Report No. 28334-GRD Grenada OECS Fiscal Issues Policies to Achieve Fiscal Sustainability and Improve Efficiency and Equity of Public Expenditures October 25, 2004 Caribbean Country Management Unit Poverty Reduction and Economic Management Unit Latin America and the Caribbean Region Document of the World Bank Preface This report was completed inApril 2004, before Hurricane Ivanstruck GrenadainSeptemberof that year. Hurricane Ivan was one of the most severe natural disasters worldwide in the past 30 years with damage inGrenada exceeding 200 percent of GDP. InJuly 2005, ten months after Hurricane Ivan, Grenadawas struck by HurricaneEmily with damages of about 13 percentof GDP. The report reviews Grenada public expenditures for the period 1995-02 and suggests policy recommendations to achieve fiscal sustainability, improve social service delivery, and reform social protection based on the economic situation of the country at the time. Since the completion of the report, Grenada has undertaken a number of important initiatives to address the fiscal challenges that the country faces, especially in the aftermath of Hurricanes Ivan and Emily. In particular, the authorities have developed a "burden-sharing" strategy to achieve fiscal sustainability. However in Grenada, as in all small states, faster implementationis hindered by limited institutional capacity. The authorities have completed the restructuring of commercial (November 2005) and bilateral (May 2006) debt. Furthermore, revenue enhancing and expenditures measures aimed at reducing the financing gap have been introducedin the context of a three- year Poverty Reduction and Growth Facility (PRGF) approved by the International Monetary Fund (IMF) on April 17, 2006. In addition, the authorities have improved transparency of the fiscal accounts with the Accountant General now current with the submission of the public accounts to Parliament and the Public Accounts Committee is fully functional Acknowledgments This report is based on the contributions of a team consisting of Lorraine Blank (social protection), Andreas Blom (education), Patrick Grady (public sector investment program and public sector employment and compensation), Ted Paterson (budget management), Helen Saxenian (health), and Claudia Sepdlveda (fiscal sustainability and fiscal and business cycles). As Task Manager, Claudia Sepdlveda was responsible for the overall preparation of the report. Shahrokh Fardoust and David Rosenblatt were peer reviewers of the report. The team would like to thank Antonella Bassani and Mauricio Carrizosa for their helpful comments and their invaluable collaboration to improve this report. The report also benefited from the accomplished research assistance of Laura dos Reis, Thomas Pave Sohnesen, and Kevin Tomlinson and the excellent assistanceof Patricia Chac6n Holt. Michael Geller, and Anne Pillay. The assistance, cooperation, and input of many government departments in Grenada-too numerous to mention individually-is gratefully acknowledged. The report also benefited from the assistanceand cooperation of the Eastern Caribbean Central Bank, the Caribbean Development Bank, and the International Monetary Fund. Without their help, preparation of this report would not have been possible. Table of Contents EXECUTIVESUMMARY ........................................................................................................ i 1 . FISCALDEFICIT. PUBLICDEBT.AND FISCALSUSTAINABILITY ...................1 A. GRENADA FISCALPERFORMANCE. B. DOES 1990-2002............................................................................... 2 GRENADA FACE FISCALSUSTAINABILITY PROBLEM? A C. FISCALCONSOLIDATIONINGRENADA'S PUBLIC SECTOR ............................................................... 9 ........................................................ 4 2. FISCALPOLICY AND BUSINESSCYCLES ............................................................. 15 A. TRENDS B. THESTRUCTURALBUDGET AND CYCLES INGRENADA'S FISCALACCOUNTS, 1983-2002 ......................................... I 6 SURPLUS AND THE USEOF FISCALRULES INGRENADA ..................... 21 3. BUDGETMANAGEMENT ........................................................................................... 25 A CONSTITUTIONAL AND LEGALFRAMEWORK B. BUDGETPREPARATION,EXECUTIONANDMONITORING............................................... . ................................................................... 27 28 C BUDGETACCOUNTABILITY .................................................................................................... . 38 4. PUBLICSECTORINVESTMENTPROGRAM ......................................................... 41 A. INSTITUTIONAL ORGANIZATIONANDPREPARATION..................................................................... 42 B. EXECUTION MONITORING....................................................................................................... AND 46 5. PUBLICSECTOREMPLOYMENT AND COMPENSATION ................................. 51 B. TRENDSINCGCOMPENSATIONDURING1995-2002..................................................................... A. TRENDSINCENTRALGOVERNMENT EMPLOYMENT DURING1995-2002...................................... 52 56 c.PUBLICSECTOR REFORM, COMMERCIALIZATION ANDSTATUTORIZATION .................................. 58 6. THE HEALTHSECTOR ............................................................................................... 65 A. HEALTH B. THEHEALTH OUTCOMESI NGRENADA ................................................................................................. 67 .................................................. 71 C. SOURCES ANDUSESOFHEALTH SYSTEM: FINANCING, COVERAGE ANDDELIVERY SPENDINGINGRENADA1993-2003 .......................................... 78 7. THE EDUCATIONSECTOR ........................................................................................ 83 A. THEGRENADIANEDUCATIONAL ...................................................................................... B. EDUCATIONAL SYSTEM 85 c. OUTCOMES INGRENADA ....................................................................................... 86 USESOF EDUCATION EXPENDITUREGRENADA IN ........................................................................ 91 8. SOCIALPROTECTIONPROGRAMSINGRENADA ........................................... 101 A. GRENADASOCIALPROTECTIONSTRATEGYANDPROGRAMS...................................................... B. COMPOSITIONANDEVOLUTIONOFSOCIALPROTECTIONSPENDINGINGRENADA1997-2001...103 109 C SOCIALPROTECTIONAND RISKMANAGEMENT . INGRENADA ..................................................... 112 BIBLIOGRAPHY ................................................................................................................... 119 APPENDIX A .......................................................................................................................... 123 APPENDIX B .......................................................................................................................... 124 List of Tables xiii ... Table 1.1 Short-term Fiscal EffortRequiredto Achieve Fiscal Sustainability 1998-2010........................... Table E.S.l Summary of Policy Recommendations ................................................................................. Table 1.2 Debt-to-GDP ratio path under alternative Scenarios2003-2010 .................................................. 6 Table 2.1 Long-Term GDP. Government Revenue. and ExpenditureGrowth Rates 1983-2002...............19 7 Table 3.1 Programs Over or Under budget in Grenada 1994-2001............................................................. Table 2.2 Cyclical Properties of GDP. Central Government Revenue. andExpenditure. 1983-2002 .......20 36 Table 4.1 GrenadaPublic Sector Investment Program 2003-05 ................................................................. 45 46 Table 4.3 Actual CapitalExpenditures for Grenada 1994-2002................................................................. Table 4.2 Sectoral Composition of Actual Capital Expenditures for Grenada 1994-2002 ......................... Table 4.4 Actual Capital Expenditures for Grenada 1994-2002................................................................ 47 Table 4.5 RealizationRate of Grenada Capital Expenditures 1994-2002................................................... 47 Table 4.6 RealizationRate of Grenada Capital Expenditures by FundingSource 1994-2002 ...................48 48 Table 4.8 Source of External Financingof Capital Expenditure in 2001.................................................... Table 4.7 Sources of Financingof GrenadaActual Provisional Capital Expenditures 1994-2002 ............49 Table 5.1 Employment in Grenada Central Government, 1995-2002......................................................... 49 Table 5.2 Change in Central Government Employment by Ministry 1995-2001 ....................................... 53 54 Table 5.4 GrenadaCG Compensation 1995-2002 ...................................................................................... Table 5.3 Central Government Employment by Ministry 1995 and 2001.................................................. 55 Table 6.1 Health Indicators in Grenadacompared with Barbados, Jamaica and other OECS, 2002..........57 67 Table 6.2 SelectedMaternal and ChildHealth Indicators, Grenada 2001 .................................................. 67 Table 6.3 Water and Sanitation Facilitiesby Poor and Non-poor, 1998..................................................... 68 Table 6.4 Public and Private Health Facilities andFunctionsinGrenada, 2003 ........................................ 72 Table 6.5 Use of HealthFacilities in Grenada, 1998 .................................................................................. 73 Table 6.6 UserFees inPublic Facilitiesby Type and as Shareof Total Fees Collected 1993-2002..........74 Table 6.7 Personnel Employed inPublic Health Services 1997-2001...................................................... Table 6.8 General Hospital Statistics, 2002 ................................................................................................ 77 76 Table 6.9 Total, Public, and Private Health Spending inGrenadacompared to Barbados, Jamaica and 78 80 Table 7.1 The Grenadian Education System, 2001 ..................................................................................... Table 6.10 Sources of Financingof Health Capital Expenditures .............................................................. other OECS countries, 2001............................................................................................................... Table 7.2 EducationalInstitutions in Grenada by Ownership, 2001........................................................... 86 86 Table 7.4 Sources of Financingof EducationCapital Expenditures........................................................... Table 7.3 EducationalOutcomes Indicators inPrimary Education............................................................. 87 92 Table 7.5 GrenadaRecurrent Expenditures by Subsector 1996-2002......................................................... 93 105 Table 8.2 Social ProtectionExpenditures inGrenada, 1997-2001............................................................ Table 8.1 Social ProtectionPrograms, Expenditures, and Beneficiaries in 2001 ................................... 110 Table 8.3 Incidence of Poverty and Other RelatedIndicators, 1998........................................................ 113 Table 8.4 GrenadaRisk Indicators by Age Cohort, ExistingPrograms and SuggestedInterventions....115 List of Figures Figure 1.2. Grenada Central Government Primary Expenditure. Interest Payments. and Revenue .............3 Figure 1.1.GrenadaCentral Government Fiscal Performance. 1990-2002.................................................. 3 3 Figure 1.4 InstitutionalInvestor Country Credit Rating for Selected Caribbean Countries 1990-2003 .......4 Figure 1.3. GrenadaCG Debt. Debt Guaranteed andPrimary Surplus 1998-2002 ...................................... 1990-2002............................................................................................................................................ 7 Figure 1.5 GrenadaCentral Government Current Revenue Composition. 1990-2002 .............................. 10 Figure 1.7. GrenadaCentral Government Expenditure Composition. 1990-2002...................................... Figure 1.6 GrenadaCentral Government Expenditure Composition. 1990-2002....................................... 13 13 Figure 2.1 Grenada GDP. GDPTrend and Cyclical Component 1983-2002 ............................................. 17 Figure 2.2 Fiscal Cyclical Adjustment in Grenada 1983-2002................................................................... 21 Figure 2.3 Cyclical Adjusted Primary, Overall, and Current Balance inGrenada 1983-2002 ...................23 Figure 3.1 Grenada Government Structure ................................................................................................. 28 Figure 3.2 The Budget Cycle in Grenada.................................................................................................... Figure 3.3 Variance between Actual and Budgeted Recurrent Expenditures in Grenada, 1994-2001 .......30 33 Figure 3.4 Variance between Actual and Budgeted Recurrent Expenditures in Grenada, MoF and all other Ministries, 1994-2001......................................................................................................................... 33 Figure 3.5 Variance between Actual and Budgeted Recurrent Expenditures inthe MoF.......................... 34 Figure3.6 Variance between Actual andBudgeted Recurrent Expenditures inthe Ministries of Education, 35 Figure 5.1 Government Employment as percentageof Population, 2001................................................... Health, Works and Others Grenada, 1994-2001................................................................................. 56 Figure 5.2 Public Sector Wage Bill as percentageof GDP, 2001............................................................... 58 Figure 6.1 Grenada's ChangingPopulationStructure: 2000, 2025, and 2050........................................... 70 Figure 6.2 Relationship between Income Per Capita and Public Spending on Health................................ 79 Latin America and the Caribbean, 2001...................................................................................................... 79 Figure 6.3 Share of Recurrent and Capital HealthExpenditures in GDP 1993-200................................... 79 Figure 6.4 Shareof Health Programs inRecurrent HealthExpenditures 1993-2002 ................................ 81 Figure 6.5 Share in Recurrent HealthExpenditures by Budget Categories 1993-2002.............................. 82 Figure 7.1 CXC ExamPass Rates inMath andEnglish,2001 ................................................................... 88 Figure 7.2 CXC Pass Rate Distribution among Secondary Schools, 2002 ................................................. 90 Figure 7.3 Share of Education Expenditures in GDP, Grenada 1996-2002................................................ 91 Figure 7.4 Education Expenditures in Grenada 1996-2002........................................................................ 92 Figure 7.5 Education Expenditures inGrenada 1996-2002....................................................................... 93 Figure 7.6 Access to RequiredTextbooks by Poor and Non-poor students, 1998...................................... 