December 14, 2012
Hon Mark Simmonds, MP
Minister for the Overseas Territories
Re: Framework to replace 2003 Borrowing Guidelines
Dear Minister Simmonds,
I was grateful for the opportunity to discuss the above captioned subject at the UK – OTs Joint Ministerial Council Meetings in London last week (week of December 3, 2012). As I indicated to you the AUM Administration which I lead as Chief Minister in principle has no difficulty with the desire of the UKG to see the OTs like Anguilla move towards a higher level of governance in terms of public expenditure and financial management. Indeed I indicated as much to your predecessor Minister Bellingham in correspondence dated January 19, 2011.
To quote from that correspondence (which I am also attaching in its entirety for your convenience):
“The current global economic and financial crisis, which has been termed the Great Recession places new demands on the relationship between the United Kingdom and Anguilla and indeed on the relationship between UK and all its Overseas Territories (OTs). In this context the most significant development in our engagement to date has been the indication as communicated in your letter of November 4, 2010, that the UKG is prepared to enter into discussions with the GoA concerning a framework to replace the existing Borrowing Guidelines which are the framework of fiscal rules for Anguilla and the other Overseas Territories (p. 2).
I also went on to state that:
It is my belief that if Anguilla (and all our fellow Overseas Territories) is to aspire to the highest degree of autonomy, then the new rules of engagement must be more than fiscal rules but should represent a General Framework for Fiscal Sustainability and Economic Development. Fiscal targets which are not rooted in an economic context have no basis. For Anguilla and the other OTs, as small open economies especially vulnerable to economic and natural hazards (shocks), overcoming such vulnerability must inform short, medium term and long-term development objectives.
When Anguilla agreesto terms with the UK on the proposed new Framework and enacts the relevant provisions into public finance law, it will be the first Eastern Caribbean Central Bank (ECCB) member country to put in place Legislated Fiscal Rules.
GoA technical officers have engaged in much analysis and discussion of the Framework for Fiscal Responsibility (FFR) proposed by the UKG in November 2010. They have also sought feedback from regional and extra-regional stakeholders such as the ECCB, CDB and IMF. The common view is that while a framework to replace the 2003 Guidelines is desirable how it is designed is of great importance and given Anguilla’s context it must avoid an “anti-development bias” (refers CDB’s view of the FFR attached).Another common view is that the new framework ought to be anchored by more conventional solvency and adjustment ratios” (refers IMF Article IV Mission Summary Report and ECCB Debt and Sustainability paper attached).
GoA technical officers as authorized by Executive Council have been engaging with UKG technical officers on the debt solvency, debt adjustment, debt service as well as liquidity ratios. The GoA now offers the following position for the UKG’s consideration, subject to certain caveats which will be outlined later:
Solvency Ratios
• These indicators include ratios such as debt to recurrent revenue and debt to GDP. They place an upper limit on gross or net public debt in an attempt to respond to, or prevent, a debt sustainability problem. Under the Borrowing Guidelines regime which has been in place since 2003 theGoA was subject to a debt to recurrent revenue rule. However, in keeping with international best practice as recommended by the IMF, for example, the GoA proposes to switch to debt to GDP rule,which will allow more coherence with its reality as a member of the ECCB. GoA also proposes to track the debt to GDP in its equivalent for recurrent revenue.
• The GoA proposes to adhere to “crisis” and “maximum” debt sustainability ratios. For the period to the end of 2016 the GoA will adhere to a crisis debt limit of 20% of GDP (and the equivalent of recurrent revenue) – where debt is taken to be net debt (total outstanding value of public borrowing less liquid assets). Outside of these parameters the GoA will target primary balances which will reduce the debt to the required level. Towards the end of 2016 the GoA and UKG agree to revisit the crisis debt limit. At that time a determination would be made as to whether the fiscal and economic situation of Anguilla has improved such that it can operate under a max debt limit, such limit to be negotiated between the GoA and UKG but which GoA proposes that 40% net debt to GDP (and the equivalent of recurrent revenue) is reasonable.
• To illustrate how the above translates into actual numbers please note the following. Historically, Anguilla has registered low net debt to GDP. In recent times Net Debt to GDP has risen from 9.02% in 2007 (pre-crisis) to a peak of 29.64% in 2010 and is projected to fall to 14.82% by 2016. This scenario assumes no new borrowing for “Central Government” (except on a case by case basis) over the period 2013 – 2016 and average GDP growth of 4.22% per annum over this same period.
