Review of Government’s Fiscal Operations for the period January to December 2012
Presented by: Hon. Harold E. Lovell Minister of Finance, the Economy and Public Administration
28 March 2013 10:00am
Ministry of Finance Conference Room
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Ladies and gentlemen, welcome. In 2012, the Ministry introduced quarterly reviews of the government’s fiscal operations. That is, to provide to the people of Antigua and Barbuda, a regular account of how the government manages its revenue, expenditure and debt. Today I will present the details of the Government’s fiscal performance for the year ending December 31, 2012. In the review I will describe the national and international factors influencing our performance and the impact this has had on the economy. In 2009 we confronted the most severe fiscal and economic challenges in modern history. Our response was a home grown National Economic and Social Transformation Plan, crafted and drafted in consultation with the people. Together .........we designed the NEST plan. We realised we had to accelerate the pace of reform that started in 2004. This required tough and painful decisions to address the structural and institutional weaknesses of our economy. It is universally recognised that the road to fiscal consolidation can be tough. The task of reducing expenditure; increasing revenue, and placing public debt on a sustainable footing, whilst promoting economic growth is never an easy one. But we have made significant progress. At the end of 2009 our total expenditure stood at $1.2 billion. By the end of 2012 total expenditure was reduced to $679 million. In other words, since 2009 we have cut our total expenditure by $522 million or approximately 43 per cent. When we examine our growth figures over this period we are encouraged that although there is still much to do, we are on the right path. Between 2009 and 2011, we experienced a cumulative economic contraction of just over 20 per cent. However, by the end of 2012, we experienced growth of 1.6 per cent. Conservative projections indicate that the economy will grow at a rate of approximately 1.7 per cent in 2013. The main drivers of this growth are expected to be tourism, construction, and wholesale and retail trade. The support we have been receiving from the IMF in the form of a Stand-By Arrangement comes to an end in June of this year but our fiscal consolidation efforts will continue. We have developed the technical expertise and we are committed to continue on the path of fiscal responsibility, an imperative for economic stability and growth. The world economy has not yet recovered. The IMF World Economic Outlook projects a ‘gradual upturn’ for 2013 of 3.5 per cent - a mere one third of a per cent increase over 2012. Recovery in the US, our main tourism source market, seems largely on track. This is despite 2 per cent growth projected for 2013, which is 0.3% lower than that recorded for 2012. However, we remain cautiously optimistic. We must also continue the business of fixing our house to repair, reduce or remove the legacy of those structural policies and practices that left us severely exposed in 2009.
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The policy interventions made over the past few years, though difficult, were necessary to help Antigua and Barbuda to achieve fiscal sustainability and economic stability. Though challenges remain, I can state that our fiscal consolidation initiatives have buffered the brutal fallout from the global economic and financial crises. Our efforts have been applauded and supported by regional and international partners such as the Caribbean Development Bank (CDB), IMF, World Bank and the European Union. Since starting the fiscal consolidation programme, the Government generated nearly $2 billion in total revenue and grants between 2010 and 2012. Over the same period, the Government spent:
$803 million on wages and salaries
$336 million on goods and services, which includes rent and maintenance of roads
$629 million on pensions and transfers
$122 million on capital expenditure
$203 million on interest payments
These figures are evidence that the majority of the Government’s revenue is used to cover personnel costs and nondebt obligations. Moreover, the total of all these payments is greater than the nearly $2 billion in total revenue and grants received over that period. The Government succeeded in closing the gap between total revenues and total expenditure with resources received from financing sources such as the IMF and the CDB. Since June 2012, Antigua and Barbuda received $233 million from these two sources.
FISCAL REVIEW Compared to 2011, overall fiscal performance in 2012 improved by nearly 63%. Increased revenue collections and maintenance of strong expenditure controls are two factors that contributed to this increase. Revenue Performance Revenue performance in 2012 is explained by a $20 million increase compared 2011. That is, total revenue and grants collected and received totalled $644 million in 2012. The main component of total revenue is current revenue. Current revenue increased by 7.5% (or $45 million) from $597 million in 2011 to $642 million in 2012. This increase in revenue was mainly driven by strong performance of four key taxes: The personal income tax, which grew by 22%; stamp duty by 35%; the ABST by 12%; and property tax by 26%. This tax yield improvement is attributed to modest growth in economic output, increased compliance and widening the personal income tax base. Revenue was bolstered by a 3% increase from the import duty and the revenue recovery charge.
Import duty yielded $81 million at the end of 2012 compared to $78 million at the end of 2011.
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RRC amounted to $70.5 million at the end of 2012 compared to $68 million at the end of 2011.