95 Figure7.7 Number of TeachersNeededinthe GrenadaPrimary Educational System 1998/99-2008/09 ..97 Figure 7.8 Share of Trained Teachers inPrimary and Secondary Education, Grenada and the Caribbean, 2001.................................................................................................................................................... 98 Figure8.1 Social ProtectionExpenditures inGrenada 1997-2001........................................................... 111 Figure 8.2 Composition of Social Protection Expenditures in Grenada 1997-2001................................ 112 Figure 8.3 Social ProtectionExpenditures in Grenada 1997-2001.......................................................... 112 Listof Boxes Box 1.1The Convergence Criteria inthe ECCU and WAEMU ..................................................... 8 Box 2.1 Chile's Fiscal Rule........................................................................................................... 24 Box 3.1 Errors and Omissions inGrenada Estimates.................................................................... 32 Box 4.1 The use o f Build-Operate-Lease-Transfer (BOLT) Agreements to Finance Capital Box 5.1 The Post Office Statutorization........................................................................................ 61 Expenditures .......................................................................................................................... 44 69 Box 7.1 The Grenadian Experience with Student loans................................................................ Box 6.1 Relevance of the Health MillenniumDevelopment Goals for Grenada ......................... 96 OECS FISCAL ISSUES: GRENADA POLICIES TO ACHIEVE FISCAL SUSTAINABILITY ANDhPROVEEFFICIENCY EQUITYOFm L I C AND EXPENDITURES EXECUTIVE SUMMARY Overview deterioration of the ECCU fiscal position in the recent years, notably in Antigua and Barbuda, 1. Grenada comprises three small islands (Grenada, Dominica, and St. Kitts and Nevis, has reinitiated Carriacou, and Petit Martinique) with a population of discussion among its members of the need to about 100,000 inhabitants in an area of 750 square coordinatefiscal policies. kilometers and a per capita GNIof US$3,290 in 2002 (World Bank Atlas methodology, current US$). A 4. During 1980-89, Grenada's economy showed a former British colony, it became a member of the strong growth performance, with an average growth British Commonwealth in 1974. Until the early rate of about 6.3 percent per year. However, in the 199Os, banana cultivation and export was the main 1990s economic growth in Grenada slowed to 3.6 economic activity of the country. During the 199Os, percent per year as a result of exogenous shocks this activity declined sharply and virtually ceased in (hurricanes and declining trade preferences for 1997 as a result of low productivity, poor fruit banana). In 2000, the Grenada economy rebounded quality, and erosion of the preferential access to the growing at 7.2 percent, but in 2001 and 2002 the European Union (EU). The country remains heavily economy contracted by 3.8 percent and 1.1 percent, dependent on tourism and spice production. Inrecent respectively, as a result of the September 11 events, years, however, it has been able to successfully the global economic slowdown and tropical storm diversify into light manufacturing, telephone, and LiliinSeptember 2002. The projectedgrowth ratefor internet based marketing. 2003 is 2.0 percent. This contraction has been accompanied by increasing fiscal deficits and rising 2. As a member of the EasternCaribbeanCurrency public debt and debt service obligation as capital Union (ECCU), Grenada shares a common central expenditures in2001 doubled its 2000 level. In 2002 bank, the Eastern Caribbean Central Bank (ECCB), the Central Government (CG) primary deficit after and a common currency, with the other five grants was 14.7 percentof GDP, the CG debt-to-GDP independent members of the Organization of Eastern ratio 84 percent and interest payments about 5 Caribbean States (OECS) and three dependent percentof GDP. territories (Anguilla, Montserrat and the British Virgin Islands).' Their currency is the Eastern 5. The medium term growth potential in Grenada Caribbean(EC) dollar, which has been pegged to the i s in the range of 3.5-4.5 percent, reflecting the U.S. dollar since 1976 at EC$2.70 per US$1. The completion of most of the major infrastructure commitment to a fixed exchange rate and a prudent projects and a pick up in the global economy monetary policy under the ECCU umbrella has been inducing restoration of tourism to its pre-September a key element in maintainingan inflation rate close to 2001 levels. However, main exogenous risks to the international levels. medium term scenario are posed by natural disasters such as tropical storms or hurricanes, reduced access 3. Notwithstanding a common central bank and a to the regional capital market fuelled by high fiscal common currency, Grenada, like the other ECCU deficit and debt ratios, increase in oil prices, and member countries, conducts fiscal policy higher interestrates inthe US. independently. While limited progresshas beenmade on a common fiscal policy in the region, the 6. Despite high levels of per capita income and good social service provision, poverty remains a ' The persistent problem in Grenada. The national 1999 OECS consistsof six independentmembers: Antigua poverty assessment indicates that approximately one and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. in three individuals is poor (that is, living below a Lucia, and St. Vincent and the Grenadines, in addition to locally defined poverty line). Moreover, three dependent territories of the United Kingdom, approximately 13 percent of Grenada's population is Montserrat(full member), Anguilla, and the British Virgin indigent; that is, they do not have sufficient resources Islands(associate members). to meet their basic dietary needs.' Unemployment is government services. However, until now the impact also a concern; the unemployment rate in 2000 was of the commercialization program (statutorization 15.2 percent and according to the 1999 poverty and contracting out) on the quality of services has assessment, the unemployment rate among poor varied and no fiscal savings over the previous level females is 20.5 percent and 18.6 percent among poor appear to havebeenrealized. males. Income insecurity/volatility at country and household levels as a result of climatic and external 9. To restore rapid economic growth, ensure economic shocks is particularly pronounced in medium-term fiscal sustainability under the umbrella Grenada, like in the rest of the Caribbean, given its of the currency union and protect the social small size, limited economic diversification and high achievements realized in the past decades, the main degree of openness, and its extreme vulnerability to challengesfacing the Grenadagovernment are to: (a) hurricanes. The impact of this extremely high tighten fiscal policy, notably through reduction of volatility is especially negative for the poor and near capital expenditures and the realization of the fiscal poor who may not be able to rely on savings or on the savings expected from the public sector reform government's social protection programs to smooth initiated in 1997 (b) increase the efficiency of public consumption duringtimes of hardship. investments and public service delivery; (c) strengthenregulation and efficiency of public utilities 7. With respect to the Millennium Development and sedair transport; (d) modernize the legal Goals (MDGs), the primary education goal has been framework that oversees public sector employment; attained-primary education is universal for boys and and (e) promote education and skills developmentto girls. I t is likely that the goal of eradicating extreme prepare the population, notably the poor, to take poverty and hunger will be achieved; Grenada is advantage of new opportunities in the global estimated to have less than 2 percent of the environment. population living on less than US$1 per day. With respect to the health MDGs, the under-5 mortality 10. This report concludes that the fiscal policy and HIV/AIDS goals are the most relevant to conducted by Grenada during 2001 and 2002 was Grenada. Malnutrition (defined as the prevalence of unsustainable, due to a one-time spike in capital underweight children), maternal mortality, and expenditures to 22 percent of GDP in 2002, and that tropical diseases (other than dengue, which is it will require an average primary surplus of 4-5 endemic) are not major issues. The under-5 mortality percent of GDP during 2003-2010 to achieve a debt- rate in Grenada dropped from an estimated 37 per to-GDP ratio of 60 percent (the ECCU target). Most 1,000 in 1990 to 26 per 1,000 in 2000. This is a of the adjustment needed to achieve a sustainable decline of about 3.9 percent per year. The MDG fiscal policy will have to come from expenditure target-a reduction of two-thirds from 1990 to cuts: reorientation of capital expenditures to projects 2015-would require that the rate fall to about 13 per geared to growth and poverty reduction and the 1,000 by 2015. According to trend projections, realization of the fiscal savings expected from the Grenadawill not reach this MDGtarget. At the same public sector reform initiated by the government. In time, it is important to recognizethat the MDG goals addition, a reduction in tax exemptions and get harder to achieve as countries move to relatively discretionary concessions is essential, as is a low mortality rates. It is difficult to assess the restructuring of the revenue base through the likelihood of reaching the HIVIAIDS target, because introduction of the value-added tax (VAT). This is baseline data on HIV prevalence and incidence are particularly timely given the high dependence of the poor. However, the government has launched a country on international taxes and the expected comprehensive HIV/AIDS prevention and control negative impact of FTAA on the OECS' countries tax program with the support of the World Bank with the revenues.Next, while social indicators are good for a objective of reversing its spread. country at this level of gross domestic product (GDP), there is ample room for more effkient 8. Grenada was one of the first OECS countries to modalities of education and health service delivery explore alternative forms of public service delivery that can generate savings and improve effectiveness. such as the statutorization (Le., transformation from a In addition, the government needs to ensure that its government department to a statutory body) of the social programs, in particular social protection, are Post Office in 1997 and the contracting out of provided in a well-targeted and effective manner in order to provide more effective safety nets to mitigate * In 1999, the possible impact of fiscal consolidation and of the the adult equivalent poverty and indigence lines rationalization in education and health service were equal to EC$ 1,83 1 and EC $1,431 respectively. .. 11 delivery, and continued vulnerability to external 3.8 percent in 2001 and 1.1 percent in 2002 as a shocks. Specific recommendationson how to achieve result of the global economic slowdown, drop in fiscal sustainability, improve social service delivery, tourism following September 11, and Tropical Storm and reform social protection are provided in the Lili in September 2002, current revenue as a attachedmatrix. (See Table E.S. 1). percentage of GDP kept constant at its pre -2001 level of about 27 percent. 11. The report is organized as follows: Chapter 1 discusses fiscal sustainability in Grenada and 14. The fiscal policy implemented by the CG during presents options for fiscal consolidation; Chapter 2 2001-2002 was unsustainable, but in 2003 the CG discusses the role of the business cycle in the design stabilized the debt-to-GDP ratio at about 85 percent of fiscal policy by reviewingthe cyclical components of GDP. The government in the 2004 budget of the fiscal accounts; Chapter 3 discusses the budget presentation targeted the years 2007-2010 to achieve management system in place and its effect on a CG debt-to-GDPratio of 60 percent. A fiscal policy budgetary outcomes. Chapter 4 examines the Public similar to the one set in 2003 and reasonable Sector Investment Program (PSIP); Chapter 5 assumptionsfor the real interestand growth rates will discusses public sector employment and not accomplish the objective established in the compensation issues; Chapters 6 and 7 examine budget presentation. Indeed, the debt-to-GDP ratio public expenditures and outcomes in the education will increase steadily to a level of about 90 percentof and health sectors; and Chapter 8 discusses social GDP by 2010, under the assumptionof a real interest protection programs. rate of 4 percent and growth rate of 2 percent. But a CG debt-to-GDP ratio of 60 percent can be achieved Fiscal Sustainability in 2010, if the government can on average run a primary surplus of about 4-5 percent of GDP during 12. At the Central Government (CG) level, the fiscal the period 2003-20IO. This fiscal effort is reasonable position of Grenadahas weakened substantially since given that the 2001-2002 spike in capital 2001. After a primary fiscal deficit (after grants) of expenditures was inall likelihood a one-time event as about 8 percent of GDP in 1990, the Grenada CG the CG bought out the lease arrangements for the followed a cautious fiscal policy from 1991-2000. National Stadiumand the FinancialComplex. During the 1991-2000 period, the CG contained the primary fiscal deficit to 0.9 percent of GDP in 1991 15. The ECCB's Monetary Council meeting that and ran a primary surplus of 2-3 percent of GDP took place in February 2003 reconfirmed the agreed between 1992-95. In 1996 and 1997, the CG primary regional fiscal framework that includes ceilings on balance was nil. However, since 1998 the CG fiscal debt and on fiscal performance for the CG (see position started to deteriorate. From 1998-2000, the Chapter I,paragraph 1.16). The aim of the ECCB in primary deficit was manageable at 1-1.5 percent of setting these fiscal convergence criteria is to ensure GDP. But since 2001, the CG fiscal position long-run fiscal sustainability and the stability of the deteriorated sharply and the CG ran a primary deficit currency union by limiting negative spillovers. Based of 5.8 percent of GDP in 2001 and 14.7 percent of on its fiscal ratios in 2002, the deadline for fiscal GDPin2002. convergence (a four-year horizon) requires a fiscal adjustment higher than the one discussedabove if the 13. The main cause of the deterioration of the CG objective is to meet the proposed 60 percent of GDP finances since 2001 has been an increase in non- ceiling. But a date of 2010 seems feasible for interest expenditures, predominantly capital Grenada. expenditures. Non-interest expenditures were about 35 percent of GDP in 1990 and during 1991-2000 FiscalPolicy and the BusinessCycle were contained to about 29 percent of GDP. However, since 200I they increased steadily until 16. Economic volatility tends to discourage long- reaching a peak of 43 percent of GDP in 2002. At term investments in physical and human capital, and the core of the observed increase in CG expenditures thus leads to a lower growth potential. The poor is a surge in capital expenditures, some of them segments of the population