Author: ChrisRam

Conclusion
This is the fourth and final part of a review of the Mid-year Report 2009 presented by the Minister of Finance to the National Assembly under the Fiscal Management and Accountability Act, 2003. As I promised last week, the purpose of this closing part is to pull the strands of the three preceding segments together and to look for any causes of optimism in the economy and its management.

Despite its title, the Act requires of the mid-year report more than the year-to-date execution of the annual budget. It requires the report to set out the prospects for the remainder of the year. It also mandates the inclusion of a revised economic outlook for the rest of the year, a statement of the projected impact of the trends on the remainder of the year, and very importantly, a list of major fiscal risks for the second half of the year with likely policy responses that the government proposes to take to meet the expected circumstances. In my view the report presented by the Minister falls very short of the requirements of the Act, and he spent no more than a few sentences on the revised economic outlook, fiscal risks and proposed government responses for the rest of the year. If proof be needed, then the Minister himself provided it this past week when he brought before the National Assembly requests for $5 billion, mainly for spending in the second half of the year, which must have qualified for – but did not receive – inclusion under projected trends and major fiscal risks. It is also a case of how bad and weak the Ministry of Finance is when it comes to budgeting and planning.

Before proceeding, I digress to repeat what I consider a major concern about the report, and that is its lack of timeliness and therefore its limited practical value. The report is by law due no later that August 30 of the year. It is now normal not only for the report to be issued months later, but also for it to bear a date that is very misleading, sending a signal to others that it is okay to do so. For 2009 it was presented on November 12, but bearing the date September 25. The Minister must be aware not only that the National Assembly has a registry to receive reports when it is in recess, but that it is wrong to send signals to subordinates that such conduct is acceptable.

Disdain
In part 2 of this short series I drew attention to an item in the Bank of Guyana Half-year Report submitted to the Minister of Finance, in which the performance of the economy in the first half of the year was addressed in considerable detail. I noted an obvious conflict between the numbers presented by the Minister and those presented by the Bank of Guyana; while one was reporting growth, the other was reporting a decline. Clearly they both could not be right, and the public would have expected, both out of duty and professional self-respect, either or both of these entities to have addressed the issue. Neither has done so, further evidence of the Minister’s disdain for the public, recalling his response to a Kaieteur News article on grossly excessive payment by the government for the purchase and supply of equipment, when he suggested that the newspaper should start bidding for contracts!

LCDS and accountability
The Minister must be aware that the President’s attempt to raise money internationally for Guyana’s proposed low carbon development strategy is also drawing attention to the country and its management. Everyone, including the General Secretary of the ruling party, now admits that corruption is taking place in the country – any difference being only the matter of degree, with most independent opinions leaning towards corruption on a massive scale. That view is reflected in Guyana’s ranking in the Corruption Perception Index by the internationally respected, German-based Transparency International, where Guyana is rated at 126 of 183 countries, the worst in the region.

This series on the mid-year report pointed to one of the most celebrated cases of flagrant breaches of financial procedures – that involving the purchase of drugs by the government, largely from an entity with which the President admitted to having close ties, and which had earlier been singled out for unlawful tax concessions. But that is only one case among many that are surfacing daily with contractors, whose low expertise in construction is only matched by high level connections, and who receive multi-million dollar contracts that cost as much in rework in some cases, almost as soon as the work is signed off and payment made. Corruption is one C-word that is alien to any half-year or full-year review done by the Minister.

Unlike the Minister of Finance and the President, Norway, the government’s LCDS benefactor, is not oblivious to or unaware of the endemic problems of corruption in Guyana, neither does it seem willing to sweep them under the carpet. That country’s Environment and International Development Minister Erik Solheim has made its position on corruption clear by prescribing robust anti-corruption measures before Guyana can draw down on the six-year US$250 million promise made by Norway. That understanding is still only at the MOU stage and may therefore be subject to further refinements and a formal and binding agreement.

Transparency
It is almost a joke to speak of a transparent financial mechanism while simultaneously and strongly refusing to put into effect constitutional provisions regarding the procurement of goods and services or an Audit Office headed and staffed by persons with appropriate qualifications. That the current head of the Audit Office is merely acting has as much to do with the fact that he has no professional accounting or audit qualification as that it serves the government well to have someone hold a key constitutional, accountability position purely at its whim and for its convenience. Those in acting positions know that if they rock the boat they risk sinking with it, a chance that out of self-interest, they will not take.