Adjustment Mechanism – Primary Balance Targeting
• A commonly used indicator by countries (and in the IMF’s Debt Sustainability Framework) to target fiscal and debt sustainability is the “debt stabilizing primary balance”. The debt stabilizing primary balance method views fiscal policy as sustainable if it delivers a ratio of public debt to GDP that is stable, and then calculates the related primary budget balances. If the actual primary balance is less than the debt stabilizing balance, current fiscal policy implies an increasing ratio of public debt to GDP and is therefore viewed to be unsustainable.
• For Anguilla since public debt, as measured by net to GDP, is currently above the proposed crisis debt limit (20%) the challenge is to target “debt reducing primary balances”during the period to 2016. As indicated above, Anguilla’s net debt to GDP increased significantly from 9.07% in 2007 to a peak of 29.64% in 2010 as policy-makers sought to adjust to the shocks of the global financial and economic crisis. Since then policy-makers have been targeting debt reducing primary balances. This has resulted in net debt to GDP reducing to 27.46% in 2011, and is expected to further fall to 26.93% in 2012 and to 14.82% by 2016. It should be noted that as a member of the ECCBAnguilla is required to publish annual primary balance targets.
Liquidity Ratio
• Liquidity ratios take into account the cost and structure of the debt. They also highlight the potential rollover/refinancing risks that may be inherent in the public debt portfolio. The primary indicator is the debt service ratio which measures a government’s ability to service debt. The GoA proposes to adopt a maximum debt service to recurrent revenue ratio of 15%, consistent with the target set by the ECCB, of which it is a member. This would represent an increase from 8% which was the max limit set under the Borrowing Guidelines regime.
• Historically, Anguilla’s debt service ratio has been sustainable. However, the refinancing of loans (EC $120 million) with the indigenous commercial banks in 2008 and 2009 (at their behest) and to inject some liquidity into the economy put some pressure on this ratio. However, the GoA was successful in substituting short term debt instruments with a Policy Based Loan (PBL) from the CDB in 2010 which has enabled debt service to return to more manageable levels. In terms of the numbers, the debt service to recurrent revenue ratio increased from 4.77% in 2007 (pre-crisis) to 8.13% in 2009 (representing a breach of the limit) to 42.17% in 2010 and declined to 5.06% in 2011 as a result of GoA’s debt restructuring initiative.
Liquid Assets (Fiscal Reserves)
• Under the Borrowing Guidelines regime the GoA was required to have fiscal reserves equivalent to 90 days of recurrent expenditure in place by the end of 2008. Starting from 2003 the GoA was able to build fiscal reserves to a high of 86 days of recurrent expenditure in 2007. However, fiscal pressures starting in 2008 with the global financial and economic recession occasioned the GoA to tap the reserves so that by the end of 2009 only 4 days of reserves remained. In 2009 alone the GoA utilized close to EC$40 million in reserves to help finance the large recurrent deficit in that year. However since then starting in 2011 the GoA has been able to re-start the process of building back up its liquid assets putting some EC$14.5 million into reserves in that year. A further EC$11.6 million were added to reserves in 2012. They now stand at EC$29.24 million. The GoA proposes to attain the minimum fiscal reserves level target of 90days of recurrent expenditure by the end of 2016.
Capital Development Fund
• The GoA proposes to establish a Capital Development Fund to fund projects for which it would be difficult to justify borrowing. The Fund is no doubt a beneficial one and there are clearly benefits to accumulating and dedicating pockets of expenditure separate from operational funding to securing priority areas of development progress – e.g. social development projects. The mechanics of establishing the Capital Development Fund which essentially represent Capital Reserves are to be agreed. Funds that would finance and replenish the Capital Development Fund are the same funds that must secure a balanced budget and are indeed the same funds that must finance the prescribed levels of reserves.Should the focus be on at first building up Fiscal Reserves and then switch to building up both Fiscal and Capital Reserves? Or should some other approach be used?
If GoA is compliant with Net Debt to GDP, Debt Service and Fiscal Reserves ratios the condition of “automatic borrowing” will apply. If GoA is in breach of one or more of the prudential ratios “case by case borrowing” will take effect.