are generally the most contracted in the early 1990s but only now recorded affected because they lack the means to protect as expenditures (as for example the Ministerial themselves from adverse employment and income Complex and the National Stadium) as well as the effects. Governments have a broad set of instruments completion of the first stage of the reconstruction of available to reduce aggregate volatility and its the General Hospital. Although GDP contracted by effects, one of which is fiscal policy. In developed 111 economies, fiscal policy is usually designed to lower tax collection, the cyclically adjusted overall stimulate output when the economy moves into fiscal deficit was only 18.7 percent of GDP. The recession and to contract output when an expansion Grenada cyclical adjustment compared to other takes place. A fiscal policy designedinthis way leads countries in the region is in the low range. The to a strongly countercyclical fiscal policy. cyclical adjustment in St. Kitts and Nevis is between -1.8 and 1 percentof GDP and in Chile is between - 17. Volatility in Grenada, measured by the standard 4.0 and 2.5 percentof GDP. deviation of the cyclical component of GDP, was about 2.2 percent during the period 1983-2002 and 21. Once the cyclical effects are factored out, the very similar to volatility in St. Kitts and Nevis (2.1 country has run a structural primary and overall percent). The Grenada GDP cyclical component detkit since 1996. In 1994. the structural primary shows no clear link to its major sources of economic deficit was 0.1 percent of GDP and kept increasing volatility, hurricanes and tropical storms, but several until it reached 13.9 percent of GDP in 2002. The expansions and contractions are worth noticing. same pattern is observed for the structural overall Between 1980 and 2002, Grenada was hit by six fiscal balance. This confirms the conclusion that the hurricanes and one tropical storm. In four out of business cycle has had little effect on the sharp seven hurricane and tropical storm years, Grenada's deterioration of Grenada's fiscal position in 2001 and GDP decreasedbelow its trend, and inthe other three 2002. years increased above its trend. The deepest contraction took place in 2002, the year of tropical 22. Fiscal rules have two main objectives: (a) to storm Lili. enforce fiscal responsibility, and (b) to ensure a countercyclical fiscal policy. In this regard, Grenada 18. All components of the fiscal accounts are more is on the right path with an acyclical fiscal policy. volatile thanGDP. The highest volatility is for grants, However, in order to move the country to a tax on income and profits, and capital expenditure. countercyclical fiscal policy we propose a fiscal rule Current expenditure and all its components, as well based on a structural surplus of about 2 to 4 percent as capital expenditure and interest payments, are of GDP. This rule is more austere than the Chilean acyclical (that is, in good times or bad times the fiscal rule of a structural surplus of 1 percent. government does not increase or reduce its However, considerations of high GDP volatility and expenditures). This result is similar to the one credibility insmall states would require that countries observed in the Organization for Economic like Grenada adopt tighter fiscal rules. The Cooperation and Development (OECD) countries, recommended fiscal rule implies a fiscal adjustment but not in developing countries. Current and tax of about 9-11 percent of GDP, higher than the revenues are procyclical (not surprising given that adjustment to achieve fiscal most taxes are in some way proportional to economic sustainability.recommended activity), in particular tax on international transactions. All other tax componentsare acyclical. 23. However, successful implementation of a fiscal rule based on a structural surplus would require, as a 19. Finally, all measures of fiscal balance such as first step, timely and reliable fiscal information. As primary, current, and overall balance are acyclical, discussed inthe report, the current presentationof the that is, they do not co-move with the GDP cycle. In fiscal information does not follow international good times the government does not run a higher or practices and presents a distorted picture of the lower fiscal surplus than its trend. This is an country's fiscal situation. interesting result and contrary to the empirical evidence for developing countries. However, most of 24. This report envisages a two-step sequence in the this evidence does not include small states' like government fiscal policy. First, achieve fiscal Grenada, in which the procyclicality of tax revenues consolidation by running, on average, a primary is high andexpenditures are acyclical. surplus of about 4-5 percent of GDP between 2003- 2010. Duringthis period the'government would build 20. The cyclical adjustment to the government credibility with its prudent stanceon fiscal policy and budget balances in Grenada varies from 1.3 percent simultaneously use this transition period to ensure of GDP in 2000 (expansion year) to 0.8 percent of that transparency in the fiscal accounts and debt GDP in2002 (recession year). For example, in2002, reporting complies with international guidelines (a the overall fiscal deficit after grants was 19.5 percent pre-condition for successful implementation of the of GDP, but factoring out the cyclical impact of fiscal rule). Second, after 2010 the structural surplus iv rule would be implemented, which will reaffirm and DBM has been plagued with high rates of staff intensify government commitment to fiscal turnover, forcing Grenada to call on the ECCB for responsibility and reorient its fiscal policy to an backstoppingsupport on a regular basis. To facilitate effective performance of its countercyclical role and cash flow and debt management, the Ministry of strengtheningfiscal discipline. Finance has instituted a Debt Management Committee, comprising the Permanent Secretary of FinancialManagement Finance, Accountant-General, and Director of Economic Affairs. This committee meets monthly to 25. Grenada introduced in 1997 a set of budget review revenue and expenditure performance and reforms that served to improve aggregate tiscal consider financing alternatives. It is recommended outcomes. These changes, however, have not yet that the domestic and external debt units be merged fully translated into improved resource allocation, into one. Inaddition, this new unit needs to be staffed effective expenditure controls, and improved with qualified personnel that can keep adequate transparency.The reasons behind these shortcomings records of external and domestic debt, analyze the are the lack of firm resource envelopes at the data, and advisethe government on debt management aggregate and ministry level underpinned by a issues. medium-term economic strategy and ministries' corporateplans nested ina consistentmacroeconomic 28. While independent in a sense by dint of framework. Both the Strategic Policy Paper (a yearly authority derived directly from the Constitution, the document that presentsthe economic prospectsof the Director of Audit (and the Audit Department) has no country for the next fiscal year) and the Medium- guaranteed operating budget or staff complement, Term Economic Strategy Paper (MTESP, a three- and must obtain approval from the Executive via the year economic plan) last prepared for the Caribbean annual Estimatesprocess. The problemsof Grenada's Group for Cooperation in Economic Development Audit Department are longstanding. No government (CGCED) in June 2002, suffer from the same accounts were submitted from independence in 1974 shortcomings: (a) top-down estimates of aggregate until well after the US intervention a decade later. resources available for public expenditurenot always From the late 1980s to the mid-l990s, Grenada consistent with macroeconomic stability, (b) lack of benefited from a British project to strengthen the bottom-up estimates of the cost of carrying out Audit Department and to bring the public accounts ongoing and new programs, (c) no attempt to up-to-date. During the life of this project, a fire reconcile the aggregate resources with the cost destroyed the Ministry of Finance Complex in 1990, estimates of ongoing and new programs. Another making it impossible to prepare the 1988 and 1989 shortcoming is the failure of the Accountant General accounts. The accounts were reconstructed as of the to submit the government's financial accounts on a day of the fire, involving write-offs of EC $46.9 timely basis and therefore be subject to audit by the million, but by 1995 the government's annual Audit Department. statements were again well in arrears. In 2000, the Director of Audit was suspended and her case is still 26. The budget provides an accountant's view of before the courts so an individual on an acting basis government transactions rather than a presentation of fills this important position. the government's fiscal policy. The budgetadheres to the traditional administrative, program, and economic 29. In addition, other factors that have served to structure format. However, this presentation is reduce potential benefits accruing from the work of insufficient to assess the fiscal position of the the Audit Department include: (a) the automation of governmentand to follow up on key programs linked critical financial management functions without to policy priorities. The Ministry of Finance does, adequate input from the Audit Department; (b) the however, have the capacity to present the budget by non-functioning of the Public Accounts Committee, standard functional classification and it is and (c) lack of training for staff, particularly on recommendedthat it do so infiscal year 2005. computer assisted auditing tools, auditing of computer systems, and value-for-money auditing. 27. The debt management function needs to be strengthened. This function is split between the 30. The financial statements of Grenada present a Budget and Debt Management (DBM) unit in partial view of government activities. The operations Finance that maintain data on foreign debt and the of statutory bodies are not covered, and several Accountant General's Department, which handles contingent liabilities are not presentedinthe financial domestic debt. The debt management section within statements. Most of the State owned-enterprises V (SOEs) are significantly in arrears in the preparation Lili in 2002. However, the fact that (a) important o f their financial statements and the submission of infrastructure projects such as the Financial Complex, these for audit and for Parliament's review. Although Ministerial Complex and National Stadium are not the Director o f Audit has the right to require part of the capital budget due to their financing submission o f SOE audit reports and to supplement mechanism; and (b) a large fraction of the them by further investigations if helshe considers it expenditures recorded under infrastructure (for necessary, helshe has not done so. example, the road maintenance program) are recurrent expenditures and not investment in fixed 3 1. Foreign aid accounting is also a problem. When capital which raise questions on the actual impact on cash is received that is tied to a project or a program, infrastructure and growth o f these expenditures. it is credited to a temporary account, and cleared to Since 1997, capital expenditures have been mostly revenue only when expenditure reports are received. financed through loans and local revenue. It appears that considerable expenditure is not cleared or is cleared after long delay, so both revenue and 35. The public sector investment program presented expenditure are understated. This pattern seems to be in the MTESPand the capital budgetpresented in the worse for capital projects. Estimates Book mainly cover Central Government, but some projects of statutory agencies are also 32. The formulation of the budget receives inputs included. N o project being considered to be financed from the social partners, but this undoubtedly could under Build-Operate-Lease-Transfer (BOLT) be made more systematic. A Multipartite agreements or by private corporations but guaranteed Consultative Committee was established in the late by the government is included in the PSIP. It is 1990s as a means for discussing public policy options recommended that the government subject all C G and has met regularly. Also, the Chamber o f investment projects and investment projects to be Commerce submits budget recommendations each guaranteed by the government to a cost-benefit year. The recent agreement by OECS countries to analysis before the government commits to undertake establish National Economic Councils with public or guarantee the project. BOLT agreements covering and private sector members may lead to a more the National Stadium and the Ministerial Complex systematic approach. However, the capacity of the have financed investments for a total o f EC$ 127 social partners-most o f which are small million. However, these projects although guaranteed organizations-to go beyond their immediate by the government, were not subject to any cost concerns and address complex national policy issues benefit-analysis. Investment projects by private remains limited. corporations but guaranteed by the government should be disclosed in the government's financial PublicSector InvestmentProgram statement as government liabilities. 33. From 1994 to 2002, capital expenditures in 36. Grenada has a dual budget. The Budget and Debt Grenada were on average about I 1 percent o f GDP. Unit in the Ministry of Finance is responsible for This level of capital expenditures is one of the recurrent expenditures, while the Project highest in the OECS countries. Dominica's Central Management and Technical Cooperation Unit Government (CG) spent about 9.0 percent o f GDP in (PMTCU) prepares the capital budget and the capital expenditures during FY 1995196-2000/01, St. medium-term PSIP. The Chief Planning Ofiker Kitts and Nevis Federal Government about 5.1 heads the PMTCU unit. There are two committees percent of GDPover the period 1996-2001(a country that oversee the capital budget and the medium-term that like Grenada was hit by two major hurricanes PSIP, the Planning and Priority Consultative between 1996 and 2001), and St. Lucia 7.7 percent of Committee (PPCC) and the PSIP Operating GDPduringFY 199396-2001102. Committee (OC). The PPCC is responsible for formulating policy and selecting projects to be 34. During this period, on average almost half of included in the PSIP. The OC is the working level capital expenditures were in infrstructure. The social committee that is responsible for the identification, sectors accounted for about 20 percent of total capital preparation, implementation, and monitoring o f expenditures and agriculture and others (including projects. During the 2000 medium-term PSIP public services and safety) about 28 percent. In part, exercise for the Medium-term Economic Strategy expenditures on infrastructure have been driven by Paper (MTESP), another committee known as the the damage caused by the passage o f Hurricane Project FacilitationCommittee became operational. It George in 1998, Lenny in 1999 and Tropical Storm was chaired by the Prime Minister and included vi selected Permanent Secretaries and Technical the Post Office, Grenada has contracted out several Officers from line Ministries. Its main function was government services. This policy has translated in a to identify policy issues and actions affecting the decline in CG employment from 5,264 positions in implementation of projects. The Project Facilitation 1995 to 5,074 in 2002 or 0.5 percent per year. This Committee like the PPCC does not appear to be decline inC G employment is the result of a reduction active. Thus, the lack o f coordination and in the number of non-established positions, which institutional authority in the PMTCU unit and decreased from 1,235 positions in 1995 to 402 in between the Budget and Debt Unit and the PMCTU 2002. is one o f the main reasons behind the lax management of capital expenditures. 