Cayman Islands Finance Minister delivers the government’s Strategic Policy Statement for financial year ending 2016
Address by the Hon Minister for Finance & Economic Development, Hon. Marco Archer 26th November 2014
Madam Speaker, the Government’s 2015/16 Strategic Policy Statement (the “SPS”) which has just been Tabled, outlines the Government’s medium-term fiscal plans, policy priorities and broad strategic outcomes. It also establishes the Government’s fiscal targets for the next three financial years: 2015/16;
2016/17 and 2017/18, and will form the basis of the budget planning process for the next three years.
Whilst the presentation of a 3-year Strategic Policy Statement is mandated by the Public Management and Finance Law, I am not here today to speak simply about compliance with a statutory requirement, important as that may be.
My purpose today in speaking to the SPS that has just been Tabled, is to demonstrate the importance of, and evidence for, strategic planning – which is a defining characteristic of this Government. Strategic planning is essential for the success of our Country and is at the core of prudent fiscal management. Although the wants and the needs of the Country are many, it remains essential for the Government to engage in strategic and sound fiscal planning to ensure the sustainability of our thriving and successful economy.
Madam Speaker, through the strategic planning process, the Government is able to identify the needs that are most important to our community and to allocate funds to meet those needs. The process also allows us to look ahead and make provisions for the necessary investments that will take these Islands to the next level. The goals of this Government are to reduce cost of doing business and to elevate the overall quality of life for all Caymanians and residents alike – a higher standard of living, better and affordable healthcare, higher academic achievement in our schools and stronger and more competitive tourism and financial services industries.
Improvement in the quality of life comes in many forms: be it creating additional jobs and achieving full employment; be it improving the transportation network so that families spend fewer hours sitting in traffic and more time interacting with their children; or finding ways to reduce the cost of doing business in
order that we can reduce the cost of living so that families do not have to work so many hours to meet the monthly expenses of the household – this Progressives-led Government is working hard to build a better community for the benefit of current and future generations.
The Strategic Policy Statement of the Government sends a clear signal to citizens and residents of these Islands and, to the private sector that the Government will not be an impediment to progress: that public finances are being restored; that public sector debt is declining; and that the Government has a credible plan to move the Country forward for a bigger and brighter tomorrow.
Working together Madam Speaker, we will build a stronger community with a diverse economic base, where businesses and individuals can continue to thrive.
Madam Speaker, this Government strongly believes, that the means to restore public finances and the fortunes of these Islands, is not through greater taxation and bigger Government; rather, it is through sound economic policies that are conducive
to economic growth and increased economic opportunities for our citizens and residents.
The domestic economy continued to recover in 2013, and higher growth is expected for 2014. This is conditional on the sustained strengthening in demand for tourism services and modest growth in the financial services industry.
As you know Madam Speaker, the GDP of a country is the monetary value of all the finished goods and services produced within its borders during a specific period of time – a year. It is widely regarded as a benchmark indicator for economic performance.
The economic outlook for these Islands over the next three financial years shows sustainable growth in Gross Domestic Product (or “GDP”), relatively stable inflation rates and declining unemployment.
Based on the economic performance of 2013 and the first six months of 2014, estimated GDP growth for the 2013/14 fiscal year stands at 1.6 per cent while the forecast for 2014/15 remains at 2.1 per cent.
Madam Speaker, those growth rates are the strongest estimated so far for the Country during the post-2008 global financial crisis. We have seen economic growth in the wholesale and retail trade; hotels and restaurants; transport storage and communication; real estate, renting and business activities; and construction.
Madam Speaker, over the upcoming 3 financial years, the Cayman Islands’ GDP is expected to grow by an average of 2.6 percent. Among Economists, there is a general consensus that presently an average annual growth rate between 2.5% and
3.5% in GDP is considered respectable.
Whilst the Government will continue to play its part in facilitating economic growth, it is important to note that Government spending is not expected to be the sole driver for the forecasted increase in GDP.
Instead, growth in the economy will rely heavily on domestic private consumption and investments, which will be primarily stimulated from construction projects (such as hotel and condominium developments), and major infrastructure ventures (including the George Town cruise-ship berthing facility; Owen Roberts Airport terminal upgrades; the East-West arterial road extension; and the new solid waste management facility).
Madam Speaker, where the GDP of a country is growing at a moderate but sustainable rate and its inflation levels are kept in check, that is an excellent indicator of a thriving economy.
