1998 - 1999 Budget Address

BUDGET STATEMENT

 April 21, 1998

PRIME MINISTER AND MINISTER FOR FINANCE

SAINT LUCIA

 INTRODUCTION

Mr Speaker, whatever mysteries that may have been concealed in previous budgets, I aim to make this one different. I will be lengthy; I apologize for this, but I am anxious to encourage our people to understand what this Government is seeking to do. So, I have opted for substance and detail.

There is a level of technical sophistication in this budget that is unprecedented. This is so because we have challenged ourselves to bring to bear the most rigorous analysis and the most modern tools of macro-economic investigation and policy.

We have left few if any stones unturned in the quest to find the most creative ways of balancing long-term necessities with short-term benefits. An excellent indication of this is the new approach that was taken in the preparation of this budgetary statement, and is being taken in the multi-media presentation of this budget.

Mr Speaker, the presentation of this Budget has benefitted from a programme of financial reform and management, currently underway in the Ministry of Finance.

Sound financial management of the State’s resources provides a strong foundation for proper accountability. As far as the citizens of this country are concerned, they pay taxes in the full expectation that resources so raised by Government will be used for the services that are beneficial to this society. They expect that those entrusted with the responsibility for providing these services will at all times be accountable for the proper use of the resources made available to them. Government stewardship of public resources calls for full accountability and transparency on the part of public service managers and all other officials entrusted with public duties and responsibilities. The people in turn, expect that those upon whom such authority is conferred will use it responsibly and that they will at all times, remain fully accountable to the people.

Financial Management Reform

The objective of the Financial Management Reform of the Public Service, commonly known within the Public Service by the acronym FINMAN, is to enhance financial management and planning.

In September, 1997, Government embarked on reforming its budgetary process as a means of enhancing economic management through effective planning, allocation and management of Government’s

financial resources. To achieve this objective, Programme Budgeting was introduced in the preparation of the Estimates and a number of mechanisms to strengthen the planning and preparation phases of the Budgetary process have been introduced in Central Government operations.

As you will notice, Government has tabled its Estimates in two Volumes. Volume I presents an overview of the plan for each Agency for the 1998-99 Fiscal year . Volume II shows the resource allocation for each agency and its various programmes and activities.

Traditionally, estimates for each agency were developed using the incremental approach to budgeting. The focus was only on inputs or how much funding was required for the various line items, that is, Salaries, Wages, Supplies, etc. Requests for Departmental Budgets were not based on objectives and outcomes. Few Agencies undertook the preparation of annual plans to direct the needs of their operations. Attempts at formulating the Government’s priorities for the Budget Year were made after the Estimates Circular was issued. Budget monitoring, as is common with Line Item Budgeting, centred on financial performance only, that is, staying within expenditure allocations and revenue inflows. Until now, discussions were never focused on programme objectives and outcomes since these were not the focus of estimates requests. Ministries generally did not attach ownership to their budgets since they felt that they had no flexibility and little responsibility for the establishment and management of their budgets.  

The Estimates for this year were developed using the Programme Budgeting Process. Programme Budgeting switches the focus from inputs, to the process of determining resource allocation on the basis of objectives and outputs. In essence, it leads to the allocation of the

Government’s budget by programme and activity, not by line items or costs.

As part of the budget preparation phase, an extensive review of Central Government Operations was undertaken to classify each agency’s operations into programmes and activities. Agencies were required to develop their missions, priorities, objectives, and results expected for the 1998-99 year at the Ministry level, and for each programme and activity. This information for each Ministry, referred to as "Programme Narratives", comprise Volume I of the Estimates.

To facilitate the determination of resources needed for each programme and its activities, and to ensure that estimate requests maximize opportunities to accommodate Government priorities, Ministries were issued "Preliminary Allocations" or an "Envelope of Resources" to focus their demand for programme resources. This concept of developing estimates within Preliminary Allocations certainly encouraged a shift from the traditional approach of incremental budgeting. The excessive focus on inputs shifted to a focus on linking programme resources to objectives, and the identification of alternatives and priorities in undertaking activities (Services). Volume 2 of the Estimates reflects the resources required to accomplish the Government’s Programme this year, as reflected in the Programme Narratives under Volume I of the Estimates.

The shift to Programme Budgeting certainly directed the allocation of scarce resources more effectively. The development of this year’s budget has seen the involvement of all levels of management. A process of decentralized decision-making and accountability at all levels of the organization has thus been initiated. Managers are now empowered to decide how best to achieve programme results.

The Programmes and Activities structure will enhance the reporting of programme information and facilitate the review and analysis of Government operations.

After many years to the contrary, the budgetary process has this year, finally resulted in an integrative approach to the budgeting for Capital and Recurrent Expenditure. Therefore, recurrent cost implications of capital expenditure are being identified at the outset of project planning.

For the first time, all agencies were required to develop detailed proposals, including the economic and client benefit, and financial implication of new initiatives both of a recurrent and capital nature, early in the estimates preparation phase of the budget cycle. This cultural shift to have agencies develop extensive policy proposals, facilitates the prioritization of demand for resources within the envelope issued to Ministries.

As part of the Budget Reform, the budget cycle was redefined to have a duration of 24 months instead of 18 months, and to commence April 1, instead of September of the year preceding the budget year. The extension of an additional 6 months in the budget cycle allows for an injection of a Strategic Outlook Phase as the first step in the budget cycle. The Strategic Outlook is the determination of the macro-economic outlook for the upcoming year alongside fiscal targets and Preliminary Allocations for agencies, critical information to structure the call for estimates from line Ministries, and to facilitate fiscal planning.

During Operating Year 1998-99, Ministries will be required to table quarterly performance reports for Cabinet Review. The emphasis of these reviews will be on the achievement of the results as specified in Volume I of the Estimates. Staff of the Budget Division will be working with each Ministry to establish systems to capture and report on programme performance.

In order to support the enhanced preparation and monitoring of a Ministry’s budget and strengthen accountability and ownership, Budget Committees were established in each Ministry. These were established as the Ministries developed their Budgets and will function in-year, as the budgets are operationalized.