41. However, a new form o f employment has arisen under object 340 (Professional and Others Services) 37. Although the PSIP is prepared as a three-year in the budget. The economic object 340 in the medium-term investment program, in practice the Estimates has been often used in the case of IT focus is the one-year capital budget. The relatively professionals where there is a EC$ 500-1,000 per low realization rate (about 65 percent), but higher month gap between the government pay scale and the than in St. Kitts and Nevis, provides an indication of private sector salaries. However, the government the extent to which the capital spending intentions decided to keep some o f the employees released included in the estimates do not represent a firm through commercialization in the payroll. Because investment plan. Also, several investment projects the government could not re-hire the released included in the PSIP and the capital budget should be employees and was committed to the targeted staffing classified as recurrent expenditures (about at least 25 level of 5,000, their compensation was recorded in percent of the reported capital expenditures in the the object 340. Moreover, some of these employees year 2002). were kept on the payroll under object 340 performing the same tasks as prior to commercialization. 38. The implementation of the PSIP is carried out by Although these expenses must be approved as part of the line ministries and monitored by the Project the annual budget process, they are not subject to Management and Technical Cooperation Unit. central control by the Department o f Human However, the coordination among these agencies is Resources. Consequently, their use results in reduced weak. Post-evaluation of projects is usually controls on staffing. conducted only for projects financed by external donors. 42. Personal Emoluments and Wages increased (in real terms) in total by 20 percent or 2.5 percent per PublicSector Compensation year during the period 1995-2002. This increase in the wage bill is wage driven rather than employment 39. Given the small size of its economy and driven. There were only three negotiated increases in population, Grenada has limited resources to carry salaries and these increases account for a small out the whole range of functions performed by any fraction o f the raise in the wages bill. However, pay government. As several studies have shown, small scale changes and performance increments explained countries tend to have bigger public administrations most o f the increase in the wage bill. In 1996, in response to the higher cost of supplying public following a study by KPMG done in May 1995, a goods and the need to provide a stabilization role to new pay and performance system was implemented. ameliorate the effect of external shocks. However, in The new performance appraisal adopted, and still in this regard, Grenada has managed its wage bill place, yielded increases o f about I O percent per year prudently in comparison to neighboring countries. because most of the employees were ranked as best Since 1995, the wage bill as percentage o f GDP has remained stable at around 11.8 percent o f GDP. But even under this prudent management o f the wage bill, There are two types of government positions in Grenada, there is still scope for improvement, in particular in established and non-established. Employees in established the wage policy used by the government to reward positions are appointed by the Governor General upon performance. formal request by the Public Service Commission, with the approval of the Establishment Division in the Prime 40. The Grenada government is to be commended Minister's Office. Established positions are permanent positions listed in the budget, and their compensation is for its commitment to public sector reform, mainly in classified as Personal Emoluments. Employees to non- the form o f contracting out services and established positions are hired directly by line ministries, statutorization. Since 1997 with the statutorization of their numbers are also presented in the budget, and their wages are includedas a line item. vii performers. The Department of Human Resources observations, it is recommended that the government believed that increases due to performance will max collect more data to carry out a more detailed in 2004 as most employees will be in the last pay evaluation of the commercialization program to date, level and will only get increases if they are promoted to further informfuture initiatives inthis regard. to the next grade. Although these increasesmay have, to some extent, reduced the gap between public and 46. Grenada presents some fragmentation and private sector compensation, they have also implied duplication of work betweenministries, departments, an increase in CG compensation that does not and agencies leading to a diffusion of responsibilities. necessarily reflect increases in productivity in the The survey of public officials, carried out by the public sector. World Bank for the OECS Institutional and Organizational Capacity Review (IOCR) in 200I, 43. This inflexibility of the public sector wage noticed a fragmentation and duplication of functions policy is a concern inthe context of a currency union. which adversely affect the public service. This In a currency union, the real appreciation of the suggests that missions, objectives, and functions of exchange rate that fiscal deficits can generate cannot the different ministries need to be reviewed to be compensated by an increase in the exchange rate, determine the most effective and efficient thus wages will need to adjust downwards to organizational structure. Opportunities to pool maintain the competitiveness of the economy. resources and realize lower unit costs through greater However, if the public sector wage policy is not collaboration, including at the regional level, extend flexible, as seems to be the case in Grenada, and to almost all areas of public sector activity, including public employment represents a substantial share of international relations, economic and social policy, total employment in the economy. then the country and policing. The benefits of commonorganizational will be double tied, as was the case inArgentina. One arrangements for tax administration, customs, audit alternative that has been discussed in the literature is services, police services, magistracy, and to index wages to GDP. environmental protection were discussed in the OECS IOCR. 44. The government is strongly committed to a program of commercialization as part of an overall 47. A modern public sector reform program would public sector reform. Several different arrangements need to address the issue of the existing have been employed during the divestiture of fragmentation and duplication of work among functions. Inrecent years, 800 to 1,000 positions (the ministries, departments, and agencies, leading to a majority non-established positions) have been diffusion of responsibilities. The reform would need contracted out of the CG. It represents a significant to be informed by a human resource management proportion of the total CG employees and has been strategy, and a performance appraisal system should the main mechanismthat the government has used to be established with bonuses to reward good achieve its targetedstaffing level of 5,000. performancebut not built into the pay scale. Itwould also need to be accompanied by the introduction 45. However, a preliminary assessment of the andfor upgrade of information systems in order to commercialization process in Grenada conducted by accurately cost its implications (pension and the World Bank in 2003, at the request of the severance payments) and monitor public employment government, concluded on the basis of interviews (established and non-established positions) on a with public officers, supervisors of contracted out regular basis. services and consumers that: (a) the impact of commercialization on the quality of services Health contracted out varied: (b) no economies over the previous level of costs appear to have been realized 48. Public financing and public provision of health (the failure to realize savings was likely a product of care dominate Grenada's health system. The system the model used for contracting out): and (c) the has a strong primary health care orientation with a outsourcing or privatization of services employing solid nursing base. The public health sector has establishedemployees is impededby the inordinately managed to avoid investments in unsustainable heavy burdenof severance paymentsand an outdated medical equipment and tertiary facilities, and has and restrictive legal framework. Thus, to date introduced a policy of contracting out hospital outsourcing has been confined to services employing support services and other innovations to improve daily wage workers requiring costly but manageable efficiency. Grenada's health system has served the severance payments. On the basis of the above country well, although the model now needs some ... Vlll redesign to face the challengesof the coming years- 52. Public health financing is mainly through the fiscal pressures exacerbated by the demands on the consolidated fund. User fees in public facilities are system from an aging population not a significant share of total public spending on health. The government collected about 49. Public spending on healthduring 1994-2002 was EC$1,032,000 inuser fees inpublic facilities in2002 about 3.9 percent o f GDP, on average. In the same (1995 EC$), about US$4 per capita. That same year, period, average recurrent public spending on health user fees were the equivalent of 10 percent of the was about 3.1 percent of GDP. The share of capital General Hospital spending, and 3 percent of total expenditures financed by loans has been rapidly recurrent spending by the Ministry of Health. rising throughout the period with the reconstruction Facilities do not retain fees, so they have little of the General Hospital. The reconstruction was of incentive to put effort into collection. Fees revert to highpriority, given how deteriorated the hospital had the consolidatedaccount. become. Some of these capital investments have already generated efficiency improvements, such as 53. The government recognizes that the user fee the reduction inaverage lengthof stay. system has problems and is reviewing it. In revising the fee schedule, several factors need to be 50. The government has been successful in considered. First, exemptions for individuals and for containing the share of health spending allocated to types of services are needed so that the poor are not wages (below 60 percent, one of the lowest shares in deterred from getting service and individuals are not the OECS countries). This has allowed expenditures deterred from getting services with large externalities on non-wage inputs such as pharmaceuticals. Drug (such as immunizations, tuberculosis treatment). stock outs-a common problem in many countries- Second, fees needto be kept affordable for reasons of are reported by health personnelto be infrequent. The financial protection-for services offered in the public sector purchases most of its drugs-85 to 90 publicly-financed health service, fees should not percent-through the OECS drug procurement become a catastrophic burden even on the non-poor. service in order to achieve economies of scale and Third. fees can be used to improve efficiency, for good prices. Grenada has a good payment record- example, by charging people a fee when they go to paying its bills relatively quickly compared to other the overcrowded emergency room for a problem that OECS countries in the procurement service. should be addressed in a health center. Fourth, it is However, maintenance problems appear widespread recommendedthat the General Hospital be allowed to inpublic healthfacilities. The percentageofrecurrent retain fees, as an incentive to collect and reinvest in health expendituresallocated to maintenancewas 9.6 the hospital. With the proper incentives, the Hospital percent in 1993 and only 3.5 percent in 2002. In could keep Admissions and Billing open 24 hours, addition, the process inplace to access these funds by with all people routed through admissions, with the health centers seems cumbersome and slow. deposits for people on private wards, among other Ensuring adequate funding in the budget and measures, inorder to increasecollections. decentralizing the control of some maintenancefunds might be one-way to improve the situation. 