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Putting some sense in the 2009 Budget

Introduction
The National Assembly has the most unenviable task of making sense of the 2009 Budget presented last Monday in the National Assembly. The Minister of Finance apparently saw its greatest virtue as being the “biggest budget ever.” Not only is a boast on size from a Minister of Dr Singh’s stature interesting, but if size is the only thing that commends this budget, then there must be serious concern about its wisdom. Size only tells us how much of our money the government will be spending and where the money is coming from. It does not tell us how well the money is being spent and surely that is at least as important.

I understand that MPs, constituted as the Committee of Supply for purposes of Budget consideration, can at this stage, raise “any question relating to the line item being considered and all others relevant to the provided profile for capital items, description provided for each line item, etc.” They need to use that right to the hilt. In terms of ideas and direction, this Budget is by far the worst ever constructed under the Economic Recovery Programme, and even before. It perhaps reflects the involuntary departure from the Ministry of Finance of Mr Winston Jordan who long held the position of Budget Advisor and who was replaced by Ms Sonia Roopnauth, parachuted into the ministry, along with a Deputy Minister of Finance whose role and utility is hardly well communicated.

More resources for the Audit Office
Expenditure has been climbing inexorably over the years which Dr Singh sees, incredibly, as a virtue. The perpetual late availability of the annual report of the Audit Office on the annual public accounts is often of little more than curiosity interest. That adds to the responsibility on the committee to thoroughly review the entire Budget, even at the risk of being accused of stalling. They owe it to the nation.

By the time the year is over, with accurate accounting, we will likely see the highest deficit ever recorded by this country. If all goes to form we can expect that the audit report on the finances allocated in the 2009 Budget will not be available until some time in 2011, the year of the next general election. We can expect as well that the report will be subject to the usual defects expected from an office short of critical resources and accustomed to failure to meet statutory obligations. One of the urgent and most significant recommendations of the committee therefore is the provision of increased sums to finance a functioning Audit Office.

As usual, most of the big players know that because of weak supervisory oversight on spending, they have tremendous latitude on how they account and spend. There is still lots of money outside there that is not properly accounted for on the income or expenditure side of the accounts. That is the case with the Lotto funds and now NICIL headed by Mr Winston Brassington, involving over the years billions of dollars. Those are unconstitutional and unlawful acts. The committee must come down on this. Since a Budget deals with available resources and their application, the estimates (budget) as presented are not correct in that they leave out substantial resources. They should be referred to the Minister for amendment.

There is no known case in recent memory where any Budget figure was changed after debate. Additionally, a significant part of the Budget is based largely on the system of incremental budgeting − take last year and add x %. That is not budgeting but arithmetic. In other words if we spent $100 dollars last year we look at inflation and then do a top-up to arrive at the current year. If we assume even a modest 10% in fat, wastage and inefficiencies, a clinical surgery of that fat without going yet into “lean and clean” could cut the budget by $12 billion – allowing a reduction of several forms of taxation including the VAT.

Zero-based budgeting
No change will come about without a new approach and nothing ever will. But blame me for being an optimist. I think it can be done, even beginning in 2009. Dr Singh was keen to tell us again about his government’s plans for the constitutionally independent Office of the Auditor General. What he should be telling us is how he intends to improve and modernise the system of budgeting of government finances. As an academic and accountant the Minister would be very familiar with the system of zero-based budgeting (ZBB).

He would know that properly applied, zero-based budgeting is particularly useful in the public sector and that the UK government in its 2007 Comprehensive Spending Review carried out a set of zero-based reviews of baseline expenditure in government departments to assess the effectiveness of government spending and its long-term objectives. ZBB starts from the premise that no costs or activities should be factored into the plans for the coming budget period, just because they figured in the costs or activities for the current or previous periods. Rather, everything that is to be included in the budget must be considered and justified. In effect, start by saying the budget is zero and then add the cost of those things considered necessary.

The key benefit of ZBB is that it focuses attention on the actual resources that are required in order to produce an output or outcome, rather than the percentage increase or decrease compared to the previous year. Under ZBB, budgeting is no longer a number-crunching process of spreadsheets, but an exercise involving the budget agency and the spenders in an analytical and decision-making process. The stupidity of the government’s rhetorical question, where is the money going to come from if this or that tax is cut, is based on a lack of appreciation of ZBB and the whole budget matrix, a criticism I never thought I would make under this Minister’s stewardship.

Bloated government
ZBB is not rocket science. Admittedly our budget is distorted by political considerations like having to find ministries and placements for all those party loyalists and those willing to go on the elections slate, hardly a relevant factor for ZBB. Do we really need a Ministry of Sport with a Minister and a Parliamentary Secretary, when we have a Director of Sport and a National Sports Commission? Do we need two former ministers to advise the current Minister of Local Government which cannot deliver local government elections? And does the President need and use all those advisers in the Office of the President?