The introduction of computerization in the Budgetary Process both at central agency and line Ministries resulted in efficiencies in all aspects of the process from Budget Planning to Budget Finalization. Ministries were introduced to a data base concept in the production of their estimates. Ministries’ estimates were electronically downloaded into data files at the Budget Division. Significant improvements in the turnaround time for analyzing budgets and producing budget schedules were achieved.

Budget Reform continues in this fiscal year with the objective of achieving sustainability of all aspects of the reform. The Ministry of Finance will continue to facilitate the change process and will work closely with each agency to sustain processes developed, and to develop other aspects of the Reform.

Another very important component of the financial management reform is the implementation of a government-wide computerized financial system designed to re-engineer and improve the financial and business practices of the Treasury and line Ministries. For Government to formulate and manage implementation, it requires accurate, relevant and reliable financial information. Financial reporting is also of interest to several other users including the general public, and serves as a basis upon which legislative accountability could be satisfied. This new system is therefore designed to improve the quality of financial reporting by the Treasury and all Ministries.

The implementation of the new system will result in major improvements to the payment turnaround time by Government. The new financial system will attempt to remove the bottlenecks in the payment system and reduce the frustration experienced by Government creditors and the public in general.

The initial phase of this system has been successfully implemented in the Treasury and the Administration Department of the Ministry of Finance and Planning. The rollout will continue in this financial year to all other Ministries and Departments. Similarly, a new payroll system is expected to come on stream from January 1999. Apart from the numerous benefits to be derived from this new automated payroll, it will also ensure that the Government of St. Lucia is not exposed to the threat known in Information Technology circles as the "Millennium Bug" or "the Year 2000 problem."

The Government-wide financial system requires an investment in computers and an elaborate network infrastructure that is going to transform the communications for the entire public service. This network reflects Government’s growing communication/information needs and is designed with the future in mind. The system infrastructure will provide a starting point from which departments can evolve strong communication networks, the likes of which have never before been experienced in Government. To this end, Government has allocated $2.6 m in the Capital Estimates. Of this sum, $600,000 will be provided by UNDP and $2 m from local revenue.

The benefits of this investment can be summarized as follows:

1. There will be an E-mail network connecting all Departments.
2. There will be capacity for all Departments to connect their networks on to the infrastructure in order to build a Government INTRANET and Video Conferencing. This will result in significant financial savings to Government.
3. There will be the facility to communicate via the Internet through the Government Network and Internet Service Provider/Web Server without making outside calls.
4. Finally, there will be a basis on which to build a modernized sophisticated and reliable voice network for linking government departments in Castries in a cost-effective manner.

The training component of the Financial Management Reform will provide public officers with the specialized training needed to effectively discharge their responsibilities, and also to ensure sustainability well after the life of the project. A number of short-term courses will be conducted in this financial year, including computer audit courses, specifically for the staff of the Audit Department and the Field Auditors of the Treasury. With a sophisticated computerized system within Government, it is essential that the staff of the Director of Audit be provided with the tools necessary to enable this officer to effectively discharge her responsibilities as provided under the Constitution.

With all those developments taking place, including the advent of the new Finance (Administration) Act and the anticipated improvement in

the accountability of public officials, St. Lucia is well poised to have the most advanced public sector financial system in the Eastern Caribbean.

Proposals from Social Partners

Mr Speaker, in keeping with Government’s pledge to encourage broad consultation with its social partners, the public sector, the trade unions, private sector organizations and private individuals, were invited to submit proposals for consideration and for possible inclusion in the budget. One hundred and sixty-seven suggestions were made. Some focussed on broad policy issues while others recommended specific measures.

In general, the response was overwhelmingly positive, with some very useful recommendations, ranging from proposals for duty concessions to help revitalize domestic industry, to suggestions for re-engineering of the economy. The recommendations also contained a number of public policy proposals aimed at addressing various issues relating to public utility companies, and the restructuring of the Banana Industry. Many of these recommendations were consistent with Government’s plans and are already being pursued. Others were given due consideration and are reflected in this budget. Mr Speaker, this interaction between the public and private sectors must be sustained as this can only augur well for the future development of our country. Allow me, Mr Speaker to express my gratitude to those persons and organizations that enriched the pool of ideas from which this budget emerged.

Mr Speaker, permit me at this juncture, to commend the invaluable contributions of those public officers who have participated in this budget process.

Among them I include all officers of the various Ministries and Departments who contributed to the extensive consultations leading up to the budget presentation, as well as the staff of the Government Printery, whose expertise ensured that the budget documents were prepared on time and in a professional manner. We are also indebted to the technical and support staff of the Ministry of Finance and Planning and the Prime Minister’s Office, who have laboured long and toiled tirelessly into the night to finalize this presentation, and the presentation to this Honourable House of the Estimates and the Economic Review. 

PERFORMANCE OF ECONOMY, 1997/98

Mr Speaker, St Lucia is in transition from an agro-based to a service-based economy. Agriculture, including the banana industry will still be important, but tourism and other services will play an increasingly critical role in economic growth and development.

That transition must be well managed. We must maintain our competitiveness in international markets, even as we aim for brisk but sustainable growth and a fair distribution of income at home. We must not be afraid to embrace new strategies in the pursuit of our goals and in our quest for development. We must be strong and bold.

Last November, I outlined the elements of the new strategic direction designed to enable us to re-orient and re-focus our energies and re-define our approach for the next few years. I described the new initiatives on institutional strengthening, the shift in economic focus and public sector reform. However, it is in the spirit of our promise to be accountable, to let you know how the economy is faring, and not to keep our social partners in the dark, that I now wish to report on the performance of the economy for 1997.

The economy in 1997, grew slightly faster in real terms, at 0.92 per cent, than in 1996 when growth had declined to 0.82 per cent. Real growth of less than 1 per cent is insufficient to meet our requirements for jobs, social and economic services, imports of goods and services and a better quality of life on a sustained basis.

