Budget Address For Fiscal Year 2005/2006

‘Towards Growth and Social Protection’

By

The Honourable Roosevelt Skerrit

Prime Minister and Minister for Finance, Planning

Introduction

Madam Speaker, Cabinet Colleagues, Members of this Honourable House, Fellow Dominicans.

Last year, in this House, in my Budget Address delivered on 29^th June 2004, I pleaded with the Nation to consolidate the gains that our country had made during 2003/04. Contrary to the fiscal and economic outcome of the previous year, our country had witnessed a stabilising of the fiscal situation. The year 2003 had also witnessed a reversal of the declines in economic growth that had been registered in 2001/02, and the fiscal situation had begun to show signs of improvement.

However, Government was aware that these were early days yet, and while there was a basis for satisfaction and relief considering our performance in 2002/03, the gains that we had made could easily be frittered away, if we did not consolidate those gains by continuing to demonstrate prudent and disciplined management of the national economy.

As I will indicate shortly, Government has continued to do what is right by the economy. Fiscal year 2004/05 shows an improved performance over the previous year. We have satisfactorily consolidated our gains, and must continue to move on, placing greater emphasis on the generation of sustained economic growth.

May I say that the most important step that the people of this country have taken to consolidate those gains has been to return this Government to office.

Our people have recognised the tremendous gains our country made under the stewardship of this Government, taking into account the difficult inheritance that had been bestowed on us, and have decided to give us an opportunity to continue the good work. I extend gratitude and congratulations to the people of this country for your vote of confidence. I do so particularly on behalf of the late Hon. Pierre Charles of blessed memory, whose role in taking the courageous decision to embark on our programme of economic stabilisation and adjustment, must never be allowed to be forgotten. 

The challenge during this fiscal year can be summarised as: continuing to improve the macroeconomic environment as a necessary precondition to increased economic growth, and otherwise facilitating private investment. We will achieve this objective by:

• Building on the gains we have made through continuing fiscal adjustment and prudent management;
• Providing space for the private sector to grow, by various means, including reducing the size of Government;
• Reforming the tax system;
• Improving the climate for the generation of additional private investment;
• Proactive engagement by Government in providing the necessary infrastructural investment in support of economic growth; and
• Ensuring that appropriate and adequate actions are taken towards social protection and poverty reduction.

I will elaborate on these strategies in the course of this Budget Address.

Recent Economic Performance

For the second year running, I am proud to report to this House that past sacrifices have not been in vain. Indeed I am in a position to report an improved economic performance over last year. During last year’s Budget Address I reported that our country had turned the corner. I said further, “As we predicted, confidence in our country had returned. Dominica had acquired the image of one willing to help itself. Donors have been sympathetic to our cause. The economic situation had begun to improve.”

Our country registered growth of 3.57% in 2004 as compared with a growth performance of 0.1% the previous year. The growth in 2004 was broad-based, with tourism and transportation being the larger contributors to this overall performance.  Agriculture, communications, construction and services sector were also important contributors. 

Indications for the first half of this calendar year remain encouraging – our country is on track to sustain the growth performance of 2004 into 2005 – indeed subject to weather patterns and other external factors, Dominica is on track to exceed last year’s growth performance.

The public finances have continued the upward trend that I reported in last year’s Budget Address.  Revenues increased from $234.9 million in 2003/04 to an estimated $242.9 million in 2004/05. As shown in Chart 1, our revenue lines reflect a continuous upward movement, while recurrent expenditure reflects an initial tendency to increase, but with a subsequent decline since 2003/04, reflective of our improving fiscal performance. Both the sales tax and taxes on international trade show continuous upward movement since 2002/03, an especially encouraging development given that these two are useful proxies for the level of economic activity in our country.

In sum, the current account balance has improved steadily from negative $39.4 million in 2001/02 to a surplus of $30.8 million in 2004/05.

As regards capital expenditure, $62.2 million was spent on implementing the public sector investment programme, as compared with a budgeted $88.7 million. This shortfall in capital spending was due mainly to issues of capacity in the ministries concerned, and also the rate of disbursement of donor funds to support major capital projects, notably the Dominica Social Investment Fund. The satisfactory growth performance recorded to date would have been even higher if these limitations had not inhibited the rate of implementation of the capital programme.