The consumer price index (which measures inflation), which represents the variation in prices paid by typical consumers for retail goods and services, is expected to grow by an average of 2.3 percent in the 3-year period covered by the SPS.
Madam Speaker, the unemployment rate varies with economic growth and the anticipated creation of increased employment opportunities. We are anticipating a reduction in the unemployment rate from 5.9 per cent in 2014/15 to 5.7 per cent in 2015/16 and down to 4.9% by the fiscal year 2017/18.
The Government, through the National Workforce Development Agency, will work to ensure that the decline in unemployment does not only relate to the aggregate workforce, but more importantly, to the Caymanian unemployment rate. We have to be clear Madam Speaker, as to for whom we are building this Country. Nevertheless it is accepted and expected that the unemployment rate for non-nationals will also decline over the same period.
Therefore, the Cayman Islands are currently in a “sweet spot” in regards to its current and forecasted GDP growth – a relatively low inflation and declining unemployment rates.
The Government’s medium term fiscal strategy is focused on: continued fiscal prudence in the Public Sector; the facilitation of continued private sector growth; development of key infrastructure projects; and continued investment in our people.
Prudent Fiscal Management:
Madam Speaker, as a result of this Government’s fiscal prudence, there have been no new revenue measures thus far and it is our hope that this will remain the case during the 3-year period covered by this SPS.
On the expenditure side, the cost of operating the Public Service is forecast to remain relatively static with an increase of just 1% between the current 2014/15 expenditure budget and the SPS financial targets for the 2017/18 year. This forecast position does not take into account any efficiency gains which may accrue from the implementation of any accepted recommendations contained in the Project Future report – also known as the Ernst & Young (“EY”) report.
To ensure Public Sector expenditures remain in-check and further enhance the prudent management of public sector finances, the Government will be taking steps to improve its procurement regime.
The Ministry of Finance & Economic Development will be leading the initiative to leverage the immense buying power of the Cayman Islands Government through a centralized procurement system.
To further that effort, the Ministry recently concluded the recruitment of the Director of the Central Procurement Office.
Standardization in specification and policies are expected to yield numerous benefits such as reduced costs, reduced future maintenance on vehicles, machinery and equipment, greater transparency in the procurement process and greater compliance by private sector merchants wishing to do business with the Government.
The Ministry will now be moving swiftly to develop the policies and procedures that will be used going forward to ensure that the citizens of this country receive optimum value for every dollar spent.
Madam Speaker, the Government is working hard to keep public sector expenditures in check. Presented today is a modest, credible and achievable plan on how this Government intends to manage its affairs in the upcoming financial years.
Madam Speaker, there is a clear economic and moral case for providing some relief to Civil Service workers and I am proud to be part of the Government that has managed the financial affairs of the country in such a manner as to be able to afford to do this in the 2015/16 financial year without significantly increasing the cost of running the Government. Government’s budgeted net Operating Expenditure for the current 2014/15 financial year is $529.7 million: the expected net Operating Expenditure figure for 2017/18 is $535.7 million. This is a modest increase of $6 million or a 1.1% increase over a three year period. However, Madam Speaker, this is CI$30.8 million less than the actual expenditure as at 30 June 2013 of CI$566.5 million.
The Government, like the private sector, is subject to the same pressures of inflation, therefore, the ability to keep Government’s expenditures more or less constant is a result of increasing efficiency. Moreover, the cost-of-living adjustment is offset by other areas of expenditures which show decreases over the SPS timeframe – such as reduced interest costs; and reductions in “other executive” expenses with respect to provisions established in the current 2014/15 budget that are not required to be repeated in years subsequent to 2014/15.
Notwithstanding the planned cost of living adjustment, the Government’s fiscal plan shows marked improvement in several key indicators of fiscal health within the public sector.
Annual operating surpluses are expected to be $124.5 million in 2015/16, $134.8 million in 2016/17 and $168.3 million in 2017/18. Over the same period, the Government’s net worth is expected to grow from an estimated $1.594 billion as at 30th June 2014 to a forecast $1.948 billion at the 30th June 2018. This Madam Speaker is before the impact of the past service healthcare liability which I will speak to later in this address.
During the 3-year period covered by the SPS, the Entire Public Sector will repay approximately $127.6 million in Debt principal. This will reduce the Public Sector debt balance to a forecast amount of $509.7 million as at 30th June 2018.