However, it should be noted that the growth rate declined significantly from 2.6 per cent in 1994, to 1.0 per cent in 1995, and then to 0.82 per cent in 1996. The policies enunciated in last year’s supplementary budget in November, but which were in some cases implemented before November, were designed to arrest the decline and stabilize the economy. Although it is too early to evaluate the medium term impact of the announced measures, the economy has stabilized in the short term. We can look forward to stronger growth performance this year. I will share our 1998 targets for growth and other economic targets with you presently.

Economic management issues apart, the problems confronting the banana industry last year and the slow growth of construction and manufacturing are associated with the low growth rate. Banana production fell by 32.6 per cent to 71,395 tonnes, while export revenue from bananas declined by 41 per cent to just $74.6 million compared to $125.8 million in 1996. In other words, income to St Lucia from the exportation of bananas fell by over $50 million.

Given the nature of bananas as a cash crop, and its direct effect on the incomes of rural families, it is little wonder that employment, savings and growth have been adversely affected. Even the amount of liquidity – that is, the excess of deposits in the banking system available for lending, continues to be tight.

Nevertheless, there were signs, towards the end of last year, and during the first three months of 1998, that the banana industry is on the way to recovery. No fruit was left back last year, so that exports and production were virtually identical. In August last year, production fell to an all-time low of 823 tons in week 33. By January of 1998, production increased to a high of 2,004 tons in week 2. Since then, the drought has taken its toll and production at week 16 stood at 1,378 tons. In addition, fruit quality is estimated to have improved by 9 per cent, with producers achieving the highest quality rating of recent years. Even greater improvements in quality and productivity should be made this year, given the substantial price differences now being applied to high, medium and low-grade fruit.

The steep decline of 5.8 per cent in manufacturing in 1996, was stemmed in 1997 when the sector experienced a slight fall in output of 0.4 per cent. Significantly, the apparel sector grew by 9 per cent. It will be a challenge to compete effectively with US and Latin American producers, given low US inflation and the economies of scale that can be realized in those markets. The manufacturing sector must redouble its efforts to forge appropriate links with the growing tourism sector if manufacturing is to survive. Government will do what it can to assist by ensuring that an appropriate macro-economic climate exists. However, the onus of marketing and modernization must be on our manufacturers.

I am convinced that our manufacturing industries can be competitive. A case in point is the apparel sub-sector, which has proven to be resilient over the years, and which, as I mentioned earlier, registered impressive growth of 9 per cent last year. The private sector needs to provide strong management and take advantage of niche markets. The Government will continue to provide the enabling environment.

The substantial contraction of 6 per cent in construction in 1996 was reversed in 1997, despite the overall slow down in economic activity. While not buoyant, construction activity grew by 1.2 per cent, mainly on account of growth in residential construction and the expansion of electricity and telecommunications infrastructure.

On average, inflation hovered around zero during 1997, primarily because of low inflationary pressures in our main trading partners and because of the economic slow-down of recent years. This is the lowest rate of inflation achieved since 1979. In addition to benefitting from low inflation, a buoyant tourism sector helped to cushion the adverse effects of the decline in agriculture.

The major success story was tourism. This sector grew by 5 per cent in 1997 and accounted for around 72 per cent of exports of goods and services. The contribution of tourism to national output has exceeded that of agriculture since 1994, and at 12.9 per cent is now the third largest contributor on a sector basis, after distributive trades (13.7 per cent) and government services (13.2 per cent). However, the distributive trades and government sectors are to a large extent dependent on other productive sectors (mainly tourism and agriculture) for generating economic activity and earning foreign exchange. It is probably only a matter of time before tourism becomes the largest single contributor to GDP.

The number of stay-over visitors grew by 5.4 per cent in 1997 compared to 1.4 per cent in 1996, while the number of cruise ship visitors grew by 59 per cent compared to 13 per cent in 1996. St Lucia’s tourism sector is set to grow substantially over the next 2 to 3 years, with additional bed capacity and the number of cruise ship visits increasing. Hotel occupancy was the highest since 1992, indicating that better use was made of existing capacity during 1997.

Approximately 98 per cent of all stay-over visitors to our shores come from North America, Europe and the Caribbean. Our approach to marketing must take into account the uniqueness of our people, our country and our way of life, as well as differences in the requirements and desires of potential visitors. In other words, our marketing efforts must be well researched and well targeted, taking into account both the demand and supply side peculiarities that face us. Special events tourism, carnival, sports, cultural activities, conference markets, are all activities which need to be explored further.

The Government’s fiscal policy stance is one of financial prudence designed to generate healthy current account surpluses for capital investment. Fiscal policy during 1997/98 was used to stabilize the economy and generate growth via the public sector investment programme.

The general economic slow-down led to the slow growth of current revenue of just 2.2 per cent during the fiscal year 1997/98. On the other hand, current expenditure grew by 3.5 per cent (compared to 3.7 per cent in 1996/97). The current account surplus was lower at $51.7 million or 3.4 per cent of GDP compared to $54.7 million or 3.6 per cent of GDP the year before. In addition, the overall deficit after taking capital expenditure into account was lower at $12.4 million (or 0.8 per cent of GDP) in 1997/98, compared to $25 million (or 1.6 per cent of GDP) in 1996/97. The lower overall deficit was due mainly to the late receipt of loans for capital projects that were not completed as planned.

Despite the need to obtain loans for the purpose of stabilizing the economy, the debt ratios fall within acceptable norms. The ratio of external debt service to exports of goods and non-factor payments rose from 3.4 per cent to 3.5 per cent, while the stock of external debt to GDP grew from 24.9 per cent to 26.9 per cent. These ratios are expected to remain within manageable and internationally acceptable limits for the foreseeable future. However, because of loans contracted in the past, there will be a bunching of debt payments within the next four years. We will be monitoring these developments very closely, as well as the servicing of loans obtained since last November to stimulate economic activity and to deal with the security problems that have plagued the country for so long.

Mr Speaker, it would be remiss of me not to mention one or two developments in the monetary sector. I have already indicated the extent of the tight liquidity situation experienced by the banking system. This was accompanied by generally higher interest rates on fixed deposits, aimed at attracting additional savings.

