DFID’s NEW APRROACH TO ECONOMIC GROWTH AND DEVELOPMENT ON MONTSERRAT BORDERS CLOSELY ON STRUCTURAL ADJUSTMENT
By Peter Queeley
I listened keenly to a recent press conference held on Monday January 18, 2016, by Her Excellency the Governor and Elizabeth Carriere and the British Department For International Development (DFID) local representative on Montserrat, Mr Martin Dawson.
A number of interesting points where made at the interview, especially those relating to public service restructuring and reform from a customer service standpoint. However, when one examines the new approach to fiscal administration and economic management as proposed by Her Excellency the Governor and DFID in particular, it is easy to conclude that the new partnership arrangement announced jointly by Her Excellency the Governor and Premier Donaldson Romeo actually has the semblance of an economic STRUCTURAL ADJUSTMENT PROGRAMME.
Moreover, if one considers certain statements made by the local DFID representative Mr Martin Dawson in respect of the approach to budgeting, it’s very clear that the economic prescription that is being proposed by DFID is inappropriate given (1) Montserrat’s current economic and financial circumstances and (2) The economic and financial system within which Montserrat exist and operates.
I thought that the Honourable Premier and Minister of Finance and Economic Management, Donaldson Romeo supported by his advisors, would have responded to the remarks made by Her Excellency the Governor and (DFID) local representative by advising as to their position on the said matters. To my surprise, and perhaps true to form, the Honourable Premier responded on Thursday January 20, 2016, by outlining a small number of construction related projects on the horizon.
Therefore, I have tasked myself with the responsibility of providing a response to Her Excellency The Governor and DFID on behalf of the business and financial community, the public servants and the poor and down trodden people of Montserrat. These are the various interest groups that stand to be affected greatly by what can be considered as an inappropriate approach towards economic and financial management in Montserrat by the said parties.
In part one (1) of my response, I will examine closely the approach by Her Excellency The Governor and DFID’s towards fiscal administration and economic management on Montserrat and its possible implications.
In part two (2) of my response, I will address the Honourable Premier and Minister of Finance and Economic Management regarding his approach, or lack thereof, to fiscal administration and economic management on Montserrat.
DFID’s Budgeting Approach In The Context of Montserrat Economic & Financial System
Now in terms of implementing macroeconomic policy, governments generally have at their disposal Fiscal and/or Monetary Policy. Monetary policy involves the use of monetary tools and instruments such as exchange rate manipulation, interest rates adjustments, reserve requirements and central bank buying and selling of financial instruments (open market operations) to either positively or negatively affect macroeconomic variables such as the money supply, consumer spending, domestic credit creation and hence economic activity.
Montserrat is a small open economy operating under a monetary union, fixed exchange regime. Under such economic systems, Governments have little or no options to influence economic activity via Monetary Policy. As such fiscal policy is the only option the said Governments have at their disposal.
Therefore, let us examine the below statement by the local DFID representative, Mr Martin Dawson from a Montserrat macroeconomic policy standpoint:
“Prioritizing budgets has emerged as a critical element for the future where the government must now look at what can be cut to balance the requirements for any new expenditure”
Put simply, Mr Dawson is suggesting that in the absence of locally generated revenues, increases in expenditure in one Ministry will only be possible by a cut in expenditure in some other Ministry, or increases in expenditure in any area will only be accommodated by a reduction in expenditure in some other area. Therefore, the overall budgeted figure in terms of expenditure would not change, given that DFID for the most part controls the input side via Aid Funds.
In economics and finance that is defined as Zero Sum Budgeting. For those who are closely following the US Presidential elections it’s very close to the proposals made by Republican candidate Carly Fiorina for balancing the US federal budget.
DFID’s proposals suggests a constant stance to fiscal policy, which will most likely turn into a contractionary fiscal policy position in the event of inflation or a decline in local revenues. That approach to economic management, in the context of small open economies operating under a monetary union, fixed exchange rate regime is highly flawed. Not only is it flawed, but it’s contradictory to the announce partnership for sustainable economic growth and development.
Not that I am advocating big government or wasteful spending, but in the context of the economic system within which Montserrat operates, fiscal policy is major economic driver. Therefore, a contractionary fiscal policy position, will definitely lead to a contracting economy.
The conduct of economic policy in the context of monetary union is a very complex area of economic thought and understanding. Many of us like to knock the independent Eastern Caribbean Countries for having large debt levels etc. However, in doing so, one must also take into considerations, the options these Governments have to affect economic activity. Moreover, it’s very easy for things to go wrong when governments borrow to finance budgets, hence the reason why economist and financial analyst recommend developing small open economies to pursue a policy of balance recurrent budgets and foreign direct investment initiatives to drive capital programmes.
DFID’s Budgeting Approach to Montserrat’s Current Economic Situation and Circumstances
I have noted with a great deal of concern that DFID seems to have a habit of taking certain policy stance in respect of Montserrat that is inconsistent with the current situation and economic circumstances.
Now let us take a look at the ECCB’s assessment of the economy and economic prospects for Montserrat. The ECCB in its September 2015 Quarterly Economic and Financial Review, states as follows:
1. “Economic activity in Montserrat is provisionally estimated to have contracted in the first nine months of 2015 compared with the corresponding period in 2014. The main sector contributing to the deteriorating performance was public administration, defence and compulsory social security.”
2. ‘The economy of Montserrat faces an uncertain outlook for growth in the last quarter of 2015, as the performance of key drivers of economic activity is expected to continue on a downward trend. Preliminary economic indicators in the sectors of public administration, defence and compulsory social security; construction; transport, storage and communications reflect continued slowdowns. Hence the likelihood of growth for the last quarter of 2015 remains uncertain.”
In light of the above, if DFID is going to pursue a constant or contractionary fiscal policy stance in a contracting economy where nearly every major sector including the largest sector public administration is forecast to decline, what will be the economic consequences? Based on the ECCB’s assessment, Montserrat appears to be heading into a recession. When one couples that with constant or contractionary fiscal policy there exist the potential for the economy to enter what is defined in economics as a depression.
Prudent Financial Management of Government Resources
Now, let us turn to examine Mr Dawson’s statement from the standpoint of prudent financial management of government resources.
Mr Dawson has a strong case as it relates to his point about prioritization, given what has transpired over the last financial year. For example, when one looks at the following examples of GOM spending and intended spending’s, it is clear why Her Excellency The Governor and DFID decided to fly another consultant all the way from St Helena to interview for the post of Financial Secretary:
1. The excess spending on the new festival village in December 2014.
2. Lack of proper negotiations resulted in what can be described as excessive spending of $12,000 per month rent for the ferry terminal in Antigua plus renovations and more renovations.
3. The ill-timed rolled out of the ICT project at a time when the economy was showing a decline. Surely those monies could have been employed in more productive and important areas. On close examination only about three of the projects would lead to greater efficiency in Government, hence a possible reduction in expenditure. Yet DITES for example that reflected budget expense of $769,000 for professional Services and Fees in 2015/2016, and, who had some oversight over the rollout of ICT projects did not see it fit to insist that some of the ICT projects take over functions that were outsourced overseas, thereby resulting in the circulation of money in the local economy.
4. The excessive traveling by the Premier and some other Ministers of Government.
5. Finally, the intended purchase land in the unsafe zone for approximately EC$15 per sq.ft.
However, though DFID and Her Excellency The Governor may take some credit for their stated objective of financial prioritization of scare Government resources, their words contradict their actions.
In the 2015/2016 Government Fiscal Budget extra monies were placed under Human Resources Section of the Office of the Deputy Governor as professional services and fees (payment to consultants). In fact, the budgeted figure rose from $500,000 in 2014/2015 to 3,710,000 in 2015/2016. Base on the statements made by Her Excellency the Governor this figure is likely to rise in the 2016/2017 Fiscal Budget.
My question therefore to Mr Martin Dawson and DFID, whose priority it is with respect to the excess spending on consultants? Why is DFID giving Montserrat aid money on one hand and at the same time dictating that Montserrat prioritizes spending the said money on your consultant friends?
We pray that the Honourable Premier and Minister of Finance & Economic Management have the testicular fortitude to negotiate better in terms budgetary allocations in 2016/2017. However, the evidence thus far, regarding his so call better negotiation skills, leaves much to be undesired.
The IMF/ World Bank require countries seeking its financial assistance to under what is terms structural adjustment. Structural Adjustment involves budget deficit reduction through higher taxes and lower government spending, also known as austerity. It also involves cutting wages through government layoffs, public service restructuring and reforms, rationalizing and cutting subsidies in social areas such as health and education.
Countries wishing to access IMF/ World Bank loan funding assistance, most times must agree to undergo a certain level of management to ensure the required reforms are implemented, so that the loans extended can be repaid.
Therefore, when one takes into consideration the pronouncement by Her Excellency The Governor, that the funds are ready and available to be channeled into Montserrat for the various projects, but, such funds would not be forth coming unless certain reforms are undertaken, it suggestive of an IMF World Bank approach to structural economic adjustment. The only difference is that instead of loan funds, Montserrat is receiving aid funds.
Further, when on takes into consideration the statement by Her Excellency the Governor that the GOM employs almost 1000 workers which is approximately half the workforce of Montserrat and the need for public sector reforms. This is again suggestive of staff reductions which are another structural adjustment measure.
Additionally, when one takes into consideration, Martin Dawson statement quoted above, which in effect speaks to reduce government spending. This is also suggestive of structural adjustment.
Moreover, and perhaps most importantly, Martin Dawson statement regarding the impending arrival of a private sector development advisor puts the icing on the cake. Any experienced and trained economist can see clearly that DFID is about to embark on a subtle process of retraining and retooling public servants to funnel them out towards what they hope will be an absorbing private sector. This is all part of what is called Social Safety Nets measures which are aimed at cushioning the effect of austerity measures.
In my humble opinion, with respect to Montserrat, DFID seems to have developed a culture of high ranking non-performance and failure. Their reputation in terms of development finance assistance to Montserrat is worse than the reputation of the Chinese in the other OECS countries.
At least with the Chinese, the other OECS Countries receive low cost funding, no structural adjustment terms and conditions, few jobs and the capital projects gets completed generally on a timely basis. The downside is that some of development funds get funneled back in Chinese labour cost and loan payments.
In terms of Montserrat, DFID has now tied structural adjustment measures to its aid funds. Instead of jobs, Montserratians face the possibility of been placed on the breadline. Further, the capital projects seem to never get started. Worst, most of the aid funds get funneled back out via high cost consultants.