54. The country has debated for some time whether it should adopt a national health insurance system 51. As the disease patterns change over time and based on payroll taxes. For such a small country, with the goal of achieving greater economiesof scale, working with the existing financing system, but it may be possible to rethink the configuration of finding ways to improve efficiency to ensure that the health facilities in the country, primarily by country is getting better value for money may be a reorganizing and consolidating some of the primary better choice in the long run. Assuming that the health center services. The government should also government continued to finance general health be able to achieve greater economies of scale by services, the introduction of a social security tax better coordinating health services with its OECS system would have the advantage of generating neighbors and other countries inthe region, including additional funds for the health system and this is for specialized laboratory tests and procurement of important given that some groups in the population medical supplies. An excellent example of exploiting are willing to pay for additional coveragedue to their economies of scale at the regional level that can be purchase of private insurance and of private services extended to other services is the Eastern Caribbean out-of-pocket. Furthermore, the existing National DrugProcurementService. Insurance Scheme already collects revenue from payroll taxes so that mechanism is already in place. However, there are disadvantages. Payroll taxes are ix a tax on labor. In addition, given that many at all educational levels, they only play a minor role households are outside the formal sector, a national in the provision of education. The Grenadian health insurance system would not cover the full government investedon average about 5.7 percent of population-the government would need to cover GDP in education from 1996-2002. This level of those outside the formal sector from general expenditure is significantly higher than the ratio in revenues. There are administrative costs to the the Latin American and Caribbean Region (4.1 system. Collecting contributions from those who percent of GDP), but below the average for English- have the ability to pay, but who are outside the speaking Caribbean countries (6.6 percent of GDP). formal sector, would be a challenge. The high investment in education provides a Workers/employers contributing to national health tremendous opportunity for skill building and insurance would expect differentiated services from economic growth. However, this has not always been what they can already obtain through the existing accompanied by satisfactory education outcomes, system. If the government cut its contributions to equity, and efficiency. health from the general tax base over time, it would have consequences for the poorer segments of the 58. The allocation of recurrent expenditures by population dependent on governmentfinancing. educational level has remained fairly stable since 1996. This partially reflects a failure of the budgetto Education foster progress in the education system. In 2002, the primary education system continued to receive the 55. The government is to be commended by the lion's share of the budget (47 percent), with reform efforts in the education sector initiated in the secondary schools as the second largestrecipient (25 1990s. These reforms have produced improvements percent). Thereafter followed the sub-sectors in educational outcomes, including increases in administration (10 percent), tertiary education (8.5 enrollment into pre-primary and secondary education. percent), pre-primary (6 percent) and other (3.5 However, the Grenadian education system faces two percent). This report argues that policymakers could main challenges that require strong policy actions to to a greater extent shift resources away from the be overcome: (i) the cohorts entering the education government's lower priorities towards the top system since the late 1990s are smaller, therefore priorities in the system (secondary education). For without a gradual reduction in the number of schools example, the government could shift expenditures and teachers in pre-primary and primary education, away from pre-primary and primary levels, where the unit costs will rise; and (ii)the education system pupil population is declining, towards the top priority needs to improve learning outcomes of the students. of expansion of secondary education. Such shifts The low quality of education substantially reduces have not taken place in the recurrent budget, which the value of the invested resources. Raising the indicates that better coordination between stated quality of education will require additional teacher education policies and budget allocations and training programs that need to be financed by execution could improve the value of the current reallocating resources within the Ministry of sizeable level of expenditure ineducation. Education`s budget. 59. Administration expenditures for education in 56. The results of the Minimum Competency Test, Grenada take up twice the resources compared to administered to students in grade 4 and designed to larger developing countries. The way forward to determine whether students at that grade level had overcome economies-of-scale is to increase sub- acquired the expected knowledge and skills, reveal regional cooperation. Grenada spends one dollar on the needto improve the quality of primary education. administration out of each ten dollars spent on In the Caribbean wide CXC-exam, that measures education. This is slightly below the average among learning outcomes for graduates of secondary its OECS neighbors but double that of the average education, Grenadianpupils scored the lowest among Latin American region. The OECS difference is its OECS peers in 2001, with a pass rate of 24 in explained by the high degree of fixed costs in Math and 57 in English. Insufficient teacher administration in small states, for example in the qualifications are one of the main reasons behind development of curricula and information systems, thesepoor outcomes of the educationsystem. and elaboration of new programs and guidelines in general. As a result, innovation in provision is 57. From pre-primary to tertiary education, the infrequent and ministerial staff is overloaded with government is the main provider of education in little time to supervise and reform the system-all Grenada. Although non-governmental schools exist factors that contribute to an inefficient and X occasionally outdated modus operandi of the targeting mechanisms and criteria (the government Education Ministries in the OECS countries. One implements, through at least ten different line such example is the development of a new ministries and statutory organizations, over twenty- curriculum for secondary education, where the OECS five social protection programs); (b) the limited countries through the OECS Education Reform Unit availability of time series data on social protection have agreed to develop and implement a common programs which makes their monitoring and curriculum. Despite the existence of a new evaluation difficult; and (c) the significant number of curriculum, the OECS countries, including Grenada, social protection programs funded through the .capital have been reluctant to implement it. Enhanced budget. This reduces the transparency of decision cooperation could take place in many other areas of making for social protection and also raises concerns educational management, such as information about the sustainability of social protection system, monitoring and evaluation of programs, initiatives. examination and testing at the primary level, teacher training, and development of new programs and 64. Between 1997-2001, Grenada spent-on guidelines. average-about 2.8 percent of GDP on social protection programs (including social security). This 60. Salaries represent about eighty percent of figure is below the average for LatinAmerica and the recurrent education expenditures in Grenada, one of Caribbean region, and other OECS countries. For the lowest shares in the OECS countries. The main example, during the same period, Dominica spent on reason for this lower share of salaries in recurrent average about 5.0 percent of GDP on social expenditures is that Grenada is among the Caribbean protection programs and St. Kitts and Nevis around states that employ their teacher force most efficiently. 3.5 percent of GDP. The combination of relatively In fact, in 2001, in primary and secondary education low allocations to social protection and large the pupil-to-teacher ratio (PTR) reached 25 and 23, numbers of overlapping programs and administrative respectively. Only Jamaica and the Dominican structures increases the cost of services provisionand Republic have a higherPTR inthe Caribbean. thinly spreads the already limited resources available for social expendituresfrom the government. 61. The most important educational barriers for low- income families are limited access to, and 65. The government of Grenadadoes not have yet a inconsistent quality of, the education system. The clearly articulated social protection strategy. Priority School Feeding Program is traditionally perceivedas areas for action include poverty reduction through an expenditure line that benefits low-income human resource development - particularly through students. However, the School Feeding Program in expanded access to early childhood and secondary Grenada covers the majority of the primary school education with government provision targeted to the population without being adequately targeted. The poor. In addition, frequent ministerial shifts in 1999 poverty assessment indicates that 41 percent of portfolio responsibility for social protection programs children from poor households receive free meals and frequent personnel shifts - particularly at the compared to 59 percent from non-poor households. level of Permanent Secretary - have resulted in A similar patternis observedwith free textbooks. The duplication and fragmentation of programs and a loss lack of targeting for textbooks is especially of institutional memory. As a result of the lack of a worrisome given that 1out of 5 poor children has no coordinated social protection strategy and clearly textbook, while this happens for only 1 in 12 among identified social protection priorities, there are no children from the richest quintile. mechanisms for fiscal prioritization of programs. This is reflected in the budgeting process during SocialProtection which budgets are essentially determinedby previous budget allocations and not in response to changing 62. Grenada implements a range of social insurance needs and priorities. and social assistanceprograms, which incombination attempt to address the critical risks and vulnerabilities 66. The large number of programs, each with faced by the population. separate administrative systems and procedures, strain an already overburdened public sector. The 63. The most important features of Grenada's social lack of coordinated efforts across ministries and protection structure are: (a) the large number of departments has resulted in overlaps, duplication, agencies involved and the array of programs - many inefficiencies, and administrative waste. In addition, of which target the same groups but with different these agencies have different systems for identifying xi beneficiaries. This increases administrative costs and time costs for beneficiaries. There is a need to strengthen the planning and executing capacity for these programs and to put in place mechanisms for their fiscal prioritization. 67. Several programs, including the school lunch program and the road maintenanceprogram, are not sufficiently targeted to the poor. Reducing program leakage and introducing better targeting would considerably ease pressureon the budget. Divestment of programs to private providers (profit or nonprofit) could also result incost savings. These savings could be used for much-needed capacity building and institutional strengthening, including development of targeting, management information systems (MIS), and survey capacity. Savings could also be used to expand program coverage with provision of benefits conditional on activities that promote human capital. The net fiscal impact of the above reforms would needto be carefully assessed. 68. Next, programs targeted to the poor are not linked to any requirements, such as school or health clinic attendance (like, for example, Bolsa Escola in Brazil andPROGRESA in Mexico) that could help to break the cycle of poverty. Also, they are not well poised to respond to income volatility resulting from significant economic downturns or natural disasters and therefore to mitigate transient spells of poverty. In addition, the National Insurance Scheme (NE) does not cover a significant share of the population and faces long-term sustainability issues that will need to be addressed inthe future. 69. InadequateMIS systems and capacity constraints with respect to data collection, monitoring, and evaluation are common across the OECS. Regional initiatives for MIS development and monitoring and evaluation capacity building would address the human resource constraints in individual countries and would be more cost effective than developing systems on a country-by-country basis. 70. Effective planning will require updated poverty and labor market information at regular intervals. Timely and reliable information on poor and vulnerable groups is essential for the design and implementation of social safety net programs. The Caribbean Development Bank (CDB)-financed Poverty Assessment that was conducted in 1999 provided useful information; however, it is recommendedthat data on poverty and labor markets be collected on a regular basis. xii E P2 U Bc' m c Y E 4 Y 8 8 .3 Y cn c VI r C .e I 6 P c d .3 .3 C K i EI 6 F U Bc 2 * * * * .-E U 4 EE e ..Ee c d > .3 cb e X i 2 iI ri 1 e I F U L7e ?t e 2e ? : e e a : I : ;r I I $ i I L 0 0 0 0 8 E 8 a, Y Y Y Y c 8 c8 c8 v, v, v, 0 0 0 0 0 0 Y E Y E E E Y o 3E Y c gE .*I= a e e e e e I 1 3E E Y c s Y cd sa u U 6 0 5 Y e : P Y id 0 c g0 4Y X .i X d e 0 c 0 3 .e C X X a a a E .E F: 2s 8 M E Y e, Y e, > + 1. FISCALDEFICIT,PUBLIC DEBT, AND FISCAL SUSTAINABILITY I.1 Grenada comprises three small islands (750 square kilometers) in the Eastern Caribbean, Grenada, Carriacou, and Petit Martinique, with a population of about 100,000 inhabitants and a per capita GNI of US$3,290 in 2002 (World Bank Atlas methodology, current US$). A former British colony, it became a member of the British Commonwealth in 1974. Until the early 1990s' banana cultivation and exports was the main economic activity of the country. During the 1990s, this activity declined sharply and virtually ceased in 1997 as a result of low productivity, poor fruit quality, and erosion of the preferential access to the European Union (EU). The country remains heavily dependent on tourism and spices. In recent years, however, it has been able to successfully diversifying into light manufacturing, telephone and internet based marketing. 1.2 Grenada, as a member of the Eastern Caribbean Currency Union (ECCU), shares a common central bank, the Eastern Caribbean Central Bank (ECCB), and a common currency, with the other five independent members of the Organization of Eastern Caribbean States (OECS) and three dependent territories (Anguilla, Montserrat, and the British Virgin island^).^ Their currency is the Eastern Caribbean (EC) dollar, which has been pegged to the U.S. dollar since 1976 at EC$2.70 per US$1. The commitment to a fixed exchange rate and a prudent monetary policy under the ECCU umbrella has been a key element inmaintaining an inflation rate close to internationallevels. 1.3 Notwithstanding a common central bank and a common currency, Grenada, like the other ECCU member countries, conducts fiscal policy independently. While limited progress has been made on a common fiscal policy in the region, the deterioration of the ECCU fiscal position inrecent years, notably inAntigua andBarbuda, Dominica, and St. KittsandNevis, has reinitiateddiscussion among its members on the need to better coordinate fiscal policie~.~ 1.4 Grenada's fiscal position has weakened substantially since 2001. After a primary fiscal deficit (after grants) of about 8 percent of GDP in 1990, the Grenada Central Government (CG) followed a cautious fiscal policy from 1991-2000. But since 2001 the CG fiscal position deteriorated sharply with the CG runninga primary deficit of 5.8 percent of GDP in 2001 and 14.7 percent of GDP in 2002. Thus, the CG debt-to-GDP ratio increased from 49 percent in 2000 to 84 percent in 2002. The projected primary surplus in2003 is 1.O percent. 