Exchange controls were further liberalized by raising the threshold for purchasing foreign currency without prior permission from the Ministry of Finance, from the equivalent of EC$100,000 to $250,000. This was part of a wider initiative among all the member states of the Eastern Caribbean Central Bank, and should be beneficial to commerce and external trade. Earlier this year, the Government also abolished the requirement for nationals who are resident overseas to secure the approval of the Ministry of Finance to obtain loans in the domestic market to finance activities in St. Lucia.

THE REGIONAL AND INTERNATIONAL CONTEXT

Mr Speaker, we survive in an increasingly interdependent world. We have committed ourselves to a regional economy. The performance of the regional economy provides important benchmarks against which to assess our own performance. Needless to say, our very survival depends on the fortunes of the international economy.

Mr Speaker, Honourable Members, the CARICOM region as a whole experienced positive economic growth in 1997, despite a slower rate of growth in some countries, notably Jamaica. One favourable aspect of the global economy facing our region at this time, is low inflation. Vigorous low-inflationary growth is a key objective of economic policy. The low inflation expected to prevail in the international economy in the medium term, provides us with a special opportunity to fashion our own unique growth path over the next few years.

It is instructive that Tourism and International Financial Services played major roles in generating economic growth in many CARICOM countries over the last 15 months or so. This is true of Barbados which grew at 4.3 per cent in 1997, the British dependent territories (The British Virgin Islands, Cayman Islands and the Turks and Caicos), and the Bahamas.

Manufacturing and agriculture were major contributors to growth of 3.2 per cent in Trinidad and Tobago, and 3 per cent in Belize, while construction activity helped stimulate growth in many regional economies.

In light of the key role of tourism and international financial services in the economic growth of the CARICOM countries to which I just referred, the performance of the OECS economy last year is interesting. The Leeward Islands sub-grouping, which depends more heavily on tourism and services than the Windwards, experienced higher growth than the latter. Real growth was 4.8 per cent in Antigua and Barbuda, 3 per cent in St Kitts and Nevis, and 6.5 per cent in Anguilla.

In contrast, growth was 2.3 per cent in Dominica, 1.5 per cent in St. Vincent and 0.92 per cent in St Lucia. Grenada, which was buoyed by a vibrant construction sector, and which has become less dependent on agriculture and more dependent on tourism, experienced growth of 4.3 per cent, the highest of the Windwards grouping.

The southern OECS countries are in transition from agro-industrial to service (particularly tourism) based economies. St Lucia is ideally suited to being a mixed economy with tourism being the leading sector. We are nowhere near our true tourism potential, and the emphasis this year and in the medium term will be on developing that potential rapidly, but in a sustainable way.

During the course of the year, the OECS countries look set to intensify their association by further developing their capital markets and harmonizing relevant legislation. I would like to urge members of the regional financial sector, particularly the banks and the private sector, to make greater use of the Eastern Caribbean Home Mortgage Bank and to embrace the expansion of the capital markets with enthusiasm and creativity.

On the CARICOM front also, there are signs of renewed vigor in an integration movement that had become stale and uncreative over the years. The Government supports the deepening of the regional integration movement and will do all it can to encourage it.

The international economy continues to be characterized by low inflation and moderate real growth. World output grew by around 4 per cent in 1997 compared to 3.8 per cent in 1996, with the industrial countries as a whole growing by about 3 per cent. Japan led the way with growth of 3.7 per cent, followed by the United States economy with 3.5 per cent, the United Kingdom with 3.3 per cent, Germany 2.3 per cent and France 2.2 per cent.

The countries that I have just mentioned are important sources of demand for our output, particularly the tourism product. Positive forecasts of growth in those countries are welcome, as are forecasts of continuing low inflation. Even growth in the developing countries as a whole seems to have been robust at 6 per cent, with low or declining inflation and sustainable fiscal positions. In a few cases the banking systems remained fragile and the balance of payments continues to be weak.

The forecast for continuing moderate growth in the world economy remains valid despite the financial crisis in East Asia. The crisis was associated with fundamental weaknesses in the financial systems (including exchange rate regimes) of several countries in East Asia, and with irresponsible behaviour on the part of governments and the private corporate sector.

The World Bank suggests that the crisis has indeed had a significant effect on the world economy, to the extent that growth expectations in the medium term must be revised downwards. Nevertheless, growth for the world as a whole for the next three years will still be around 3 per cent, which is higher than the average for 1991 to 1997. Developing countries are still expected to grow by about 5 to 6 per cent over the next three years, which is similar to their average growth since 1991. It is estimated that if the crisis had not occurred, growth in developing countries would have been one percentage point higher in 1998, half of one percentage point higher in 1999, and one third of a point higher in 2000.

The Asian crisis has affected or will affect developing countries by: exacerbating capital flight and making capital loans less available and more expensive, as a "flight to quality jurisdictions" takes place; reducing the prices of primary commodities in general; reducing the demand for the exports of developing countries with strong ties to East Asia (i.e. not St Lucia) and causing their imports and exchange rates to deteriorate, with adverse implications for growth. In general, adverse effects for developing countries could come directly through trade flows and indirectly through changes in international commodity and financial markets.

For St Lucia and the Caribbean, the likely effects if any, may be through changes in the prices of, and demand for, primary commodities. On the other hand, there are likely to be favourable effects such as lower oil prices and lower inflation. In general though, moderate growth for St Lucia is achievable based on growth in western countries, the strengthening of demand for our outputs, improvements in efficiency and productivity in the banana sector, sound fiscal and economic policies, and a substantial and appropriate public sector investment programme.

One other potential source of adversity for the world economy needs to be carefully watched. It is the deepening of the recession in the Japanese economy which is linked to many of the large industrial economies in Europe and North America and other economies throughout Asia. Steps have been taken by the Japanese authorities to avert impending disaster linked to financial and economic weaknesses, but only time will tell whether measures taken are adequate or have come too late.

BUILDING ON STABILIZATION AND ESTABLISHING MACRO ECONOMIC PERFORMANCE

CRITERIA

Mr Speaker, I had the privilege of addressing this Honourable House in November last year, when I presented the Supplementary Budget for 1997/98. At that time, I outlined the three economic objectives which the policies enunciated in that budget sought to address. They were stabilizing, stimulating and strategically re-orienting the economy towards the path of sustained growth.

