Focus on Guyana’s National Budget 2016

Focus on Guyana’s National Budget, © Copyright Ram & McRae 2016

Review 2015

Financial Review

Current Revenue earned in 2015 of $161,710 million was $1,941.4 million short of budget. While Internal Revenue exceeded budget by $528.4 million, Customs & Trade Administration receipts fell below budget by $170 million while Value Added Tax (VAT) & Excise Tax fell by $714.7 million. Other current revenue fell short of budget by $1,586.1 million. See Financial Operations of Central Government (Accounting Classification) on page 28.

Within Internal Revenue, Corporation Taxes and Income Tax on the self-employed fell short of target although not substantially. VAT which was budgeted to bring in $39,315.9 million fell short of that target by $3,942.2 million, shared almost equally between VAT on imports and VAT on Domestic Supplies. Fortuitously, the significant shortfall in VAT was compensated for by an increase of $3,247.1 million over budget in Excise Taxes. Significant shortfall in Other Current Revenue arose from Dividends from public companies of exactly $1,000 million and Bank of Guyana profits of $687.3 million.

On the expenditure side Personal Emoluments of $44,641 million was $537.1 million less than budget while Other Goods & Services was $1,803.9 million below the budget of $44,979.8 million. Transfer payments budgeted at $56,466.4 million came in at $53,314.5 million, a favourable variance of $3,151.9 million.

Interest Expenditure for 2015 amounted to $5,225.2 million compared with budget of $5,663.9 million, a saving of $438.7 million.

As a percentage of current expenditure, Transfer Payments account for a substantial 37.8%. For 2016, the percentage is expected to climb to a whopping 40.6% of current expenditure. As a percentage of revenue, Transfer Payments in 2015 was 33% while for 2016 it is projected at 38.5%.

Economist Professor Clive Thomas, in his Stabroek News column on Govern-ment Transfers, identified as the two main categories of such transfers those based on Government’s social protection and welfare programmes for example, the National Insurance Scheme, and the other, interest payments on the outstanding public debt.

The current balance in 2015 was $15,332.8 million against a budget of $11,342.7 million, due in large measure to lower realised current expenditure.

Capital revenue and grants amounted $6,329.2 million compared with budget of $7,473.6 million while Capital Expenditure of $30,664.9 million fell short of budget at $39,048.6 million by $8,383.7 million, or 21.5%.

Debt repayment of $15,038.8 million was $14,682.3 million less than budget with the entire amount being on the External debt.

The overall balance on financial operations for 2015 was $24,041.7 million compared with a budget of $49,953.4 million, a difference of $25,911.7 million or 51.9%. The overall balance was financed from external sources $14,710.5 million and $9,330.9 million from domestic sources.

The Domestic Economy

Source: Annual Budget Speeches

Per Capita GDP

The per capita GDP saw continuous growth over the years with an increase from US$3,606.4 in 2014 to US$3,723.6 in 2015 as shown below.

Source: Annual Budget Speeches

Domestic Debt
The Minister announced that domestic debt decreased by 48.6% in 2015. The growth in the domestic bonded debt from 1994 to 2014 is shown in the following graph:

Source: Annual Budget Speeches

The above graph includes only central government borrowing and therefore excludes any borrowings by public corporations and non-interest bearing debt, such as the Special Issue of Government of Guyana Securities by the Bank of Guyana.

External Debt

The tables shows that over the period 1998 – 2015, the external debt has fallen by US$407 million or 27.0%.

Source: BOG Statistics and Budget Speech – All shown at December 31

Banking and Interest Rates

There was a slight increase in the 91-day Treasury bill rate to 1.92% while the rate of interest on savings remain at 1.26%. The weighted average lending rate decreased from 10.86% to 10.63% still reflecting the wide spread which fuels the profitability of the banking sector. Most borrowers pay rates that are higher than the weighted average lending rate while the banks’ effective borrowing rate is lower than the savings rate as most demand deposit accounts earn no interest. Despite the spread, both loans and deposits have continued an upward trajectory.

The following chart shows the spread earned by the commercial banks as the financial rates continue to decline.

The Exchange Rate

The value of the Guyana dollar to the US dollar remains the same when compared to 2014 (see Highlights on page 7 for changes in market rates for the US dollar and other currencies).

Ram & McRae’s Comments

1. The global economy is facing special challenges including terrorism, a glut of oil and the reduced demand for commodities by China. It is this challenging environment that Guyana’s economy will have to navigate and succeed. Given the structure of our domestic economy, focus has to be on accelerating production, stimulating growth and exports and creating jobs. This is a task as much for the private sector as it is for the Government.
2. The gap between funds available for lending by the commercial banks and the amounts lent has actually increased in 2015. The whole economic argument for saving is to create the funds for investment. Insufficient use appears to be made of this huge opportunity.
3. The output for several sectors stand out in comparison with the prior year as follows:

Source: 2015 and 2016 Budget Speeches

The Gold Industry reported increased production of 16.5% from 2014 to 2015, to which Guyana Goldfields and Troy Resources would have contributed significantly. On the other hand, the Bauxite Industry saw a decline by 13.4% in 2015.

