DRAFT October 13, 1996
Fiscal policy consists principally of revenue policy, expenditure management, and policies for managing the deficit and the accumulated public sector debt. These are all-encompassing topics that influence all sectors of the economy and touch upon the lives of all citizens. In the present context of economic transformation in Guyana, fiscal policy cannot be stated independently of yet another broad topic: the reform of the public sector. Therefore, this Chapter deals with all four of these topics and for each of them synthesises the main orientations of this National Development Strategy.
Fiscal policy involves topics such as the level and structure of taxes -who pays and by how much- and it requires decisions on priorities on public expenditures, such as basic social services and infrastructure. Defining fiscal policy requires a vision of how the Government, working within its resource limitations, can best promote attainment of the nation's most fundamental aspirations and goals. Indeed, it requires a clear definition of the role of Government in the economy and society, not only with respect to taxing and spending, but also with respect to regulating economic activity and owning productive assets. And to carry out its role adequately, Government must deal with a large number of demanding issues of management.
These various aspects of fiscal policy are addressed in the course of this Chapter. The exposition begins with the evolution of the fiscal deficit which, although it is the net result of other kinds of policy decisions, is the factor that most heavily impinges on the inflation rate and therefore often is of the most immediate concern.
The fiscal deficit in Guyana has the following three expressions: (a) the deficit of the Central Government, (b) the deficit of the non-financial public sector and (c) the deficit of the public sector as a whole, including Central Government, the non-financial public corporations and the Bank of Guyana.
Throughout the 1980s, the public sector deficit (including that of the Bank of Guyana) was increasingly high, reaching 37.4 percent of GDP in 1989 while the Central Government deficit reached 41.4 percent. Due to the sharp decline in the availability of external financing, the large financing requirement between 1982-85 had to be met increasingly by the domestic monetary system. The share of domestic borrowing as a percentage of total net borrowing requirements increased from 39 percent in 1981 to 87 percent in 1984. After 1985, however, as the deficit fell somewhat, external financing started gaining importance, increasing from 51 percent of net borrowing requirements in 1985 to 82 percent in 1989. This jump was due to the increased disbursements for projects and grants in support of the Economic Recovery Programme (ERP). In 1989, the overall public sector deficit was G$3,885.4 million, with the Central Government deficit at G$4,353.0 million and the rest of the public sector (including the Bank of Guyana) recording a surplus of G$467.6 million.
Central Government tax revenues accounted for about 85 percent of total revenues in 1989 (17.6 percent of GDP). Notwithstanding the efforts to strengthen tax administration and collection --which raised taxes relative to GDP from 25 percent in 1978 to 39 percent in 1986-- the tax base shrank progressively during the 1980s because of both the contraction of real economic activity and the diversion of an increasing share of transactions into the parallel market. Consequently, the taxation structure became more regressive as indirect taxes increased their share in total tax revenues. In 1989, indirect taxation reached 60 percent of total revenue. The structure of taxes was also characterised by an increasing and excessive reliance on consumption taxes as a major revenue source (especially the specific taxes levied exclusively on alcoholic beverages). Income taxes became less important in the 1980s as the country's economic activity decreased sharply and foreign trade taxes remained about the same.
Central Government expenditures on goods and services decreased from 33 percent in 1985 to 22 percent in 1989 because of a substantial fall in government employment over 1987-89 which more than offset the nominal wage increases granted following the devaluations in 1987 and 1989. As a percentage of total expenditure, consumption of goods and services reached only 40 percent, as the interest payments on the large public debt continued to absorb a substantial proportion of revenues.
The decade of the 1990s began with a fiscal deficit of 32.1 percent (current account balance in 1990), and an overall balance of 45.1 percent, when the capital account is included. However, steady progress in reducing the deficit was made and by 1995 the overall deficit of the Central Government had shrunk to 7.9 percent of GDP. In 1996 it is expected to fall further to about 6.1 percent of GDP (when the latter is measured at current market prices).
The other major branch of the public sector, in fiscal terms, is the public enterprises, which are dominated by the companies producing sugar, bauxite and electricity. Those three sectors accounted for almost 59 percent of total operating revenues of such enterprises in 1989. Except for the electricity corporation, these enterprises are export-oriented and benefitted substantially from the real depreciation in the Guyana dollar in the late 1980s and early 1990s. In spite of a primary operating balance that has been positive, their overall deficit was 6.3 percent of GDP or G$472.8 million in 1989 with GEC recording a deficit of about 7 percent of GDP that was counterbalanced by GUYSUCO's surplus of about 2.6 percent of GDP while the others recorded an overall deficit of about 1.9 percent of GDP.
Since that time, the consolidated overall deficit of the public corporations has been reduced and the net transfers or recurrent account from the Central Government have been eliminated. That net outcome is the balance of surpluses and deficits in different corporations, with GEC accounting for the bulk of the deficits, but by the end of 1995 even GEC's primary operating balance had almost climbed out of the red.
The fiscal picture of the public corporations has been considerably different, however, when account is taken of potential revenues foregone. They received many exemptions from payments of taxes on inputs, and in the case of GUYSUCO approximately 90 percent of the subsidy implicit in the concessional marketing arrangements is absorbed by the corporation rather than being passed on to the Central Government. In many cases, and argument can be made that full payment of taxes, including income taxes on a respectable rate of profit, would have yielded a greater surplus for the Government.
The main public sector reforms undertaken in the context of the structural adjustment programme and subsequent policies are the restructuring of the central administration (to streamline and simplify government activities and procedures), the divestment of public enterprises, and strengthening the managerial, technical and financial capacities of these enterprises. These measures were accompanied by a series of fiscal reforms aimed at promoting sustained economic growth by increasing domestic savings and channeling investment to upgrade infrastructure, slow inflation and ameliorate balance of payments pressures in the economy. Fiscal balance was targeted via changes in the tax system by broadening its base and improving the efficiency of tax collection, and enhanced expenditure control involving substantial cuts, in real terms, in the financing of both investment and current expenditures in areas such as basic health services, water and sewerage, education, and essential economic infrastructure.
Despite the reforms undertaken, public sector finances continue to be under great stress due to Guyana's large debt service burden. Control of non-interest expenditures and increases in revenue during the adjustment process led to a substantial improvement in the primary current account balance from 13 percent of GDP in 1989 to 19.5 percent in 1994 after reaching 23.5 percent in 1992. It was expected to be about 22 percent in 1995. As a result, the overall primary balance of the public sector improved from -14.8 percent of GDP in 1990 to about 4.6 of GDP in 1995. To a large extent this improvement reflects improved Central Government finances and underestimates the progress achieved in the public enterprise sector, as several public enterprises have been divested.
During the period 1991-95, in current prices the total public sector deficit increased from G$11,883 million to an estimated G$13,044 million, but when compared with GDP, the deficit improved significantly by more than 50 percent from 30.5 percent of GDP in 1991 to 13.7 percent of GDP in 1995. The main reasons for these continuing deficits are: the use of scheduled rather than cash external payments in the fiscal tables; the large increase in foreign and locally funded capital expenditure in recent years; and the increasing level of domestic interest payments resulting from the build up of foreign reserves at the Bank of Guyana.
Table 13-1 shows some of the principal recent trends with regard to the fiscal deficit.
Table 13-1
Guyana: Fiscal Deficit 1991-95
(figures in current G$ million, except as noted)
| Year | 1991 | 1992 | 1993 | 1994 | 1995a/ |
| Central Governmentb/ | -6,313 | -7,994 | -4,001 | -5,092 | -6,944 |
|
Non-financial public
enterprises |
-9,163 | -7,305 | -8,287 | -5,069 | |
| Total public sector | -11,883 | -11,949 | -13,108 | -8,485 | -13,044 |
| GDP (in billion of G$) | 39.0 | 46.7 | 59.1 | 75.4 | 88.3 |
|
Public sector deficit
(percent of GDP)c/ |
30.1 | 25.6 | 22.2 | 11.4 | 15.4 |
Source: Government of Guyana, Estimates of the Public Sector. Current and Capital Revenue and Expenditure for 1996, and IMF staff estimates
Notes: a/ revised actual figure.
b/ Op.cit., appendix B (for 1994 and 1995).
c/ IMF.
Recent years have seen a further strengthening of fiscal accounts. The primary current account balance of the public sector moved from a surplus of 12.6 percent of GDP in 1990 to 19.5 percent of GDP in 1994. Central Government balance moved from a surplus of 2.1 percent of GDP to 12.2 percent over the same period; the public enterprises and the National Insurance Scheme (NIS) surplus moved from 10.6 percent to 7.5 percent. The overall balance moved from a deficit of 14.8 percent of GDP in 1990 to a surplus of 7.8 percent of GDP in 1994, reflecting a decrease in capital expenditures from 27.3 percent of GDP to 11.7 percent of GDP in 1994.
Current revenues of the Central Government increased from 21.6 percent of GDP in 1990 to 27.7 percent of GDP in 1994. Tax revenues increased from 20.3 percent of GDP in 1991 to 25.7 percent in 1994 reflecting improved tax collection and administration, and increases in income levels. Central Government non-interest expenditures decreased from 19.4 percent of GDP in 1990 to 15.5 percent of GDP in 1994 as a result of the rationalisation exercise undertaken during the recovery programme and its follow-up. Interest expenditure decreased from an extraordinarily high 34.2 percent of GDP in 1991 to 15.4 percent of GDP in 1994, reflecting mainly liquidity relief under a Paris Club rescheduling, although actual external interest payments were less than their scheduled levels.
From 1993 to 1994 period, Central Government's current revenues declined slightly from 29.1 percent of GDP to 27.7 percent. This was a result of a relative stagnation of imports associated with the decline in real public investment outlays, and the effect of tariff reductions under the CET and on certain capital goods authorised by the Government. In contrast, collections in personal income tax and consumption taxes on domestic goods grew much faster than GDP, driven by large increases in public and private wages.
There are three main current revenue categories in Guyana. These are:
(i) income taxes, which cover personal and corporate incomes;
(ii) taxes on production and consumption, which include the Consumption Tax and excises;
(iii) taxes on international trade, consisting of import duties.
Categories (i) and (ii) make up 35 percent of total tax revenue. Export levies on sugar and rice also make a significant contribution to revenue generation. In 1995 tax revenues amounted to G$30 million, a figure which is expected to rise to G$31.5 mn in 1996.
1. Income Taxes
There is a single withholding tax of 15 percent on bank interest.
There is an extensive and generous array of tax concessions including accelerated depreciation, exemption of dividends from withholding tax during tax holidays, and carry over and loss set off after the holiday period for selected industries and sectors.
There is some personal taxation of employer benefits such as housing.
2. Consumption and Production Taxes
Guyana has a consumption tax that is essentially a value added tax (VAT) except for the manner in which it is administered. It is levied on imports and domestically produced goods. To try to equalise its effect it is levied on imports on the basis of cost, insurance and freight value plus the import duty payable. Goods used as materials for production in some productive sectors are not taxed. In a typical VAT system, the inputs would be taxed and the tax paid credited against the tax payable at the output stage. The credit approach reduces avoidance. Most goods are taxed at the rate of 10 percent or 30 percent.
Excise taxes are imposed on domestic production and imports of alcoholic beverages and matches. The tax range on alcoholic beverages is between 5 percent and 30 percent. Most of the revenue comes from beer and rum, which is taxed at 20 percent.
3. Taxes on International Trade
Import duties range from 0 percent to 45 percent. According to the World Bank's Guyana Public Sector Review (1993) import duties gather much less revenue in Guyana than in comparable countries because of the extensive use of remissions and tax concessions. Historical data suggests that import remissions are at least 50 percent of potential collectible tax. Remissions are provided by Government for expansion of enterprises, machinery, and materials. Import duties are slated for reduction by 1997 as part of an agreement between CARICOM States on a Common External Tariff (CET).
Guyana is party to international trade agreements among which are the Lome Convention and Sugar Protocol of the European Union, and is a signatory State of the World Trade Organisation.
Guyana has been a member of the Lome Convention since its inception in 1975. This agreement gives free access to EU markets for exports without reciprocity; it is especially relevant to rice and sugar exports. Export levies on these goods are charged on the differential between the preferential price received in Europe and the world market price for the commodity in question.