1.5 Inlight of the preceding discussion, the main objective of this chapter is twofold: first, to evaluate the fiscal sustainability of the Grenada Central Government (CG) and second, to propose various options for the adjustment required to achieve fiscal sustainability. The main findings and recommendations can be summarized as follows: 0 On the basis of a continuationof the government 2003 fiscal policy (with a projected primary surplus of 1 percent of GDP), the CG debt-to-GDP ratio is expected to remain at high levels (83-90 percent of GDP in2010), depending on the assumptions of real interest and growth rates. The OECS consists of six independentmembers: Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines, in addition to three dependent territories of the United Kingdom, Montserrat(fullmember), Anguilla, and the British Virgin Islands(associatemembers). The communiqukof the SpecialMeetingof the OECS Authority, Castries, St. Lucia, September 28, 2001, alludes to the need to examine in the medium term public sector reform aimed at increasingefficiency, and fiscal reform includingmatters relatedto revenue, expenditure, financing, and debt management, as well as common approaches to taxationand incentivesto be appliedto encouragecruiseshipping. e An averageprimary surplus of about 4-5 percentof GDP during the period 2003-2010 will allow the CG to achieve a debt-to-GDP ratio of 60 percent in 2010 (the targeted level by the government in the 2004 Budgetpresentation and by the ECCB's Monetary Council). e The fiscal adjustment implicit in a primary surplus of 4-5 percent is feasible. The adoption of the tax policy recommendations suggested by the International Monetary Fund (IMF) would yield a small increase in revenue collection, because of the excessive reliance of the country on international taxes and the expected negative impact of the FTAA on Grenada's tax revenues, but alone would not be sufficient to reach the recommendedprimary surplus. It is therefore recommended that expenditure be cut (in particular capital expenditures) and the public sector reform initiated by the government in 1997 be pursued. A. GRENADA FISCAL PERFORMANCE, 1990-2002 1.6 At the Central Government level, the fiscal position of Grenada has weakened substantially since 2001. As Figure 1.1 shows, after a primary fiscal deficit (after grants) of about 8 percent of GDP in 1990, the Grenada CG followed a cautious fiscal policy from 1991-2000. During this period, the CG contained the primary fiscal deficit to 0.9 percent of GDP in 1991 and ran a primary surplus of 2-3 percent of GDP between 1992-95. In 1996 and 1997, the CG primary balance was nil. However, since 1998 the CG fiscal position started to deteriorate. From 1998-2000, the primary deficit was manageableat 1-1.5 percent of GDP. But since 2001 the CG fiscal position deteriorated sharply, with the CG running a primary deficit of 5.8 percent of GDP in 2001 and 14.7 percent of GDP in 2002. This last figure should be used with caution because 2002 was an unusual year as the government made a one-time payment (EC$ 127 million) for the transfer of the National Stadium and the Ministerial Complex properties to the government by buying out the lease arrangements. 1.7 The main cause of the deterioration of CG finances since 2001 has been an increase in noninterest expenditures, predominantly capital expenditures. As Figure 1.2 shows, noninterest expenditures were about 35 percent of GDP in 1990 and during 1991-2000 were contained to about 29 percent of GDP. However, since 2001 they increased steadily and reached 43 percent of GDP in 2002. At the core of the observed increase in CG expenditures is a surge in capital expenditures, some of them contracted in the early 1990s but only now recorded as `expenditures (for example the Ministerial Complex and the National Stadium) as well as the completion of the first stage of the reconstruction of the General Hospital. Although GDP contracted by 3.8 percent in 2001 and 1. I percent in2002 as a result of the September 11 effect on tourism, the 2001 global economic slowdown and Tropical Storm Lili in September 2002, current revenue as percentage of GDP kept constant at its pre -2001 level of about 27 percent of GDP! 1.8 No reliable information exists of the overall fiscal performance of the rest of the Non- Financial Public Sector? Grenada began a privatization program in the mid-1980s and by 1993 had privatized 19 of 27 state-owned enterprises (SOEs). At present, there are seven remaining SOEs. These are supposedto pay dividends to the government but only the Post Office and Port Authority do so. The estimated revenuesfrom these two entities are included in the budget but in practice only a fraction of the estimated revenuesare collected. In January 2003, the IMF approved US$ 4 million in emergency assistance for Grenada in support of the 'government'spublic efforts to deal with the aftermath of tropical stormLili. Grenada's enterprises are their date of creation are: Grenada Ports Authority (1978), Grenada Airports Authority (1985), National Water and Sewerage Authority (1969), Housing Authority of Grenada, Grenada Marketing and National Importing Board (1973), Board of Tourism and the Post Office (1997). 2 Figure1.1.GrenadaCentralGovernmentFiscalPerformance,1990-2002 (aspercentage of GDP) 1 5 00 0 00 -5 00 -10 00 -15 00 -20 00 i -25 00 o P n m a y Fiscal Balance (aftergrants) nCurrentFlscal Balance -0uerall Fiscal Balance (after grants) Source: ECCBand IMFdata Figure 1.2. Grenada CentralGovernmentPrimaryExpenditure, InterestPayments,andRevenue 1990-2002 (as percentage of GDP) 1 50 00 - 40 00 - 30 00 - 20 00 ~ 1000 - 0 00 - -10 00. -20 00 - 3 1.9 Due to the weakening of the CG fiscal position, the government turned to borrowing to finance its fiscal deficit. From 1998 to 2002, the ratio of CG debt-to-GDP increasedfrom 48.0 percent of GDP to 84.0 percent, an increase of 75 percent or 19 percent per year (see Figure 1.3).' As a result, interest expenditures increasedfrom 1.6 percent of GDP in 1998 to 4.8 percent of GDP in 2002. As will be illustrated in the next section, to maintainfiscal solvency and to achieve the debt-to-GDP ratio targeted by the government in 2004 Budget presentation and by the ECCB's Monetary Council, the CG will need to generate a sizeable primary surplus to pay the interest on the debt. InJune 2002, Grenada issueda US$ 100 million (about 25 percent of GDP) 10-year international bond with a yield of 9.5 percent. The receipts of the bond issue have been used to retire more expensive debt, including the lease-purchase arrangements discussed above, to clear arrears, and to finance highpriority investment projects. Figure 1.3. GrenadaCGDebt, DebtGuaranteedandPrimary Surplus 1998-2002 (aspercenfage of GDP) loooo 1 0 00 1 2 -20 00 DomesticCG Debt ExternalCGDebt 0 PrimaryFiscal Balance (aftergrants) Source: ECCB and IMFdata 1.10 Moreover, the additional borrowing of the CG has been contracted mainly with external creditors, at commercial terms. This pattern is the opposite of St. Kitts and Nevis, and similar to the one of Dominica. ASFigure 1.3 shows, in 1998 about 56 percent of the total CG debt was external in comparison to about 70 percent in 2002. Inaddition, the GC government guaranteed debt in an amount of 29.6 percent of GDP in 2002. B. DOES GRENADA FACEFISCAL A SUSTAINABILITYPROBLEM? 1.11 The figures on primary deficit and debt presented above raise serious concerns about the fiscal solvency of the government since 2001. We address these concerns using an intertemporal approach to fiscal solvency. This approach, broadly speaking, defines a fiscal policy as sustainable if the present value of all future primary surpluses is enough to repay the current outstanding debt. It is * Unfortunately,consistentCG debt data is only available since 1998. 4 important to stress that this type of debt sustainability analysis does not address the optimal level of indebtedness, its composition, and political economy consideration^.^ Central Government 1.12 The fiscal policy implemented by the CG during 2001-2002 was unsustainable, but in 2003 the fiscal policy of the CG stabilized the debt-to-GDP ratio at about 85 percent of GDP. As Table 1.1 shows, the one-year fiscal effort (increase in revenuesandor cut in expenditures) requiredto achieve a stable debt-to-GDP between 1998 and 2000 was feasible at between 1.5 to 2.4 percent of GDP depending on the assumptions of real interest and growth rates. However, in 2001 the fiscal effort required to achieve the previous year debt-to-GDP ratio increased to 6-7 percent of GDP depending on the assumptions of real interest and growth rates and reached 15-16 percent of GDP in2002. I.13 The previous conclusion is also supported by Grenada's credit ratings. One indicator commonly used as a proxy for fiscal sustainability is the country credit ratings. Drudi and Prati (1999) present a signaling model in which the primary surplus and outstanding debt are complementary inputs in the determination of the credit of a country. An improvement in the primary surplus or a reduction in the debt-to-GDP ratio is expected to raise the country rating. One of these credit ratings is the Institutional Investor rating published twice a year since 1979. Banks are asked to grade each of the countries on a scale of 0 to 100, with 100 representing those with the least chance of default. As Figure 1.4 shows, Grenada's country rating, as of September of each year, increased steadily until 2002 (with a 38 rating) and declined in 2003 as the weak fiscal performance of Grenada in the previous year was made public. In a sub-regional context, Grenada's country rating is worse than Barbados, Trinidad and Tobago, and the Dominican Republic, but better than Jamaica. 1.14 Faced with high debt and debt service obligations, in 2003 the government decided to stabilize its debt-to-GDP ratio at a level of about 83-84 percent of GDPand targeted the years 2007- 2010 to achieve a CG debt-to-GDP ratio of 60 percent. However as Table 1.1 shows, based on reasonableassumptions for the real interest and growth rates, a fiscal policy similar to the one set in 2003 (a primary surplus of 1 percent of GDP) would not achieve this objective. Indeed, the debt-to-GDP ratio would increase steadily to a level of about 90 percent of GDP by 2010, under the assumption of a real interest rate of 4 percent and a growth rate of 2 percent. An increase of 1-percentage points in growth would stabilize the debt- to-GDP ratio only at 83 percent by 2010, but still above the targeted 60 percent. That is, the key driver of the CG debt-to-GDP ratio in the next years is interest rates. This methodology includes seignorage as a source o f revenue; however, the apportioning o f seignorage to national economies has not beendiscussed in the ECCU, and it is not taken into account in$e fiscal sustainability exercise at the country level. However, any fiscal sustainability exercise at the ECCU level should incorporate seignorage as revenue. 5 d o 0 " 3 s C 0-l z w o o (u C 9 8 3 od (u 2 s c m 0 9 z 0 w o o 3 (u s C 3 z (u -s zC (u 0 9 0 3 z (u s z 0 c1 0 9- z 0 (u s- 2m m 9 L 0' ' ( u 4 2 % 2 + Figure1.4 InstitutionalInvestorCountry CreditRatingfor SelectedCaribbeanCountries1990-2003 (100lowest chance of default) I 70.0 7 60.0 *--- -/' -- a- . /*-- 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 D G R E N A D A +TRINIDAD ANDTOBAGO 4 D O M i N l C A N REPUBLIC +JAMAICA BARBADOS Source: Institutional Investor, September of each year 1.15 To achieve a CG debt-to-GDP ratio of 60 percent by 2010, the government would need on average to run a primary surplus of about 4-5 percent of GDP during the period 2003-2010. As Table 1.2 shows, for a real interest rate of 4 percent and a growth rate of 2 percent, an average primary surplus of 5 percent from 2003-2010 would achieve the objective of a CG debt- to-GDP ratio of 60 percent. An increase of 1-percentage points in the growth rate would reduce the primary surplus required to stabilize the debt-to-GDP ratio at 60 percent to 4 percent. Both figures of primary surpluses are feasible and would require a fiscal adjustment (cut in expenditures and increase in revenue) of 3-4 percent of GDP. Table 1.2 Debt-to-GDPratiopathunder alternativeScenarios2003-2010 (aspercentage of GDP) ScenarioA Scenario B Real interestrate=4 percent Real interestrate=4 percent Growthrate= 2 percent Growthrate= 3 percent PrimarySurplus= 5.0 % of GDP PrimarySurplus=4.0 % of GDP 2003 85.60 83.41 2004 82.3 1 80.24 2005 78.95 77.05 2006 75.53 73.82 2007 72.04 70.56 2008 68.48 67.26 2009 64.85 63.93 2010 61.15 60.57 Source: World Bankcalculations 7 FiscalRules in the ECCU I.16 The ECCB's Monetary Council that took place in February 2003 reconfirmed the agreed fiscal framework that includes ceilings on debt and fiscal performance of the CG. The aim of the ECCB in setting these fiscal rules is to ensure long-run fiscal sustainability and the credibility of the currency union by limiting negative spillovers. However, as discussedin paragraph 1.3, the ECCB has no mandate over fiscal policy in any member country, and the fiscal rules are not binding at this moment for the member states. Box 1.1 presents the convergence criteria in the ECCU and the Western Africa Economic and Monetary Union (WAEMU). Like the ECCU, the WAEMU comprises developing countries with a currency peggedto only one single currency, the Euro. Box 1.1. The ConvergenceCriteria inthe ECCUandWAEMU EasternCaribbeanCurrency Union(ECCU) The ECCB has put forwarda proposalthat comprisesthe following four targetsto be achievedby 2007: A CentralGovernmentcurrent account surplusof4 to 6 percentof GDP An overall governmentbudgetdeficit of no morethan 3 percentof GDP A total outstandingCentralGovernmentdebt of no more than 60 percentof GDP Debt servicepaymentsby the CentralGovernmentof no morethan 15 percentof currentrevenue. Western African Economic and Monetary Union(WAEMU)* The regionalConvergence,Stability, Growth,andSolidarityPact adoptedin December 1999by the WAEMU, has four primary convergencecriteriaandfour secondary criteria. The norms establishedby these criteria haveto be met by 2002. The primary criteria are: The ratioof the basic fiscal balance(definedas non-grant revenueminus expenditureexcludingforeign- financed investment) to GDP must be zero or positive The ratioof outstandingdomesticandforeigndebt to nominalGDPmustnotexceed70percent The averageannual inflation cannot be more than 3 percentayear No accumulation of domestic andexternal paymentarrears inthe current financial period. The secondarycriteriaare: The ratioof the wage billto tax revenuecannotexceed35 percent The ratioof domestically financedpublic investmentto tax revenuemust be at least 20 percent The ratioof currentexternaldeficit, excludinggrantsto nominalGDP, cannotexceed5 percent The tax-to-GDPratio mustbe 17 percent or more. However, because of the limited progress achieved by the member countries in meeting the convergence criteria at end-December 2002, the WAEMU Commission proposed to the Heads of State to extend the timetable to end- December2005. * The eight members of the WAEMU are Benin, Burkina Faso, C6te d'Iv6ire, Guinea-Bissau, Mali, Niger, Senegal, andTogo. 1.17 In 2002, Grenada did not meet any of the four debt and fiscal performance ceilings proposed by the ECCB's Monetary Council. However, in previous years the government met some of the fiscal targets. Every year with the exception of 1999 and 2000, the CG has run a current fiscal surplus above the target of 4 to 6 percent of GDP. The target for overall deficit (after grants) has been reached in 7 of the last 13 fiscal years. If we do not take grants into account, the CG has met the target of overall deficit only in 1 of the last 13 years. The target debt service to current revenue and debt-to-GDP ratio has been met every year since 1990with the exception of 2002. 8 1.18 At the time of the reconfirmation of the fiscal framework agreement, the ECCB's Monetary Council regarded 2007 as a critical date for fiscal consolidation. As we discussed in para. 1.15, Grenada can achieve in 2010 the fiscal consolidation aimed by the ECCB's Monetary Council, but this will imply runningan average primary surplus of about 4-percent of GDP between 2003-2010. 