It is less than six months since I presented the Supplementary Budget, and its full effects have not yet been felt. Nevertheless, the policies which I brought to your attention and which to some extent had been implemented from the start of my Administration’s term of office have already had some measure of success. It is evident that the deterioration in economic performance, the integrity of our social and economic structures, and in institutional capacity, have been arrested, and the economy stabilized.

Real economic growth, which had been on the decline since 1994, was stabilized in 1997, virtually without incurring inflationary cost. The fall in construction activity, manufacturing, the wholesale and retail trades, and the Government sector were either stabilized or reversed. The tight liquidity situation worsened, but is expected to improve significantly during the course of this year, as economic growth improves and the disbursement of external finance for projects picks up speed.

Stabilization of the economy was only the first objective and the first stage of modernizing the economy and preparing it for the 21^st Century.

In the Supplementary Budget, I described the underlying economic and social philosophy of the Government, as well as our strategy for achieving medium term growth and sustained development.

The budget is, in effect, a detailed one-year plan that forms part of a longer medium-term plan. In order to measure our performance in an objective way, it is necessary to set specific targets for the achievement of economic goals. We have identified a few macroeconomic criteria for judging economic performance during the fiscal year.

While the Government has, internally, identified the targets we have set, they have also been accepted by foreign donors. In particular, some of our fiscal and macroeconomic targets have been adopted in the STABEX agreement for financial and economic assistance to St Lucia, which I signed recently with the European Commission. Under that Agreement, we will receive over a three-year period, EC$53.1 million for a variety of purposes, including Agricultural Diversification, Poverty Reduction, Economic Diversification and Training. Approximately 79 per cent of the STABEX grant will be disbursed under a new "Budgetary Support" arrangement that is intended to be more flexible than the traditional approach. However, in order to qualify for the disbursements, we will have to satisfy certain macroeconomic criteria that by and large, we had already set for ourselves.

Our fiscal and economic targets for this year are as follows:

1. To achieve Central Government saving of 2.5 per cent of GDP for the fiscal year 1998/99.

We consider this to be a minimum and in practice we are aiming for a surplus in excess of 5 per cent of GDP in order to allocate more resources to the Capital Investment Programme. We expect Government savings this fiscal year to be about $84.5 million.

2. To achieve total public sector savings of 7 per cent of GDP.

The restructuring of WASA and other public sector utilities will strengthen the public sector as a whole, and enable this target to be achieved.

3. To increase the liquidity of the banking system from a loan/deposit ratio of 100.7 per cent to 95 per cent by the end of fiscal year 1998/99.
4. To achieve real economic growth in the range of 2 to 2.5 per cent for 1998.

This is based on the continued strong performance of tourism, the recovery of the banana sector, the coming on stream of major construction projects in both the public and private sectors, low inflation and the inflow of substantial external finance into St Lucia on a grant basis or on concessional terms. I must point out that the Eastern Caribbean Central Bank has forecast a growth rate of 4 per cent for 1998, and that its forecast is based on the Central Bank’s evaluation of the effectiveness of the expenditure programme and policies of Government, the projected level of exports, the extent of external funding to be made available to the economy, and the projected liquidity of the financial system. We prefer to be a bit more conservative in forecasting growth of 2 per cent to 2.5 per cent.

5. To attain a Current Revenue/GDP ratio of 29 per cent.

Given the anticipated growth in real GDP with a fairly stable inflation rate, and given that the Revenue/GDP ratio has not exceeded 28.9 per cent in the last three fiscal years, achieving 29 per cent will not be easy. Nevertheless, I am confident that our revenue collection efforts will bear fruit.

6. To keep the Current Expenditure/GDP ratio below 26 per cent, in keeping with the usual prudential ratios.

This index has been creeping up in recent years, rising from 24.2 per cent in 1995/96, to 24.7 per cent in 1996/97 and 24.9 per cent in 1997/98. We expect that the ratio will level off somewhere below the maximum target of 26 per cent this year and in the medium term.

(7) In pursuit of our stated policy of generating growth, we have set as a minimum target to be sustained in the medium term, a "capital investment/government expenditure" ratio of at least 30 per cent.

There is a great deal of international empirical evidence linking the real growth rate of output, income and employment on the one hand, and investment on the other. We believe that this applies to the St Lucia economy. This year, we are devoting 37.6 per cent of expenditure to the capital programme in order to put the economy back on the fast track to growth. However, growth is the concern of all of us and the Government will spare no effort in improving the structures and systems in the Planning Department to ensure that private sector development applications are dealt with swiftly and effectively.

 

Mr Speaker, in recent years, it has become fashionable for governments to argue that the responsibility for generating investment, employment and growth in the economy must be shared with the private sector. Indeed, previous administrations have adopted the policy position that theirs was the responsibility for setting the enabling economic environment, while the private sector should be the primary engine of growth and development.

In practice, however, this has not been observed. Until May 1997, what passed for government in this country, operated in exactly the opposite manner. The former government monopolized the investment agenda, undertaking ill-conceived and ill-advised projects in the private domain. Many of these projects were undertaken without appropriate dialogue or discussion, drawing down indiscriminately on financial resources which should have been available to other sectors in the economy. Such action has the effect of crowding out private initiative, and setting up all sorts of nefarious bodies in areas where government has little commercial advantage, and even less chance of financial viability.

In such an environment, it is not surprising that our private sector has often withdrawn in fatigue and frustration, and has not made a meaningful impact on policy formulation, decision making and implementation. The Government is determined that a new cooperative relationship, based on systematic dialogue and communication ought to exist among the major social partners. The chronic lack of information regarding Government policy and priorities must be reversed. The lack of confidence, which inevitably follows highly autocratic decision-making, must be redressed. This Government will not frustrate the private sector into retreating into safe, secure, traditional activity, while a yawning gap exists in critical leading-edge investment. It is precisely such leading-edge investment that St Lucia required to take it into the future, and Government will do all in its power to facilitate the private sector in this direction.

