Protecting Public Sector Investment from worrying fiscal risks Pt 1
A positive outlook for the remainder of 2016 is certainly shared among many local financial experts.
However, most agree that there are a few risks the Government must pay attention to so as to guard against affecting public sector investment and the economy at large.
According to Finance Minister, Winston Jordan, the major risks to the economy are driven by both external and domestic factors and may affect the real, fiscal, external, or monetary sector, or any combination of the four sectors.
Because of Guyana’s status as a small open economy, and the importance of trade to its economy, the Finance Minister said that Guyana is particularly vulnerable to external risks.
He said however that the Government is working to improve its ability to identify these risks, and to implement policies and programmes that reduce or mitigate them.
The economist noted that one domestic risk to the real, external, and fiscal sector is the performance of the rice and sugar industries.
Jordan said that while Government involvement has kept these industries afloat, it has also shielded them from market conditions that would otherwise force the industries to reform or innovate.
The Finance Minister said that the lack of alignment between production costs and prices typically results in the destabilisation of revenues and the eventual need for government support packages.
He said that this is exemplified in the case of GuySuCo, where constant demands for transfers continue to crowd out other priority public sector expenditure. The Finance Minister said that these inefficiencies compromise GuySuCo’s ability to compete globally, while at the same time continuing to face growing competition from alternative sweeteners and sugar substitutes.
The Finance Minister said that the rice and sugar industries make up a consequential portion of GDP, so their performance has important implications for growth.
“They also make up a large share of exports, and reduced export earnings from these industries could negatively affect reserves and the balance of payments. In the short run, GuySuCo, in particular, also poses a large risk to the Government’s fiscal position. If sugar production fails to improve in the second half of 2016, GuySuCo may face financial strain that will lead to requests to the Government for further transfers, on top of the $9 billion it has already received in the first half of the year,” the Finance Minister revealed.
He said that despite the risk posed by the rice and sugar industries, the agricultural sector still holds potential for development, and the Government is working to improve the robustness of the sector by improving the competitiveness of both crops and increasing diversity.
Another category of domestic risks are those affecting the implementation of the Public Sector Investment Programme (PSIP). The Finance Minister said that one such risk is the possibility of rising contractor costs.
The economist explained that as the PSIP becomes larger and more ambitious and complex, the Government’s ability to manage projects and contractors will become more crucial. He said that inefficiency in project management can cause delays, cost overruns, and diminished quality. He noted that poor implementation of the PSIP is a risk not only to Government finances but also to the real sector, as public sector investment projects are an important source of business for the construction industry and other related sectors.
The politician said that accelerating the pace of implementation of the PSIP during the second half of 2016 is a key priority. To address these problems, he made it clear that the Government will work to train and build staff capacity to manage projects, including bidding processes, overseeing contractors and procurement planning.
At both Cabinet and Budget Agency levels, the Finance Minister said that sectoral ownership is being emphasised and has resulted in more intense supervision at the policy and senior technical levels.
Further, the Finance Minister said that Heads of Budget Agencies have been mandated to conduct fortnightly, multi-agency PSIP review meetings that focus on solutions.
He said that increased monitoring and reporting from Ministries, Regions, and semi-autonomous agencies on their rate of implementation is anticipated to improve accountability. Going forward, the Finance Minister said that the recommendations include the meeting of conditions precedent prior to signing of loan documents, and the hiring of project managers prior to the signing of loan agreements as part of the project planning team so that the project design and objectives are fully understood ahead of the project implementation period.
The economist is of the firm conviction that this will ensure that valuable time is not lost and commitment fees not incurred while lead project staff are being hired and becoming familiar with project components.