The annual interest cost on Entire Public Sector debt amounted to
$39.2 million for the 2012/13 financial year – which coincides with the start of this Government’s term. As a result of the debt principal repayments, interest costs for the Entire Public Sector are expected to fall to $28.2 million during the 2017/18 financial year.
This $11 million reduction is enough to fund the entire scholarship program of the Ministry of Education which provides increased opportunities for Caymanian students to receive tertiary education.
Madam Speaker, for the 2013/14 financial year, the Government had an overdraft facility and the overdrawn balance peaked at CI$22.6 million on 20th December 2013 but this was well within the overdraft limit. On 14th January 2014, the Government’s operating bank account balance became positive and, remained positive to the end of the 2013/14 financial year. In contrast to the existence of an overdraft facility during the 2013/14 financial year, the Government will not require an overdraft facility to fund its operations during 2014/15 and subsequent financial years. This again is a result of prudent financial management which has now placed us in a position whereby our operating cash is sufficient to fund the operations of the Government throughout the entire 2014/15 and subsequent financial years without the use of an overdraft facility. Therefore, there has been a significant improvement in the management of Government’s cash resources.
Madam Speaker, as I’ve just outlined, the Government is expected to have healthy surpluses throughout the forecast period; and a significant decline in its debt balances. As is often said Madam Speaker, “cash is king”.
The Government is also required to have sufficient cash balances to cover a minimum of 90 days of expenditure, for financial years 2015/16 and onwards. For the 2015/16 financial year, it is expected that Government’s cash balances will provide coverage for 96.3 days of expenditure, at the measurement date of 31st December 2015. For the financial years 2016/17 and 2017/18, the ratio is expected to be 156.1 days coverage and 202.6 days coverage, respectively. Therefore, Government will comply with the 90-day minimum requirement as set-out in the FFR. Government is forecast to have a total cash balance of $256.1 million at the end of the current 2014/15 financial year. At the end of 2015/16 financial year that balance is expected to rise to $337.8 million, and then to $404.7 million at the end of 2016/17 and to $514.5 million by the close of the 2017/18 financial year.
What that means Madam Speaker is that by 30th June of 2018, if there are no natural disasters, the economy performs as expected and we are able to contain or further reduce operating costs, the central Government is forecast to have more cash in its bank accounts ($514.5 million), than the total outstanding debt balance of the entire public sector ($509.7 million). That will be a monumental achievement for this Country considering where we were just a few short years ago.
Facilitation of Private Sector Growth: As we all know Madam Speaker, the private sector is the engine that drives our Economy. The Government will therefore ensure that measures taken will be conducive to an environment which fosters continued private sector growth and job creation locally.
In the current 2014/15 financial year, the Government announced measures to reduce the cost of doing business for private sector businesses. These measures included a reduction in the import duty rates for licensed traders, various fee reductions for small businesses and a reduction in the import duty rate on diesel fuel used for electricity generation. The Government plans to continue these reduced rates and fee waivers as they are beneficial to the economy and will continue to evaluate opportunities for further reductions to the cost of doing business.
Madam Speaker, in addition to the measures announced in the 2014/15 budget, the Government will continue support to small and medium-sized enterprises (SMEs) in a targeted and cohesive manner.
Internationally, it is accepted that the development of SMEs has shown the greatest potential for job creation, sustainable economic development, and the production of affordable goods and services.
One of the biggest challenges to the development of SMEs in the Cayman Islands is access to credit. As the Government works to reduce the level of debt outstanding at the Cayman Islands Development Bank and strengthen its balance sheet, it will also seek to make continued capital injections to enable the institution to resume its role as a facilitator for the development of small and medium size enterprises.
Madam Speaker, mistakes were made in the past which led the CIDB to the brink of bankruptcy. This Government has taken a more measured approach in ensuring that entrepreneurs have appropriate guidance and coaching through the Department of Commerce and Investment to develop their ideas.
Where a business shows true potential, the CIDB will be placed in a position to provide appropriate credit facilities for its further development of that business.
Development and modernization of our Infrastructure:
The public sector capital program is set to remain modest as the Government continues to improve public sector finances and reduce debt. The Government’s strategic plan provides for a $47 million investment in capital expenditures for the immediate 2015/16 financial year. Of this amount, approximately $20 million will provide on-going support to Statutory Authorities and Government owned Companies. This means, the Government will only have approximately $27 million available to spend on true capital projects.
However Madam Speaker, as many Caymanians will tell you, ‘it’s not about what you make, it is what you make of it.’ Therefore, there are times when we simply have to cut our garment to suit our cloth.