Regarding the issue of capacity, and based on the outcome of the recent Donors Meeting on Dominica, Government will be following up with formal approaches to agencies and friendly Caribbean countries for technical support with a view to more efficient implementation of the public sector investment programme.

Chart 1

As I indicated last year, the ‘primary balance’ is the critical fiscal indicator under the ongoing arrangement with the International Monetary Fund. (It is defined as total revenues minus total expenditures net of interest payments). Government is in a position to report successful attainment of the 3% (of GDP) primary surplus target in fiscal 2004/05. This compares with a primary deficit of 1.6% of GDP in 2002/03 and a primary surplus of close to 1.7% in 2003/04. In fact the primary surplus in 2004/05 was close to 4%.

This improvement in our fiscal position is a significant achievement. It represents the outcome of a process of disciplined economic management, characterized by prudence and fiscal responsibility, and careful attention to the public debt. It should not have escaped the attention of members of this House and the public at large, that the improvement in the country’s growth performance has more or less coincided with the improvement in the country’s public finances. We had promised the country that the stabilisation programme was intended to put our fiscal situation in order, as a basis for achieving economic growth.  I am pleased to report that the programme has been vindicated. What is left for us to do is continue the fiscal vigilance, even as we press on with programmes and policies that will sustain the growth. 

Macro-economic Framework

So that this Budget reflects continuation of the fiscal imperative that good economic management requires.

The major planks of the fiscal framework going forward continue to be the public debt, the wage bill and the critical fiscal target, the primary surplus.   Consistent with this macro-economic framework, the public investment programme for 2005/06 will be kept at an upper limit of 10.5% of GDP, and the share of the Public Sector Investment Programme (PSIP) to be financed through borrowing to a limit of 14.5% of the capital programme for the fiscal year. These are the prudential parameters that frame this year’s Budget.  Observance of these parameters will see our country safely through the next year, in terms of fiscal performance, economic growth and debt restraint.

Government is committed to maintaining a responsible fiscal stance into the medium term. The policy is to target a minimum primary surplus of 3% of GDP and to continue on the path of debt and fiscal sustainability. In so doing we will be creating the conditions for sustaining the growth performance at a minimum of 3% into the medium term.

The Primary Surplus

As I indicated earlier, the centerpiece of our macro-economic framework into the medium term is the ‘primary surplus’ target, which we have set at 3% of GDP over the medium term. This target is the minimum that is required to attain eventual debt sustainability. Notwithstanding, the country still has a very high level of debt, and debt servicing continues to be burdensome in terms of the country’s revenue generation capacity. Government must therefore continue to limit its debt, and make adequate provision for debt servicing and arrears reduction.

Size of Government

We have heeded the warnings of expert observers that the wage bill continues to be a source of concern in our forward movement. At $106.5 million or 13.7% of GDP, Dominica’s wage bill is very high by any standards, and Government will continue to work to reduce it further as a percentage of GDP.

The intention is to make the public service more efficient, and less involved in the provision of services that the private sector can provide. The objective is for our country, over time, to have a relatively smaller, more efficient and better paid public service, as well as an expanding private sector.

Reduction in the size of Government will be achieved through streamlining of Government offices and outsourcing of Government services. The actions that will be taken in the course of fiscal 2005/06 with a view to these objectives will consist of the following:

• Outsourcing the provision of security services of certain Government Buildings -- this will affect 52 employees from 1^st January 2006;

• Phased outsourcing of the provision of janitorial services within the Roseau area. These services are generally provided on a part-time basis. This will affect 37 such employees from 1^st January 2006, 21 more from 1^st March 2006, and 18 more from 1st June 2006;

• Reducing the size of the Electrical Division as a consequence of the impending establishment of the Independent Regulatory Commission in January 2006; and

• Merging the Management of the airports with the Port, thus making for a Dominica Air and Sea Ports Authority, with effect from 1^st January 2006.