If the Norwegians are any more careful with their taxpayers’ funds than say the multilateral IDB or the World Bank, the chances of Guyana drawing down the entire sum must be low. If US$250M buys the Norwegians sufficient carbon credits to embellish their questionable record as an environment polluter, they may feel they have obtained a basement bargain. On the other hand, Guyana gives up major rights and opportunities, raising the question whether the country should not have had an indigenous low carbon development strategy rather than one dictated by the Norwegians, acting in their interest.

Contract employees
Another issue highlighted by this series was the increasing prevalence of the use of contract employees to get around the rules of employment in the public service. I had drawn attention to the more than $3 billion paid in salaries to this group of hand-picked persons, with another huge amount paid in benefits to them, including a 22% gratuity every six months. The really lucky ones get cars, drivers and duty concessions on top. This means that even the non-contract employees are really a benefit to the contract employees. Who these lucky ones are is intended to be a secret, but the Office of the President is a wonderful case of abuse. Of 201 employees in the Office of the President, ninety-five are contract employees and fifty-four are temporary. Among the contract employees are former ministers, all of whom are reported to be employed at the pleasure of the President on the same salaries and with the same benefits that they received as ministers. The Ministry of Local Government has two former ministers who must still be financed by the taxpayers.

Ironically, both the Public Service Commission and the Public Service Ministry which are expected to protect the integrity of the public service are themselves serial cases of the contract employee syndrome, while the culture also seems embedded in the Ministry of Culture, Youth and Sport.

Implications
The implications of this are huge and costly. It gets around the constitutional provisions for employment in the public service, creating a huge army of often highly paid loyalists but more importantly, it destroys the public service and its structures. What institutional memory will remain if on a change of government, the holders of all major key positions are not retained? Are we again going to turn to the British government which in the late eighties paid huge sums on financing a study that led to sweeping changes in the public sector and a dramatic reduction in the number of ministries? But that was before we had VAT that provides an annual windfall in revenues for the government to (mis)spend as it pleases, even as the half-year report discloses increasing borrowings without any indication of the actual amount of funds in the Treasury. That simply cannot be responsible financial management.

We noted in paragraph one that the Minister had approached the National Assembly for close to $5B to pay for unbudgeted expenditure on the army, Office of the President, LCDS, GuySuCo and other agencies and ministries. But we had also noted from the first-half report the low level of spending in that half year. The country’s financial rules provide for the reallocation of funds from one budget area to another. There is no indication that this sensible practice is ever employed instead of the simplistic approach for the National Assembly to rubber stamp excess and excessive spending. Simplistic too is its approach to sugar into which it continues to pump billions while its relationship with its major stakeholder – the workers – deteriorates rapidly. It is easy to forget that the government defied the World Bank and informed the public concerned about the Skeldon Project, the largest single public investment ever undertaken in this country. The results so far have been more than merely disappointing.

Where next?
Ram & McRae will this Thursday publish its report on its annual Business Outlook Survey which would give a good indication of the private sector’s take on the economy. From the empirical evidence only a few sectors are doing well but none of these is in manufacturing or production. Our financial sector continues to do well, as does distribution, but important as these are, they provide an intermediary function. The state-owned power company, whose costs feed into the rest of the economy, continues to struggle to reduce inefficiencies and costs. The public sector wage bill keeps mounting while services remain stagnant. The bureaucracy and its sibling, corruption, impose a huge cost on the highly-taxed economy, in which equity and fairness hardly exist.

It would not be right to argue that there have not been improvements in infrastructure, health and education, which were tied to the huge debt reliefs enjoyed over the past two decades. We have, however, failed in diversifying and strengthening our productive capabilities. Until we do that we cannot declare that we have accomplished the mission set by the PPP/C when it assumed control of this country, including making the country a place where rights, responsibilities and rewards were borne and shared equitably.

Introduction
This is the third and penultimate instalment of a short series reviewing the mid-year financial and economic report presented last month by the Minister of Finance. This review has benefited and drawn from the half-year report presented to the Minister of Finance by the country’s central bank, the Bank of Guyana. We will also look at two developments this week – the two supplementary papers presented on Thursday to the National Assembly by the Finance Minister Dr Ashni Singh seeking another $4,677,208,405, roughly the equivalent of US$25M, some of which has already been spent. The other is the news that the state-owned sugar company is experiencing cash flow difficulties in meeting its payroll obligation, while also being the beneficiary of another $1.4B for its capital expenditure programme. The inability to meet one’s payroll obligation is one of the worst signs of serious financial difficulties a business can encounter, and one wonders how the corporation which is top heavy with accounting expertise did not foresee this and take preventive action.