1. Rice saw an increase of 8.3% and sugar followed closely with an increase of 6.9% when compared to 2014. However, both key Agricultural subsectors are facing some real challenges with the future of GuySuCo uncertain rice having to cope with weather and water problems, marketing challenges and declining confidence.

Unfinished Business

As a matter of convenience this section highlights unresolved issues from pronouncements of earlier years and is presented in three parts – National issues, Campaign promises, and Pronouncements by the Minister of Finance in the 2015 Budget. Those issues which straddle the three parts are duly noted.

National Issues:

1. Electoral Reform including reform of the model of the Guyana Elections Commission and Campaign Financing. The Carter Model for the 1992 Elections of a political party dominated GECOM remains in place. No party it seems is willing to engage the issue of campaign financing. GECOM as the elections manager has failed to take any initiative.
2. Judicial review; including establishment of a Constitutional Court, implementing the ‘new rules’ and dealing with the backlog of cases: The push for a Constitutional Court of more than a single judge appears to have lost its appeal and urgency. New Rules of Court are being pursued and have been promised by end of March 2016. Status of backlog cases remains elusive despite efforts by Bar Association.
3. Law Reform: Law Reform Commission Act passed and assented to but concerns about independence and appointments of Law Reform Committee expressed.
4. Revision of the 2010 edition of the Laws of Guyana to correct the errors, omissions and other deficiencies: It is now clear that the problems are unfixable and work ought to commence on a new edition effective 2017.
5. Census 2012 Report: Guyana must be one of the few countries that have not completed their report on the last census, three years after the census and a year and a half since the preliminary report.

Campaign Promises:

1. Manifesto Action Programme not actioned:

• Significant salary increases for all categories of government workers: The Minister has now responded to concerns about ignoring the principle of free collective bargaining. The relevant Unions will now engage in negotiations.
• Implementation of a phased reduction of VAT and the removal from VAT from food and other essential items: Increase in the number of        zero-rated items but no reduction in rates.
• Significant increase in Old Age Pension: Moderate increases granted.
• Establishment of: passport and birth certificate licensing offices in Berbice, Essequibo and Linden; a Public Procurement Commission; a National Cane Workers and Cane Farmers Conference; an Investigative Commission on Corruption; and the Liberalisation of the Telecommunications and ICT sectors: None of these have been done but there are indications that the Government is determined to carry these out. Draft legislation for liberalisation has been completed and the Minister notes that Government is committed to having these  ‘tabled and passed this year’.

1. Waiving of duties on fuel, tools and small scale mining equipment bought by identifiable holders of small concessions: Agreement was signed with miners but not executed as many miners are non-compliant with their tax obligations.

Pronouncements by the Minister of Finance:

1. Constitutional Reform: The APNU+AFC Coalition Manifesto promised the appointment of a Constitutional Reform Commission within three months of taking office. Committee established to advise on procedures. Draft report presented December 31, 2015 but no pronouncements by the Government on when the Commission will be appointed or what its Terms of Reference will be. Experience is that the longer it takes for the process to begin, the less likely there will be meaningful reforms, particularly if the constituent members of the Coalition have different goals. .The 2011 Elections Manifesto of key Coalition member AFC had promised to deliver proposals for the removal of the Executive Presidency.
2. Building of a Green Economy: The government saw as a point of reference for building a Green Economy Article 36 of the Constitution which mandates sustainable extraction of country’s natural wealth. Steps taken in several areas including hydro and wind power, Styrofoam ban, vehicle and tyre restrictions.

• Establishment of a Sovereign Wealth Fund: In progress.

1. Crime: Public Security Plan, implementation of the Disciplined Services recommendations and the establishment of a command centre and resuscitating of CCTV feeds were among the measures identified to fight crime. Earlier this month the Government launched a US$15 million Citizen Security Strengthening Programme, which they believe will contribute nationally to reducing crime and violence.
2. Policy to be developed to address: licensing and contracting, fiscal framework, capacity building, transparency and accountability, environmental management and measurement indicators.

• Mining: Small and medium scale miners to benefit from the waiver of custom duties to create a more level playing field when compared to

large scale miners.

• Forestry: The conclusion of the 5-year forest agreement with Norway provides the impetus to open discussions on a successor agreement,

and this was to be pursued when a team from the Kingdom of Norway  visits our country.

These have to be considered as work in progress but success will depend on the establishment of clear goals and targets for the successor to the Climate Change Unit.