We are therefore actively pursuing new channels of dialogue, a new framework for cooperation, and renewed relationships based on confidence and trust. We are determined to do whatever is necessary and within our power to rebuild confidence in the process of good government and in the future of this country. We are determined to encourage the private sector to venture out into higher risk/higher return projects, particularly those that are consistent with economic diversification and employment generation. Therefore, where new or pioneering projects are concerned, Government will consider its role to be that of a joint-venture partner, bringing to the investment table, concessions and considerations within its purview, which can enhance the financial, economic and social returns to the economy.

To demonstrate this determination, Government has devoted resources to several on going and planned initiatives. Please allow me to explain.

Office of Privatization and Private Sector Relations

In order to strengthen our relationship with the private sector, an office of Privatization and Private Sector Relations has been created within the Office of the Prime Minister. The work of this office is two-fold:

1. To reconstruct a bridge of communication and co-operation between Government and the private sector.

This entails frequent and systematic dialogue on various policy instruments, including this Budget. In this regard, and as promised in the Supplementary Budget, it is our intention to establish a formal assembly of social partners as a further logical step, to embrace the labour unions and other representative organizations in the process of governance. The assembly will be a permanent decision-making body with significant influence on public sector policy.

2. To pursue Government’s privatization agenda.

The office will seek to create, out of the economic chaos we have inherited, new investment opportunities for businesses large and small, domestic and foreign. It is pointless for Government to retain control of strategic functions in the economy and manage these functions in an inefficient or monopolistic manner. By removing government domination of what ought to be private activity, opportunities for a whole generation of smaller efficient companies will emerge.

In respect of privatization, Government’s policy is guided by three major priorities.

The first priority is for Government to withdraw from areas of commercial activity in which its presence is no longer needed, and which are better managed by private sector interests. The long-term objective here is to create space for new dynamic businesses to emerge and flourish. Where this proves feasible, Government may divest altogether to retain a minimum equity position, while passing management, operational control and majority ownership into more efficient private hands.

The second priority is to minimize the drain on the public purse created by inefficient state-owned enterprises. We realize that the economic circumstances which prompted the creation of many state-owned enterprises, have long since changed. It is therefore necessary to review, revise and restructure these entities for greater efficiency, productivity and profitability. This may also allow for privatizing the management of an entity while retaining total or partial ownership.

The third priority is to allow for broad-based private investment and ownership in the financially viable assets of the state. Where Government investment has created a profitable, viable entity, there is every reason for that profitability to be shared with the public whose tax dollars or NIS contributions have financed the venture in the first place. Government will therefore, make every effort to create opportunities for every St Lucia to be able to invest and profit from such enterprises through the sale of shares to the general public. This approach is also compatible with Government’s vision for the development of a domestic capital market in which investment instruments such as shares can be actively traded.

Mr Speaker, consistent with our commitment in the Agreement recently signed with the European Commission, the Government of St Lucia will join hands with the private sector and develop a Private Sector Development Strategy. An amount of EC$1 m has been made available in the Capital Estimates for this exercise.

The process has already begun in conjunction with major players and representative organizations. From the public sector side, these include: the Ministry of Commerce, Industry and Consumer Affairs, the Ministry of International Trade, the Ministry of Finance & Planning, the Small Enterprise Development Unit, and the National Development Corporation. From the private sector side, we are targeting the Chamber of Commerce, St Lucia Industrial and Small Business Association, National Research and Development Foundation, the Employers Federation and the St Lucia Hotel and Tourism Association.

The primary objective of this Private Sector Development Strategy is to accelerate growth, development and employment in the economy. The essential focus of the strategy will be:

          (a)      Enhancement of St Lucia’s international competitiveness; and

(b) Acceleration of economic diversification within the economy.

It is anticipated that the Private Sector Development Strategy will facilitate:

1. a more co-ordinated agenda of policy initiatives, programmes and projects which reflect the needs of the private sector;
2. enhanced capacity for efficient service delivery and improved functional cooperation among participating agencies;
3. systemic and institutional strengthening to develop specialized competencies; and
4. co-ordinated resource mobilization, programme implementation and market interventions.

Mr Speaker, Honourable Members, there is another major initiative. In this financial year, Government also proposes to confer upon selected private sector agencies, the special status of "Development Agency" which will afford them certain duty free and tax free concessions required for the efficient continuation of their development programmes and projects. This is being done in recognition of:

1. The broad scope of their development activities.
2. The benefits which accrue to the economy as a result of their activities and undertakings.
3. Their substantial contributions to the wider community over the considerable duration of their existence.

Initially, it is proposed to confer the status of "Development Agency" upon the following organizations:

The rationale for this action is relatively simple: These Private Sector Representative Organizations currently undertake significant development activity, largely in support of public policy, programmes and projects, which are outside the immediate sectoral interests of their members, and which benefit the entire economy. These activities include generally:

These activities have, for many years, been underwritten substantially by members’ contributions, corporate donations, financial covenants and subscriptions. It is fitting, therefore, that Government should remove disincentives to their further institutional development by enhancing their ability to compete for, acquire and retain real, human and financial resources.

The various initiatives and policy thrusts, which I have just described, will be the responsibility of the Office of Privatization and Private Sector Relations.

POLICIES AND BUDGETARY PROPOSALS

Mr Speaker, it is now time to introduce and explain the 1998/99 Budgetary Policies and Proposals. I can understand the impatience of Honourable Members

Mr Speaker, I would now like to present to this Honourable House, the estimates of Revenue and Expenditure for 1998/99. I will give you a broad overview before delving into the detailed analysis of the amounts to be collected and expended for the new fiscal year. After painting the broad picture, I will focus mainly on the new revenue measures in support of this budget and on the capital investment programme. I leave it to you to decide whether or not this budget contains any surprises and whether or not they are pleasant, unpleasant or simply an anticipated or unanticipated delivery of the right stuff at the right time.

Let me state from the outset, that the Budget for 1998/99 is balanced. In other words, total expenditure, both current and capital, taken together, is fully financed. Balancing the budget has, in truth, been a difficult task, given all the programmes we would like to undertake for the people of this country. Nevertheless, we have done so without resorting to the old trick used by former administrations, of padding the budget with unrealistic estimates of revenue which in many instances, have not been anywhere near actual collections. For example, capital revenue earmarked for vital projects was woefully short of expectations, thereby putting undue pressure on the public purse. The Budget Estimates of this Government are fully available for your scrutiny.