This request for additional funding of roughly 5% of the 2009 budget is itself troubling since the Minister’s mid-year report had shown key ministries being unable to absorb and spend the money authorised by the National Assembly in the 2009 Budget. Readers will recall from last week that the key sectors identified by the Minister had only been able to spend 34.6% of the 2009 full-year budget allocation, compared with 38% in 2008. By way of an explanation for the capital expenditure in half-year 2009 falling behind schedule, the mid-year report identified “some delays as a result of logistical and other issues.”

A large proportion of the money is for areas controlled by President Jagdeo – the army and the burgeoning Office of the President. The current request brings to more than half a billion dollars the additional sums given to the GDF, an entity that is regularly reported as failing to meet proper standards of accountability. The Office of the President – Presidential Advisory will receive an additional $50M to meet expenditure in relation to the Office of Climate Change and the Low Carbon Development Strategy. It is uncertain whether this money will be reimbursed by our Norwegian benefactors under the Guyana-Norway LCDS MOU which provides for a possible grant to us in 2010 of US$30 billion Guyana dollars.

The Public Works Ministry which is one of the sectors whose expenditure is not on target is yet being given additional sums, while the $400M promised by the President to the rice sector is now part of those supplementary funds. Sugar, rice and electricity, three sectors with an all-pervasive government involvement are proving a heavy burden on the national coffers, raising serious doubts about the capacity of those sectors to deal with their apparent incessant problems, some of which may be weather related.

Let us return to the mid/half-year reports which include the following table of the country’s principal export commodities. While rice export is showing a substantial increase, half-year output in 2009 was 7% lower than in 2008, suggesting a substantially lower level of domestic consumption or lower stock levels at June 2009.

Exports of Major Commodities

Source: Bank of Guyana Mid-Year Report

The country’s import of merchandise also declined – by 16.2 per cent or US$104.3 million to US$538.5 million. This is partly attributed to a decline in import prices, mainly of fuel and food. While the decreases in other intermediate goods may not warrant major concern, that cannot be said for capital goods; the import of all categories of machinery declined by 16.1 per cent or US$21 million. What must be of concern, however, is the import of consumption goods which expanded by 7.6 per cent or $11.6 million primarily due to increases in other non-durables and motor car subcategories. We seem to have a mindless non-policy on vehicle imports, a significant proportion of which are for the growing band of contract employees and others in receipt of duty-free concessions, while the statistics highlight the increasingly visible extravagant lifestyles and conspicuous consumption of a fortunate few.

The Bank of Guyana report shows the extent to which Clico – the country’s largest insurance company has impacted on the economy. As a consequence of that failure, the total resources of the domestic insurance companies (life and non-life segments) declined by 34.7 per cent to G$25,640 million. The life component, which amounted to 64 per cent of the industry’s resources, fell by 46.8 per cent to G$16,321 million, whilst the non-life component rose by 8.8 per cent to G$9,319 million. The resources of the insurance companies are available for investment in other sectors of the economy but because of the surplus liquidity in the banking sector the impact has not been as strong on the rest of the economy. In respect of the savings and pensions of thousands of individuals – either held directly with Clico or indirectly through pension schemes – the impact has been dramatic if not visible.

This column has been strongly critical of the poor management and governance of Clico and the equally inadequate regulatory oversight that allowed the company to break all the rules. It also believes that more thought should have been given to saving the salvageable segments of the company. If the die has been cast and extreme unction has been administered, then there are compelling reasons for the payment of a first dividend to those with savings and pensions in Clico. What a good Christmas gift that would be.

In foreign exchange, net current transfers declined by 17.2 per cent to US$120.5 million as a result of lower inflows to the private sector in the form of worker remittances. The main sources of outflow were workers’ remittances and remittances to bank accounts, which amounted to US$54.4 million and US$29.7 million respectively. The issue of outward worker remittances highlighted in the Bank of Guyana report, amounting in the half-year to more than ten billion dollars is a serious development in the economy, but instead of addressing it, the Minister misrepresents the data in his own report.