With the net debt and fiscal reserves ratios not expected to come within target levels until 2016, it effectively means that GoA would be committing not to undertake any significant borrowing during the period to 2016.And with no capital reserves at its disposal, how then can the GoA maintain the integrity of its social and economic infrastructure? It could only conceivably do so by having access to capital grants and the ability to engage in public- private partnerships.
UKG Capital Grant Access
The UKG in March 2005 ceased to provide grant assistance to GoA through DfID. It is my understanding that the argument used was that Anguilla had graduated out of such assistance on the basis of the criterion used by OECD countries to measure development – namely GDP per capita. Given that Anguilla’s GDP (and consequently GDP per capita) has declined for 5 consecutive years (2008 – 2012) Anguilla would once more be eligible to receive official development assistance (ODA). This is confirmed by Anguilla’s placement on the OECD DAC’s list of countries eligible for ODA.
How can the UKG help? Given these recent changes in the Anguillian economy it is most important for Anguilla to understand the criteria for receiving DfID assistance similar to the assistance received prior to 2005. In other words, how can Anguilla access DfID funding going forward? St Helena receives grant funding for an airport and the reasons cited for the support include, economic and social decline and declining GDP per capita. These conditions also exist in Anguilla following the crisis which has unfolded since 2008.
The issue of macroeconomic stability and the impact of the crisis cannot be considered in isolation. It must also be balanced by issues of social reporting. The findings of the Country Poverty Assessment are available albeit from assessments undertaken in 2008 at the advent of the impacts of the economic and financial crisis. Nevertheless, it speaks to the most vulnerable (17.7%), those most at risk of falling into poverty should any adverse economic shock or natural disasters occur. While recent impacts can be seen in the numbers of those accessing and the levels of expenditure on our limited package of social safety nets (public assistance, medical exemptions, food vouchers and water assistance) most telling perhaps in recent times are the numbers of disconnections from the electrical power company whichillustrates both foreclosures and those living without access to the most basic of needs.
Assuming that UKG capital grant assistance can again be accessed GoA is seeking a minimum of EC$140 million from the UKG in capital grant assistance over the period 2013 – 2015, focusing on the following areas: Ferry Port Development – Blowing Point Ferry Expansion (EC$60 million), Road Development (EC$40 million) and Social Development Infrastructure (EC$40 million). Both the FCO Economic Report for Anguilla 2011 and the IMF Article IV 2011 Reportpoint to the need to improve access to Anguilla as a matter of urgencyto regenerate economic activity. Improving the facilities at Blowing Point, which is the main port of entry for tourist arrival, is therefore essential. Similarly, the recent Value for Money study for roads highlighted the need for major investment to arrest the state of disrepair of the road network in The Valley. Of equal importance is the need for major investment in Social Development infrastructure, including schools, the hospital and community recreational centres.
Non UKG Capital Grant Access
It has often been stated that the GoA is not been eligible for capital grants from “third party” countries except in the case of certain “regional projects”. This issue was raised with Permanent UnderSecretary of State at the FCOin November 2011 and a response (attached) was received from the Governor’s Officer in September 2012 which suggests that it is indeed possible for Anguilla as an OT to access bilateral funds from countries other than the UK.
Public Private Partnerships (PPP)
GoAis also inclined to support capital investment through the use of Public Private Partnership arrangements.A regional project is currently underway within the OECS, funded by the EIB, with the aim of enhancing public officials’ capacity to design and implement PPP projects in infrastructure, both at regional and country level.The Commonwealth is also undertaking a similar initiative. The framework to replace the 2003 borrowing guidelines will allow for the possibility of PPPs, something that wasn’t previously accepted.
Minister Simmonds, I trust that this correspondence has brought to the forefront the main issues for Anguilla as it regards the FFR and the economic and social development for the period 2013-2016 and beyond. I look forward to a favourable response.
I would like to take this opportunity to wish you season’s greetings and best wishes for a prosperous 2013.
Sincerely,
Hubert B. Hughes
copied: Minister of State DfID; UK Treasury Minister; Permanent Under Secretary of State – FCO; Director- Overseas Territories Directorate; Governor of ECCB, OECS Director General, President of CDB; EU Ambassador to Barbados and OECS; UNDP Resident Rep for Barbados and OECS; IMF Chief of Division for Caribbean Region; GoA Ministers; Governor; Deputy Governor