The Government will therefore not lament the relatively small amount afforded for capital; rather, we will focus on the most effective use of our resources.
Madam Speaker, we are therefore allocating approximately $47 million for capital investments and expenditures in the 2015/16 financial year. Thereafter, we plan to allocate $57 million and $47 million, respectively, in fiscal years 2016/17 and 2017/18. Concentrating on the 2015/16 financial year, the SPS indicates the following allocations to Government Agencies:
$22.6 million to the Ministry of District Administration, Tourism and Transport;
$8.8 million to the Ministry of Planning, Lands, Agriculture, Housing, and Infrastructure;
$5.0 million to the Ministry of Education, Employment and
$3.5 million to the Ministry of Home and Community Affairs;
$3.3 million to the Ministry of Health, Sports, Youth and
$2.2 million to the Ministry of Financial Services, Commerce, and Environment;
$1.4 million to the Ministry of Finance and Economic
$0.2 million to Judicial Administration.
Madam Speaker, investment by the Government in the country’s infrastructure is important. As an illustration of this, the Government has therefore decided to pledge a firm commitment of $15 million over two years, 2016/17 and 2017/18, to fast track the redevelopment of the Owen Roberts International Airport and bring relief to the traveling public.
Madam Speaker, the Government remains steadfast in its goal to significantly reduce Public Sector debt.
In addition to the repayment of the normal principal amounts which are falling due this financial year, the Government will also do an early retirement of approximately US$10 million in bonds currently held by the Cayman Islands Development Bank.
Consequently, as at the 30th June 2015 the total Public Sector debt balance is forecast to be $631.4 million – comprising of $523.5 million for the Central Government and $107.9 million for Public Entities. These amounts are expected to decline over the period of the SPS to arrive at an overall Public Sector debt balance of $509.7 million as at 30th June 2018.
Madam Speaker, when that target is achieved, it will represent a
35.7% decrease in Public Sector debt from the outstanding borrowing figure of $793.4 million recorded at the end of the
2010/11 financial year.
Madam Speaker, I am proud to say that this Government has structured its affairs in a manner so that no more than 9.8% of its recurrent revenue is required to service its annual debt obligations over the SPS period (from 2015/16 to 2017/18).
A 9.8% debt servicing ratio will satisfy the PMFL requirement for the debt servicing ratio to be no more than 10% from 1st July 2016 onwards whilst also allowing the Government to repay the existing debt at an aggressive pace.
This will be achieved through a prudent debt management strategy which includes the setting aside of approximately $18 million of future debt servicing payments in a restricted Sinking Fund during the current 2014/15 financial year. A portion of our future debt repayments will therefore come from this Fund instead of from recurrent revenue.
Importantly, no new long term borrowing is planned during the entire SPS period.
Liability Management Plan
Madam Speaker, as one would expect from a prudent Government, the management of its affairs is not limited to what presently exists, we must also be cognizant of and make plans for how we are going to manage in the future – that, after-all, is one of the primary purposes for which we are here today.
Much has been said about the future healthcare and pension liabilities of the Public Sector and rightfully so. This Government will not bury its head in the sand and pretend it does not exist. Rather, the Government plans to fully ventilate the issue, take ownership of it, and most importantly, do something about it.
Since taking Office, the Government has been making annual contributions of some $11.6 million towards the post retirement defined benefit plan for Civil Servants. The $11.6 million contribution is above and beyond the normal 12% pension monthly contribution paid as a percentage of monthly pensionable earnings. The Government plans to continue making this $11.6 million annual contribution, and have included appropriate provisions in its fiscal plans to do so.
In the area of post-retirement healthcare benefits, the Government commissioned an actuarial study of the future impact of the status quo; that is, what will happen if we do nothing and the present regime is allowed to continue and mature. The study considered future potential benefits for Civil Servants as well as Seamen and Veterans as there are legal, constructive and moral obligations to provide for these groups.
According to the results of the actuarial study, based on what obtains today, the potential future liability of providing for these groups is approximately $1.18 billion. This is predicated on various assumptions including the rate of inflation for healthcare costs, the number of individuals who will quality for these benefits, interest rates, life expectancy and various other factors. What is clear Madam Speaker is that something must be done and done soon.
The Government is now engaging in discussions and further analysis to determine ways in which current changes will impact the extent of the future liability and how best to introduce those changes.