The committee looking at the line items in the Budget should ask for full particulars of the terms of employment of all advisers to the President and his ministers. Under ZBB there would have had to be good reasons to for their continuation.

Think what happens when you cut a ministry: savings on ministerial salaries and perks including chauffeur, guards, duty concessions, allowances, secretaries, public relations persons and property expenses. Even with the smallest ministry this can easily add up to hundreds of millions.

ZBB particularly lends itself to discretionary spending such as this and that activity, and showing overseas travel, etc. The committee should ask for details of the 2008 expenditure and 2009 projected expenditure on local and overseas travel by the President, ministers and other public officials. Almost on every occasion I travel I see some politician or other travelling first class. The committee should not be prepared to accept glib answers but only hard evidence on the amount and details of money spent for the President and his ministers’ overseas travel in 2008 and their specific spending plans for 2009.

Too many dollars, too little sense
The committee should ask about the $2.5 billion being spent on GECOM in 2009 – more than the amount spent on agriculture – and consider whether we are getting value for money. The Ministry of Foreign Affairs is getting $3.2 billion and cannot put a representative in the UK where even a government supporter has lamented we do not have a representative and miss many, many meetings. What contribution does former Home Affairs Minister Mr Gajraj’s presence in India bring us that cannot be achieved by contacts between our Ministry of Foreign Affairs and the Indian High Commission?

We need to know why with all this overseas representation the President has to go out of the country sometimes three times per month. Are our representatives not functioning and do the things the President goes to really require the presence of our head of state?

The committee should find out about the money allocated in 2008 for airstrips in Leguan and Wakenaam, for which no work was done. It should ask for information on the Hope Canal on which $3 billion is being spent this year – all from borrowings and on the basis of technical advice of which the public knows nothing. Should the committee not want to ensure that it acts before the money is spent and the problem remains? The committee should scrutinize the capital budget with the greatest of care – some $46 billion dollars are involved.

It should request the audited financial statements of the National Drainage and Irrigation Authority since it came into being in 2006. To give money to people who are derelict in their statutory duty to account is irresponsible. That of course applies to all the Budget agencies and those to whom public monies are given.

Conclusion
I do not expect that everything can be done immediately. But it is time that we move to serious budgeting and not indulge in politics and arithmetic as the 2009 Budget does. The Committee of Supply should request the presence of the Budget Director as it wades through the 2009 Budget. The accounting officer from the relevant ministry or department should be present to answer questions and if Minister Singh is too busy then his apparently under-worked deputy should be present at all the sessions.

Business Page would also like, respectfully of course, to recommend that we move to a system of zero-based budgeting and that we begin by identifying three or four ministries for the exercise in phase one, to begin in 2009. And to recommend as well that all positions paid from the public purse be listed in the Estimates, and not only those which have come through the Public Service Commission. Too much is being hidden.

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Staggering increase in external debt

Bad news
The country’s stock of external public and publicly guaranteed debt rose by 20.3 per cent to US$804 million from the end of September 2007 to the end of September 2008. This dramatic increase has been reported in a quarterly report by the Bank of Guyana for the nine months ended September 30, 2008. As a consequence, external debt service costs increased by 10.5 per cent to US$11.5 million, reflecting new debt payment schedules primarily for multilateral creditors. These were among a number of interesting issues raised in a most commendable effort by the central bank, and the Governor, Mr Lawrence Williams and his team deserve kudos for what appears to be a first for the bank.

Otherwise the report makes for a most depressing report on the management of the economy by President Bharrat Jagdeo and his Finance Minister Dr Ashni Singh, of whom so much was expected when he first was appointed a minister after the 2006 elections. By almost every measure the economy in the three months July to September 2008 performed worse than it did in the same quarter in 2007.

There was lower output in all the country’s major commodities during the third quarter of 2008 compared with the same period in 2007. Sugar fell by 3.6%, rice by 1.6% and poultry by 12%, while in forestry products, diamond and fishing the story was the same. Someone counted the eggs and came up with a 64% increase in the country’s production of eggs while there was modest growth in the mining sector, including the foreign owned bauxite companies blessed with generous concessions which the government has refused to disclose.

More bad news
If the overall performance of the manufacturing sector is depressing, the non-performance of segments of the sector must be a cause for serious concern. The production of paints and alcoholic beverages increased by 1.7 per cent and 6.3 per cent, respectively, whereas there were declines in the production of pharmaceuticals by 2.5 per cent and non-alcoholic beverages by 33 per cent. Our pharmaceutical company is another beneficiary of concessions and valuable contracts to supply Indian manufactured drugs to the government.

And if non-alcoholic beverages include Coke, Pepsi and I-cee, is it an error or did we in the third quarter produce only two bottles when three months earlier we were producing three? Where are we going and what does it say that a senior official of one of those beverage companies is a top member of the increasingly useless National Competitiveness Council?

