The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas would see its credibility “quickly destroyed” if it attempted to impose so-called ‘fiscal rules’ in the near term because the Government’s financial management systems will be unable to cope, an International Monetary Fund (IMF) affiliate has warned.

The Caribbean Regional Technical Assistance Centre (CARTAC), in a March 2015 ‘discussion paper’ on implementing a ‘fiscal rule’ in the Bahamas, said “the slow pace of reform” in government accounting and information systems would stymie such an initiative for now.

“Successful adoption and application of fiscal rules requires a number of essential pre-conditions to be in place, without which, the rules are unlikely to be sustained and may end up undermining policy credibility,” CARTAC’s report said.

“These pre-conditions include a high level of institutional capacity, information systems that support sound macroeconomic and fiscal forecasts and financial reporting, and a high level of transparency in fiscal policy making and operations.”

The report, made public as part of yesterday’s 2015-2016 Budget presentation, said the Ministry of Finance had begun to address these issues with CARTAC’s help, but much more remained to be done.

Support for “greater transparency and accountability” was vital, the report said, adding: “In general, the pace of reform has been slow, and significant further work is required to complete these necessary pre-conditions for fiscal rules.

“In particular, access to accurate and reliable financial information will be critical for monitoring adherence to fiscal rules, as well as providing an early warning if policy changes are needed.

“Indeed, the lack of quality data will quickly destroy the credibility of fiscal rules. Internal and external audit systems also need to ensure that public resource utilisation is fully accounted for,” CARTAC added.

“It is also important that fiscal data consistent with the budget reporting system is publicly released in line with a pre-announced calendar to allow external monitoring of the rule.

“The ability to comply with any targets set by the fiscal rules will, at the same time, require the continued application of rolling multi-year Budget ceilings in order to effectively control expenditure.”

‘Fiscal rules’ commonly set numerical targets and restraints on government spending, “so as to ensure fiscal responsibility and debt sustainability”. Such rules often seek to limit the government’s debt to a certain percentage of GDP, or involve ‘balanced budget’ requirements that prevent or restrain deficit spending.

The Government previously rejected advice from its own US consultants, Compass Lexecon, that it should adopt such a ‘fiscal rule’ to boost credibility with the international rating agencies and capital markets.

However, demands from the private sector and the Bahamian public for greater accountability and transparency in the public finances have not abated, especially since the Government started extracting more money from the economy via Value-Added Tax (VAT).

The Coalition for Responsible Taxation, in particular, and its members have focused on this issue as a way to keep public spending in check, and view it as the Government’s side of the ‘fiscal bargain’ that needs to be implemented in return for the private sector agreeing to VAT.

The Coalition, though, has been seeking a Fiscal Responsibilities Act, rather than the ‘hard and fast’ fiscal rule that the CARTAC report refers to.

Assessing other Caribbean nations, CARTAC said: “In the region, the fiscal rules of the Eastern Caribbean Currency Union (ECCU) members initially aimed to reduce the public debt-to-GDP ratios to 60 per cent by 2020. The timeframe has subsequently been amended to 2030.

“ECCU members also had in place for some time an overall deficit target of 3 per cent of GDP. However, compliance was weak due to various external shocks that affected the region, and the overall deficit target was dropped in 2006. Achieving a primary balance consistent with the debt target has been used to guide fiscal policy since then.”

And CARTAC then warned: “The application of overly rigid deficit and debt rules may exacerbate the fiscal and economic impact of external fiscal shocks, which in turn may lead to further deterioration of fiscal balances and debt.

“Such rules may also reduce the quality of fiscal policy because they are generally silent on the composition of the eventual fiscal adjustment needed to comply. This may result in a bias towards less politically difficult reductions in capital spending that affect development and growth, rather than current expenditure.

“The application of numerical rules can also result in the use of more ‘creative’ accounting and off-budget operations in order to appear to be seen abiding by the rule, while reducing transparency. It is important that such issues are taken into account when designing fiscal rules.”

Such sentiments were echoed by Prime Minister Perry Christie yesterday, when he said: “While we must have a further discussion on the pros and cons of such a legislative change, it is clear that any fiscal responsibility framework will only thrive under a modernised public financial management and accounting system, which I am pleased to report is a path on which we are already embarked.”

The CARTAC paper’s release is intended to kick-off national discussion, as the Government had promised, on whether the Bahamas should introduce such legislation/rules, and if so, in what form.