The US established a Generalised System of Preferences (GSP) for Guyana in 1975. Under a GSP lower rates of duty are charged on imports from Guyana. Guyana can reasonably expect to retain GSP status.
The Common External Tariff (CET) turned CARICOM from a free trade area into a customs union. The CET requires member states to lower their tariffs by 1997. The common rate was already lowered from 30 percent to 25 percent in 1995.
4. Purchase Tax
A purchase tax is collected on the sale of automobiles.
5. Revenue Collection Agencies
There are two main revenue collecting authorities in Guyana, the Inland Revenue Department (IRD) and Customs & Excise. Administratively they fall under the Ministry of Finance. The IRD is responsible for collecting income and company taxes, as well as vehicle licenses and purchase tax on vehicles. IRD uses a system of card index files on taxpayers. Customs & Excise collects consumption tax, import and export duties, excise duties, and liquor license duties. Customs & Excise uses a separate record-keeping system from IRD.
6. Tax System
A present weakness in the income tax system is the distortions between the corporate and personal tax regimes. The two regimes are totally separate; corporate income is taxed more than personal income at lower incomes because distributed profits are taxed at a uniform 15 percent.
The Central Government's current non-interest expenditure declined from 17.1 percent of GDP in 1993 to 15.5 percent in 1994. A reduction in transfers to international and private local organisations and to the private sector, following completion of an IDB-financed programme of cash assistance to low income groups, more than offset an increase in expenditures and goods and services other than wages. These latter expenditures have borne the brunt of the adjustment, declining from 9.5 percent of GDP in 1989 to 5.9 percent in 1993.
However, in 1995 the Central Government's current non-interest expenditure increased as a share of GDP for the first time in many years, and its capital expenditure remained approximately constant as a share of GDP. It was significant that the Central Government's non-interest current expenditures in 1995 exceeded its interest payments. In 1994 the situation had been the opposite.
The total interest obligations of the Central Government decreased progressively as follows: 25.9 percent in 1991, 22.4 percent in 1992, 16.2 percent in 1993, 15.4 percent in 1994 and 14.9 percent in 1995 (preliminary). However, the interest payments on domestic debt have shown a slightly increasing trend, reflecting the debt associated with the increased use of treasury bills.
Regarding basic services, current public expenditure on health care increased by 5.5 percent in real terms in 1995 and is projected to increase by a greater amount in 1996. Current expenditure on education, on the other hand, decreased by 9.8 percent in real terms in 1995 but is expected to rise by about 10 percent (real) in 1996, bringing it back to the 1994 level in purchasing power equivalent.(1) Expressed as percentages of the total current account budget of the Central Government, the current expenditures on these social sectors were as follows:
1994 1995
Health 3.7 4.2
Education 4.0 3.9
Expressed as percentages total non-interest current account expenditures of the Central Government, these outlays were as follows:
1994 1995
Health 8.9 8.0
Education 9.6 7.5
The largest increases in the 1995 Budget over 1994 were registered in expenditures for agriculture and for labour, human services and social security. However, the real increase in expenditure in both these areas is expected to be considerably more modest in 1996.
The total wage bill of the Central Government was 11.9 percent of total current outlays in 1994 (28.5 percent of non-interest current expenditures).(2) In 1995, the corresponding figures were 14.3 percent and 27.3 percent, respectively. To put the Central Government's labour costs in another perspective, in 1995 wages and salaries amounted to 14 percent of total tax revenues. They were almost the same size as total taxes on international trade.
1. Overview
Over the past 25 years until recently, the public sector in Guyana has expanded dramatically in both its functions and size as the Government assumed responsibilities not only for basic infrastructure and social services, but also in the productive sector. This expanded role was evident in the expansion of Central Government, the growth of semi-autonomous bodies, constitutional agencies, public corporations, public financial entities and regional government. The institutional structure emanating from these creations proved to be unmanageable and contributed to:
The over-extension of Government;
Overlapping jurisdiction and functional responsibilities within the Central Government;
Weak financial management;
Multiple and sometimes contradictory lines of authority and responsibility over the decentralised administration, particularly with regard to autonomous institutions and Regional Administrations, that led to ill-defined operational responsibilities and weaknesses in operational capacity;
A lack of effective control over the expansion of public sector employment; and,
A deterioration in the quality and composition of public employment, particularly at the management and technical level, because of a failure to provide adequate and transparent incentives to performance.
In 1989 the Government embarked on the Economic Recovery Programme (ERP) which encompassed a radical shift in philosophy towards a market-based economy. This programme of economic reform has had profound implications for the role of the State. The engine of growth is now seen as being the private sector, necessitating a review of the institutional setting to enable the public sector to deliver the services needed to sustain private sector led economic growth.
It is in this context that the need for Public Sector Reform has arisen. The Government has adopted a course of economic action which requires rethinking its objectives. It is determining anew what its essential functions and core activities are and aims to strengthen these, whilst at the same time developing an environment which will foster private sector development. Administrative reform cuts across all functions and levels of the public sector and requires the prioritisation of government functions, the reform of the organisational structure, and the rationalisation of resource use.
The Government which came in to office in 1992, reiterated its commitment to the Economic Recovery Programme, and thus committed itself to pursuing market-oriented economic policies. Encompassed within these policies in the medium term was a commitment to increase public sector wages within the confines of fiscal realities, and the decompression of wages to provide incentives to technical and professional personnel.
Much still remains to be done to improve public sector performance: the size of the public sector needs to be reviewed; there is a need for a pay policy, and incentive structure; job evaluations; a need to set and maintain staff establishments which reflect the real needs of the Public Service; develop systems for the generation, storage and dissemination of operating and management information; improvements in accountability etc.
There is a growing recognition that Guyana needs a comprehensive Public Sector Reform Programme, instead of only Public Service Reform, to make the government bureaucracy more responsive to developmental needs. Any civil service reform will have to be undertaken within the confines of Guyana's severe budgetary constraints. Hence all the more need to review resource mobilisation and promote efficiency in resource allocation and budget processes, review the role of the Public Corporations, and expedite the privatisation process.
2. Public Service
Beginning in the 1970s, the Governments conception of its mandate and the extended role in society that this involved, required a large civil service (the Public Service) to maintain and administer the myriad duties of the State. Alongside the dramatic expansion in its numbers, there has been a substantial deterioration in its quality, largely as a result of salaries at a level too low to attract and retain qualified staff. A large number of staff move into the higher paying private sector (and Semi-Autonomous Agencies) A fall in real emoluments by about 40 percent on average between 1987 and 1992 (World Bank, 1993: xviii) has contributed to the fact that most ministries were operating with significant vacancy ratios of up to 61 percent (Office of the Prime Minister), 50 percent (Office of the Auditor General) and 80 percent (Department of Culture) at the end of 1995. In most cases, the vacancy problems are particularly severe at the higher levels. Coupled with the fact that most budgeted positions are at the lower levels, the result is a bottom heavy civil service. According to Public Service Management records, 12 percent of staff in the public service are in the top 8 salary scales, while 84 percent are in the bottom 8. This limits the Governments ability to collect and analyse data, perform adequate accounting and cost control, carry out sector planning and deliver essential service.
The Public Service Ministry (which is responsible for the management and development of the personnel function), like most other ministries, has suffered a deterioration in its ability to perform the functions assigned to it. This situation is reflected by the fact that the Ministry lacks comprehensive and up-to-date figures on the number of civil servants by institutions, their respective salaries, the approved establishment lists, and budgeted positions. Consequently it is difficult for the Ministry to develop and implement management activities and estimate the impact of reforms to the Public Service.
3. Semi-Autonomous Agencies
Semi-Autonomous Agencies (SAAs) were created mainly as a reaction to the growing problems and deficiencies evident in the civil service from the mid-1970s. These arose from the combination of an extensive and bottom-heavy civil service, and a down-turn in the country's economic fortunes which made it increasingly difficult to pay salaries which would both attract and retain qualified personnel. SAAs were viewed as a means of circumventing the problems in the civil service by delinking certain functions of Government from Ministries and creating new agencies. This allowed SAAs generally to establish their own conditions of service and levels of remuneration, apart from the strictures of the public service.
Each SAA with its own terms of reference, once approved by Cabinet, is created by an Act of Parliament. There is no standard definition of an SAA, rather Cabinet has established SAAs on an ad hoc basis often in response to the particular demand of a Government department or Minister. There is no clear plan of what constitutes an SAA, or what characteristics a department must have in order to be considered for SAA status.
This is borne out by the wide variety of SAAs which have been created. For example, Guyana Agency for Health Environment and Food Policy (GAHEF), State Planning Secretariat (SPS), Guyana Natural Resource Agency (GNRA), Guyana Forestry Commission (GFC), Department of International Economic Co-operation (DIEC), Statistical Bureau.
a. Types of SAAs
There are several different types of semi-autonomous bodies. The differences are minor and largely conceptual; no standard legal definition for these agencies exist. Though these distinctions technically exist, they are not used in a consistent manner. The types of agency include:
Closed Ministries. These are SAAs established with a ministerial structure. The proposed Ministry of Legal Affairs is a closed ministry.
Public Corporations (PCS). These agencies are legally registered as body corporates and follow the legal and administrative structure of a company. Though legally companies, they still fall under the jurisdiction of the Government. One such company is the GEC.
Revenue Generating Bodies. These are charged with collecting revenue for the Government. The Guyana Forestry Commission (GFC) and the Guyana Geology and Mines Commission (GGMC) are revenue generating entities (with a regulatory role as well).
Statutory Bodies. These are organizations that do not properly fit under any specific ministry. They do have a designated minister they must report to but remain independent from the standard ministerial structure. The Central Housing and Planning (CHPA) is such an agency.
Project Execution Units (PEUs). These are temporary units responsible for the implementation of specific projects. They are usually funded by donor agencies. The Environmental Protection Agency/ National Protected Areas System Project Preparation Unit is an example of a PEU.
4. Public Corporations and Privatisation
Under the policies of the 1970s the Government created a number of State Corporations, often referred to as Public Corporations. These Corporations included industries which had been nationalised, as well as manufacturing industries designed to produce items in keeping with the then-prevailing philosophy of import substitution. The rationale for establishing Public Corporations stemmed from the perception that there was a vital role for the State to play in protecting its citizens and ensuring that all had access to goods and services. Thus it was felt that it was the State which should ration economic factors of production as it saw fit, rather than the market.
From the beginning the Corporations were ruled more by political imperatives than economic and financial ones, and thus they were often seen as a means of creating gainful employment for large sections of the population. In this manner they fulfilled social objectives at the expense of economic efficiency.
The Public Corporations covered a variety of activities, but were by and large inefficient (producing goods at high costs of production) and were a drain on the Central Government since their operations were subsidised by the more productive sectors of the economy.
The Corporations suffered from political interference in their management, poor administration and management and limited financial resources. This latter fact impeded their acquisition of capital and their ability to maintain equipment effectively, thereby further weakening their ability to produce goods and services in an economically efficient manner.
These problems were recognised and attempts were made to restructure the entities over the years, under the auspices of GUYSTAC, and later under the Public Corporations Secretariat (PCS). A system of Supervisory Boards, under the jurisdiction of subject Ministers was introduced, with the PCS monitoring their activities.
In 1989, in recognition of the continuing failure of many of the public enterprises, and under the Economic Recovery Programme, a policy of privatisation was adopted. A diagnosis of 11 public enterprises was undertaken and three options examined (i) financial restructuring; (ii) management contracts; and (iii) outright sale of the company or its assets. Technical assistance was provided by donors, and a Privatisation Unit set up within the PCS. Between 1989 and 1992, 12 enterprises were privatised and a further 23 identified for privatisation and/or restructuring.
5. Regional Administration
Another administrative layer was added to the extended public sector bureaucracy in 1980 with the passage of the Local Democratic Organs (LDOs) Act of 1980. This created 10 regions with Regional Administrations and Regional Democratic Councils, as areas of local government intended to ensure participation and decentralised development in the regions. Below the Regional Administrations are sub-regional units comprising six town Municipalities, 19 district councils, 33 village councils and 75 Amerindian councils. The Regional Administrations are responsible for the management of operational responsibility for education (nursery, primary and secondary), the day-to-day workings of the health sector and the operation and maintenance of roads, river and sea defences, irrigation and water facilities. In 1992 yet another layer of government was added in the form of the 65 elected Neighbourhood Democratic Councils.