Inflation
The Bank of Guyana, sourcing its information from the Bureau of Statistics reported that the inflation rate “during the third quarter of 2008 grew by 7.8 percent compared with 13.9 percent for the corresponding period in 2007.” There must be some error here, however, since the inflation during the quarter could not be 7.8% and was probably the rate for the nine months. The food basket maintained by Ram & McRae for the quarter reflected an increase of 8.2% over the three months but for the year the firm’s basket of food showed an increase of 33%, similar to the increase in Trinidad and Tobago. Conveniently, the Bank of Guyana concludes, without offering the kind of analysis and evidence expected from such a body, that the level of inflation in Guyana was driven by higher international fuel and commodity prices.

What is troubling is that the report indicates that price data for the third quarter were not available. Yet we will be expected to accept without question inflation figures pronounced by Dr Singh when he presents another of his big budgets that would not only include all of the third quarter but the entire year! It is hardly surprising therefore that leading economists and the public have ceased to give any credence to the numbers provided by the government, particularly on inflation and GDP, two politically sensitive variables.

Wages and employment
The Bank of Guyana clearly forgot that these are key issues in the economy since they give them a complete pass, meaning no mention. Expectedly, it did devote much attention to the financial sector reporting that the foreign exchange market continued to grow during the review period. The bank seems to forget as well the role and scale of the underground and parallel economy, and as our newspapers show, the role of drug money in the economy. It has decided, again without solid information, that sales of foreign currency “were related to higher import costs.”

Almost half of the transactions by value in the foreign exchange market were accounted for by the cambios with the bank itself purchasing some US$376 million, comprising mainly purchases of US$212 million from GuySuCo and the Guyana Gold Board. Despite the perceived strong links between the non-bank cambios and the underground economy the report does not reflect any cause for concern on the part of the bank in its supervisory role over these entities, most of which are unincorporated businesses not requiring independent audit of their books.

The drugs trade
At least as readers of the daily newspapers, the bank must be aware of the drug trade with its own oligarchy. And so too must be the one-man Financial Intelligence Unit, located within the Ministry of Finance, that is supposed to prevent money-laundering. The report indicates that sales by the non-bank cambios represented 8% of total currency sales. Even Lewis Carroll would have hesitated before writing this figure. This column has criticised the law regulating the non-bank cambios, noting that they have outlived their initial purpose and called for their abolition. In a remarkable sign of impotence and or lack of will, the response has been that it will drive the business back onto the streets. This seems to suggest that instead of running the country on the basis of laws, we are at best closing our eyes and ears to reality, operating on fear of stepping on the toes of the powerful.

Despite the bank’s poor record of supervision of the cambio sub-sector the report devotes several pages on the remittance business, advising of the steps being taken to bring it under its control. The report notes the significant increase in the inflow of remittances during the past six years, increasing from US$3.4 million in 2002 to US$224.4 million in 2007. In the first half of 2008, net flows of remittances increased by 6.3 per cent, or US$6.6 million to US$111.8 million compared to half year 2007. Interestingly, Caricom countries now rank only behind the United States of America as the dominant countries from which Guyanese receive remittances.

Tax, borrow and spend
The report emphasises that the overall surplus of the public sector contracted during the review period, resulting from relatively higher expenditure by the central government since receipts from corporations and tax revenues increased slightly. The tax and spend approach that has characterised President Jagdeo’s style of financial management seems to have been taken to new levels by Dr Singh. With him at the helm of the Finance Ministry, it is now tax, borrow and spend. Since moneys borrowed have to be repaid later, no government, elected or otherwise, should be allowed to borrow away the future of a country. There should be a cap on how much a government is permitted to borrow, even if it is to stabilise excess liquidity in the financial system as the report indicates.

The report which was created in PDF format on December 29, 2008 for publication on the bank’s website “predicted” that in the fourth quarter, the economy would continue its growth path, particularly in the mining, construction and services sectors, and that the agriculture sector which had faced “minor setbacks in the third quarter” would register modest growth. Clearly it could not be referring to sugar where the drama became even more surreal. In a cleverly worded disclaimer for the (mis)management of the economy, the report notes that the efficacy of the bank’s policies will depend on the stance of central government fiscal policy. And we all are aware of the history of that policy.

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Half year economic performance

The Guyana economy has performed reasonably well during the first half of the year according to Dr. Ashni Singh, Minister of Finance, and there is cautious optimism about the domestic economy for the rest of the year. This is according to the mid-year report presented to the National Assembly by the Minister on October 27, 2008. However, anyone with a serious interest in the economy and concerned about the several important omissions contained in the mid-year report should read the report in conjunction with the half-year report done by the Bank of Guyana and published on the bank’s website.