Overall expenditure in this Budget comes to a grand total of $633,973,413. This is divided into Recurrent Expenditure of $395,491,082 and Capital Expenditure of $238,482,331. Capital Expenditure accounts for approximately 37.6 per cent of total expenditure.

Recurrent Expenditure, with principal payments on debt and sinking fund payments counted in, is more than fully financed by recurrent revenue of $439,386,860. After allowing for Recurrent Expenditure, the amount available from Recurrent Revenue for the Capital Investment Programme is $43,895,778. When local Capital Revenue from sale of assets and other public sector institutions is added, the total amount of local revenue available to finance Capital Expenditure is $53,595,778.

RECURRENT REVENUE 439,386,860

RECURRENT EXPENDITURE 395,491,082

Less Debt Principal and Sinking Fund

Payments 40,629,722 354,861,360

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CURRENT SURPLUS 84,525,500

Less Debt Principal and Sinking Fund

Payments 40,629,722

---------------

Investment 43,895,778

==========

CAPITAL ESTIMATES:

Capital Receipts

Recurrent Revenue Contribution to Capital 43,895,778

Sale of Assets 5,700,000

Capital Transfer from SLASPA 3,000,000

Capital Transfer from National Lottery 1,000,000 53,595,778

---------------

Capital Financing:

Grants 77,285,407

Loans 107,601,146 184,886,553

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Total Capital Financing 238,482,331

Capital Expenditure

Revenue 53,595,778

Grants 77,285,407

Loans 107,601,146 238,482,331

--------------------------------

TOTAL SURPLUS (DEFICIT) 0

=========

In addition, Mr Speaker, when external grants of $77,285,407 and loans of $107,601,146 are added, the total Capital Budget of $238.5 million is fully financed. The grants are mainly, though not exclusively, from STABEX sources, while the loans are largely on concessional terms. I will go into those details in greater depth presently.

As I explained earlier, the Government’s actual current account surplus (which is exclusive of repayments of principal on Government debt), or alternatively central Government saving, is seen as an important measure of effective fiscal management. The minimum target recommended by our economists and agreed under the STABEX arrangement for 1998/99 is 2.5 per cent of GDP. We believe it is necessary to squeeze even more resources out of the current budget to finance the Capital Investment Programme. Consequently, this year, we plan to realize a higher surplus/GDP ratio than the suggested prudential minimum. Central Government saving is estimated at $84,525,500 or in excess of 5 per cent of Gross Domestic Product. A current surplus of $84.5 million represents the highest absolute current surplus since 1993/94 and will reverse the downward trend experienced ever since.

Before I present the detailed Revenue Measures and Capital Investment Programme for 1998/99, I would like to mention some of the main components of Recurrent Revenue and Recurrent Expenditure embodied in the estimates.

Tax revenue accounts for around 88.6 per cent of total revenue, with the balance coming from licenses, fees, user charges and other miscellaneous items. This is similar to the distribution between tax and non-tax revenue in recent years: 88.7 per cent in 1997/98 and 87.9 per cent in 1996/97.

However, there will be a moderate shift in the sources of tax revenue this year, compared to the last two years. Direct taxes on income and profits accounted for 26.2 per cent of total revenue in 1996/97 and 26.9 per cent last year. For the fiscal year 1998/99, they will make up 24.8 per cent, reflecting a slight shift towards indirect taxes in the composition of revenue. Taxes on international trade (e.g. customs duties) will comprise 50 per cent of total revenue compared to 49.1 per cent in 1997/98 and 50.6 per cent in 1996/97. The other broad grouping of indirect taxation, namely taxes on domestic sales and services, will be 13.3 per cent of total revenue (compared to 12.2 per cent in 1997/98 and 10.9 per cent in 1996/97). The Government is still in the process of evaluating the tax system to ensure that it is efficient and that the burden of taxation is evenly spread.

On the expenditure side, 37.6 per cent of total expenditure will be for the capital programme, compared to an estimated 20.7 per cent in 1997/98 and 22.8 per cent in 1996/97. Actual current expenditure (i.e. excluding principal repayments on debt) will account for 56 per cent of total expenditure compared to some 74 per cent in 1997/98 and 73 per cent in 1996/97. All the figures for 1997/98 are preliminary, as the fiscal year has only just ended. Every effort is being made to generate resources for capital investment, without compromising the viability of the recurrent budget.

We need to keep a close watch on a few areas of expenditure this year and over the next few years. The first area is that of Government debt

which bunches around the year 2000, because of the scheduling of loan repayments in accordance with signed agreements. In addition, the stock of outstanding debt grew from $362.4 million at the end of calendar year 1996, to $429.6 million at the end of calendar year 1997.

You will recall that the Government had to take certain strategic decisions to stabilize and stimulate a sluggish economy in 1997. Those decisions involved curtailing expenditure, improving expenditure control, tightening up on revenue collections, financing new and existing capital projects by generating a current surplus, and by borrowing. Our strategy has already begun to bear fruit: the decline in the real growth rate has been arrested – indeed, it is slightly higher than the previous year, while there have been improvements in revenue collections in some areas (notably the Inland Revenue Department).

Although the amount of debt actually outstanding has grown and will increase this year as loans already contracted are drawn down, the debt ratios are still within internationally recognized prudential limits. As I pointed out, it was necessary last year to borrow on favourable terms, in order to help stabilize and stimulate the economy, and to ensure that a high level of national security was restored after years of neglect. The provision for total debt service this year is 66.5 million, compared to actual provisional expenditure in 1997/98 of $40.2 million. However, the usual debt ratios used for measuring performance are still favourable: external debt service to GDP has increased from 3.37 per cent in 1996 to 3.54 per cent at the end of 1997, while external debt outstanding to GDP has grown from 24.9 per cent to 26.9 per cent. The international community considers a ratio of 15 per cent of external debt service to GDP and 25 per cent to 30 per cent for external debt outstanding to GDP to be sustainable. We are well within the first ratio, but with regard to the second, we must closely monitor the magnitude of future external debt. It is expected that the projected increase in economic growth next year, will strengthen the capacity of the public sector to carry the somewhat higher, though not unsustainable level of debt.