Finally, non-tax revenue [licenses, fees, work permit fees, Profits from ECCB] declined by 1.5% from $45 million in 2011 to $ 44 million in 2012. This decline in non-tax revenue is attributed to lower profits received from the ECCB. Expenditure Performance Total expenditure decreased by just over 5% [or $36.2 million] from $715 million in 2011 to $678 million in 2012. Additionally, primary current expenditure, which includes wages and salaries, goods and services, pension, and other transfers declined by $27 million from nearly $613 million in 2011 to $586 million in 2012. The main contributor to the decline in primary current expenditure is spending on other transfers. This includes transfers to statutory corporations such as Mount St. John Medical Centre, Antigua Barbuda Tourism Authority, and Antigua Barbuda Investment Authority. It also includes transfers to the Barbuda Council and payments to our Missions and Tourist Offices overseas. Expenditure on other transfers was reduced by 32% ($51 million), moving from $162 million in 2011 to $111 million in 2012. This is largely a result of lower financial assistance provided by the Government to ABI Bank. All the components in primary current expenditure did not record reductions. For instance, expenditure on wages and salaries nudged 3% ($8 million) upwards from nearly $264 million in 2011 to $272 million in 2012. As indicated in previous reviews, this was due to employment of new teachers and upgrades for staff in some government departments. Though expenditure on overall wages and salaries increased, expenditure on overtime fell by approximately 62% from $12 million in 2011 to just under $5 million in 2012. Expenditure on goods and services increased by 12% from about $104 million in 2011 to $115 million in 2012. Included in this expenditure on goods and services is spending on road repair and maintenance, which increased by 47% in 2012. Capital expenditure declined by 53% from $39 million in 2011 to $18 million in 2012. This reduction in capital expenditure was the result of the completion of the Fisheries Complex in Barbuda. When the $23 million in capital grants for the Barbuda Fisheries project in 2011 is excluded, spending on capital projects actually increased by 20% from about $15 million in 2011 to $18 million in 2012. Public Sector Debt Turning to public debt, total interest payments on central government debt increased by 19% from $63 million in 2011 to about $75 million for 2012. Of this amount, $15 million represented interest payments on external debt while approximately $60 million represented interest payments on domestic debt. Continued rescheduling of external debt delivered an $8 million drop in external interest payments in 2012. Government’s increased activity on the Regional Government Securities Market (RGSM) resulted in a $20 million increase in domestic interest payments. The debt stock, which includes central government and government guaranteed debt, remained stable at $2.8 billion between 2011 and 2012.
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Two important factors contributed to this outcome: 1.
Government’s success at reconciling arrears with its creditors.
2.
Government’s ability to keep additional borrowing in line with actual repayments during the year.
Overall fiscal performance: The overall fiscal performance improved by 63% from a deficit of about $92 million in 2011 to a deficit of $34 million in 2012. The primary balance (that is, excluding interest payments on debt) also improved by about 243% from a deficit of $29 million in 2011 to a surplus of $40.5 million in 2012. This significant improvement means that the Government was able to allocate about $40 million of revenues generated to cover some of its debt obligations. That is, interest payments, debt amortization, and the repayment of floating debt (which includes unpaid balances due to local contractors and suppliers). The Government financed its overall fiscal deficit with funding from external and domestic sources. In particular, the Government received financing of $71 million under the IMF Stand-by Arrangement and $98 million from securities issued on the Regional Government Securities Market. Remaining funds were used to amortise central government debt and reduce unpaid amounts due to local contractors and suppliers. In 2012, the Government paid $65 million to local contractors and suppliers as part of its ongoing plan to reduce floating debt. To this end, the Government has paid more than $271 million to local contractors, suppliers and merchants since June 2010. Finally, the Government’s current cash flow challenges have prevented timely settlement of critical obligations. This has prompted much discussion and proposals for dealing with the fiscal constraints. One seemingly popular recommendation is related to public debt and whether the Government should continue to honour its debt obligations or seek some reprieve from creditors. I wish to point out that the Government’s interest bill has been significantly reduced from over 35% of total expenditure to 12% of total expenditure. This was achieved through negotiations with local and external creditors. They provided a combination of debt forgiveness, reduced interest rates, and longer repayment periods to lighten Antigua and Barbuda’s debt service burden. Another important point to note is that about 80% of interest payments is paid to domestic creditors. These creditors include domestic banks, and individual and institutional investors in treasury bills and bonds. This means that much of the impact of additional adjustments to interest payments on debt would be borne by our local creditors. Further, such a move could also negatively impact the Government’s ability to access funding through the Regional Government Securities Market. The RGSM is an important source of funding for the Government. As indicated earlier, the issuance of treasury bills and bonds on the RGSM provided $98 million in financing to the Government in 2012.
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These resources were used by the Government to cover some of its operational expenses. To maintain investor confidence and interest in Antigua and Barbuda’s securities, our policy is to ensure that these obligations are honoured. Notwithstanding improvement in fiscal operations, the economic difficulties that depressed revenues more than three years ago have not fully abated. While there was growth in economic output in 2012 and there has been some increase in revenue compared to 2011, revenue remains about $100 million below pre-crisis levels. At the same time, essential expenditure such as pensions and wages and salaries continue to account for more than 50% of total expenditure. The Government has made the policy decision not to pursue any public sector retrenchment and not to reduce the pay of public servants given the economic conditions. Therefore, we all have to work together to get through this challenging time. The Government will continue to pursue a number of options to help mitigate the cash flow constraints over the next few months. At the same time, we expect that once a number of the projects highlighted in Budget 2013 are initiated later this year, there would be more economic activity, improved revenue performance, and an ultimate easing of the cash flow constraints. At a meeting held with the unions on Monday of this week, we advised that payment of salaries to public servants would commence on Thursday 28 March and be completed by Friday 5 April. I am pleased to report that payments actually commenced yesterday, Wednesday 27 March, and are expected to be completed by close of business today. However, if there are any challenges that prevent payment of all salaries today, we will complete any remaining payments by the next business day, Tuesday 2 April.
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