6. Resource Utilisation
A discussion of the budget process must look at a variety of areas including laws and regulations, accounting systems and policies, budget processes and reporting, and control systems.
a. Legal Framework
Formally, the management and control of public expenditures are regulated by various constitutional provisions, standing orders and specific acts approved by the National Assembly. The Constitution and the Financial Administration and Audit Act provide controls and broad guidelines of the system.
The Constitution: The Constitution covers the establishment of the Consolidated Fund; withdrawals from the Consolidated Fund; authorisation of expenditure from the Consolidated Fund by appropriation; authorisation of expenditure in advance of appropriation; establishment of the Contingencies Fund; public debt and servicing of it, remuneration of holders of certain offices; and the office and functions of the Auditor General.
Financial Administration and Audit Act: Ratified in 1973, this Act outlines the procedures for receipt, control, and disbursement of public monies and related matters (including procedures in respect of the Consolidated Fund, such as the requirement that it be kept in two accounts, capital and current), and it provides responsibilities for the Auditor General, the Minister of Finance, and the Secretary of the Treasury. Specific measures, among others, are as follows:
Minister of Finance
Authorises the Minister to withdraw monies from the Consolidated Fund for up to three months from the beginning of the fiscal year or the coming into operation of the Appropriation Act, whichever is earlier.
The Minister of Finance is granted comprehensive powers, including powers of inspection, over such matters as authorising expenditure, collecting revenues, investing public monies, and borrowing by means of advances from banks and through the issue of treasury bills.
The Act authorises the Minister of Finance to issue instructions and to make regulations regarding matters such as the preparation of the Budget Estimates, the opening of bank accounts for public monies, and it requires the Minister to submit annual Statements to Parliament on revenues and deposits, expenditures and loans, public debt and Government guaranteed loans as regulated under the Guarantee of Loans (Public Corporations and Companies) Act, 1971.
Secretary to the Treasury
The Act requires the Secretary to designate accounting officers to be responsible for accounting of public expenditure and revenue.
It empowers the Secretary to levy a surcharge against any public officer who fails to perform such duties efficiently.
Auditor General
Sections 26 to 35 set out the functions, powers and responsibilities of this office.
Constitutionally, timely reports are required from the Auditor General on the audit of Government accounts.
The Act gives the Auditor General comprehensive powers to inspect, at any time, all records on financial matters, to summon persons, whether public officers or not, and to give information regarding receipt or expenditure of public monies.
The Act requires Accountant General, accounting officers, and principal receivers of revenue to submit the various Statements and accounts to the Auditor General, within a period of four months, after the close of each financial year.
b. Organisational Arrangements
Office of the Budget
The Office of the Budget, which deals with the recurrent budget, is a division of the Ministry of Finance. Its purpose is to "support the sound management of public finances through preparing annual estimates of revenue and expenditure for National Assembly approval, and monitoring such revenue and expenditure through the year" (Ministry of Finance, Annual Report 1992). This unit is split into three sections: the Fiscal and Monetary Division (FMD); the Budget Section; and the Debt Management Division (DMD). It reports to the Secretary to the Treasury, who is the administrative head of the Ministry of Finance.
Alongside the annual Budget Speech, the Office of the Budget produces the Estimates of the Public Sector Current and Capital Revenue and Expenditure (referred to in this document as the Estimates), which brings together information on recurrent and capital expenditure and revenue.
State Planning Secretariat (SPS)
This agency, originally established under the State Planning Commission Act of 1977 to engage in medium and long-term planning, had its activities scaled down in 1993. It now functions under the Ministry of Finance (until the formal restructuring of the Ministry is completed) and is responsible for the capital budget.
The SPS is divided into four divisions, with functions ranging from macroeconomic level planning to planning of specific productive and infrastructure projects. In recent years the focus of the SPS has been short-term planning. The SPS also has responsibility for the Public Sector Investment Programme (PSIP). The PSIP includes externally financed projects and all ongoing projects financed by Government resources.
Accountant Generals Department
The Accountant General's Department, provided for under the Constitution (Article 223) and accountable to the National Assembly, is organisationally separate from the Ministry of Finance and is responsible for auditing and reporting on the public accounts. Its statutory functions are not set out in a single specific piece of legislation, but references to the Accountant General's responsibilities are made in a number of acts, the most important being the Financial Administration and Audit Act. The Act requires the Accountant General to operate the detailed accounting arrangements in relation to the Consolidated fund and to furnish statements on them to the Auditor General.
A new Auditor General, appointed in 1991, began a campaign to restore the accountability component of financial management. Under the Financial Administration and Audit Act, the Auditor General must ensure that spending is for the Parliamentary purpose intended, that spending conforms to the authority which governs it, and that there is due regard for the avoidance of waste and extravagance exists.
c. The Budget Process
Expenditure
Budget: Budget preparation begins in late August when standard expenditure forms are sent out to all Ministries, Departments and Regions that incur capital and recurrent expenditure. These forms are completed using a circular that is sent out at the same time for guidance, and they should be submitted by the end of September in time for the Budget meeting held in mid-October. Such a schedule should allow for a February Budget.
Ongoing expenditure: Data (such as cash flow and financial statements) are sent into the Ministry of Finance on a regular basis over the year. Information must be processed by the Office of the Budget (such as for the monthly releases, virements and supplementary provisions) and by the State Planning Secretariat (such as for monthly releases, supplementary provisions and programme changes).
Revenue
Budget: As with expenditure, the revenue data must be obtained from the ministries, departments and regions (a circular is sent out, though standard forms are not, given the variation in the data needed). Information is submitted mostly by the end of September, to coincide with submissions for expenditure. Data on capital revenue are collected by the Divestment Unit and the Public Debt Division and processed by the Office of the Budget. Information on external capital grants is processed by the State Planning Secretariat.
Ongoing revenue: The Office of the Budget receives data concerning projections for the following year in September which are updated at the end of the current year. Projections for revenue are then updated on a quarterly or half-yearly basis, though in the future it is hoped that updates can be produced monthly for current revenue. Data for actual current revenue and external capital grants are received monthly.
1. Tax Policy 1989-1994
In the late 1980s and early 1990s major reforms were implemented in the income tax structure. These measures included:
Simplification of the income tax system in 1991 and 1993.
Basic exemptions in income tax established in 1991. This exemption was set at G$72,000 or one third of total income, whichever figure was higher. The first G$50,000 of taxable income was taxed at 20 percent, the next G$50,000 at 30 percent, and the rest at 40 percent.
In 1993 tax for income over G$120,000 was set at a straight 33 1/3 percent.
Corporate taxation was simplified. The basic rate was set at 35 percent, a significant reduction from previous rates.
The distinctions between types of companies was eliminated. However, this measure was negated in 1993 when a 10 percent development levy was levied on "commercial" companies, effectively raising their rate to 45 percent.
Government has broadened the tax base.
A corporate minimum turnover tax of 2 percent was introduced. However, in 1997 companies other than commercial companies will no longer have to pay this tax.
The excise tax was eliminated by integrating it with the consumption tax on relevant goods.
The consumption tax was amended to include domestic and imported goods at rated of 0 percent, 10 percent and 30 percent.
Government decided not to remit consumption taxes of minibuses of seating capacity of greater than 29 seats used in public transport.
A three-year phased programme was begun in 1994 to reduce the number of rates under the consumption tax schedule, reduce the highest marginal rate under this schedule, and eliminate and/or reduce the number of items accorded duty free exemptions.
In 1993 Government eliminated the grant of tax holidays as part of the fiscal incentive package to attract and encourage investment.
A hotel accommodation tax of 10 percent was introduced; various percentage increases, between 50 percent and 100 percent, were made to a number of licenses and other fees levied by the Inland Revenue Department.
2. Tax Policy Since 1994
In 1996 the threshold under which income tax is not collected has been raised from the 1995 figure of G$12,000 per month to G$15,000 per month, which means that approximately 20,000 taxpayers will not be required to pay income tax.
No further tax liability will be charged on discounts earned on treasury bills, which are usually subject to the 15 percent withholding tax. The withholding tax deducted at source will be a final tax for non-bank investors.
Under the Purchase Tax Regime, tax on motor vehicles under 1500cc or rotary type engines under 750cc increased from 5 percent to 10 percent.
Under the Consumption Tax, additional selected plant machinery and equipment are to be added to the list of zero rated items.
3. Tax Administration
Government increased the budgets of the Inland Revenue Department (IRD) and Customs & Excise Department. A central Revenue Authority is now being created under the Ministry of Finance to replace these two departments, and it is scheduled to become operational in 1996. Creation of a Tax Court is also planned.
A Customs Operations Monitoring Unit (COMU), Berbice Anti-Smuggling System (BASS), and the Assimilated System for Customs Documentation (ASYCUDA) have all been recently implemented.
1. Recent Policies
The Governments commitment to increasing efficiency in resource utilisation is Stated in the 1996 Budget Speech ["both the resources available to us and the efficiency with which we use them matter. Productivity improvements can frequently be more important contributors to growth than additional resources" (p.2)], and is reflected in a number of major reforms that have been initiated throughout the budget process, including expenditure monitoring systems, departmental restructuring and extensive computerisation. A major focus of this efficiency drive is on the national budgeting system, the key government management system.
There have been a number of important (and interrelated) changes - both in policy making and public sector management - designed to begin addressing the historical weaknesses listed above. There are various projects providing technical assistance to many of these reforms. The major areas of change have been in the areas of organisational structure and the budget process.
2. Changes in Resource Utilisation
a. Legal Framework
Contingency Fund: For the 1996 Budget, the Minister of Finance has resolved to use the Contingency Fund for the purposes for which it was intended. This should send out a strong signal about the need to plan and manage resources better.
Auditor General: The Auditor General has been seeking approval for a new Audit Act to expand his authority in the Constitution and replace the provisions of the Financial Administration and Audit Act which refer to the Audit Director as a member of staff of the Ministry of Finance. The Auditor General would like to elaborate the independence of his office by confirming the independent role of reporting to Parliament, independent engagement of staff, independent determination of staffing levels, among other things. He has not varied the scope of his proposed audit from that set out in the Financial Administration and Audit Act.
b. Organisational Arrangements
Office of the Budget
A number of fundamental changes are being proposed and implemented "to improve expenditure and revenue systems and management to achieve efficiencies in resource management (allocation and utilisation)"(3). There are three objectives of the restructuring: (1) to strengthen the forecasting ability of the Office of the Budget; (2) to generate expenditure and revenue databases and analyses that facilitate informed policy decisions; and (3) to introduce programme budgeting on a pilot basis. Under the new system, economists will be responsible for both the expenditure and revenue aspects of a specific head, and a pool of assistants will be assigned directly to the economists. This reorganisation should improve the efficiency of the Office, in terms of both expenditure and revenue control and management.
Auditor General
As part of its concern for proper financial management, the Government has decided to bring the outstanding accounts up to date and has set a timetable for doing so. The Auditor General has been provided with a modest amount of additional funds in his 1996 budget in order to complete his assessment of the backlogged accounts once they are finalised by the Accountant General.
c. Budget Process
Planning, Monitoring and Control: There is to be an improvement of monitoring and control of programme implementation in 1996. A review of "work programmes" related to funds provided has been completed. In addition, there will be more visits to the field, including more repeat visits with stronger investigative teams. The requirement for the timely submission of work programmes, as well as monthly financial statements, will be backed up by the threat of the following months current expenditure releases being withheld. In 1996, the Office of the Budget is also going to commence the preparation of rolling expenditure and revenue forecasts. Based on the accuracy of the expenditure plans made through the meetings on releases with the ministries every two months, and improved monthly financial statements (due to the computerisation of line ministries accounting systems), the Office believes it will be able to update forecasts monthly and make them more accurate. All these developments are occurring against a backdrop of the continuing budget reform process which will improve both the allocation and management of funds, including more careful planning of expenditures and accountability for results.