In addition to public debt, salaries and wages account for around 52.4 per cent of current expenditure, compared to 53.5 per cent last year and 52.6 per cent the year before. The lower figure this year can be partly explained by the growth in current debt service payments which contributed more to the increase in total current expenditure than did the growth in expenditure on salaries and wages. Although the share of salaries and wages in the total has fallen slightly, we still consider it to be too high, and our objective in the medium term is to reduce it below 50 per cent of current expenditure, by containing the growth in the overall staff complement.

In keeping with the necessity to restructure certain ministries, it has been necessary to strengthen the Public Service in a number of areas by bringing in a few top and middle-level managers. The process is almost complete and the emphasis for the medium term will be on improving productivity and efficiency.

Transfers and subsidies to the public and private sectors and contributions to regional and international organizations taken together will be reduced from 13 per cent to 11 per cent of current expenditure. In particular, statutory and other public sector bodies will increasingly be expected to be self-financing. Expenditure on goods and services will be slightly higher this year at 20.7 per cent of current expenditure compared to 19.5 per cent last year, to allow for the increasing computerization and automation of Government processes, particularly expenditure control systems.

Mr Speaker, you will note that I have not made any provision for increases in wage and salary rates for the three-year period 1995/96 to 1997/98, or for the next triennium 1998/99 to 2000/1001. This is not an accidental omission. It is not my wish to pre-empt or compromise the negotiations between Government and the public sector workers. Any wage agreement during the financial year can, if necessary, be addressed in a supplementary budget.

However, it would be remiss of me not to emphasize the critical nature of these negotiations. Wages and salaries together make up around 52 per cent of the current budget, the single largest component of current expenditure. The nature, direction and magnitude of fiscal policy are inevitably connected to wage-related decisions.

This round of negotiations is critical because of the delicate state of the economy. We are optimistic about future prospects this year and beyond, but the fact is that the economy has been in recession for several years and this Government has only recently arrested the decline. Whatever we do, development on a sustained basis must not be jeopardized. Some breathing space is still required for the fledgling green shoots of growth to take firmer root and to mature.

Mr Speaker, I propose now to introduce the fiscal measures that would allow us to earn the revenue to finance this modest budgetary outlay.

 Increase in Airport Service Charge

Mr Speaker, as part of the marketing effort in tourism, Government agreed to make a one-time contribution to American Airlines of US$1.5 million. Already, the tourism industry has begun to benefit by this measure. Airline seats to St Lucia from Miami are solidly booked. To finance this expenditure, the Airport Service charge will be restructured and increased. Effective 1^st May 1998, nationals will be required to pay EC$35 while non-nationals will pay EC$40. While this increase affects nationals who travel overseas, albeit by an increase of EC$8, the bulk of the revenue which is derived will come from our visitors. This measure is expected to allow us to increase expenditure on the marketing of tourism.

On 1^st May 1998, and consistent with an earlier announcement, the cruise passenger head tax will also be increased by US$1.50 to US$6.50 in keeping with an obligation under St Lucia’s agreement with the World Bank in respect of the Solid Waste Management Project, being financed by that institution. Incidentally, the increase is intended to apply to all visitors, not just cruise ship passengers. The air-arrivals component of this tax will be absorbed in the increase in the Airport Service Charge.

Mr Speaker, we have reviewed the current charges paid on travel tax. When compared to similar charges imposed by other countries in the OECS, St Lucia’s rates are the lowest. The rates were last adjusted some fourteen years ago, in 1984. Given the present demands for adequate air services to St Lucia, there is consequently the need to review the current rates. The present system whereby two different rates apply, one for regional travel and the other for international travel, will be abolished and replaced by a single tax. As a result, the travel tax rates will be increased to 7.5 percent of the ticket cost.

Mr Speaker, Government has attempted to maintain petroleum prices at the same level over the years. In fact, since 1994, the price of gasoline has remained the same at $6.10 (in the case of leaded gasoline) and $6.50 (in the case of unleaded gasoline). This has been achieved through a price structure that allows ONLY the Government to bear losses or to enjoy any benefits when the imported price of petroleum changes.

Since 1993, prices have fluctuated widely with pronounced increases since 1995. Petroleum prices, on average, increased by 20.1 per cent between 1993 and the first half of 1997. Honourable members will note that between this period, Financial Year 1993/94 and Financial Year 1996/97, consumption taxes from gasoline and other petroleum imports declined by more than $6 Million. This situation was compounded in early 1997 when the former administration allowed retailers an increase of 10 per cent on their margin/gallon, but did not approve any change to prices at the pump. Approaching elections make governments do strange things.

Mr Speaker, this decision of the former administration has had a significant impact on Government revenues and has contributed in large measure to the deterioration in the fiscal performance, at a time when additional revenues were most needed. There is however, some hope as world oil prices are now falling, but should stabilize in the coming months. Government, Mr Speaker, is anxious to share some of the resulting benefits (and losses if prices do rise later) with the consuming public. I therefore propose an amendment to the price structure such that effective 15^th May 1998, consumption tax on petroleum products will be fixed as follows:

(a) Gasoline: Leaded - 246.85 C/tax per gallon

Unleaded - 285.15 C/tax per gallon

(b) Diesel: - 255.94 C/tax per gallon

(c) Spirit Type Gasoline: - 246.85 C/tax per gallon

These rates will be allowed to fluctuate within a range of plus or minus 10 cents per gallon. If the imported price changes to the extent that the consumption taxes should change beyond the stipulated range, pump prices will change by the equivalent amount outside the range.

Permit me to illustrate Mr Speaker. The consumption tax on unleaded gasoline is set at 317.39 cents per gallon. The proposed rate as indicated earlier has however, been fixed at 285.15 cents per gallon or 32.24 cents per gallon less than the current rate. The idea is for Government to retain 10 cents per gallon and to pass on the remaining 22.24 cents to the consumer, reducing the existing pump price. The advantages of this change Mr Speaker are as follows: