IMF hones in on public agency ‘reform’

State-owned enterprises and public institutions are again under the microscope as the International Monetary Fund zeroed in on the agencies’ draining the public purse.

The IMF warned the Government that “reform” of SOEs will be critical to the success of the homegrown Barbados Economic Recovery and Transformation (BERT) austerity programme.

An IMF report on Barbados’ request for changes to BERT’s targets and benchmarks blamed central government’s transfers to SOEs for being a “significant burden” on the budget and a major contributor to fiscal risks.

The IMF forecast that the Government’s suggestions were expected to increase temporarily in the current financial year due to one-off spending mainly in health, tourism and social assistance in response to the COVID-19 shock.

But the IMF is expecting those grants to then decline to under six per cent of gross domestic product by fiscal year 2021/2022, pointing out that SOE reforms remained essential for achieving higher primary surpluses targets and maintaining them over the medium term.

Transfers to public institutions fell by some $114 million or 1.1 per cent of GDP in financial year 2019/2020.

The IMF said: “To secure fiscal space for investment in physical and human capital, transfers to SOEs need to continue to decline after the global coronavirus pandemic is over by a combination of phasing out of COVID-19 related additional transfers; much stronger oversight of SOEs, supported by improved reporting; cost reduction, including reduction of the wage bill; revenue enhancement, including an increase in user fees; and mergers and divestment.”

So far, Government has prepared a consolidated report on the performance of SOEs and submitted a first report to Parliament as it seeks to strengthen oversight and tighten reporting requirements. It also completed a review of the tariffs and fees SOEs charge up to September last year.

The Mia Mottley administration has also increased bus fares, adjusted water rates and introduced an interim health levy, airline and travel development fees and a garbage and sewage contribution levy, all as part of the SOE reform process in a bid to wean the agencies providing these services off the Treasury.

In its country report dated June 2020, the IMF said the country’s debt was still projected to decrease and reach the long-term anchor of 60 per cent of GDP by financial year 2033/2034, but the risks have notably increased.

It said: “Considering the exogenous and transitory nature of the COVID-19 shock on Barbados’ growth, debt continues to be assessed as sustainable.

“With the external debt restructuring now completed, debt is projected to decrease on a steep downward trajectory towards 60 per cent debt/GDP by end-financial year 2033/34. However, the interim 80 per cent target is now expected to be reached only in financial year 2029/30, instead of financial year 2027/28.”

The risks to this forecast related to the potentially very severe impact of the coronavirus pandemic, the report added.

To support the adjustment effort over the medium- and long-term, a fiscal rule is expected to be introduced by the middle of next year – the resetting of fiscal rule benchmark from December 2020 to June 2021.

An IMF technical assistance team is expected to advise authorities on the design of a fiscal rule, including coverage and an escape clause to accommodate the impact of natural disasters and other potential shocks.

The fiscal rule will support the planned reduction of the debt to GDP ratio to 60 per cent by the 2033/2034 target.