1.19 The successful achievement of debt and fiscal ceilings needs the simultaneous introduction by the ECCB member states of a system of incentives and penalties to encourage compliance and a mechanism for monitoring and surveillance of the fiscal performance. The ECCB has not yet specified any system or mechanisms to ensure compliance with the proposed fiscal ceilings. Moreover, the WAEMU example suggests that surveillance of the fiscal ceilings and close monitoring against annual targets during the convergence phase are key to achieving fiscal convergence. 1.20 Moreover, the ECCB-proposed fiscal ceilings cover only the CG; public enterprises and government-guaranteed debt have been excluded. However, the public sector position can be critical and should be included in any proposal of deficit and debt ceilings. Also, the inclusion of the public sector in the fiscal framework would ensure that the government would produce accurate and timely information on the financial position of public enterprisesand their debts. 1.21 The deficit and debt ceilings do not take into account the cyclical nature of the fiscal indicators inthe OECS countries, which as small states are subject to frequent external shocks. In that regard, it is recommended that the ECCU move from debt and fiscal performance ceilings to a countercyclical fiscal policy basedon a simple fiscal rule for the structural balance. This report envisages a fiscal policy sequencing in which first, fiscal consolidation is achieved and then a structural surplus is implemented (see Chapter 2 for more details). C. FISCALCONSOLIDATIONINGRENADA'S PUBLIC SECTOR 1.22 Inthe previous section, we showed that the CG primary surplus needs to be increased in future years to ensure fiscal sustainability. We propose that the fiscal adjustment rely primarily on expenditure cuts, in particular capital expenditures and the realization of the fiscal savings expected from the public sector reform initiated by the government in 1997. Tax increases are seen as only a small fraction of the adjustment. As discussed below, this type of adjustment is based on the observed pattern of government expenditures and the expectation that a tax reform will yield only a limited increase in tax collection given the expected negative impact of the FTAA on Grenada's tax revenues. Tax Revenues 1.23 The main characteristics of Grenada's tax structure can be summarized as follows (see Figure 1.5): e Current revenue (tax and non-tax revenue) has been stable at about 25 percent of GDP between 1990 and 2002 with a minimumof 23.5 percent of GDP in 1992 and a maximum of 27.0 percent of GDP in 2000. e Taxes on international trade have declined as source of the tax revenue intake. In 1999, 75 percent of tax revenue was collected from international trade taxes compared to 58 percent in 2002. The trade taxes collected are the common external tariff (CET) under the CARICOM agreement, the general consumption tax (GCT) and a custom service charge (CSC). The current tariff rate is 25 percent and was to go down to 20 percent in 2000, but an extension of the 25 percent rate has been granted until 9 2005. The GCT on imports varies between 0-75 percent and a 5 percent CSC is applied. An environmental surcharge is also applied to a range of goods. Figure 1.5 GrenadaCentralGovernmentCurrent RevenueComposition, 1990-2002 (aspercentage of total tax revenue) 100% I 1 80% 60% 40% 20% I 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 oTaxes on lnternabonalTrade Taxes on Income& Profits 0TaxesonDomestic Goods & Sewices EITaxes on Properly Source: ECCB and IMF. 0 Taxes on income and profits represented on average about 19 percent of tax revenue during 1990- 2002. However, during this period it fluctuated significantly between 9 and 22 percent of GDP. This is the result of several decisions with respect to exemptions, income threshold, etc., taken during this period. There is a personal income tax on wages and salaries at a single rate of 30 percent. However, the income threshold at which persons become liable to income tax is EC$ 60,000, so high that most of the population has dropped out of the tax rolls. Moreover, a decision was made to exempt all civil servants and members of the parliament from income taxation. Corporate tax is levied at a reasonable rate of 30 percent; the exceptional aspect of the corporate tax is the substantial number of exemptions granted to particularfirms. Taxes on domestic goods and services represented on average about 18 percent of tax revenue during 1990-2002. They fluctuated from a minimum of 14 percent in 1990 to a maximum of 21 percent in 1997. This category includes the GCT, that is a remnant of the failed 1986 VAT much modified and eroded, and a number of excises and licenses on specific goods and services; the largest ones are the tax on hotels and services, the gasoline levy, and the stamp duty. The gasoline levy, contrary to other taxes on domestic goods and services, is the residual of the retail price (fixed by the government) minus the cost, insurance, and freight (c.i.f.) price of the imported product and the fixed margins for importers and retailers. 0 Property taxes, on rental income from houses and on land have increased steadily during 1990-2002. In 1990they only accounted for 2.2 percent of tax revenue, but in2002 they accounted for 7 percent. 10 1.24 A key feature of the present tax system in Grenada and other OECS countries is the pervasive use of tax concessions. loBain (1995) estimated that in 1991 revenues foregone from tax concessions on imports (including import duty, consumption tax and others duties collected on imports) were about 53.9 percent of potential revenue, on the assumption of zero elasticity of imports with respect to tariffs and consumption tax. Moreover, tax concessions commit the government to sacrifice revenuefor years ahead. Indeed data for 1999 show that tax concessions already given will expire in the year 2013. This estimate of revenue foregone does not include revenues foregone from income tax holidays, which cannot be easily done, as OECS countries do not systematically require the filing of income statements by companies enjoying tax holidays. 1.25 The main stated purpose of tax concessions in Grenada, as in other OECS countries, is to attract foreign investment. However, the empirical evidence suggests that taxes are not among the main determinants of foreign investment. Foreign investors place more value on a stable economic environment with transparent rules than on tax incentives." The most suitable approach to address the concerns of tax competition among OECS countries is to support, more forcefully, a program of fiscal policy convergence that includes tax harmonizationamong member states. I.26 A complete discussionof a short and medium-term tax policy strategy is beyond the scope of this report. The IMF Fiscal Affairs Department has produced two reports on the subject. Unfortunately, no estimatesof the revenue implications ofits tax recommendations were attempted; however, given the expected negative impact of FTAA on the OECS' countries tax revenues, it is likely that tax reform measures will only result in a small net increase in revenue collection and alone would not be sufficient to reach the recommended primary surplus (Tait, Terkper and Dieterich 2000; Stotsky, Dos Santos, Dieterich, Palomba, and Bristow 2003). The main recommendations of these reports can be summarized as follows: Taxes on goods and services. Inthe short-term, move toward equalizing the general consumption tax rate and apply this rate equally to domestic and imported goods and services. Implement a modem system of excises, applied equally to domestic and imported goods. Deregulate the retail price of gasoline and levy a specific excise on petroleum. Phase in this tax to avoid any significant jump in retail prices. Phase out general consumption tax and import duty exemptions currently granted. Inthe medium term, implement a value-added tax (VAT) to replace the consumption tax, and the hotel occupancy tax, and a number of minor levies (the petroleum tax on a specific basis and the others on an ad valorem basis). Income Taxes. Reduce the threshold for personal income tax to less than half of its current value of EC$ 60,000 per year and apply tax to the income in this bracket at 15 percent rate. Apply a final withholding tax at the lower bracket rate to all interest payments to individuals. Require corporations to aggregate interest income with other forms of income and apply the standard corporate income tax rate. Restructure income tax to enable the elimination of tax holidays by increasing the generosity of depreciation allowances and extending them to commercial structures. Implement transfer price regulations. loAn elaborate system of import duty exemptions provides for very generous concessions for taxes on imports for the development of industry, tourism, agriculture, social, educational, cultural, and other purposes. The main exemptions are provided under the Customs Act, the Fiscal Incentive Act, and the Hotel Aid Act. Also, some investorsbenefitfrom income tax holidays. 'ISee Zee, Stotsky, andLey (2002) and the references therein. 11 0 Property Tax. Property assessment needs to be comprehensively revalued and then updated on a regular basis, using information from recent sales as a guide to market value. Over time, the rate should be increased to a level of about 1 percent. 0 Tax concessions. Award tax concessions only in accordance with a strict interpretation of the Hotel Aid Act and Fiscal Incentive Act. Repeal other acts authorizing tax incentives and cease granting them on an ad hoc basis through cabinet or ministerial decisions. Do not renew income tax holidays and do not grant new ones. With the replacement of existing direct taxes with moderate taxes, such as the VAT and excises, do not extend concessions under the old tax system to the new tax system (VAT). CentralGovernment Expenditures 1.27 CG expenditures during 1990-2000 were on average about 31.6 percent of GDP, but have increased steadily since 2001 reachinga peak of 48.9 percent of GDP in 2002 (Figures 1.6 and 1.7). As Figure 1.6 shows, the largest part of the increase was incapital expenditures and interest expenditures associated with the increase in borrowing. These increases have led to the need for a fiscal adjustment focused mainly on a reduction in capital expenditures and the realization of the fiscal savings expected from the public sector reform initiated by the government in 1997. 1.28 During 1990-2002, personal emoluments and wage expenditures fluctuated between 10.4 and 13.9 percent of GDP. The wage bill increased in real terms during this periodat a reasonable 1.8 percent per year. At the core of the increases observed in the wage bill in real terms (in constant 1995 EC dollars) is an increase in wages due to the performance appraisal system in place. Under this performance system the increments are too large and almost everyone (95 per cent of civil servants) qualifies for them. Chapter 5 examines the impact of the public sector reform initiatedby the government in 1997 and presents recommendations to realize some fiscal savings expected by the government from this reform. 1.29 Capital expenditures were, on average, about 8.3 percent of GDP during 1990-2000, but increased to 15.2 percent of GDPin 2001 and reached its peak of 22.5 percent of GDP in 2002. In constant EC dollars of 1995, capital expenditures increased from EC$ 81.0 million in 1990 to EC$ 145.0 million in 2002. The main reasons for this increase were a) large investment projects (off-budget) contracted in the early 1990s (for example, the Ministerial Complex and the National Stadium), but only recorded as capital expenditures in 2002 when the government bought out the lease agreements and both properties were transferred to the government for EC$ 127 million; and b) the reconstruction of the General Hospital. To deal with these problems, in chapter 4 a tighter control of the PSIP is recommended as a crucial element in containing and improving the efficiency of capital expenditures and helping the government to achieve its goal of fiscal sustainability. Expenditures on goods and services during 1990- 2002 were stable at around 4.8 percent of GDP. 1.30 Finally, interestpaymentsas a percentageof GDPincreased2.5 times during1990-2002and almost tripled in constant EC dollars. In 1990, interest payments were 2.3 percent of GDP and increasedto 4.8 percent of GDP in 2002. This increasereflects two factors: (a) the higher indebtednessof the Grenadian government, and (b) the increasedreliance of the government on borrowing at higher costs duringthis period. 12 Figure 1.6 GrenadaCentralGovernmentExpenditureComposition,1990-2002 (as percentage of GDP) 1 60.00 50 00 40 00 30 00 20 00 1000 noo 1990 1891 1992 1993 1894 1995 1996 1997 1998 1899 2000 1001 2002 PersonalEmolumentsandWages aOtherGoodsandServices 0 TransfersandSubsidies CapitalExpenditure a InterestPayments Source:ECCBand IMF Figure1.7. GrenadaCentralGovernmentExpenditureComposition, 1990-2002 (inmillions EC$1995) 500.00 1 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 0 PersonalEmolumentsandWages 0 OtherGoodsandServices .TransfersExpenditure and Subsidies 0 Interest Payments Capital Source: ECCBandIMF 13 Social Security Scheme 1.31 The NationalSecurity Scheme (NIS) is currently financially sound, but it is crucial that the government maintain regular contribution payments, that its portfolio is diversified into regional and international assets, and that its current concentration inpublic sector assets be reduced. The National Insurance is funded by a mandatory 9 percent payroll tax (4 percent employer contribution and 5 percent employee contribution) levied on wages of all employed and self-employed persons, including public employees. Approximately 15 percent of the elderly receive pensions. L O actuarial analysis indicates that the number of people contributing at least once in 1999 was approximately 26,800 or 73 percent of the employed population. Coverage of self-employed persons is not mandatory and only a small percentage of the self-employed participate. Also of concern are seasonal, domestic and informal sector workers for whom contributions are not made. The 1999 Actuarial Review found that the National Insurance Scheme was adequately funded. Although immediate measures are not needed to extend the life of the NIS reserves, long-term sustainability will require increases in contribution rates and/or reform of benefits, payment of government arrears to the system and strengthening of investment policies to ensure risk diversification." Moreover, as with many social security funds worldwide, there is a need to ensure that the long-term investment strategy is sufficiently diversified into regional and international assets and away from heavy concentration on public sector assets. Following a recent reduction in government arrears financed through the US$lOO million bond issue (see para. 1.9), no detailed figures are available on their current level. 14 2. FISCALPOLICY AND BUSINESS CYCLES 2.1 The Latin America and the Caribbean (LAC) Region, like other developing regions, faces a high degree of volatility in real output. In the last 40 years, the standard deviation of the growth rate of real GDP inthe LAC region has been twice as highas in industrial economies. Moreover, smaller economies such as Grenada tend to experience, on average, higher volatility than larger econ~mies.'