1. Agriculture: Modernisation and diversification to expand the sector. On Sugar, the word was awaiting the report of the Commission of the Inquiry before deciding on the next steps with regard to the sugar industry. Report submitted in October 2015. A sum of $9 billion was allocated to be injected into the sugar industry. The decision to close one of the Estates outside of the Commission’s recommendations suggests that the Government has not decided on how it will treat with the Report, adding further uncertainty to the process.
2. Tourism: Creating a must see Tourist Destination and delinking tourism as a sector in its own right. After seven months the new Tourism Ministry subsumed in Ministry of Public Telecommunication and Tourism, raising concerns about the Government’s commitment to the sector. There is clearly a need for a sector strategy and policy. .
3. Energy: The government planned to consider alternatives such as wind, solar and bagasse as well as the possibility a large joint hydropower project with Brazil in the Mazaruni area. Adoption of a more integrated approach to providing for our energy needs over a 5 years period. All sources of energy – fossil fuels, wind, solar, bagasse and hydropower will be explored.
4. Doing Business in Guyana: Commitment to smash the suffocating red tape that stifles businesses and stunts growth in the country. Establishment of a Small Business Development Centre to facilitate the need of small and medium sized enterprises (SMEs). Initiatives planned to make Go-Invest the single stop when registering a new business.
5. Water: Re-establishment of the National Water Council. Overhaul of the Shelter Belt facility and building new treatment plants.

• Financial Sector Reform: The International Monetary Fund and the World Bank to carry out a Financial Sector Assessment Program after a request by the Government. No announcements.

1. Public Administration Reform: Strategic planning should have been implemented along with enhanced evaluation and monitoring capability so that regions can be assessed using key performance indicators. Commission set up. Report expected shortly.
2. Tax Reform: The government planned to appoint a committee to pursue tax reform with a mandate to provide a comprehensive plan that will result in transparency, predictability, promotion of investment, national competitiveness and removal of distortion across sectors. Report submitted on January 18, 2015.
3. Tender Board Reform: Financial support has been received from the IDB to implement a project to strengthen and overhaul public procurement, an area of significant corruption and leakage of public funds.
4. Matters not yet implemented also include the establishment of a Parliamentary Budget Office and strong internal audit units in every ministry and department.
5. All tax measures announced in 2015 Budget have been implemented.

2016 Policy Issues and Targets

Policy issues

The Minister of Finance Mr. Winston Jordan presented the second budget of the APNU/AFC Coalition – with the theme “Stimulating Growth, Restoring Confidence: The Good Life Beckons”and anchored on five pillars: National Unity, National Infrastructure, National Institutions, National Security and Public Services.

The Minister dealt at length with the Government’s Agenda for 2016. The following principal issues were discussed:

1. Macroeconomic Stability: The government will continue to maintain macroeconomic stability.
2. National Unity: Focus on reviewing, enhancing and implementing a National Cultural Policy.
3. Social Cohesion: National institutions to be empowered to address issues of diversity.
4. Gender Equality- Equal Rights for All: The Government intends to launch “The National Gender Policy” in 2016.
5. Hinterland Development & Preservation of Indigenous Culture: The Government intends to bridge the divide between the hinterland and coastland and will invest over $4 billion to support the Plan of Action for Hinterland Development.
6. 50th Anniversary of Independence: A sum of $300 million has been budgeted to support activities in celebration of this Golden Jubilee year.
7. National Infrastructure: Investment of $3.1 billion for the ICT Access and E-Services for Hinterland, Poor and Remote Communities Project.
8. Passage of legislation to liberalise the telecommunication sector.
9. Managing the Extractive Sector: Completing the framework for a Sovereign Wealth Fund.

• Production Transformation and Agricultural Diversification: Creating an economic environment in which farming and agro-processing operations can grow the economy and create employment; injecting $9 billion in the recovery and modernisation programme of sugar; and assisting the rice sector

1. Energy: Review with Norway the climate change agreement between the two countries, including the Amaila Falls Hydro Project.
2. National Insurance Scheme: Exploring options to repay $5.24 billion owed by CLICO.
3. Tax Reform: Review and consider the report submitted by four-person Committee.
4. Public Administration and Public Financial Management: Amend the Regulations to the Procurement Act to require the posting on NPTAB’s website of all contracts exceeding $1.5 million. .
5. Data for Decision Making: Completion and release by second quarter 2016 the 2012 Census results.
6. Producing a Well-Rounded Life Long Learner: Substantial increase in expenditure in education and the provision of the necessary resources, over time, to upgrade the entire University of Guyana (UG) system.
7. Health for Human Development: Mount a commission of inquiry and develop an emergency suicide prevention plan of action.

• In the financial sector, implement deposit insurance in Guyana, license cambios located outside of Georgetown, and examine the feasibility of agency banking.