Computerisation: As part of the Governments drive for greater efficiency and better resource management in the public sector, it is intended that the budget process be computerised under the IDB/UNDP Central Government Accounting System (CGAS) project. CGAS aims to reinstate a core computerised central Government accounting system that will produce timely reports, improve accountability, facilitate budgetary control, and that will be easier to audit than the one which broke down some years ago. The computerisation process should bring a number of benefits to the budget process, including:
A substantial improvement in the accuracy and speed of the budget process: there will be a substantial reduction in the need for the physical movement of documents and paperwork, and budget submissions will be made in a standard format that can be easily (and/or automatically) manipulated into the required formats. Manual double-checking can be avoided, enabling economists to engage in analysis to a much greater extent than the current time-consuming process allows.
Improved monitoring, control and analysis: the development of a central database will enable expenditures to be traced and costing norms to be developed. Analysis of the effects of policy decisions, among other issues, will be made easier.
Accounting System: A major overhaul of the accounting system is underway. The CGAS project (referred to above) aims to strengthen the Ministry of Finance and Office of the Auditor General through a review of the auditing, accounting and budgetary systems and procedures. The new accounting system will provide information which supports both expenditure planning and control, and thereby accountability.
Implementation of the National Development Strategy: The preparation of this Strategy should have a beneficial effect on the budget process. It will provide additional input into the framework of Government policies and priorities which will, in turn, feed into the Budget and Estimates planning processes and provide additional direction to the spending units as they plan and defend their annual spending plans before the Ministry of Finance.
Programme Budgeting: The aim is to carry out pilot projects in programme budgeting as a part of an overall plan to move to a programme-based approach to budgeting and away from the traditional line-items. Programme budgeting insists that ministries address questions of policy, priorities, strategies and implementation approaches.
Timing: The aim is to have the Budget submitted earlier. (The 1996 Budget was the first to be tabled in January since 1987.) This will help tackle the problems discussed earlier. Note that, with regard to the disbursement of funds for recurrent expenditure before the Estimates are passed, the method used is far more precise. For January, amounts for "employment costs" are based on actual expenditure in November, while those for "other charges" are based on actual expenditure in January of the previous year. For February, written requests must be made.
The Government has recognised the need for public sector reform and initiated a number of projects with donor agencies. In 1990 the Overseas Development Administration (ODA) funded a review of the Public Service which focused on the restructuring and reorganisation of Central Government ministries and related agencies, as well as the strengthening and institutional development of the Public Service Ministry.
As a result of this review a reduction in the number of ministries from 18 to 11 was effected in 1991, and blueprints for re-organisational provided for each ministry to lay the foundation for ongoing organisational development and improved efficiency.
The public service review also pointed to the need to pursue rationalisation of the systems and procedures of ministries and to put in place key management and information systems needed to establish both financial and performance accountability. It also highlighted the need to arrest the deterioration in the real wages of Central Government.
In an attempt to rectify this position, the Government has introduced multiple pay systems over the years. However, because of their lack of transparency they have fostered resentment and created some distortions. As new staff have been added to the various ministries, new job titles and positions have been developed, often with little uniformity in professional rank, levels of remuneration or necessary qualifications. These distortions in salaries and relationships between jobs and positions have further contributed to the disarray of the personnel records system.
A job evaluation exercise has been introduced, along with improvements in the personnel record keeping system.
Since the inception of the Economic Recovery Programme in 1989, Government institutions have gone through extensive restructuring as their objectives have changed. Throughout this process, some existing SAAs have remained largely unchanged, some have been effectively disbanded although the legislation creating them remains in place, and new ones are being contemplated. As problems in the civil service with respect to qualified personnel and remuneration have worsened, and in the face of external pressure from donor agencies for more efficient public sector management, Government has reacted by seeking to create new SAAs.
In its drive to ensure more transparency and accountability, the Government in 1992 established a new Privatisation Unit under the auspices of the Ministry of Finance and published a Privatisation Policy Framework in 1993. The objectives of privatisation were enunciated as the promotion of broad share ownership, promotion of efficiency, improvement of economic efficiency and the modernisation of a variety of industries through new investment and technology.
The approach to privatisation was subjected to review, especially in respect of the valuation of corporations and their assets and the capacity of local private sector to absorb the entities slated for privatisation. However, since August, 1996, the privatisation programme has accelerated with the offer of ten enterprises to the market.
An analysis of the regional system of government was conducted and presented to the Central Government in December, 1995. Amongst its recommendations was the need for legislative and regulatory procedures which would provide a more effective institutional framework and functional mechanism to enable the better provision of services at the regional level.
During the conception of the regional system it was determined that in order to promote linkages between the centre and the regions, the regional authorities could be staffed with public servants from central Government on a rotational basis. In practice this policy has not met with much success. Public servants from the centre have demonstrated a reluctance to be posted to interior locations.
Further improvement of public sector finances needs to be pursued in the context of a comprehensive public sector reform, including: (a) strengthening the public sector administration, (b) enhancing resource mobilisation; (c) improving the efficiency of resource allocation; and (d) pursuing further privatisation. The issue of efficient resource management is critical, for two reasons: (1) unless addressed, the wide spectrum of objectives and policies laid out within this National Development Strategy will be difficult to achieve, and certainly not in a sustainable manner; and (2) the likely decline in future official development assistance means that it is crucial for existing resources to be used better and for ways of raising revenue to be analysed. The issue of resource mobilisation has, therefore, two key aspects: resource utilisation (management) and revenue raising.
In order to improve the effectiveness of the public sector, public service wages urgently need to be improved, accompanied by measures to reduce labour redundancies, especially at lower levels. In particular, the salary structure must be made transparent, and the salary scale decompressed to provide incentives to technical and professional personnel. Current wages are not sufficient to attract or retain qualified higher level personnel, and the resulting low quality of the public service is a key constraint to more efficient operations in the public sector. Two types of proposals have been advanced in this direction: (a) an across-the-board increase of wages by specified amounts per wage category, and (b) a selective wages supplement scheme, in which a number of qualified positions would receive substantial higher wages for a period. The latter proposal emphasises the repatriation of qualified Guyanese workers living abroad.
Both approaches have their strong points. When considering the across-the-board proposition, it is apparent that unless wage increases are tied to productivity gains, they will not necessarily increase efficiency in the public sector permanently, although they might prevent a further deterioration of the situation. Workers who were about to leave might be induced to stay, low-morale workers might be motivated to improve efficiency, and better qualified workers might be attracted to public service. However, qualified workers will have opportunities represented by increasing wages in the private sector and the less-qualified may be induced to stay by the higher wages.(4) The supplementary wage-support programme benefits from allowing better targeting and can lead to substantial improvement in efficiency, in particular if wage support is declared to be a long-run policy and is tied in an objective manner to effectiveness in performance and upgrading of skills through training.
An important issue in this regard is to include in the analysis the notion of "critical mass" for efficiency improvement programmes. Efforts to increase the skills and knowledge in public sector entities would probably be short-lived and inconsequential if those entities do not have access to training in more efficient managerial techniques. In this sense, concentrating efforts to train certain areas of the public sector before others might be an approach consistent with the lack of resources. For example, training personnel in tax collection and at Customs House can bring about a significant change in tax revenue to finance later the training of other institutions.
Whatever approach is adopted, it is vital to decompress the wage scale of Public Service, in order to stanch the attrition of the most talented and highly trained officials who would occupy the highest ranks in the system. While the system is being rehabilitated, it would be productive to make greater use of nationals as consultants and of expatriates in fixed-term appointments. By the same token, the downsizing which has been occurring needs to continue further in the lower ranks. This can be accomplished by a variety of humane means, including natural attrition, preventing moonlighting, enforcing the retirement age, desisting from use of temporary workers, and introducing programmes of incentives for voluntary retirement.
On the revenue side, the Government has given priority to strengthening the tax and customs administration. The tax structure also needs to be revised in light of the changing structure of the economy. The principal outstanding revenue issues are:
In spite of recent progress, lack of qualified staff, inadequate equipment and inefficient procedures hamper collection efforts in tax and custom administration and need to be addressed urgently.
The tax base is too narrow and needs to be broadened further through drastic reduction of remissions, and the curtailment of concessions. The concessions have resulted in a very uneven pattern of taxation, especially for consumption taxes and import tariffs. Exemptions of dividends from the withholding tax and tax holidays on the income tax also have reduced revenue collections, with dubious effects on private investments.
New tax sources need to be identified. (See, for example, the discussion of potential revenue sources for seawall maintenance in Chapter 40.) Instruments such as the property tax are very much underutilised, and to date the revenue potential from forestry concessions has not been fully exploited.
Cost recovery has been underutilised as a mechanism of revenue collection. It also can serve as a tool of redistribution. Higher-income households can be charged for certain health services which are provided free to the poor. Educational subsidies can be targetted more effectively on low income households. User charges can improve the quality and quantity of infrastructure. Examples include road tolls, drainage and irrigation charges, tariffs on water calculated through metering, and the proposed land tax to provide revenues for maintenance of sea walls. These and other possibilities are discussed in Chapters 19, 20, 29, 38 and 40.
Tax enforcement mechanisms need to be strengthened starting with improved computer systems for cross-checking tax returns and other data, and improved procedures for follow-up on delinquent taxpayers. Legislation needs to be amended to improve the effectiveness of the auditing function and investigation work, such as the sharing of information among government departments and financial institutions, the ability to seize and impound books and impose penalties for default, and making compulsory the obligation to register for tax purposes. Tax evasion increases if taxpayers perceive a low cost and low risk associated with noncompliance.
The system of registering businesses for tax purposes is weak and can easily be improved, including for curbside businesses. Similarly, greater efforts are needed to register the self-employed and expedite the implementation of a unique taxpayer identification system.
The budget process needs to be revised and oriented towards objectives, translated into activities and progammes. Currently the budget process is oriented towards line items, making it difficult to assess the impact on budget cuts on actual operations. As a complementary measure, expenditure control and management also need to be improved through the implementation of adequate financial management systems and procedures.
The shortfall in outlays for operations and maintenance has to be addressed urgently. Operations and maintenance expenditures have decreased by 40 percent in real terms over the past decade, preventing adequate maintenance to such an extent that new investment often reflects capitalisation maintenance expenditures. A comprehensive assessment should be undertaken to establish adequate levels of operations and maintenance expenditures, and a plan developed to reach this level within the coming years to be financed by cost recovery measures. In this connection, consideration should be given to contracting operations and maintenance activities to the private sector.
Increased funding for health and education is urgent. Government is on a course to cease transfers to public enterprises and restructure them for more efficient operations. A reallocation of these transfers to economic and social services would yield high returns in view of the underfunding of operations and maintenance activities and social sector services.
Another issue is that the increasing use of short-term treasury bills as an instrument of monetary policy is contributing to a rise in the Government's outstanding indebtedness. It also has the potential to weaken the stability of the financial system, given the short term of these instruments. This issue is reviewed in Chapter 12.
A systematic review of the procedural issues that have affected resource utilisation is presented in the remaining paragraphs of this sub-section. It should be borne in mind that extensive reforms have just been initiated to deal with some of these issues (see sections II above and V below), but the issues are described fully here as a backdrop to the reforms.
1. Legal Framework
The legal framework is no longer adequate to ensure proper financial management and accountability. Significant weaknesses exist both in relation to the operation of Consolidated Fund and the Contingency Fund. On the one hand, the executive has the power to withdraw funds from the Consolidated Fund without Parliamentary approval, and on the other the Contingency Fund has often been used to fund non-emergency expenditures.
Operation of the Consolidated Fund
Statutory Expenses: Certain statutory expenses, such as public debt and salaries of officers so designated under the Constitution (Articles 221 and 222), are charged directly to Consolidated Fund instead of being appropriated by Parliamentary approval. In the absence of the timely passage of appropriations, the determination of the use of funds occurs without appropriate legislative controls.
Minister of Finance: The Constitution empowers the Minister of Finance to withdraw monies from the Consolidated Fund for up to 3 months from the beginning of the fiscal year or the coming into operation of the Appropriation Act (whichever is earlier).
Operation of Contingency Fund
Control: In 1974, the National Assembly established a Contingency Fund (2 percent of estimated expenditure in the preceding financial year) to meet unforeseen expenditure for which no other provision exists. These funds do not form part of voted provisions of the ministries (approved by National Assembly to be appropriated form the Consolidated Fund), and because expenditure is approved in an ex post manner, there is no sanction applied by the National Assembly if the explanation given for the expenditure is inadequate.