Driven by improved performances in agriculture, mining, engineering and construction, and services, the economy recorded a 3.8 per cent GDP growth during the first half of 2008, but still a sharp decline from the 5.8 per cent growth in the corresponding period of 2007. The Bank of Guyana – using that well-known oxymoron – reports that the manufacturing sector recorded negative growth, due partly to the high cost of inputs − fuel and imported raw materials, challenges to which the sector is no stranger.

2008.11.16_Chart1
Source: Bank of Guyana Half-year report 2008

Revenue and expenditure
On central government revenue and expenditure, the mid-year report presents some interesting information. Value-added and excise taxes were budgeted to increase by 12.8% from the $36.7 billion collected in 2007 to $41.4 billion in 2008. For the half-year actual collections amounted to $17.8 billion (43% of full year) compared with the $17.1 billion collected last year. On a period by period comparison these collections represented a marginal increase in value-added tax to $11 billion from $10.2 billion, although excise tax collections declined to $6.7 billion from $7 billion.

Internal revenue collections amounted to $19 billion in the first half of 2008 compared with $17.4 billion collected last year. The bulk of such revenue comes from a handful of companies, including the commercial banks, telecommunications companies and Banks DIH, DDL and DEMTOCO. Despite the many unincorporated businesses, the self-employed category pays less than one billion dollars in taxes, or just about 15% of the taxes paid by the employed persons.

While both reports indicate significant growth in key sectors, tax revenues have not risen correspondingly and one is left to wonder whether this is a case of generous tax concessions or continued tax evasion within key sectors.

But it is in relation to expenditure that the picture is particularly interesting. And while the Minister in his report did not discuss the table which contains several errors, it must now be a matter of speculation why only 38% of the full year budget has been expended in what the table itself describes as key sectors. Particular attention is drawn to the Health,

Infrastructure and Agriculture sectors where only 41%, 27% and 33% respectively, have been spent in the first half of the year. Are we going to see a mad and irresponsible rush to spend during the second half of the year, simply because the money has been allocated?

2008.11.16_Table1

Debt
The mid-year report deals very inadequately with external debt and omits completely any information on domestic debt which has been rising alarmingly over the past several years. The Bank of Guyana Report shows the stock of government’s domestic bonded debt increasing by 7.6 per cent, while its external public and publicly guaranteed debt rose by a whopping 16.8 per cent from end-June 2007.

The outstanding stock of government domestic bonded debt, which consisted of treasury bills, debentures, bonds and the CARICOM loan, amounted to G$74,223 million, an increase of 7.6 per cent from end-June 2007 and 7 per cent from end-December 2007 balance. The increase from one year earlier reflected the expansion in the stock of outstanding government treasury bills at end-June 2007.

Over the year July 1 2007 to June 30, 2008, the stock of outstanding public and publicly guaranteed external debt rose by 18.2 per cent to US$774 million. This increase reflected disbursements of US$45 million by the Inter-American Development Bank and the delivery of US$44 million credit by the Venezuela Petrocaribe agreement.

Employment
This very critical economic and social indicator once again fails to attract the attention of the Minister and again recourse has to be had to the Bank of Guyana Report which by its own admission is not based entirely on hard data. One has to wonder why the government continues to refer to labour surveys but yet the Ministry of Finance seems unable or unwilling to deal with the issue. While indicating that preliminary data indicated that public sector employment remained relatively stable, the Bank of Guyana reports some decline due primarily to factors such as resignation and retirement of employees.

The Bank of Guyana reported that while “data on private sector employment are sparse, there are indications that the growth sectors recorded higher levels of employment.” It went on to state that the mining, distribution as well as the engineering and construction sectors seem (emphasis mine) to be associated with increased employment.

It is interesting how the Bank of Guyana and the Ministry of Finance are so sure of the performance of the various sectors of the economy but cannot establish similarly reliable numbers on employment.

Inflation
Inflation has been one of the most disputed and massaged variables in the Guyana economy. Both reports indicate a 5.8% rate of inflation but again the Bank of Guyana is more informative even if no less controversial. The Minister of Finance attributes the increase mainly to food items, identifying cereals and cereal products as the principal contributors which are unlikely to be the main concerns of the average consumer. In fact in a typical food basket done monthly by Ram & McRae, Chartered Accountants, the price increase in food items over the six month period was 10.2%, compared with the Bank of Guyana figure for the food group of approximately 9%.

Conclusion
While the date on the Minister’s report is shown as September 12, in fact it was presented to the National Assembly on October 27, repeating a pattern of wrong dating by this Minister. Despite the additional time he took in presenting his report, the Minister chose not to address the serious global economic issues that surfaced in the third quarter, nor did he treat in any serious way his duty under the law to include in the report a list of major fiscal risks for the remainder of the fiscal year, together with likely policy responses that the government proposes to take to meet the expected circumstances.