Targets

Overall real growth is projected at 4.4% in 2016 with the non-sugar economy and the sugar economy projected to grow by 4.3% and 4.8% respectively. The following graph presents contribution to GDP at 2006 prices by various sectors:

Source: Estimates of the Public Sector

The primary industry groups are addressed separately below. In the other sectors, Transportation and Storage Activity recorded the highest average growth of 12.76% over the five years to 2015. Growth in this sector for 2016 is expected to decrease to 2.8% from the 13.6% growth seen in 2015. The Construction sector recorded average growth of 3.6% for the five years to 2015 and a significant 10.5% growth in 2016 is anticipated. Growth in other areas is expected at 2.8% in 2016.

Manufacturing

Source: Estimates of the Public Sector

A 2.4% growth is projected for 2016 in Other Manufacturing while a 4.8% growth is expected in Sugar Manufacturing. Overall however, manufacturing is expected to decline by 0.7%.

Monetary Policy & Inflation

The rate of inflation (Urban Consumer Price Index – Georgetown) for 2016 is projected at 2% compared to the revised for 2015 of negative 1.8%. Food inflation in 2015 was 1.1% with the four years to 2014 registering 3.50%. Prices for Transport and communication decreased in 2015 to a rate of 3.3%. Medical and Personal Care inflation in 2015 was 0.4%. Footwear and repairs registered a 0.1% decrease.

Balance of Payments

The Minister projects the overall balance on the balance of payments to increase to a surplus US$46.26 million from a deficit of US$107.68 million in 2015. On the trade side, merchandise exports are projected to increase by 2.5% to US$1.2 billion. Merchandise imports are expected to rise by 2.7% to 1.5 billion. With net imports of services at US$237.26 million, and private transfers of US$437.06 million, a net deficit of US$116.86 million is projected on the current account.

The capital account is projected to have a surplus of US$163.12 million in 2016 (US$61.22 million in 2015). In this account, a net inflow of US$216.68 million is expected from medium and long term capital while a net outflow of US$65 million is expected on short term capital.

Ram & McRae’s comments Show percentage where applicable.

1. The Five Pillars are incontrovertible but the challenge will be in the execution. The gap between the Government and the Opposition in terms of votes at the elections was razor thin and political relations since then have hardly improved. Social cohesion has been an elusive concept even before Independence and unless steps are taken to identify and address the underlying problems at every level of society, the situation will continue.
2. While an influx of persons for the Golden Jubilee celebrations is expected, the spread of the mosquito-borne Zika Virus and adverse weather conditions causes expectations to be tempered. In health care, we are concerned by the following negative changes in the socio-economic indicators (see Appendix B):
3. The negative inflation described by the Minister as deflation may be a reflection of the slowing down of economic activities. However, if productive capacity has increased, the negative implications are less severe
4. It is unclear from the language used by the Minister whether the repayment of $5.24 billion to the NIS is to be made by the Government of Guyana. However, it is good news for the Scheme and will help to restore to it some financial balance.
5. With the large and increasing number of commercial banks operating in Guyana and the availability of Mobile Money, the logic for encouraging additional non-bank cambios is not clear and the idea should be revisited. The deposit insurance scheme idea has been discussed since the commencement of the ERP and the setting of a date should help to advance this matter.
6. Gold production by Guyana Goldfields and Troy Resources are expected to be the main source of growth in 2016, with overall growth being at 2.9% in non-gold sectors.
7. The decline in Rice projected for 2016 may be further affected by adverse weather conditions and irrigation.
8. Lower oil prices on the international market may have helped to push the growth seen in 2015 and the fall in the Urban consumer price index – Georgetown.
9. The list of Policy Issues is long and reflects an extensive agenda. The Minister should consider a Policy Implementation Unit to coordinate execution and ensure delivery.

The Government of Guyana Financial Plan 2016

The Government’s projected Financial Plan for 2016 is summarised and tabled on page ___ of this Publication. The current balance projects a surplus of $2,402 million, a decrease of $12,931 million or 84.3% over revised 2015. After capital receipts and expenditure, the plan projects an overall deficit of $40,909 million compared to a deficit of $24,042 million in 2015, 38.9% of which is expected to be financed by external borrowings.

The main elements of the 2016 Plan are:

Total current revenues are projected to increase by $11,615 million to $173,325 million or by 7.2%. Of this, the Guyana Revenue Authority is expected to bring in revenues of $150,407 million or 86.8% of total revenue, an increase of $7,510 million or 5.3% when compared to 2015.

Of the GRA’s collections, the Internal Revenue is projected to bring in $64,415 million compared with $60,933 million in 2015, a 5.7% increase, while Value-Added and Excise Taxes are expected to earn $72,539 million compared to $68,806 million in 2015, an increase of 5.4%. Collections by the Customs and Trade Administration are anticipated to be $13,453 million, an increase of $297 million or 2.3%.

Total Current non-interest expenditure is projected to increase by $23,156 million from $141,152 million to $164,308 million for 2016. Personal emoluments of $49,910 million represents an increase of 11.8% or $5,248 million over the revised figures for 2015.