As I said Madam Speaker, the Government plans to fully ventilate and take ownership of this issue, it is not a problem that was created overnight and it’s solution likewise will not be found overnight. That said, the Government will not be deterred in finding a solution and will work in a transparent and consultative manner to address this national issue.
Madam Speaker, whilst the number is a big number and I am under no illusion about the manner in which this will be sensationalized, what I can say, is that by owning this issue and making plans for it, the Cayman Islands will be that much further ahead of many other countries in its fiscal and risk management strategies.
With respect to the Operating Surplus, the Government has been criticized for the large operating surpluses in its fiscal plans. However, Madam Speaker these operating surpluses are necessary to strengthen the Government’s balance sheet so that when future liabilities such as those for healthcare are settled and recognized, the Government will still be in a positive net-worth position.
In other words Madam Speaker, through our fiscal planning, we are laying the ground work to be able to adequately deal with what we know lies ahead.
The Government should be applauded for having the courage to take this on and deal with it in a transparent and forthright manner.
Public Sector Financial Reporting
Madam Speaker, the Government came under much criticism recently when it sought to lift up and encourage 3 Caymanian Public Sector CPAs who achieved improved results on the audit of their respective 2013/14 annual accounts. Some people were quick on their calculators to point out that this was only 3 out of
42 agencies and so that meant that only 7% had received a favorable result.
Madam Speaker, just 4 short years ago, the Auditor General issued disclaimers of opinion on 10 (or almost 25 percent) of the Public Sector reporting Agencies, and only about 1 in 3 (or 33 percent) received a clean or unqualified opinion.
Today, I am pleased to report to this Honorable House, that according to statistics provided by the Office of the Auditor General, as at 31st October 2014, the Audit Office had completed 23 of the 42 audits for Agencies of the Public Sector.
Of the 23 Agencies completed, 16 (or 70%) received a clean (or unqualified opinion) and 7 or (30%) received a qualified opinion, no disclaimer of opinion has been issued. Now Madam Speaker, compare that to where we were just 4 years ago and I believe you will agree that we have been achieving real progress.
Madam Speaker, as the Minister with constitutional responsibility for Finance, I fully recognize and accept my role in ensuring that public finances are planned, utilized and accounted for in a prudent manner. I will not shy away from holding people accountable when they fail to meet those requirements, nor Madam Speaker, will I be deterred in encouraging and recognizing people when they work hard and achieve good results. The Government will therefore continue to encourage and support the talent we have in the Public Sector and work hand in hand to provide the resources that will improve public sector reporting to the point where full accountability is provided to the people of these Islands in a timely manner.
Madam Speaker, the outlook for the Cayman Islands is one of renewed optimism and confidence. In its first financial year in Office, the Government exceeded expectations for its operating surplus and closing cash balances. In its second year, it sought to bring some relief to the economy through reduced taxes and improved incentives for small business. In its third year, the Government will seek to bring relief to Civil Service workers who have been struggling with pay stagnation for eight years.
The two primary pillars of our economy remain vibrant with growing stay over tourism and a flourishing financial services industry.
Overall, the economy is forecast to have moderate sustainable growth, and unemployment is expected to fall below 5 percent over the next three financial years.
A Country without goals is like a ship on the ocean without a destination. This Progressives led Government is committed to the goals of a stronger economy, improved public safety, a healthy society, and a culture of good governance.
This Strategic Plan makes key provisions for the achievement of those goals. It allocates resources for the continued support of our tourism and financial services industries, education, and our law enforcement agencies. It also outlines strategies that will lead to job creation in the private sector and improved opportunities for Caymanians.
Importantly, it shows the Government returning to a position of compliance with all key Principles of Responsible Financial Management as set out in the Public Management and Finance Law (2013 Revision). This return to a position of compliance is consistent with the Medium Term Fiscal Strategy that the Progressives led Government agreed with the Foreign and Commonwealth Office in August of 2013. That plan is on track, on schedule and, on target.
Madam Speaker, it is said that “a dream is just a dream, but a goal is a dream with a plan and a deadline.”
This Government is privileged to lead a great team of people. We are not without dreams; however, what differentiates us is a credible plan for the achievement of those dreams. A main goal of this Administration was the restoration of public finances. This Strategic Policy Statement shows that the plans laid by the Progressives led Government to achieve that goal is coming to fruition and that the Country is poised to realize the dream of restored public finances and the other benefits that flow thereafter.
Thank you Madam Speaker.