Sources: Mid-Year Report 2009 and Bank of Guyana Half Year report

Once again the country is burdened with additional external and domestic debt. The total external public debt rose by US$27.2 million from December 2008 to US$861.5 million at end-June 2009 but it is the composition of the debt that must cause some concern. Over the past twelve months, the stock of outstanding public and publicly guaranteed debt rose by 11.3% to US$862 million with the IDB and the Venezuelans contributing equally to a $100 million in disbursements in the case of the IDB and trade credit by Venezuela under the Petrocaribe agreement. It must be a matter of speculation whether there is any co-ordination between those who manage our external affairs and those responsible for borrowing and spending.

Domestic debt continues its mountainous climb reaching $84 billion dollars in June 2009, an increase of 15% over the 12-month period and 11% during the first half of 2009. Ten years ago the total public bonded debt was $41.6 billion, meaning that over less than ten years the domestic debt has doubled, a situation that would have been replicated in the country’s external debt had it not been for debt-write off.

The reason for this is that what we cannot do by taxing, we do by borrowing – for anything and everything. To bring the New Building Society under the Financial Institutions Act requires the addition of just five words to the definition of a company subject to the licensing requirement of the FIA and the regulatory supervision of the Bank of Guyana. But in public finance and indeed in public management in Guyana, nothing is straightforward. We must have the obligatory consultant to come and tell us for tens of thousands of United States dollars how to do it. What a waste.

Next week we close this series by pulling the various strands together and looking for any cause for optimism in the economy and its management.

Introduction
During the past week, I received the Bank of Guyana (BOG) Report for the first half of 2009 which the bank is required under the law to submit to the Minister of Finance. As usual the report is comprehensive, contains valuable economic data, is very professionally written and therefore considered generally quite reliable. I will take into account the contents of that report as I continue my review of the 2009 mid-year report of the Minister of Finance, but before doing so, let me draw attention to certain matters touched on last week that are also addressed in the BOG report.

The first and perhaps the most important relates to performance of the economy in the first six months of the year. The Minister of Finance reported in unambiguous terms that the economy declined in 2009 by 1.4%, supporting this in Appendix A1 of his report, sourced to the Bureau of Statistics. The Bank of Guyana on the other hand, reports, both in narrative form and in a graph, a positive growth of an identical percentage and projects that the economy will “continue to grow during the second half of the year.”

There is an obvious conflict between the numbers and it is disappointing that the Minister of Finance did not detect the discrepancy on such a fundamental matter, given that the BOG’s half-year report is submitted to him. This failure suggests either gross carelessness, or, heaven forbid, that the Minister did not read the BOG report, both of which would be sad indeed. The country would no doubt expect a clarification from one or both of the parties responsible for these reports.

Another issue is the different approaches to inflation. While the BOG uses the identical percentage of 1.3% reported by the Minister of Finance, its report describes the inflation number specifically as the Georgetown Urban Consumer Price Index which is obviously different from a national inflation rate. The Minister of Finance on the other hand, was not as specific and importantly, gave only an estimate of inflation, inevitably inviting speculation about the margin of error.

In last week’s column, there was a comment that sugar was becoming the scapegoat for the poor performance of the economy with its field workers being increasingly blamed not only for the industry’s, but also the country’s economic woes. The BOG report offers some perspective. While the number of work stoppages increased by 22.9% to 102 from 83 in the corresponding period last year, the number of man days lost was only 18,785 compared with 33,389 in half-year 2008, a 44% drop in production days lost.

The BOG also informs us that exports to the European Union accounted for 97.5% of Guysuco’s exports, up from 91.7% in 2008. For all the noise that the President made about the EPA and its adverse effects on sugar prices, our dependence on the EU market in 2009 was practically total, despite the corporation’s attempt at market diversification. It would seem unfair to place that at the feet of the field workers.

Expenditure
When the 2009 National Budget was presented earlier this year it was followed by the usual chorus of the biggest budget ever, no consideration given to the absorptive capacity of the economy. Business Page of November 16 last year in commenting on the expenditure side of the 2008 mid-year report, noted that it was “a matter of speculation why only 38% of the full year budget has been expended on what a table in the report described as key sectors.” That column went on to draw attention to the Health, Infrastructure and Agriculture sectors where only 41%, 27% and 33% respectively, had been spent in the first half of the year and asked whether the country was “going to see a mad and irresponsible rush to spend during the second half of the year, simply because the money has been allocated.” That indeed is what appears to have taken place in 2008.

Mid-year expenditure of Key Sectors – G$ million

Source: Mid Year Report 2009
Note: H1 refers to the first six months.

As the table above shows, we are faced with a very similar situation in 2009, even as the number of sectors identified as “key” is reduced from nine in 2008 to five in 2009. Those excluded this year are Culture, Office of the President, Public Service Ministry and Social Welfare for which billions were allocated in the 2009 Budget. The Minister’s report did not indicate why he considered that these were no longer “key” and his discussion was therefore more than limited in this regard. In 2008 the expenditure on the Minister’s key sectors in 2008 accounted for 37% of the full-year budget allocation, compared with 34.6% this year. Yet, the Minister did not think it necessary to make any significant adjustment to the full-year projections, in fact marginally increasing the total non-interest budget expenses for the full year. If technical and administrative skills are regarded as critical to delivering on the 2009 Budget programmes, it is difficult to see how those programmes could be achieved given that there is no greater implementation capacity in the second half 2009 than in the first half.

Many of the numbers speak for themselves but with all the contracts being awarded, the almost daily appearances in the press of some of the ministers and the extent to which we have committed the country to borrowings, it is difficult to understand the low spending on these sectors, particularly given that several line items are of a fixed and constant nature. To put the figures in context, it means that Agriculture would have to spend in the current half of 2009 four dollars for every dollar spent in the first half. The same applies to Infrastructure, while for Education and Housing and Water it is a more modest $1.5 for every dollar.

The drug bonanza
Health is interesting. Successive annual reports from the Audit Office remind us that cabinet has hand-picked for unlawful but very lucrative, multi-billion procurement contracts to supply the government with drugs and medical supplies, one of the companies of the Ramroop Group, with which President Jagdeo announced he has a friendly relationship and for which new tax concession laws were passed in 2008. As if the selection by the President’s cabinet were not enough, the government makes up-front payment on those contracts. Perhaps not surprisingly therefore, of the $2.5 billion budgeted for Drugs and Medical Supplies, 66.5 % was spent in the first six months of the year, up from 53% for the corresponding period in 2008.

With this kind of abuse, the government ought not to be surprised that Guyana is ranked at 126 among 180 countries listed in the Transparency International (TI) Report, along with seven other countries that include war-ravaged countries such as Eritrea, Ethiopia, Honduras, Mozambique and Uganda. The government’s protestations about TI’s methodology would have credibility and resonance if the country was convinced that it had any interest in halting the abuses attendant on the procurement of drugs and other products and services and the Lotto funds, pursuing those who contribute to its party while engaging in the worst forms of corruption of revenue officers, keeping its promise on a Freedom of Information Act and observing good governance and the rule of law in all their forms and manifestations.

With corruption and the absence of any culture of accountability and transparency in religion, the trade union movement, civil society, the private and NGO sectors, the political parties, sports, in national and local government – in short in every area of life – many Guyanese find it hard to believe that there are countries more corrupt than Guyana. The fact is, however, that there are and we need to ensure that we do not slip further to the bottom. Like the rotting of the fish, the disintegration from corruption begins at the head.

Bloating the public sector
Another interesting line item is what is referred to in Appendix E4 to the Mid-year Report as Contracted Employees. There too we have spending very much on track as the government selectively employs more and more persons at the public expense. The 2009 Budget allocation for wages and salaries of contracted employees is $3.2 billion which the Minister projects will be exceeded, no doubt because more than 50% has already been spent in the first six months of the year. The Office of the President in particular now has a number of advisers and consultants, some of whose designations and functions are by no means clear, and who seem to be paid either for their past service to the party or to do political work on behalf of the party. The contracted employees do not come cheap. Some of them are paid in real currency, have 24-hour security, chauffeur, administrative support, enjoy valuable tax and duty concessions – all paid for by the poor taxpayers or financed by the donors who seem to be salivating at the prospect of giving to a poor country.

How much of the further $2.2 billion dollars in benefits and allowances goes to the contracted employees is not determinable but what is interesting is that the wages and salaries of the contracted employees exceeds that of the total administrative staff of the central government by more than 15%. And it is because of these contracted employees including permanent secretaries, many politically appointed, that the Public Service Commission is becoming increasingly sidelined and irrelevant. Is it because of the chauffeur-driven and state-provided vehicles that the Public Service Ministry has not seen it fit or necessary to revise the 1995 rates of travel allowances paid to public officers, many of them lower level operatives not important to the new order governing public finances in the country?

To be continued