Capital expenditure of $52,184 million represents a projected increase of $21,519 million or 70.2% over revised 2015 of $30,665 million. The big ticket items of capital expenditure include:

• $2,369 million for the upgrading of the West Demerara Highway from Vreed-en- Hoop to Parika;
• $2,000 million allocated to Power Utility Upgrade Programme for the provisionof institutional strengthening and upgrading;
• $1,400 million on National Drainage and Irrigation Authority for construction  and rehabilitation of drainage, canals, pumps and other structures;
• $1,323.1 million on Amerindian Development Projects;
• $1,120 million on the Low Carbon Development Strategy programmes;
• $860 million on Basic Needs Trust Fund;
• $560 million has been allocated to the Georgetown Public Hospital Corporation for the provision of medical facilities, equipment and vehicles;
• $550 million has been allocated to the Electrification Programme for upgrades;
• $200 million on the completion and rehabilitation of Government Buildings  and Benab;
• $150 million for rehabilitation works to the Demerara Harbour Bridge; and
• $110 million on upgrading the Office and Residence of the President.

Interest expenditure is projected to increase by 26.6% or $1,390 million. Domestic interest is projected to increase by $188 million or 10.9%, while interest on external debt is projected to increase by $1,202 million or 34.3%.

The principal element of debt repayments is projected at $6,930 million (2015: $15,039 million), made up of domestic debt repayments of a projected $35.7 million (2015: $35.5 million), while external debt repayments are projected to decrease to $6,894 million (2015: $15,003 million). During 2016, domestic and external debt service as a percentage of current revenue decreased to 4.0% in comparison with 9.3% in 2015 revised.

The projected overall deficit of $40,909 million is expected to be financed by external borrowings of $15,932 million and from domestic sources of $24,977 million.

Ram & McRae’s Comments

1. The deficit projected is one of the highest in recent years. The financing will result in both external and domestic borrowings of an equivalent amount.
2. In anticipation of growth of 4.4% in 2016, the projections anticipate a 7.2% increase in revenue with tax revenues contributing a significant portion of the increase. This will require significant effort on the part of The Guyana Revenue Authority. Should those revenues not be forthcoming and expenditure not reduced the deficit will be correspondingly high. The Minister also has the option of resorting to additional transfers from statutory bodies and balances held in the Dormant Accounts outside of the Consolidated Fund. While there are substantial funds still held by statutory and non-statutory bodies the budget already proposes an $8,700 million transfer.
3. Ram & McRae considers a 40% increase in tax revenues from the self-employed to be an ambitious if not unlikely target.
4. Expenditure on Personal Emoluments is expected to increase by 11.8% and represent approximately 30% of expenditure.
5. Capital expenditure of $52 billion will require strong implementation oversight, including coordination with the spending Ministries. As the Minister of Finance had predicted in his January 1 reported interview, substantial investments are being made in the development of the country’s infrastructure to improve the country’s roads, electricity and health services. The Government is committed to discharging a judgment for more than US$6 million to the Surinamese company RUDISA awarded by the Caribbean Court of Justice in a case arising from the Environmental Tax. It is believed that the APNU+AFC Government may have inherited other liabilities as well. The Minister did not address these and it is not clear from the Estimates that provision has been made for these debts.
6. The Minister gave no comments on Guyana’s position in the PetroCaribe fund and plans to liquidate the balances owed to Venezuela. Historical balances owed to Venezuela under the Petro Caribe initiative are illustrated below:

Source: Bank of Guyana Annual Reports and Budget Speech 2016

Who Gets What in 2016

Current Non-Interest Expenditure

In this section we consider how the budgeted expenditure is allocated among the principal Ministries, Departments, Regions and Programmes. As in 2015, in view of the reorganisation of Government when the APNU/AFC Coalition assumed office and subsequent changes, we combined agencies as necessary to allow for a meaningful comparison.

Central Government’s non-interest current expenditure (employment costs, statutory expenditure and other charges) for the year is budgeted at $164.3 billion which is 16.36% more than the revised 2015. The Ministries/ Departments with the most significant allocations and the largest changes between 2015 and 2016 are:

The regions with the most significant allocations are:

Capital Expenditure
Central Government’s capital expenditure for the year is budgeted at $52.2 billion which is 32.4% above the revised 2015 and 22.7% of total 2016 expenditure. The Ministries/Departments with the most significant capital expenditure allocations are:

Highlights from Minister’s Speech

The Minister in his speech highlighted the following allocations:

Educational facilities $40.3Bn

Health facilities                              $28.0Bn

Public safety and security          $24.6Bn

Roads and bridges          $14.4Bn

Water supply system          $11.6Bn

Sugar                                             $9.0Bn

Sea defence structures          $6.0Bn

Housing          $4.2Bn

Information technology          $3.1Bn

Ram & McRae’s Comments

1. Employments costs under the Ministry of Finance are expected to increase from $3,959 million to $7,390 million by 86.7%. This increase is shown as arising in Policy and Administration from nil to $6,987 million in 2015 and 2016 respectively and a movement in allocation for Public Financial Management from $3,475 million to $403 million in 2015 and 2016 respectively.
2. The allocation for the Public Procurement Commission (PPC) is $1,000 suggesting that the Minister is not optimistic that the PPC will be in operation in 2016.
3. The sum of $300 million was allocated to fund activities relating to the 50th Anniversary Golden Jubilee celebrations.
4. In the Ministers Budget 2015 speech, it was mentioned that “over $23 billion has been allocated to support further payments to over 7,000 rice farmers, due to the inability of the Petro Caribe Fund to meet those payments”. This was essentially a replenishment of funds used by the Government and during the 2016 budget speech, “support (for) the industry to access new trade partners” was the only offering for the rice industry.
5. The Minister announced an allocation of $9 billion for the sugar industry, as compared to a sum of $8.2 billion budgeted in the year 2015.
6. The sum of $14.4 billion is allocated to continue the upgrade, expansion and rehabilitation of the network of roads and bridges. The Minister also mentioned that over $5.0 billion will be invested in the reconstruction of Sheriff Street and $2.3 billion to upgrade the West Coast Demerara Road, from Parika to Vreed-en-Hoop.
7. No mention was made of the proposed closure of the Wales Estate or support to or infrastructure projects in the West Demerara area in anticipation of this closure. The lack of a comprehensive report on the proposed closure including an impact assessment on residents in the West Demerara area is regrettable.
8. The budget fails to provide for the transfers to local authorities under the Fiscal Transfers Act 2013, which seeks to give effect to article 77 (A) of the Constitution. The explanatory memorandum to the Fiscal Transfers Bill (No. 20 of 2012) states that “There is provision in clause 4 for the eligibility for fiscal transfers to a local authority governed by a set of conditions each of which has to be complied with in order to benefit from a fiscal transfer”. Prior to the Act and up to 2015, approximately $17 million was included in the budget as subventions to local authorities, and this has been increased to $21.7 million. The Fiscal Transfers Act requires 50% of the allocated amount to be distributed to Georgetown and the remainder shared by the 71 local authorities. The sums which appear to have been allocated are wholly inadequate, especially in view of local government elections in March 2016.

Budget 2016 Measures

Section 6 of the 2016 Budget Speech contains thirty paragraphs of Budget measures, some of which are regulatory rather than fiscal. Only some of these carry an estimated cost and a number of them have not inconsequential compensating savings. We now look at those measures and offer our comments.

Measures in support of programme of ‘greening’ the economy and protecting the environment

Measure to bring equity to the charging of excise tax on alcoholic beverages

Measures to remove arbitrary, discretionary or undefined remissions

Measures in Support of the Elderly

Measures to Improve Tax Administration

Measures to Enhance Revenue

Other Measures

Overall comments

We would have liked to see the revenue or expenditure implication of each of the proposed measures. The measures with the greatest financial implications are the increases in the pension and the increase in the threshold. Each personal income taxpayer currently earning above the personal threshold will save $1,500 per month or $18,000 per year. Assuming that there are 75,000 such persons, the cost of the measure in 2016 will be $1,350,000.

The measures on old vehicles and tyres, though eminently sensible, are likely to be unpopular. The Minister and his colleagues will have to sell these to the public.

The Minister has indicated that the recommendations of the Tax Reform Committee are to be considered by Cabinet. It is not unlikely therefore that there will be other tax measures in 2016.

Sugar or Wales

One month into the work a ten member Commission of Inquiry into the Guyana Sugar Corporation, the Minister of Finance told the nation that, “The economic wellbeing of the sugar industry is critical to the protection of jobs and growth of the economy, as well as the contribution it makes to GDP, exports and foreign exchange. ….. Whatever path the industry takes, it is vital for the sake of the national economy that it remains viable and able to compete in an increasingly competitive and volatile global market. Time is of the essence! We anxiously await the report of the Commission of Inquiry before deciding on the next steps.”

The Corporation too was telling the workers’ representatives that matters relating to their wages and salaries would also have to await the Report. The Report was eventually submitted to the Minister of Agriculture and considered by Cabinet. But before any serious discussion had begun, the Ministry of Agriculture issued a statement that the Government would close the Wales Sugar Estate by next year. What makes the decision even more difficult to understand is that the Report expressly states that while the possibility of closure of some estates had received much attention, by an 8 to 2 majority the Commissioners opposed any recommendation for closure.

Collectively of course the decision is that of the Government but it is unclear who made the decision and whether the Corporation was in agreement given that its Chairman Dr. Clive Thomas was a lead member of the Commission and contributed a significant segment to its report. The question now is what would be the fate of the Report given that its initial reception includes a rejection of a major recommendation.

Not unexpectedly, the PPP/C which enjoys overwhelming support among sugar workers opposed the closure. But they were not alone. Indeed, even persons who may have otherwise supported closure were dissatisfied with the manner in which the Government communicated the decision. TUC General Secretary complained that the unilateral decision appears to be a clear violation of the constitutional right of persons to participate in decisions affecting their wellbeing and of the Termination of Employment and Severance Pay Act which requires the workers’ union to be notified of the proposed termination and provided with specific information on reasons, dates, persons to be affected etc.

The result of this decision is that it has detracted from the broader report and recommendations which run to three volumes, the preparation of which must have been a particularly formidable exercise. The central recommendation is against closure and privatisation in not more than three years. Managing Partner of this firm who was among the scores of persons who appeared before the Commission has shared the Paper he presented to the Commission. He did not favour closure.

Mr. Ram sought in his presentation to address four questions:

Whether Guyana can become competitive in sugar given that its current cost of production is approximately US$0.40 per pound while the world sugar price is approximately $0.14 per pound;

• Whether, how much, and for how long taxpayers should be asked to sustain GuySuCo with subsidies;
• Whether, and to what extent, GuySuCo and Guyana should remain in sugar; and
• If so, whether GuySuCo should remain in state ownership, alone or with private investors.

He also sought to address two misconceptions about the local industry.

In summary, Ram recommended that the estates be grouped and their problems addressed separately with a view to creating the Courantyne Corridor as the heart of the industry. The full presentation can be found on chrisram.net.

Another approach or variant proposed by a leading individual with close ties to the industry and business is the creation of a new company to take over the Wales operation.

The shareholders of the new company will be pension funds, sugar workers, cane farmers, Demerara Distillers Limited, the public and investors from abroad. TT and USA will provide equipment for the production of white and invert sugar. Ram & McRae has read the proposal and spoken with the individual. Ram & McRae considers that the proposal has sufficient merit to warrant consideration.

There is nothing sacred about any one estate. Indeed, the history of sugar is about closure, amalgamation and reorganisation of estates. But even the announcement of closure makes it inevitable. There is a very brief window for reconsideration. Let us at least consider all the reasonable ideas before de facto, irreversible closure is set in motion.

And so far as the wider report is concerned, a national dialogue needs to take place led by the National Assembly.

Let that discussion begin now.

Steep rise in pension population and costs

Pension costs are rising in Guyana. The NIS was driven to near crisis as pension costs kept soaring. In the private sector many pension schemes have been converted from defined benefits under which pension benefits are guaranteed to defined contributions plan under which benefits are based on contributions and the investment income thereon. Now it is the turn of the State to feel the effect of pension costs as employers.

The Government of course bears special responsibility to take care of its citizens and is often judged by how it takes care of its pensioners. Always with an eye on elections, the Government has to confront is the sheer numbers so that even a small increase in a pension can result in tens of millions of dollars to be paid out monthly.

In Budget 2016, Mr. Jordan announced that the number of persons now claiming the Old Age pension has climbed to 50,000, or 6.6 percent of the population. Thirteen years ago the over 65 percentage of the population was 4.19%. This is a staggering increase and it defies all demographic logic or reality.

The Minister also announced that effective April 1, 2016 Old Age Pension will increase from $17,000 to $18,200. The increase alone will cost the country $720 million dollars while the total cost will be $3,985 million dollars. So let us look at the total cost of pensions reflected in the 2016 Estimates (amounts in G$ millions):

Source: Expenditure – Estimates of the Public Sector / Ministry of Finance (table 9)

Revenue – Estimates of the Public Sector / Ministry of Finance (table 4)

High as the numbers are, they do not reflect the sum total of pension costs borne by the Government. Contract employees are paid a gratuity of 22.5% of their salary every six months in lieu of pension. Those costs are not separately disclosed but are included in the line item Contract Employees. With wages and salaries paid to contract employees in 2016 budgeted at $$11,230 million, the gratuity works out at over $2,000 million.

The Government is also a major employer and pays to the NIS employer’s contribution for its employees, whether pensionable or on contract. In 2015, that payment was $1,962 million and in 2016 it is projected at $2,085 million. This is an enormous sum to bear. It is unclear whether the Government is fully aware of the financial costs even as it continues to discharge its obligations to its elderly citizens.

With pension costs rising inexorably the Government may wish to examine those costs and whether they can be better managed, even as pension is constitutionally rightly treated property. A useful starting point is the Old Age Pensions Act Cap. 27:02 which sets out the qualifying requirement as: (a) attainment of the age of sixty-five years; (b) been a citizen for ten years; (c) been ordinarily resident in Guyana during the last twenty years; and (d) passed a means test based on income and assets. Therefore any returnee to Guyana before 1995 is not entitled to a pension because of condition (c).

Yet, I know of persons who lived abroad for decades, paying their taxes and earning pensions outside, who are encouraged to apply for pension under the Act. That is unlawful and constitutes a fraud. Something surely needs to be done. But the generosity goes beyond payment. The country’s tax laws are no less generous. Under the tax laws all pensions and gratuities are tax exempt, regardless of the amount.

Many public sector retirees are in receipt of considerable pensions which are exempt from tax, return to the workforce on special contract and are paid a gratuity that is also tax free. The generosity does not end there. The payment of contributions to the NIS and to any other pension fund is fully deductible against the employer’s income.

Even the Scandinavian countries known for their generous social programmes do not go that far. It is time for some serious pension reform. And also to reform employment practices in the public sector and the tax rules governing those payments.

Conclusion

Budget Focus welcomes the early presentation of the 2016 Budget and looks forward to the practise to the early years of independence when budgets were prepared before the end of the year. Unlike Budget 2015, Budget 2016 is a full year budget and will require continuous management by the Minister and his team.

There is a substantial deficit in the budget and the projections are quite ambitious but yet realisable much will depend on the Revenue Authority returning to normalcy in a year when it is likely to be distracted by a Forensic Audit and for the first time in its existence will be without a substantive Commissioner General and deputy Commissioner General. It will have to contend too with the practice by the Government of acting outside of the tax laws such as tax free overtime in the bauxite industry and tax free payments to public employees. That is not only unlawful, it is also discriminatory and therefore a violation of the Constitution. Finally it has to walk the thin line of pursuing businessmen who give “gifts” to the Police and to the Government for more than altruistic and patriotic reasons. Of course it would help if the practice of inviting such gifts is discouraged and discontinued.

We note that while the budget is the largest ever, it also reflects a massive deficit the Ministry will have to consider the extent to which the Government becomes the sole investors and the nature and sources of investments. We note too that despite increasing sums allocated to social expenditure, the results have so far been unsatisfactory as measured by the Socio-Economic Indicators appended to the Budget Speech. Clearly money is not the solution.

It is regrettable that the largest Budget ever, of which a huge chunk is for capital expenditure, will probably operate in the absence of the constitutionally mandated Public Procurement Commission for which only a nominal $1,000 is provided in the Budget. At least on this it would be hoped that we can have some cohesion.

While the Budget is large it is not particularly generous, if we ignore the substantial sums of remissions which have passed under the radar but which amount to approximately fifty billion dollars per year. Can one imagine the uproar from the Private Sector Commission if half that sum were to be gifted to employed persons? The question is the capacity of the Government to execute the capital programme to ensure value for money.

Transfer payments are another issue which the Government will have to confront sooner rather than later. The cost is rising at what appears to be an unsustainable rate. What is worse is that a significant portion of the Old Age pension is paid outside of the statutory framework.

GuySuCo continues to be a headache for the country. The report of the Commission of Inquiry is welcome but the Government has made it clear that the Commission’s recommendations are “not gospel”. The cost and consequences of closing the Wales Estate are deferred for a while longer but even so, the remaining parts of GuySuCo will continue to need huge subventions.

For the next year or two, there will be budgetary support from Government companies and statutory bodies outside of a proper, certain and defined framework. We recommend that he brings to Cabinet recommendations on a policy for Government companies, and statutory bodies which collect tax revenues but which are not explicitly required to pay over those moneys to the Consolidated Fund.

Hopefully, sooner rather than later the Minister will be addressing the report of the Tax Reform Committee. Assuming that Cabinet supports any of the recommendations, these will have to be sold to the public. That will require not only capacity but political will.

We have to express our disappointment on the question of Contact Employees which continue to increase in number and cost. This is not healthy for our democracy and places a strain on Article 38 G of the Constitution which requires the public service to be free from political influence. By way of example, Agency 05 Ministry of the Presidency reports an increase in contract employees from 298 to 505. Given the revelation of ghost employees under the former administration, we expected a significant reduction.

We repeat that this is not a problem peculiar to the present Administration. The abuse started under the Jagdeo Presidency and continued under the Ramotar Administration. Between 2011 and 2016 the expenditure on contract employees will have risen from $5,274 million to $11,230 million. This makes a mockery of the idea of the Public Service Commission and approved appointments, the hallmarks of good human resource management in the public service. We sincerely believe that President Granger has the authority to end this abuse. We look to him to act on the matter.

We have noted under Who Gets What in 2016 what we believe is an omission in the Budget regarding the Fiscal Transfers Act. This is key to the functioning of the Local Government system as it provides the finances to the newly elected bodies in the upcoming Local Government Elections.

Finally, it is Guyana’s 50th for which $300 million has been provided. Hopefully in the midst of all the celebration, there will be a time for reflection, for considering what might have been, where we went wrong and what needs to be done now.

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