic policy challenge for Guyana.

"The fiscal trajectory of the last years and the new threats looming on the fiscal situation make it more imperative that structural fiscal measures be undertaken aimed at guaranteeing fiscal sustainability, while at the same time, enhancing fiscal management matters to improve transparency and accountability," the IDB says in a project profile for its new assistance.

Capital expenditure, which forms a large component of public spending, has been on the rise in recent years. Total public spending has been increasing since 2000 though lower than the 1989-1991 average of 57.6% of Gross Domestic Product (GDP) or economic growth. Public spending had reached 37.8% of GDP in 1999 but increased to 47.6% in 2001 before falling to 46.5% in 2002. Capital expenditure, on the other hand, which declined from 16% of GDP in the 1990s to 10% of GDP in 1999, began an upward trend in 2000 and is expected to average 17.7% in the financing period 2002-5.

But the revenue collected by the government is far lower than total public spending. Tax collection dropped from a high of 34.7% of GDP in the 1992-4 period to 29.6% in 2002, despite efforts to implement reforms and new tax measures. The IDB puts this down to slow improvements in collecting and administering taxes by the merged revenue agencies - the Guyana Revenue Authority (GRA) - the reduction of taxes from international trade and liberal tax holidays and customs and tax exemptions which had been granted on a discretionary basis in the past. Further erosion to the tax base is likely with the implementation of regional trade agreements.

"Declining tax collection and large variations in capital expenditures explain the dynamics of the fiscal deficit. Although the deficit was largely financed by grant resources, especially since 1999 as a result of the HIPC debt relief, it is necessary to note that the deficit after grants is large and keeps growing, jeopardizing the country's macroeconomic stability," the IDB says.

The bank says it is imperative that revenue and expenditure measures are taken to guarantee fiscal sustainability in the medium to long-term and to enhance financial management to improve transparency and accountability.

It says the "persistently" high level of government spending requires a sound programme of expenditure rationalization in the long term and improvements of the financial management systems will be vital to achieving this.

The bank, however, recognises that it is not feasible in the short to medium term to curtail expenditure in a substantial manner. It notes increases in current non-interest expenditure in the government's programme through 2007 because of higher poverty reducing spending under its agreement with the IMF. This programme, the IDB says, calls for a moderate increase in the tax burden over the next few years to see tax revenues rise by 1.3 percentage points of GDP in the 2002-7 periods.

Rising expenditure, no growth

But in spite of the high level of public spending, the IDB notes a growing local perception that this has failed to contribute to growth and poverty alleviation in Guyana. The bank says there is also an expectation on the part of the international community that resources offered to support poverty reduction be used in an "effective and transparent manner."

"In the short to medium term, significant improvements to the management of public finances will be needed in order to satisfy these concerns and to ensure that higher public spending is effectively translated into reduced levels of poverty. In the long term, additionally improved financial management will also be necessary to ensure fiscal sustainability through a reduction in the overall level of expenditures," the IDB says.

The challenges to fiscal sustainability

The IDB identifies three constraints to fiscal stability:

* reduced tax collections as a result of a narrow tax base, and steady deterioration of the tax system coupled with low tax administration efficiency;

* the lack of accurate and complete information on public finances which impede efficient decision-making and creates opportunities for misappropriation and misuse of funds;

* the non-implementation of the new Public Procure-ment Commission (PPC), the limitations on the public accounts and economic services committees of parliament to perform their oversight functions as well as the lack of autonomy of the Audit Office.

The bank notes the need to reverse the decline in tax collection and to improve the equity and efficiency in the tax system as well as to strengthen the GRA. It cites the recommendations of the IMF on reforming the tax system, including curtailing tax holidays and discretionary tax exemptions (addressed in the amendments to the tax laws last year), increasing the threshold for personal income taxes and broadening the base for consumption tax for the introduction of value added taxes in 2006 (started last year).

To deal with the second constraint, the bank says a new and adequate legal framework is needed as well as the streamlining and re-engineering of treasury and budget processes and procedures and the development and implementation of a modern Integrated Financial Management System (IFMS). A new budget law was passed in December.