Deficiencies in the Budget Process: Largely due to deficiencies in the budgetary process, the Contingencies Fund has been used to meet all kinds of expenditures, such as shortfalls in ministries' provisions arising from basic miscalculations in estimates and unrealistic budget assumptions about exchange rate changes, inflation and spending patterns, and the introduction during the course of the year of new projects or programmes deemed "necessary" or "relevant" by a political or high-ranking technical functionary. Instead of being used for emergencies, such as a major breach in the sea defence system -the use intended by the National Assembly- the Contingency Fund now serves as a source of financing for unauthorised (by Parliament) and additional expenditures.
2. Organisational Arrangements
Staffing: As with other areas in the public service, there is a lack of skilled staff and a general difficulty in recruiting and retaining competent staff. At the end of 1995, the Ministry of Finance had an overall vacancy ratio of 54 percent, while those for the Accountant General Department and Auditor General Department were 42 percent and 50 percent, respectively. Those staff that are employed are often underqualified, lack adequate training and suffer poor morale, as a result of low wages and underutilisation. Within the Office of the Budget, for example, where recurrent expenditure and revenue data are processed, serious inputting errors mean that senior staff must spend a great deal of time in routine double-checking, rather than carrying out analysis. The lack of computerisation and poor supervision has compounded the problem. In the case of the line ministries, the lack of budgeting capacity leads to delays and unsatisfactory submissions. Estimates are often put together by inexperienced staff who literally gather up requests and assemble them in the required format for submission to the Ministry of Finance.
Coordination: There is little communication between SPS and the Office of the Budget to coordinate between the capital and recurrent sides of the budget, and the linkages between the capital and recurrent budgets are inadequate. While SPS now functions under the Ministry of Finance, the processes of compiling estimates for both the capital budget and recurrent budget proceed separately. For example, there are two separate estimates review processes conducted on different dates for the same ministry. There is no process in place to relate the capital proposals to the broader strategies of the ministries, and there is no process in place to relate the recurrent costs attendant on capital projects to future recurrent costs.
Responsibilities: Some of the responsibilities outlined for the Ministry of Finance, the Auditor General and the Secretary of the Treasury by the Financial Audit Act are inadequate and inappropriate, and others are not fulfilled. For example, the responsibilities of the Secretary to the Treasury are not well documented under the Financial Administrative and Audit Act, beyond the fact that the Secretary to the Treasury "shall designate in writing the officers who shall be accounting officers or principal receivers of revenue and he may in writing, revoke any such designation". In practice, great difficulties are encountered in the execution of these duties because most of the spending units are labouring under archaic accounting systems which result in mountains of paper for each transaction and a lack of accounting skills.
3. The Budget Process
National Development Strategy: At present, the Budget is developed without the benefit of a national development strategy to guide the allocation of resources across the sectors and departments. At the very least, it is necessary to have sectoral plans to assist both the ministries and the Government in gauging whether requests for funds are consistent with the ministrys own strategic objectives and the identified public policy problems. Yet, there are very few sectoral strategies and these are underdeveloped. As a World Bank report notes, "As currently conceived, the budget process reflects the outcome of a series of negotiations rather than the product of properly costed programmes within an overall macroeconomic framework". One outcome of this approach, is that some ministries use the Estimates to put forward their own "policy" proposals, instead of using the Cabinet process. For example, during a 1993 Budget interview, it was found that the Ministry of Education was paying varying inducements to teachers and stipends to students attending vocational schools, without an overall policy to indicate the appropriate levels of such incentives.
Objectives and Priorities: There is little attempt to base requests on a clearly defined set of objectives or priorities; in many cases, non-prioritised "shopping lists" are submitted to the Ministry of Finance which then has to make cuts to fit the constraints of the macroeconomic framework and resource availability. Moreover, there is currently no institutionalised mechanism for policy and priorities discussion at the Presidential and Cabinet level as part of the pre-Budget process. In 1994, a Cabinet Economic Sub-Committee was formed which involves general discussion of budget themes and fiscal strategy at level of Minister of Finance and his technical staff. Though this is a strong guiding force, it is not a substitute for a detailed discussion of the fiscal framework and of the costs of continuing programming exactly as it is now, and for examining new policies and programming options with their costs. Another point to note is the lack of co-ordination of Budget policies (with spending implications) and Budget allocations. In short, there is a lack of advance planning of the budget process.
Incremental approach: In the absence of a national development strategy, sectoral strategies, objectives and prioritisation, the budget process has become mechanistic, incremental and somewhat arbitrary. Line ministries and the Ministry of Finance rely on past budget allocations; the former push for an increase on the previous year and for far more than they expect to get, while the latter must make cuts (by sifting through each line item) to ensure that the total allocation fits the total funds available, with the result that, prior to the 1995 Budget preparation, cuts were often made across the board. The situation is exacerbated by the time pressure involved in the Budget process.
Timing: The Budget has been customarily late, although reforms are underway in this area. For more than a decade, the annual budget has been presented in the first three months of the fiscal year under consideration (the fiscal year runs from January 1st). This is because the Budget preparation process does not start early enough, together with the fact that submissions are often late. Budget preparation typically starts after the second quarter (sometime between late August and early September), with the issuing of various budget circulars pertaining to current and capital revenues and expenditures. This results in:
(1) An arbitrary provision of funds to the spending units, prior to Parliamentary approval. Until recently, ministries, departments and regions were allocated 1/12 or 1/14 of their previous years budget (the latter if there had been large one-off expenditures in that year) per month (to be divided between the different line items as they saw fit). Some spending units have benefited substantially from this method, since the previous years expenditure may include a set of expenditures which is unlikely to recur in the next fiscal year.
(2) Funds being appropriated and spent in areas which have not received Parliamentary approval.
(3) The bunching of expenditures in areas which were left unattended prior to the approval of the Budget by Parliament, thereby creating unnecessary pressures for cash management for the last three quarters of the year.
As noted, very recently progress has been made in improving the timing of the budget.
Expenditure monitoring: The Chief Technical Adviser in Budgeting noted the lack of monitoring of programme progress in-year. In general, prior to 1995 there was a lack of monitoring of whether funds were used for the purpose for which they were appropriated. During 1995, monitoring of current and capital expenditure was undertaken. In 1996, this system is expected to be strengthened.
Programme Budgeting: Ministry Estimates are not organised on a programmatic basis; they are submitted, analysed, tabled in Parliament, published and controlled on a line-item basis. As a result, it is difficult to get picture of what the objectives of the ministries are and how much money they are spending to achieve those objectives.
Data: There are a number of serious data problems on both the expenditure and revenue side of the budget process. The problems are compounded by an insufficient level of computerisation. In the case of expenditure, despite the attempts at standardisation, using an increasingly comprehensive circular and standard forms, there continues to be a number of weaknesses in data submission. Specifically:
Data arrive in a variety of formats. Very few heads input data directly onto the forms provided, though most type up tables in the same format. In approximately one third of all cases, data are not entered in line with headings, which leads to very large data inputting errors at the Budget Section stage.
Data provided are insufficient. Despite the existence of a circular detailing the information required, forms are filled in incorrectly, entire forms are omitted, insufficient detail is given, or the necessary justifications for expenditures are not provided. The problem is particularly severe when new pieces of information are requested. During the most recent budget preparation approximately 50 percent of the heads had failed to provide all the information required. In such cases, heads are required to resubmit by the end of October.
Data submissions are often late. This year, though most submissions arrived in time for the October meetings, others were not received until December.
Though the revenue side of the budget process does not suffer from data inputting errors to the same degree as the expenditure side, there are still serious data problems. One of the main problems is the quality, timing and nature of the data received from Customs & Excise. Their systems of recording revenues are weak, and they do not provide all the data required, in terms of content and breakdown. The ASYCUDA computer system currently being used at Customs & Excise does not provide data in a compatible format to the needs of the Office of the Budget. It must be realised that in general, the revenue side is very different from the expenditure side in terms of the problems it faces. Particular problems are:
Revenue is not as easily traceable as expenditure; small agencies find it difficult to give breakdowns of revenue and cannot identify the sources of inconsistencies between their submissions, the Auditor General's Report and Accountant General's Report. Often the errors result from coding errors, but in many cases it is very difficult to locate the source of the errors.
One cannot factor in policy changes that will be included in the annual Budget, and that will have profound effects on revenue collection (due to the nature and type of changes involved).
There has been a major problem with revenue, in terms of the timeliness of submissions. Sometimes the smaller agencies simply do not bring in estimates for revenue at the required time, and it is often difficult to collect these later. The result is that, in a number of cases, the Office of the Budget has to make an estimate.
Various problems with the Accounting system: The accounting system has been in poor shape for many years. It broke down for a number of reasons, including staff shortage, poor or non-existent training, computer system deterioration, and problems of moving vouchers to the central processing unit. In his 1992, 1993 and 1994 reports, the Auditor General found a number of deficiencies in the accounting system, ranging from improper or ineffective record keeping to failure to keep supporting records, and from the absence of a Statement of the Governments Current Assets and Liabilities to discrepancies between bank deposits and accounting records. Over the decade 1982-1991, no Auditor General reports were presented and they remain outstanding to the present time, with (until recently) no timetable set for their presentation in future. In addition, the Public Accounts Committee (which meets to examine whether public expenditures are applied for the purposes prescribed by Parliament, with the objective of encouraging sound finances and evaluating the effectiveness of projects and programmes) has not produced regular reports. In fact, the last report was submitted in 1984 and it concerned Government accounts in 1967. The Committee met in December 1993 for the first time since 1990, but have now resumed regular meetings. The aim is to consolidate the financial Statements for 1992 and 1993, though the audit reports are not yet complete.
Alongside the dramatic expansion of the civil service there has also been a significant fall in its quality, largely as a result of wages at levels too low to recruit and retain adequately skilled staff. There is a serious deficiency of skills within the Public Service which needs to be addressed urgently.
Apart from the wages issue, there are number of personnel management issues that need to be addressed. Whilst on the surface the solution would appear to lie in devising an equitable and consistent wages policy for the public service, in fact this will only address part of the problems intrinsic in the civil service today. Personnel management is a key issue requiring reform. Attention should also be focused on recruitment, performance evaluation, training and development, remuneration and the terms and conditions of employment, rather than only on the narrow issue of improvements to salary levels. Furthermore, any reform must take into account the budgetary and fiscal constraints faced by the Central Government. Thus, any attempt at Civil Service reform must begin by analysing the institutions which are mandated to perform personnel functions. There are two such entities in Guyana, a situation which in itself has contributed to some duplication of effort and ambiguous lines of authority. These are the Public Service Commission which is responsible for the recruitment, promotion, removal and discipline of personnel, and the Public Service Ministry which is responsible for the management and development of the personnel function. Further, each Ministry and Region has a personnel unit, and is responsible in theory for operational matters within guidelines set by the Public Service Ministry and Public Service Commission.
Given the importance of the civil service as an employment source, innovative schemes need to adopted to minimise redundancies, and assist in the retraining of staff so that they can take advantage of alternative employment opportunities. Though some argue that the "public sector attitude" can never be removed from civil service employees, and that "excess" staff should therefore be fired, often when such employees enter the private sector they excel. This implies that the environment, level of training and level of remuneration are crucial factors. Retraining of staff to fill existing vacancies (along with restructured working environments and higher levels of remuneration) should, therefore, be a first step. In general, the social impact of civil service reform needs to be carefully considered. For example, a reduction in the size of the civil service will impact particularly on women, given their high representation in this sector.
At the level of personnel management there are a number of issues which serve to promote bureaucracy and mitigate against an effective and efficient civil service. Firstly the rigid civil service regulations make it difficult to discipline workers. For example, if an officer is suspected of being corrupt this charge must be proved, and dealt with by the Public Service Commission, during which time the officer can continue to perform his or her duties. The rigidity of the regulations also makes it hard to take action against public servants who are habitually late, absent from work or simply do not perform their jobs. Secondly, the system of promotion within the civil service is based on years of seniority, rather than ability, and this tends to act as a disincentive to employees to give their best.
