After the eurobond: transparency fiscal reform

Colin Bullock, Contributor

The Government of Jamaica is to be congratulated on raising US$400 million in the eurobond market. Coming a year after a painful restructuring of domestic debt, and with concerns about heightened debt in a context of protracted economic contraction, the achievement is even more remarkable.

The Government must have presented its case well. It could not have avoided the present concerns about debt, economic contraction and unemployment. After the debt exchange, the assertions of always honouring our debt would have had to be less strident than in earlier years. There would also have been an awareness of concerns expressed by the International Monetary Fund (IMF) regarding the pace of structural reform in public financial management. Relative to these concerns, the selling points would have related to a willingness to make difficult decisions and a clear picture of a brighter future.

The managers of the deal, Deutschbank and BNP Paribas, would also have been effective in timing the issue and in canvassing support from the emerging market investment community. This follows extreme risk aversion since the international financial crisis that has not yet fully run its course. The alteration of the terms of domestic debt, and the accompanying sharp increase in external debt, would not have inspired confidence.

Biggest thanks to IMF

The largest vote of thanks is, however, because of the IMF. The IMF has a significant financial, professional and reputational stake in the success of Jamaica's economic programme. An inability to refinance the maturing eurobond would have been in neither Jamaica's nor the IMF's best interests. In circumstances such as the recent eurobond issue, and especially with an active IMF standby borrowing agreement, emerging market investment houses will rely on the IMF's assessment of prospects in making an investment decision. The IMF's current assessment is that quantitative targets have been met, there were understandable lags in structural reforms, and that it will help Jamaica enhance its prospects for growth. There are new and renewed commitments by Government and the programme is on track.

It is generally recognised that fiscal management is central to Jamaica's prospects for growing out of debt. A cursory reading of the IMF programme documentation shows that effort is being made to address some of the more serious constraints on fiscal management. For example, a Central Treasury Management System offers more effective and rational management of Government's cash resources. Efforts are being made to strengthen the institutional framework for integrity in public-sector financial management. There now appears to be recognition that the incremental opportunistic approach to taxation needs to be superseded by more comprehensive tax reform. There is talk of tax-administration reform, although it is still to be elaborated how a semi-autonomous tax administration directorate will work with Customs as an executive agency, and how both will be integrated with the demands of fiscal and macroeconomic management.

Reportng arrears

The inability to measure expenditure arrears (although zero arrear accumulation is reported) is to be addressed by ministries, departments and agencies being asked to report on commitment against payment. Given the severe human and physical resource challenge of moving immediately from cash to accrual accounting, the manual reporting of arrears is a useful step in transition. It is to be hoped that in the new spirit of transparency, the reports will be available with reports on fiscal performance.

The programme has sought to address the greatest constraint on government revenue. By curtailing the availability of tax incentives, there has been effort to contain what are referred to as 'tax expenditures', i.e. revenue foregone (spent) on a recurrent basis without the benefit of parliamentary approval and scrutiny. Transparency demands that tax-expenditure budgets and reports be laid in Parliament detailing revenue foregone, purpose, impact and alternative.

Programme revisions seek to address some of the weaknesses in the fiscal-responsibility legislation of January-February 2010. For example, instead of being determined solely by the minister of finance, escape clauses from fiscal-performance commitment have to be justified through Parliament.

While the macroeconomic programme and its revisions have sought to address some of our more serious fiscal problems, there are some issues that require very careful attention. If we are serious about transparency, extra budgetary funds like the Tourist Enhancement Fund and the Road Maintenance Fund ought to be closed and their flows integrated with the Budget. At the very least, their budgets and performance ought to be tabled in Parliament for public scrutiny.

In the same vein, constituency funds directly involve elected legislators in project identification and implementation having the effect of splintering national programme administration.

Extra-budgetary borrowing

Extra-budgetary borrowing also needs to be curbed. Too often it is felt that the identification of financing for some desirable project is all that is necessary. Loan financing, however, adds to public debt and makes nonsense of any medium-term projections contained in the Budget. In this vein, too, extra-budgetary expenditure - recurrent or capital - is often corrected by withholding properly budgeted capital expenditure. A Budget that is not central to government financial management is a waste of time and effort.

For the Budget itself to play its important central role, it has to be realistic, avoiding revenue overestimates and expenditure underestimates. It has to be supported by analysis of potential deviation (anticipated by programme), medium-term resource implications and proper contingency budgeting.

It is still being anticipated that public-sector employment rationalisation will make a significant contribution to public sector saving. Having regard to the costs of separation, any saving may be more in the medium term than the short run. The task force was 'hamstrung' by the narrowness of its terms of reference not including the role structure and functions of the public sector; trying to do the same things with fewer people. This has implications for the efficiency of public administration.

This then points to the greatest challenge of the macroeconomic programme. The severity of the debt constraint makes fiscal adjustment potentially incompatible with the capacity to grow out of debt. This reality is exacerbated by the unlikelihood of raising tax rates in an economy that has not been growing and which may be challenged to grow at above two per cent per annum. If expenditure is then constrained to manage the deficit, it becomes crucial to properly allocate and prioritise this expenditure to enhance its contribution to economic growth. We then have to ask whether we can afford government of the current size, structure and functional diversification.

Colin F. Bullock is a senior lecturer in the Department of Economics, UWI, Mona. Email comments to columns@gleanerjm.com and colbul3@gmail.com.