To enhance auditing and fiduciary oversight, the bank says the PPC has to be established and the economic services and public accounts committees be strengthened, and the audit office be made autonomous.

The government, the bank recognises, has embarked on an "ambitious" fiscal reform agenda and undertook initiatives in 2003 to increase the withholding tax on interest income from 15% to 20%; to increase consumption tax on gasoline from 35% to 50% and to increase the consumption tax on beer from 40% to 50% as well as fill the positions of Commissioner and Deputy Commissioner of the GRA.

The third phase of the Guyana Economic Manage-ment Project (GEMP) was also initiated to provide technical and financial support for institutional reform in the public sector financial management area.

A new audit act is being formulated to allow for the independence of the audit office.

The IDB support

The US$32.5 million project being considered by the bank will provide support to strengthen the revenue base and provide a framework for the efficient rationalisation of public spending to underpin the fiscal basis for sustained economic growth. The operation will support improvements in the efficiency and equity aspects of the tax system, strengthen public sector financial management and strengthen public auditing and fiduciary oversight.

From the project, US$25 million will go to support policy changes in the adoption and implementation of a series of reforms to the tax, financial management, audit and fiduciary oversight systems to ensure more efficient and transparent fiscal management. On September 1, 2003, the government enacted a tax reform

telephone calls; introduced presumptive taxes for the self-employed; increased the license fee for professionals; eliminated the discretionary powers of the government to grant exemptions and limiting tax holidays to specific regions and sectors for limited periods.

The money under this component will be disbursed in three tranches; US$7 million, US$9 million and US$9 million.

The first tranche will flow when the GRA Act is amended to allow for its full autonomy in the management of its human resources, the regulations and administrative dispositions necessary for the implementation of the new taxes are issued; when the new budget and financial management law is enacted; and when the new audit law is enacted, the parliamentary procurement commission is appointed and the audit office policies and procedures manual is approved.

The second tranche will follow the enactment of a new customs law, a modern system to control and record tax exemptions, the publication of the tax exemptions granted during the last fiscal year, implementation of a new and unique taxpayer identification number, the adoption of a new organisational structure for the GRA which avoids overlaps, the implementation of new procedures for the two customs and revenue departments and the issuance of regulations for the new customs law; new procedures for treasury and budget, new procedures for project selection and prioritisation and when a unique and standard classification of accounts to fully integrate the current and capital budget is adopted. Also required for the release would be the implementation of the IFMS in the Ministry of Finance and three pilot institutions as well as new rules, procedures and operational policies for the economic services and public accounts committees and having in place procurement regulations and procedures for the PPC.

The final tranche will be released after the consumption tax on services and the presumptive tax on the self employed are collected; when the regime for tax exemptions adopted in 2003 is not further extended and when the current budget includes an estimate of tax expenditures and a list of exemptions granted in the last fiscal year. Also required for the final release would be the Asycuda++ system being fully implemented to support customs controls and a modern tax administration information technology system is in place for the internal revenue department. Other requirements for the release includes formulation of the budget in accordance with the new budget law, having in place central government financial statements under the new IFMS which are auditable and meet international accounting standards and the government complies with the obligations to report and publish information as mandated by the new budget law. There will also be a requirement for the audit office and the public accounts committee to establish a system to monitor the actions taken by public entities in response to audit recommendations and the economic affairs committee proposes rules and procedures for the use of contingency and other supplemental funds.

The other US$9.8 million under the project will be available for investment and technical support for the government to achieve and sustain reform benchmarks. Loan funds will finance training, consultancy services and the procurement of computer software and hardware, communications equipment and the refurbishing of building facilities.

Successful completion of the benchmarks will allow for revenues to be raised by improving the efficiency of tax administration, removing distortions and promoting horizontal equity in the system. The reform will also improve financial management practices to reduce discretion and increase transparency and see the operationalising of constitutional reforms in the areas of public audit and financial and fiduciary oversight, will strengthen the role of parliament in economic policy to consensus building and in overseeing policy implementation.