In the pursuit of these actions, Government has already begun to ensure the fullest possible sensitisation of those persons to be affected, as well as the provision of technical support to the process, with a view to a smooth transition to the new arrangements. This will, of necessity, include dialogue with the relevant unions. Preliminary discussions with groups of workers to be affected by this decision, suggest that they are not averse to the proposals for outsourcing, and Government is gratified by the generally positive response that they have provided.

Government is optimistic that those services to be outsourced will be provided by new companies that are started by the affected employees, or by companies from which Government will seek undertakings to employ the affected workers.  Government will lend every possible support to the affected employees in the establishment of private companies, or in such other ways as may be appropriate.  Government will assist in the following areas: training, preparation of business plans, book-keeping and business counselling. Our objective is that no deserving worker will remain unemployed as a consequence of outsourcing.  

In addition, to the foregoing specific measures, Government will keep under review the scope for streamlining, commercialising or privatising other services.

Finally, the ongoing work coordinated by the Establishment, Personnel and Training Division on public sector reform will continue, with a view to streamlining the structure and functioning of Government ministries and departments.

Redundancy costs arising from the decision to outsource services previously provided by Government will be met through budgetary support resources to be provided under the E.U.’s Framework for Mutual Obligations (FMO).  This FMO could be signed as early as the end of this month, with the funds becoming available by this September.

Public Debt

Government’s prudent management of the public debt has contributed in no small measure to the manifest improvement in the country’s growth performance. We reported to the Nation in June 2003 that after accounting for debt servicing and personal emoluments, (including retirement benefits), there was only eight cents left in the dollar to pay for goods and services and contribute to the counterpart financing necessary to implement the public investment programme.  Last June, I reported that Government’s fiscal measures would increase this figure to 15 cents in the dollar. The budget for 2005/2006 will further improve this figure to 29 cents in the dollar, yet another index of the improved fiscal and economic health of our blessed land.

These improvements are possible because we have both reduced the Government’s wage bill and reduced the debt burden. It bears repeating that this Government has been careful in incurring debt and such debt as it has incurred since 2000, has been on terms that are concessional and consistent with agreed fiscal parameters. It must be stated that some increase in debt was inevitable, given the parlous state of Government finances following the earlier period of imprudent management. We have been very open about the debt that has been incurred since February 2000 when we took office. The total new external debt contracted was $278.1 million. It may be worth noting that this total amount has not yet been fully disbursed. As is evident in the Appendix, most of these debts were incurred on concessional terms, and most of them were necessarily incurred in support of the programme of economic stabilisation and adjustment. It is therefore these very debts that have contributed to rescuing the economy of Dominica from the economic crisis that was the inheritance of this Government.

Total Central Government debt now stands at $632.6, $438.9 million (or 69.4%) of this external, and $193.6 million (or 30.4%) domestic. The ratio of debt to GDP (excluding guarantees in favour of statutory corporations) stands at 81.1%, which is still high by accepted standards. However thanks to the Government’s debt restructuring programme, the ratio of debt service to recurrent revenue has been reduced from 22.1% at the end of June 2003 to 15.4% at end June 2005.

Improvement in the Government's fiscal and debt position is also reflected in the state of arrears, as recorded in unpaid cheques. These declined from $58.4 million to $34.4 million or by 58.9% over the past two years. Unpaid cheques to Dominica Social Security have declined from $35.8 million in June 2003 to $28.3 million in June 2005. This amount will be further reduced to about $10.0 million on finalisation of the debt restructuring with DSS. Another indicator of our improved financial condition is the Government’s overdraft balance.   As at June 2005 the balance on the overdraft had been reduced to zero ($0), compared with a balance of $59.9 million in June 2003.

Before leaving this subject, I wish to thank all those creditors who have participated in Dominica’s debt restructuring programme. They have been true partners in development. To those creditors that are still holding out, you have the assurance of Government’s continued willingness to engage you. We continue to service your debt by making payments into an escrow account at the Eastern Caribbean Central Bank, pending completion of our negotiations. 

Budget 2005/06

Enough for the time being about the results of the stewardship of this Government over the past five years. Suffice it to say that the record is clear; and that all the indicators are pointing in the right direction.