Any attempt at Civil Service reform must begin by analysing the institutions which are mandated to perform personnel functions. There are two such entities in Guyana, a situation which in itself has contributed to some duplication of effort and ambiguous lines of authority. These are the Public Service Commission which is responsible for the recruitment, promotion, removal and discipline of personnel, and the Public Service Ministry which is responsible for the management and development of the personnel function. Further, each Ministry and Region has a personnel unit and is responsible in theory for operational matters within guidelines set by the Public Service Ministry and Public Service Commission.
The Public Service Ministry like most other ministries has suffered a deterioration in its ability to perform the functions assigned to it. This is reflected by the fact that it lacks comprehensive and up to date figures on the number of civil servants by institutions, their respective salaries, the approved establishment lists, and budgeted positions. This makes it difficult for the Ministry to develop and implement any management activities, or estimate the impact of any reforms to the Public Service.
As new staff have been added to the various ministries new job titles and positions have been developed, often with little uniformity in professional rank, levels of remuneration or necessary qualifications. Government has begun to tackle some of these issues through the introduction of a job evaluation exercise, and a Personnel Record Keeping System.
There is a need for the restructuring and strengthening of the individual ministries, to promote greater accountability. Many ministries lack effective financial management information systems, which make it hard to determine their efficiency and cost effectiveness. The set establishment levels of the different ministries also needs to be reviewed to establish whether these figures reflect government sector priorities and allow the individual ministry the room to perform, or whether the establishment levels are in fact set above the levels required. There is therefore a need to tie in the size of the ministries with the government's vision of development.
Whilst some progress has been made on civil service reform, there are still a number of priorities which need to be addressed including:
- the development of adequate systems for the generation, storage and dissemination of operating and management information,
- the standardisation of recruitment and evaluation procedures,
- the introduction of a clear system of information regarding vacancies,
- the introduction of transparent procedures for the evaluation of performance and for the linking of incentives to performance,
- the development of a transparent pay policy,
- the review of the actual needs of the civil service as they relate to establishment levels to fulfill Government policies and priorities,
- the issue of retraining lower level staff as the recruitment of high level staff progress,
- the need to develop a comprehensive recruitment policy, so as to attract technical and professional staff. This issue was addressed to some extent under the World Bank Public Administration Programme, but remuneration levels were not set at a sufficiently high level to attract the numbers of staff the policy had envisaged.
A restructuring of the conceptual, legal and operational basis of the semi-autonomous agencies needs to be carried out.
SAAs were created primarily for two reasons:
Government's inability to fulfill its mandates. This arose from the weaknesses of the public service: the lack of sufficient trained technical and professional staff, compressed wage scales, insufficient salaries, and lack of incentives for increased productivity. SAAs were seen as a way to get around the problems in the public service, by removing the agencies in question from the central government and allowing them to set their own wage and employment policies apart from the strictures of the public service. However, this has not happened.
Government reaction to pressure from donors to establish these agencies, especially the many PEUs. This was also an indication of the lack of confidence in government.
The principal issues concerning SAAs are the following:
Some SAAs have outlived their mandates. For example the State Planning Secretariat (SPS) created in 1977 by an Act of Parliament, was mandated by this Act to perform the functions of central planning in pursuance of the philosophy of co-operative socialism which prevailed at the time. In 1989 Guyana adopted the Economic Recovery Programme, which entailed a change in the dominant philosophy towards free market principles, and yet whilst the activities of the SPS have changed in accordance with this new trend in economic thinking, SPS still operates within its outdated legal framework.
No standard or consistent procedure exists for creating SAAs. Often SAAs are created in reaction to an issue, instead of purposely designed to meet a specific need. This leads to ambiguities and inconsistencies in their institutional structure, mandate, powers and responsibilities. The agency's relationship with its parent Government institution is also unclear, causing communication and co-ordination problems. The agency is often given an unclear mandate, and cannot perform its duties, resulting in administrative inefficiency.
Unclear mandates lead to problems with long term planning. Since the agency's functions are not clearly delineated the agency tends to operate on a short term basis, rather than a long term perspective. This creates deficiencies in the budget process when an agency fails to plan its capital or current budget taking all factors into account.
Inconsistency in salaries among SAAs. Due to the ad hoc nature in which SAAs have been created there is no internal consistency among SAAs as to salary levels for particular grades of professionals. This can lead to problems with attracting and retaining staff.
Insufficient autonomy in decision making on policy issues. As noted above the Boards of SAAs still have to seek approval for policy decisions, this adds to the level of bureaucracy and can serve to frustrate the SAA. For example, the recent announcement that the GFC would increase fees in the forestry sector was eventually put on hold by the Government at the request of the Forestry producers. This denies the GFC the ability to generate sufficient revenue to fulfil its mandate.
Insufficient monitoring of SAA to determine whether they are performing their functions more effectively after the granting of semi-autonomous status/or less efficiently.
There is an unclear financial relationship between SAAs and central Government. Many of these agencies depend on Government subventions. Revenue generating bodies that have been turned into SAAs, such as GFC and GGMC, are not always able to pay for their costs through levies and fees, and still require Government funding, which is insufficient. A standard procedure for the transfer of excess funds back to Government, when they do occur, does not exist.
Need to address the inherent problems of the civil service. Creating SAAs postpones the need for a radical review of the civil service and provides a temporary solution to the endemic problems of the civil service in Guyana today.
There is little accountability in the establishment of SAAs, and once in operation, there is little internal accountability in the administration of SAAs. This allows for the political interference mentioned above.
The Government's privatisation strategy is acquiring greater definition and is being implemented more rapidly. The recent decision to divest more than half of GEC's shares exemplifies this trend. The Government also plans to divest itself from its financial sector holdings (see Chapter 15). In both instances, privatisation needs to be accompanied by the establishment of an appropriate regulatory framework. The State continues to control a wide variety of economic activities through various enterprises and holdings that are in poor condition and require rehabilitation investments of millions of US dollars. Without comprehensive and rapid privatisation, these enterprises will increasingly become a burden for the successful continuation of the recovery efforts.
Some of the main issues and constraints with regard to privatisation are the following:
Non-transparent privatisation. There was a feeling that the privatisation process begun in the late 1980s was not sufficiently transparent, that is, insufficient discussion had been held on the method and means of privatisation.
Limited absorptive capacity of local private sector. The Government has expressed a desire to involve the local private sector in the privatisation process, but problems exist with this method since the local private sector tends to be relatively small and fragile, and in fact an imperfect market operates with respect to the provision of goods and services in the private sector. Businesses tend to be family-run ventures, with the ownership of many sectors of the private sector concentrated in the hands of a few families. This means that the Government has had to evaluate the capacity of the private sector to absorb the newly privatised entities. Nevertheless, progress has been made in removing lingering sources of misunderstanding regarding privatisation and other policies as well, and the policy dialogue between the two sectors is improving.
Poor asset register and weak financial records in public corporations. This makes it hard to determine a fair evaluation of the enterprises for the purpose of privatisation.
Weak monitoring of both public corporations and newly privatised entities.
Policies are required on how the proceeds from privatisation can be best used, to further the economy's growth prospects.
While privatisation is being carried out, policies also are needed on the magnitude and nature of the continuing transfers to public enterprises, as well as the tax obligations of such enterprises.
In practice, there have been a number of deficiencies in the system of regional government:
The regional system is unwieldy and inefficient, and its capacity to effectively promote participation and deliver services is very weak given its human resource and financial constraints. As in Central Government, the regional administrations suffer from chronic shortages of staff, particularly at the senior technical and professional level. Staffing levels vary widely across the different regions, with some carrying higher vacancy levels than others, especially the hinterland locations. The introduction of the regional system, which required large numbers of civil servants dispersed throughout the country, at the same time that Guyana was experiencing large-scale emigration and depletion of skills, handicapped the entire system. Thus, there were structural deficiencies which militated against the effective operation of the regional system almost from its inception. As the State began to grow in size, and personnel were spread more thinly even at the centre, so in effect the Government was instituting a further layer of bureaucracy represented by regional government increased the pressure on the availability of public servants of all skill levels. The regional system also suffers from financial constraints and is short of the funds necessary to allow it to fulfil its functions. Whilst this is true of all the central ministries, financial constraints are particularly acute at the regional level.
There are various problems relating to financial management and accountability. Lines of authority and accountability between Regional Democratic Councils and the Regional Executive Officer are not clearly delineated, and this situation is compounded by fact that regions also have Regional Chairmen. In addition, there is no effective mechanism to link lines of accountability and to ensure consistent relations between sectoral ministries and the regional administrations. Confusion often exists at the regional level as to which line ministry or agency is responsible for a particular aspect of a regional problem. Problems with financial management, accountability and resource management are exacerbated by the fact that the Regional Executive Officer is responsible for submitting the regions annual budget for approval directly to the Ministry of Finance. Thus the Regional budget is not subject to the approval or clearance of the relevant sector ministries. As a result, one may find the region and sector ministries both budgeting for the same work programme. Due to problems with lines of authority and accountability Central Government finds it hard to monitor compliance with appropriations. An additional problem for the Regions is that there is no link during the budgeting process to revenue generated and expenditure at the regional level. Expenditure within the Regions is also constrained by the regulations contained within Ch 28:02 of the Municipal and District Councils Act, which stipulates that expenditures over G$1,000 require the Neighbourhood Democratic Councils to obtain the approval of the Regional Democratic Councils before funds can be spent. Since the Regional Democratic Councils only meet monthly this limits the ability of the NDCs to execute works. Under the same Act, the regions and local authorities levy rates and taxes based on property valuations. These valuations are considerably out of date and need revising to more realistic levels so that the authorities can generate more income to cover their work programmes. Many authorities find it not to be cost effective to collect rates, and hence their collections often are very much in arrears.
In practice, the regional system has acted as an extension of the Central Government. There has been little decentralisation and insufficient autonomy for the regional bodies.
Appointments in the Regional system are sometimes based on political patronage. The Regional system includes Regional Democratic Councils which are made up of elected representatives and a Regional Executive Officer who are appointed by a Minister, often on the basis of political patronage.
The Department of Regional Administration in the Ministry of Public Works, Regional Development and Communication is itself constrained in terms of human and financial resources. The Department of Regional Administration in the Ministry of Public Works, Regional Development and Communication (now replaced by the Ministry of Local Government) was charged with the responsibility of providing technical assistance to the regional administrations. However, the Department itself is severely limited in terms of human and financial resources and requires considerable institutional strengthening if it is to fulfil its mandate.
These and other issues are discussed more fully in Chapter 24 of this Strategy, but they are also integral to any programme of reform of the public sector.
In the end, the appropriateness of the fiscal policy stance is often related to the size of the budgetary deficits. Domestic borrowing to pay for the excess of spending over revenues received causes prices and interest rates to rise. Thus, an expansionary fiscal policy, although raising aggregate demand (by increasing government consumption), typically reduces the rate of private sector investment.
The fiscal policy stance should continue to focus on the limitations of excess demand or curtailing government consumption in order to improve real rates of savings and permit more appropriate modes of financing of the deficit. Reduction of the deficit should be focused on the structure of revenues and expenditure priorities; this provides for the prioritisation of expenditure and the securing of revenues that are due to the State. The main objectives of revenue policy are: a broader tax base; a more uniform rate structure within each type of tax, a reduction of the reliance on indirect taxes, greater revenues from user fees, and improved tax collection methods.
The objectives of fiscal policy regarding the financing of the deficit should be focused on preventing the effects of "crowding out" of the private sector by restricting government borrowing from the domestic banking and non-bank systems.
Expenditure policy needs to give priority to the basic social needs for health, education, and poverty alleviation, and also to social infrastructure such as potable water and sewerage systems. Subsidies and transfers need to be well targeted on social priorities. The management of expenditures should be greatly improved, in the context of a thorough-going reform of the public sector. Finally, the privatisation programme should be accelerated and a role defined for the Government which is more appropriate for the economy in the present era.
Taken together, achievement of these objectives will result in a much more effective government that can better support the overall national objectives, including growth, poverty reduction, and satisfaction of basic social needs.
The experience of the last few decades has demonstrated that Government cannot be effective in achieving its mandated aims when it is spread too thinly and tries to guide directly the productive spheres of the economy. In addition, such an orientation on the part of Government has the effect of discouraging private initiative and fostering a mentality in the private sector which seeks favours through edicts of public policy rather than emphasising its own productive efforts.
The policy of Government is based on the premise that the private sector must be the engine of growth, that is, of creation of employment and incomes. Government is primarily responsible for assuring the provision of the basic social services and infrastructure that the nation requires, although, in many instances, the actual mechanism of providing such goods and services will be that of contracting with the private sector. Government also will strengthen its regulatory and monitoring roles in the economy, especially in areas of natural resource development such as mining, forestry and fisheries, but also in other key sectors of the economy such as banking and insurance. Above all, it will undertake to ensure that the basic needs of the poorest groups in the population are met.
An important implication of this policy stance is that Government does not require ownership of the means of production in order to carry out its role. On the contrary, ownership of factors of production by the private sector improves the incentives for investment. Accordingly, the privatisation programme will be accelerated and greater reliance will be placed on the mechanism of concessions for development of transport facilities and other forms of infrastructure, beginning with the proposed export processing zone. In the same spirit, the tenure status of agricultural land will evolve over time so that there is a predominance of the forms of freehold and tradeable leases.
This policy orientation will improve the Government's revenue base, thus enabling it to provide better support to essential social programmes, and it will allow Government to play its role of oversight and regulation more effectively by concentrating its effort and emphasising staff training for those purposes.
With regard to the public sector accounts, beyond question Government plans to continue to pursue its course of reducing the fiscal deficit. As long as the deficit is present to a significant degree, it not only threatens to spark a revival of inflation but it also affects interest rates, and therefore the volumes of private investment. Furthermore, its financing adds to the Government's stock of indebtedness at the very time when that stock needs additional reductions. Another deleterious effect of the deficit is that it inhibits portfolio diversification into productive investments on the part of financial institutions. For all these reasons, strengthening the revenue base and continuing to reduce expenditures are actions that will continue to command priority attention from Government in the coming years.
Central Government revenue mobilisation needs to be improved. Institutional weaknesses have contributed to inadequate collection rates in the major revenue agencies. There is no doubt that revenue collection can be further improved over its present levels. With regard to current revenues, the revenue collection agencies lack coordination of policies to implement properly and maintain an effective system of monitoring revenue collection; targets are being determined in an effort to meet expenditures as opposed to devising structural improvements in methods of revenue collection. Capital revenues are heavily dependent on grant financing that are subject to external contributions. Hence, this type of financing cannot be sustained in the medium to long term. It is observed that in 1995 grant financing increased from 33 percent of total capital revenues in 1993 to at about 45 percent in 1995.
The following policies will improve the government revenue collection:
1. Capital Revenues
The pace of the privatisation programme will be enhanced. The government will focus on divesting some of its financial and non-financial holdings so as to improve the growth of proceeds from divestment; this will provide a significant source of capital revenues at least in the short to medium term, perhaps of the order of G$1 billion per year. As regards external capital funding, Government will continue its policy of reducing the interest rates on outstanding obligations wherever possible, through substitutions of new soft loans for existing loans.
2. Institutional Aspects of Revenue Collection
It is essential to implement the Revenue Authority as planned and support its activities with the necessary funding, staffing, and infrastructure. Any expenses incurred in doing this should theoretically be recovered by the Authority's increased ability to collect tax revenues. The incorporation of IRD and Customs into one body should reduce administrative inefficiency, informational gaps, and confusion of responsibilities.
It is also important to implement the proposed Unique Tax Identification Number framework, as a replacement to the faulty record-keeping systems of IRD and Customs. A computerised system will be provided to facilitate duties. This would update the information on taxable resources and allow for easier and more comprehensive collection of taxes by the Revenue Authority. The information will also be easier to update. Non-compliance and tax evasion would be curbed by this system as well, mostly due to the increased accuracy and pertinence of the tax information base.
Training of staff is vital to Government's ability to collect revenues and will be pursued. This includes not only technical training, but management training as well. There is a great need for adequate personnel and training in adequate systems.
The problem of staff vacancy in revenue collecting bodies is a serious one, especially at the level of the more skilled positions and data-entry clerks. According to the Ministry of Finance, Customs & Excise had a vacancy ratio of 36 percent at the end of 1995, and 54 percent in the Ministry of Finance. This issue ties in with the greater problems of poor public sector wages. The issue of wages must be tackled before any other reforms can be properly implemented. It would be preferable to consolidate some of the vacancies into more highly-skilled positions, because a well-trained person with a good computer system at his or her disposal can make great progress in enhancing revenue collections.
3. The Structure of the Tax Regime
The tax code has been improved in recent years, but it needs further rationalisation in the interests of fairness, efficiency and ease of collection. Some of the principal options to be reviewed in this regard are the following:
Government will review and analyse the benefits of maintaining the existing indirect taxation system vs. switching to a value added tax (VAT) regime. The commitment to lower the Common External Tariff means that the tax base needs to be broadened even to maintain current levels of revenue. This may require a move away from the consumption tax and import taxes to other schemes like the VAT. Many countries do not use the consumption tax, and as economies develop they tend to shift the emphasis away from import duties, which have distortionary effects. In Guyana these duties still account for a large proportion of revenue. According to the 1996 Budget, import duties plus the consumption tax account for 36 percent of total projected tax revenue.
Under a VAT, the final consumer pays the tax, regardless of whether it is a good or a service that is purchase. One of the advantages of a VAT is that it has a larger component of self-enforcement of other tax systems and it permits easy cross-checking, since both purchaser and seller of intermediate goods and services file their receipts with the tax authorities. Therefore a VAT should reduce tax evasion. However, its implementation would require extensive training of the staff of the new Revenue Authority. The experiences of Trinidad and Tobago, where a VAT has been implemented successfully, and Grenada, where it failed, should be studied carefully.
The purchase tax collected by IRD should be incorporated into the import duty or the consumption tax regime (and eventually into a VAT). IRD has been essentially collecting revenue, through this tax, that should have been under the jurisdiction of Customs and Excise, and this has created administration confusion.
In spite of the progress in lowering the top rates of the import tariff schedule, the present tariff regime is still somewhat non-uniform when the rebates are taken into account. It could be useful to make further simplifications, for example, to a maximum of four categories of goods for purposes of applying tariffs: capital goods, intermediate goods for production, ordinary consumer goods, and luxury goods. In recognition of the need for additional public revenues, both to reduce the government budget deficit and to raise the standards of public service, it could be useful to propose a low minimum tariff, of say three or five percent, rather than a zero tariff for capital goods, with increasing tariffs for the other three categories of goods. Some countries in the region exempt imports of capital goods entirely, but a minimum tariff at this level should not disadvantage Guyana noticeably from an investor's viewpoint, and investor confidence would be enhanced by a more transparent tax regime.
At the other end of the scale, tariffs that are too high simply encourage evasion, so consideration will be given to reducing somewhat the top rates for "luxury" goods.
Similarly consideration will be given to elimination of the exemptions in the consumption tax, in favour of a uniform rate that is lower than the highest present rates of that tax.
An argument can be made for eliminating export taxes (except for the sugar and rice levies), on the grounds that they encourage evasion (e.g., in fisheries) and represent counterproductive incentives, plus the fact that the revenue they raise is relatively small. Similarly, the cost of collecting marginal taxes such as the stamp duty tax may exceed its value to the treasury. An evaluation of the cost-effectiveness of these marginal taxes will be carried out.
If different taxation rates are to be applied to foreign and domestic enterprises, or to operations of different scales, then it would appear important to develop and codify at most two or three distinct taxation regimes and clarify completely which cases belong to which regime. Clearly there is a case for a mining tax regime, as pointed out in Chapter 32, but it should be noted that preferential taxation regimes for foreign investment are on the wane world-wide, especially in the mining sector.
Consideration will be given to an eventual lowering of the top rates of the corporate income tax so that they do not exceed 35 percent for any sector. The present differential by sector in the top rates is hard to justify from a viewpoint of economic logic and the country's development prospects. The 45 percent rate is currently above the corresponding levels in almost all other countries of the region.
A case can be made for additional increases in annual licencing fees for motor vehicles. This is, after all, a progressive tax.
As noted in chapters 34, 35 and 36, high priority is being given to the development of an export processing zone for Guyana. Such zones have been instrumental in the economies of a number of other countries in the region. Guyana's economy at present is narrowly based on a few primary products and could benefit from diversification. Guyana's strategic location could become an asset for attracting the needed investment in such a zone, provided that it were linked to the proposed construction of a deepwater port at the same time. A special tax regime will be developed for the export items produced in that zone.
The special import tariffs and property taxes mooted in Chapter 40, to sustain a special fund for maintenance of sea walls, will be embodied in legislation for that purpose. Their rates are small but in the aggregate they will provide enough funding for the essential task of maintenance of that infrastructure.
The exemptions on import tariffs, the consumption tax and other taxes that are now conferred on LINMINE, GAC and other public enterprises will be phased out.
The partial cost recovery measures in the fields of health and education that are proposed in Chapters 19 and 20 should be pursued, in the interest of generating more funding to improve the quality of these vital social services. The manner in which partial cost-recovery is proposed for those sectors is progressive, so that low-income families will not suffer an additional financial burdens. Similarly, a greater degree of cost recovery needs to be pursued in transport, in order to finance improvements in that sector's infrastructure.
A major potential source of tax revenue that is hitherto almost completely unexploited is the property tax, in both urban and rural areas. A property tax regime should be structured so that it generates revenues for both local and central governments. In rural areas such a tax is especially important because of the notorious difficulty of estimating income tax obligations of farmers. For them, the property tax would be deductible from their income tax, and in practice for most of them the former would substitute for the latter. (See Chapter 29.) Simple calculations based on prevailing land rental rates suggest that a rural property tax easily could raise revenues of the order of magnitude of G$1 billion per year.
Property taxes are gaining increasing favour throughout the developing world as a revenue source. However, plans to launch them oftentimes run aground on the shoal represented by lack of up-to-date cadastral information. This obstacle can be circumvented by the expedient of establishing uniform tax rates per acre for agricultural land, and not per unit of value of the land. It is important not to establish too many categories of land for tax purposes, because that can introduce a large element of subjectivity into the taxation process. It is preferable to define at most three or four categories, such as coastland and hinterland, with and without irrigation, and establish a uniform rate per acre within each of these categories. In addition to generating revenue from a lightly-taxed sector, such a land tax has the significant benefit of encouraging more productive use of the land. A landowner can hardly leave the land idle, or underutilised, if he or she is required to pay a tax on it.
The royalty and licensing regime for forestry and fisheries requires revision, as indicated in Chapters 30 and 31, and more revenues should be generated thereby.
In the revision of the tax regimes for natural resources, it is important to respect the role of the Amerindian Development Fund and the requirement to deposit a share of the royalty proceeds in that fund (Chapter 22).
These changes in the structure of the national taxation system should result in a system that generates significantly more revenues and at the same time is fairer and more conducive to economic growth.
The following proposals are recommended to improve government's expenditure management:
1. Capital Expenditures
There should be a clear distinction between capital and current expenditures to estimate effectively the levels of expenditures needed to ensure that capital works are efficiently undertaken consistently with national objectives. This will reduce expenditure overlapping that is a result of substituting one category of expenditure for another, for example, substituting rehabilitation works for maintenance.
Technical management needs to be improved. Most capital works are stymied by the lack of technical competence to undertake required works and results in over-expenditure and inadequate quality. Also lack of technical competence severely affects the implementation of larger projects, resulting in delays in the completion of projects and reducing the estimated returns on the project.
Local systems should be put in place to guide project preparation and execution. Major investment projects in the past were not designed locally but rather outside the country and the Government had little say in their design. This allowed for projects to be alien to local technicians and resulted in many bottlenecks that slowed the execution of the project. More often than not, delays in the projects funded from external sources necessitate penalty fees that add further strain to the budget.
2. Current Expenditures
Policy on fiscal expenditures over the period of this Strategy is governed by three priorities:
Increasing real expenditure on basic social services, especially health, education and poverty alleviation.
Increasing real expenditure on productive infrastructure, especially transport and energy.
Increasing real salary levels in the Public Service by a significant amount, especially in the upper ranks.
Although fiscal revenues undoubtedly will have to increase so that these expenditure priorities can be met, a number of measures can be taken to ease the required net growth in revenues. They have been mentioned elsewhere in this Strategy; they may be summarised as follows:
Implementing a policy of partial cost recovery in the fields of health and education.
Improving administrative efficiency in both these fields, as discussed in Chapters 19 and 20.
Utilising the mechanism of concessions to the private sector for the construction and operation of productive infrastructure, including roads, bridges, ferry services, and water and sewerage systems.
Proceeding with the privatisation of GEC and evaluating the possibilities of eventually corporatising water and sewerage systems and harbours, as is being done in a number of countries in the region.
Pursuing the above-mentioned approaches to reducing the size of Public Service, especially in the lower ranks, including natural attrition, acceleration of retirement, prevention of moonlighting, enforcement of the retirement age, and so forth (as mentioned in section III.B above).
Continuing the policy of reducing transfers to public enterprises. Effectively, from 1997 onward the only items in this category that will remain in the Budget are the transfers for the hospital, schools, and water and electricity systems that have been operated by LINMINE, plus the Japanese and Dutch debt of LINMINE.
In share of total Central Government expenditure devoted to health and education, Guyana still falls well below international norms, as may be seen from the following data on those shares for developing countries in different regions of the world during the period 1989-92:(5)
Education Health
Africa 15.7% 6.0%
Asia 14.0% 5.5%
Middle East 14.3% 5.5%
Western Hemisphere 13.9% 10.2%
Global average 13.0% 6.4%
Memo: Guyana, 1994 6.3% 6.7%
The shortfall in Guyana is most pronounced in education. In health, we appear to be closer to the international norm except when compared with the average for our Hemisphere. However, it must be borne in mind that in most countries in Asia and Latin America the private health care systems are relatively more developed, and therefore our total share of public expenditure represents relatively less coverage of health needs than appears at first glance.
In order to meet the pressing needs in these sectors and restore them to their former preeminent state, goals for shares of public expenditure for these vital sectors in Guyana are as follows:
Education Health
Year 2001 10% 8%
Year 2006 14% 10%
To the extent that private services in both sectors grow over time, these goals could be moderated somewhat, but the fundamental point is that more expenditure is urgently needed in both fields, as well as improvements in the efficiency with which expenditures are administered.
Another basic budgetary reform that can assist significantly in helping meet basic social needs is to ensure that subsidies are well targeted on the lower-income groups. This means, among other things, charging large farmers for agricultural extension services, and requiring that better-off families pay fees for selected medical services and also that they pay basic fees to cover part of schooling expenses.
There is a linkage between the capital and recurrent budgets that requires more attention, viz., O&M costs. For new projects addressed during the planning process, the O&M costs should be built directly into the budget. Implications for the recurrent budgets should be worked out early, rather than capitalizing those accumulated costs into new investments. Only with sufficient provision for O&M are investments sustainable in the long run.
In the area of resource utilisation, the aim should be to implement an efficient national budgeting system, which would require tackling the problems identified in the legal framework, the organisational arrangements and the budget process. This should be done for the following reasons:
It creates the linkages with Government's overall development strategies and priorities;
It provides the key tool to enforce the spending disciplines which help to ensure macro-economic stability;
It establishes the best use of scarce resources;
It evokes public confidence in the Government's financial management;
It creates accountability in sector ministries;
It facilitates decision making and implementation of decentralisation policies;
It points out policy overlaps and gaps; and,
It brings policy coherence questions into the open.
In addition, it is essential that the important links between resource utilisation and the National Development Strategy are realised. For instance, the budget process is a principal way in which the NDS will actually get implemented.
As discussed in section II.B above, a number of far-reaching changes have been instituted very recently in regard to the budgetary process in the public sector. These changes form the foundation of the policies of the National Development Strategy with regard to resource utilisation in the public sector. Nevertheless, the reforms must be fully implemented and other outstanding issues tackled, such as:
The legal framework for the Consolidated and Contingency Funds needs to be strengthened to ensure that over the longer run they are used for the purposes for which they were conceived.
The linkages between the National Development Strategy and the budgeting process need to be specified and the corresponding procedures identified. International experience suggests that the most appropriate format is the Annual Operating Plan (AOP), which first should be developed at the sectoral level and then at the national level. An AOP should be required from each ministry before its budget estimates will be accepted. In sectors in which ministries and/or agencies need to cooperate in carrying out the National Development Strategy, the Ministry of Finance should give the corresponding guidance. The AOPs, which are in effect implementation plans for the NDS, should translate the policies of the National Development Strategy into goals and actions for each year, and those actions should then be translated into requirements for the capital and recurrent budgets. This will help institutionalise the new emphasis on programme budgeting which is being implemented on a pilot basis.
The role of the AOPs and other information about programme budgeting should be presented at Cabinet in several sessions and discussed fully.
The Financial Audit Act needs to be amended to specify more clearly and with greater precision the responsibilities of the Secretary to the Treasury, the Auditor General and the Ministry of Finance.
The new emphasis on improved monitoring and controls, including field visits, should be continued and strengthened.
Similarly, it is essential that the new momentum for computerisation and better data handling be continued and intensified.
To strengthen the links between the National Development Strategy and the budgetary process, the following measures need to be taken in addition to developing the AOPs:
Plan the budget process so that there are specific times and events at which NDS initiatives are reviewed in the context of the draft Budget, and so that time is available for the Cabinet and the President to review how the NDS is being incorporated into the Budget.
Ensure that projects are included in the PSIP for carrying out each of the sectoral strategies in the NDS, and approach donors for commensurate funding in light of the vision laid out in the NDS.
Institute a process of reviewing each year the success of major initiatives funded through the Budget in past years. A start could be made on this process by reviewing one major initiative per sector in the first year, then two initiatives in the second year, then three in the third year, and so forth. Continuing funding should be made contingent on the outcome of these reviews.
Ask Ministries to accompany their budget submissions with specific statements of the reforms the NDS requires in their ways of doing things.
Over the course of a few years these reforms, plus those which have been initiated (see section II.B) and improvements in the real wages in the public sector, will lead to very significant improvements in the way government is managed, with consequent benefits for the country as a whole.
The annex to this Chapter summarises and develops further the linkages between the Budget and the NDS.
Despite the reforms already implemented much remains to be done to improve public service performance: the size of the public sector needs to be reviewed; there is a need for a pay policy, and incentive structure; job evaluations; setting and maintaining staff establishments which reflect the real needs of the Public Service; developing systems for the generation, storage and dissemination of operating and management information; and improvements in accountability.
It should be noted that this reform process must include dialogue with interested parties, and participation from the highest levels in the sector ministries and agencies if the reforms are to be lasting and sustainable. The process must also be sensitive to the political and economic realities of Guyana.
There should also be consideration of how staff in the civil service can be retrained, either to fill vacancies at higher levels, or to take advantage of alternative employment opportunities in the public sector.
Additional specific measures that are needed include the following:
The standardisation of recruitment and evaluation procedures. There also needs to be a clear framework for disciplinary procedures. One possibility would be to devolve some of the responsibility for disciplinary action to Disciplinary Committees established within sector ministries under the guidance of Permanent Secretaries. In general, managers should be given greater control over staffing issues. The idea of the public sector as a source guaranteed lifetime employment may need to be reassessed, though only in the context of higher wages to compensate for the greater risk of redundancy.
The introduction of a clear and complete system of information regarding vacancies.
The introduction of transparent procedures for the evaluation of performance and for the linking of incentives to performance. The issue of a merit based appraisal system should be considered, and a promotion scheme, in which there would be incentives for increased performance through increments to salaries and/or promotion.
The development of a transparent pay policy.
A review of the actual needs of the civil service as they relate to establishment levels to fulfil Government policies and priorities. There needs to be a comprehensive project to look at what establishments are and whether they are needed. For a start, we need to determine whether all people on the payroll actually exist.
Initiating programmes to retrain lower level staff as the recruitment of high level staff progresses.
Develop a comprehensive recruitment policy, so as to attract technical and professional staff. This issue was addressed to some extent under the World Bank-supported Public Administration Programme, but remuneration levels were not set at a sufficiently high level to attract the numbers of staff the policy had envisaged.
Given the fundamental nature of many of changes being considered, managers need to be trained to manage the change effectively.
The basic policy thrusts required to deal with the issues concerning SAAs (see section III.F) are the following:
Clarification and standardisation of procedures for setting up SAAs, with an emphasis on the transparency of the process.
Clarification and standardisation of administrative and policy powers of SAAs, giving them the authority to make policy decisions in their respective domains.
Streamlining the mandates of SAAs to eliminate overlap and to allow the agencies to focus their activities on fulfilling those mandates.
Rationalisation and institutional strengthening of existing SAAs to enable them to operate more efficiently and where applicable in a financially sustainable manner.
Rationalisation of SAA wage and employment policies so that they conform to a standard structure rather than the dictates of high-level officials.
Institution of a system of monitoring the SAAs to ensure they are operating efficiently and effectively and in consonance with their mandates.
Specific measures to put these policy thrusts into practice include:
An extensive review of existing SAAs with the aim of disbanding or restructuring those which have outlived their mandates.
Promulgation of the legal measures required to eliminate SAAs that have outlived their mandate, and incorporate their functions into regular line agencies.
Establishment of guidelines and a standard legal framework for the creation of SAAs, relating to, for example, organisational structure, linkages with the civil service, staffing regulations, salaries, and revenue generation and subventions.
Standardisation of the definition of the different types of SAA and development of corresponding operating procedures for each type.
Verification of their mandates, and determination of options for how the agencies can better fulfil their mandates.
An institutional analysis of the relations between SAAs and Central Government. Ways to provide SAAs increased autonomy and decision-making power should be formulated under this study.
A financial analysis of the agencies. Issues to be addressed include a clarification of the funds each SAA may retain if it is a revenue generating body and a standard and transparent procedure for Government subventions. The financial sustainability of all SAAs must also be examined, including ways in which the agency can generate revenue through and for its activities.
Greater autonomy and decision-making power should be vested in the Boards of Directors of SAAs to allow them to fulfil their mandates without undue political interference.
Development and implementation of monitoring system for SAAs to promote their more efficient provision of goods and services
Development of a standard procedure for transferring funds that are collected by SAAs and are in excess of their budgetary needs, to the Central Government.
As noted in section III.G, the Government's privatisation strategy is now being clarified and the process is moving forward with greater dispatch. To complement this momentum, it is important to carry out the following additional measures:
Establish an updated regulatory framework for newly privatised entities that are in the nature of public utilities.
Ensure the transparency of the privatisation process, in part by using the mechanism of public tenders in the sale of enterprises.
In view of the apparent limitations on the financial absorptive capacity of the Guyanese public, take special measures to ensure as wide a participation as possible in the ownership of the newly privatised facilities, including partial subsidies on the shareholdings that are to be sold to the general public.
To ensure that the nation gains as much benefit as possible from the proceeds of privatisation, adopt regulations that limit the use of such proceeds only to government debt retirement and capital outlays for infrastructure projects.
Develop forums through which privatisation strategies can be reviewed with the private sector in advance of their implementation, in order to engender greater confidence in the process on the part of the private sector.
Eliminate transfers to public corporations (as is being done), except those indicated in section V.C.2 above for the case of some LINMINE's activities and debt.
The regional level of government is the one that has generated the most dissatisfaction and debate about its proper role. Clearly, fundamental reforms are needed. Chapter 24 makes extensive recommendations regarding regional government (in section VI), so rather than repeat them here the reader is referred to that Chapter.
1. These figures are calculated from Estimates of the Public Sector, Current and Capital Revenue and Expenditure for 1996, p. 33.
2. These figures exclude employment overhead expenses, which amounted to 31.8 percent of wages and salaries in 1995.
3. Restructuring Report (16/02/1996), prepared by Ms Sonya Roopnauth, Economic and Financial Analyst, Office of the Budget.
4. In addition, there is a low incentive problem inherent to generalised wage increases as individuals may interpret an increase in wages without improved performance as an "award" for efficiency, thus reducing their efforts.
5. Source: World Bank, Latvia Public Expenditure Review, 1994.