~ 2.2 The importance of economic volatility in long-term growth and its effect on the poor segments of the population are at the center of the need to identify policies and institutions that can ameliorate their impact. Volatility tends to discourage long-term investments in physical and human capital and thus leads to a lower growth potential. In addition, the poor segments of the population are generally the most affected becausethey lack the means to protect themselvesfrom adverse employment and income effects. 2.3 Governments have a broad set of instruments available that they can use to reduce aggregate volatility and its effects. One of these instruments is fiscal policy. In industrial economies, fiscal policy is usually designed to stimulate output when the economy moves into recession and to contract output when an expansion takes place. A fiscal policy designed in this way leads to a strongly procyclical budget surplus (countercyclical fiscal policy). 2.4 In industrial economies, a countercyclical fiscal policy is usually accomplished in two ways: first, by having components in the budget that respond automatically to the business cycle, such as tax revenues (which respond positively) or unemployment benefits (which respond negatively), and second, by usingdiscretionary components inthe budget to provide a stimulusduringbad times. 2.5 This chapter first describes the cyclical features of government finances in Grenada by applying the Hodrick-Prescott methodology, an algorithm that decomposes a time series into cycle and trend. Second, it suggests the implementation of a countercyclical fiscal policy based on a fiscal rule that uses the structural (cyclically adjusted) balance as the indicator of fiscal policy. The application of this simple fiscal rule can allow the government to accumulate resources in good times and run them down in bad times. 2.6 The main findings and recommendations can be summarized as follows: The weakening of Grenada's fiscal position in the last years obeys to a long-term growth rate in expenditures (mainly capital expenditures) above revenues and not cyclical factors. Grenada's fiscal policy is acyclical. That is, the primary, overall, and current fiscal balance does not co-move with the GDP cycle. In good times the government does not run a higher or lower fiscal surplus than its trend. This finding is contrary to the empirical evidence for developing countries (procyclical fiscal policy), butconsistent with the limitedevidence for small states inthe Caribbean. In order to enforce fiscal discipline and move the country to a counteryclical fiscal policy, it is recommended that a fiscal rule based on a structural surplus of about 2 to 4 percent of GDP be adopted. Thisrule implies a fiscal adjustment of 9-11 percent of GDP. This report envisages a fiscal policy sequencing in which first, fiscal consolidation is achieved by 2010 (as discussed inchapter 1) and then a structural surplus rule is implemented. This sequence will l3See De Ferranti andothers (2000);Crucini (1997); and Head(I995). 15 allow the country to build credibility and simultaneously use this transition period to ensure that transparency in the fiscal accountsand that debt reportingcomplies with international guidelines. A. TRENDS CYCLESINGRENADA'S AND FISCAL ACCOUNTS, 1983-2002 2.7 I s the business cycle the main cause of the weakening of Grenada's fiscal position? This section attempts to answer the question by examining the cyclical fluctuations in GDP and government fiscal accounts from 1983 to 2002 using yearly data." The methodology used to disentangle trend and cycle is the Hodrick-Prescott (HF') filter.15 The empirical evidence confirms that the main cause of the weakening of Grenada's fiscal position in the last few years is a long-term growth rate in expenditures, mainly capital expenditures, above revenues and not cyclical factors.16 The Business Cycle in Grenada 2.8 In the 1990s Grenada's long-term GDP growth rate slowed down to 3.4 percent per year from 7.5 percent in the previous decade. As Table 2.1 shows, Grenada's GDP trend grew by 4.6 percent per year from 1983 to 2002. This long-term growth rate is the result of two distinct periods. From 1983 to 1989, GDP trend grew by 7.5 percent per year, while from 1990 to 1999 GDP trend grew at only 3.4 percent. In the first three years of the 2000s, GDP trend grew only at 2.7 percent. This reduction observed in the long-term growth rate since the 1990s is a fundamental change in the economic environment that the government should take into consideration in future preparation of the budgetand its fiscal sustainability discussions. 2.9 The Grenada GDP cyclical component shows no clear link to hurricanes, but several expansions and contractions are worth noting. As Figure 2.1 shows, between 1982 and 2002, Grenada was hit by six hurricanes and one Tropical Storm. Infour out of sevenhurricane and tropical storm years, the Grenada GDP decreasedbelow its trend, and in the other three years increased above its trend. The greatest expansion took place in 2000, with an increase in GDP of almost 6 percent above its trend. The deepest contraction took place in 2002, the year of Tropical Storm Lili, with Grenada's GDP contracting by 3.5 percent in comparison to its trend. From 1989-1992, the Grenada economy grew, on average, by 1.5 percent above its trend. However, from 1993 until 1998 GDP decreased, on average, by almost 1.6 percent in comparison to its trend, and did not recover until 1999.17 From 1999-2000, the Grenada economy grew, on average, by about 4.2 percent above the GDP trend, with the highest expansion in 2000, 6.0 percent. The contraction in 2001 and 2002 mainly reflects the effect of September 11 on tourism, the global economic slowdown, and Tropical StormLili. l4 The choice of the sample period was largely driven by the availability of data. The ECCB provided us with disaggregatedgovernment fiscal accountsandreal GDPonly since 1983. l5In layman's terms, the HP filter can be thought of as removing a smooth trend (like one would draw freehand) from the data. A completediscussionof this method can be found inAppendix A. l6Inthis report, the long-term growth rateof a variable is definedas the first differences inthe trend of the variable. Duringthe period 1992-94, the Government implemented a self-imposed Structural Adjustment Program aimed at achieving macroeconomicstability and placing the economy on a path of sustainedeconomic growth. 16 Figure2.1 GrenadaGDP, GDPTrend andCyclicalComponent 1983-2002 (a) GDPandGDPTrend (in millions EC$95) (b) GDPDeviationsfrom Trend (as percentage) Hurricane Luis ,September 1995 Hurricane Georges, November 1998 HurlcaneLenny, November1999 Tropical StormLIIi,September2002 Source: Author's calculations based on ECCB and TMF data 17 2.10 GDPvolatility inGrenadaissimilar to volatility inSt. Kitts andNevis. However, Grenada's GDP volatility was higher in the 1990s than in the 1980s. Volatility in Grenada, measured by the standard deviation of the cyclical component of GDP, was about 2.2 percent during 1983-2002. Volatility in Kitts and Nevis during 1980-2002 was 2.1 percent." However Grenada's volatility during 1983-89 was 1.6 percent, and increasedto 1.9 percent during 1990-1999. This is a pattern opposite to the one observed in the majority of the Latin American and Caribbean countries in which GDP volatility decreased in the 1990s. For example, St. Kitts and Nevis volatility decreased from 2.7 percent in the 1980s to 1.5 percent in the 199Os.l9From the available data, the source of the increased volatility in Grenada during the 1990s is not clear, and it is recommended that a more in depth analysis be conducted inthis issue. Trend and Cyclical Componentof the Fiscal Accounts in Grenada 2.1 1 The main reason behind Grenada's ability to maintain a weak, but sustainable fiscal position during the 1980s and 1990s was a long-term growth rate in revenues higher than expenditures. As Table 2.1 shows, during 1983-2002, current revenue trend increasedby 4.5 percent per year, while the current and capital expenditures trend grew on average at 3.4 percent and 3.2 percent per year, respectively. Moreover, the data show two distinct periods. From 1983 to 1989, the long-term average annual growth rate in current revenue (5.3 percent) was slightly below that of current expenditure (5.6 percent), but during 1990-1999 the pattern was reversed. From 1990 to 1999, the long-term growth rate in current revenue (4.3 percent) was significantly higher than current expenditure (2.1 percent). However, in the first three years of this decade, the difference between the long-term average annual growth rate in current revenue (3.8 percent) and current expenditure (3.2 percent) and capital expenditure (22.9 percent) has decreased. This is the main reasonbehindthe weakening of Grenada's fiscal position in the last few years. (See chapter 1). 2.12 On the expenditure side, during the period 1983-2002,personal emoluments and wages and expenditure on goods and services drove the long-term growth rate of total expenditure. As Table 2.1 shows, during 1983-2002 the trend of personal emoluments and wages grew by 3.6 percent per year and expenditure on goods and services by 4.0 percent per year, with personal emoluments and wages representing about 36 percent of total expenditures and expenditure on good and services about 12 percent. The third determinant of the growth rate of total expenditure was interest payments, which grew at a rate of 6.3 percent per year and represented about 7 percent of total expenditures. Capital expenditures that accounted for 31 percent of total expenditures grew at a long-term rate of only 3.2 percent per year. However, for the sub-period 1990-1999 and 2000-02, the conclusions are different. Capital expenditures drove the long-term growth rate of total expenditure. The trend of capital expenditures grew by 5.9 per year and 22.9 percent, respectively, above all expenditures categories. 2.13 On the revenueside, during 1983-2002 the maindeterminantsof the long-term growth rate of current revenue were taxes on international transactions and property. As Table 2.1 shows, during 1983-2002 the trend of taxes on internationaltransactions grew by 7.7 percent per year and taxes on property by 12.6 with taxes on international trade and property representing about 52 percent and 3 percent of current revenue, respectively. Moreover, although taxes on income and profits and domestic goods and services representedabout 16 percent and 19 percent of total current revenue respectively, the long-term growth rate was only 2.1 and 0.8 percent per year. In the sub-period 1990-99, taxes on income `*See "OECS Fiscal Issues: St. Kitts and Nevis", The World Bank, 2003. l9This reduction in volatility in the 1990s has been observed in Latin America and the Caribbean by Loayza, Fajnzylber, and Caldercin (2002) for output per capita, and by the "Caribbean Economic Overview 2002: Macroeconomic Volatility, Household Vulnerability, and Institutional and Policy Responses" for Gross National DisposableIncome. 18 and profits replaced taxes on international transactions as the main determinant of the long-term growth rate of current revenue. This is not a surprising result, because the tariff reduction under the 1993 agreement on the introduction of a CET reduced import duty revenues Table 2.1 Long-TermGDP, GovernmentRevenue, andExpenditureGrowthRates 1983-2002 (aspercentage) AverageGrowthRate 1983-2002 1983-89 1990-99 2000-02 Current Revenue 4.5 5.3 4.3 3.8 Tax revenue 4.7 5.9 4.2 3.9 Tax on income and profits 2.1 -11.7 8.6 8.3 Tax on property 12.6 17.3 7.2 20.8 Tax on domestic goods and 0.8 4 . 6 4.6 2.9 Tax on international transactions 7.7 18.3 3.0 1.9 Non-tax revenue 3.5 0.8 5.4 2.8 Grants -5.6 -21.9 2.8 -1.1 Current Expenditure 3.4 5.6 2.1 3.2 Expenditure on personal emoluments 3.6 7.9 1.7 1.1 and wages Expenditure on other goods and 4.0 6.6 1.4 7.2 Expenditure on transfers and subsidies 2.6 -0.6 3.9 4.8 Interest Payments 6.3 7.8 1.4 19.6 CapitalExpenditure 3.2 -11.1 5.9 22.9 GDP 4.6 7.5 3.4 2.7 Source: Author's calculations basedon ECCB and II'vfF data. Note: Statistics are basedonHodrick-Precott trend data. Growth rates are first differences inthe trend of the variable. 2.14 Grants present a negative trend duringthe period 1983-2002, but a positive one in the sub- period 1990-99. Grants have decreasedat a long-term rate of about 5.6 percent per year, while inthe sub- period 1990-99 grants increasedat 2.8 percent per year. 2.15 All components of the fiscal accounts are more volatile than GDP. The highest volatility belongs to grants, tax on income and profits and capital expenditure. As Table 2.2 shows, grants volatility is 16 times higher than GDP volatility, and tax on income and profits and capital expenditure 11-12 times higher. Current revenue volatility is lower than current expenditure volatility4.7 percent compared to 5.7 percent. 2.16 Current expenditure and all its components, and capital expenditure and interest payments, are acyclical. Inother words, ingood times the government does not increase its expenditures, and inbad times does not cut them. The correlation between the cyclical component of expenditure and GDP fluctuates from -0.38 to 0.15, but is not significant at 10 percent. This is an interesting result, similar to the one observed in OECD countries, but not in developing countries. However, Talvi and VCgh (2000) show the same result for the case of the Dominican Republic and the World Bank for St. Kitts and Nevis inthe report"OECS FiscalIssues: St. Kitts andNevis". 19 Table 2.2 CyclicalPropertiesof GDP, CentralGovernmentRevenue, andExpenditure, 1983-2002 Standard Correlation Deviation(%) withGDP Current Revenue 4.7 0.59'' Tax revenue 5.1 0.5 I* Tax on income and profits 27.0 0.12 Tax on property 18.0 0.00 Tax on domestic goods and services 13.5 0.02 Tax on international transactions 7.4 0.48* Non-tax revenue 11.5 0.34 Grants 35.7 -0.06 Current Expenditure 5.7 0.25 Expenditure on personalemoluments and wages 6.2 0.08 Expenditure on other goods and services 11.2 -0.38 Expenditure on transfers and subsidies 10.9 0.15 InterestPayments 15.2 -0.09 Capital Expenditure 23.5 -0.04 Primary Deficit (after grants) 19.6 -0.I3 Overall Deficit(after grants) 22.1 -0.19 Current Deficit 14.5 -0.36 GDP 2.2 1.oo Source: Author's calculations basedon ECCB and IMFdata. Note: Statisticsare basedonHodrick-Recott filtered data. ** Significant * Significant at Ipercentlevel. at 5 percentlevel 2.17 Current and tax revenue were procyclical during 1980-2002, due to the procyclicality of taxes on international transactions. All other tax components are acyclical.The correlation between current revenue and tax revenue with GDP is 0.59 and 0.51 respectively, and significant at the 1 and 5 percent level. Taxes on international transactions are procyclical, with a correlation of 0.48 significant at the 5 percent level. The procyclical nature of current and tax revenue is not surprising, because most taxes are in some way proportional to economic activity. However, it is surprising that taxes on income and profits are not procyclical. 2.18 Finally, all measures of fiscal balance, such as primary, overall, and current balance, are acyclical. That is, the primary, overall, and current fiscal balance does not co-move with the GDP cycle. Ingood times the government does not runa higheror lower fiscal balance than its trend. The correlation between primary surplus and overall surplus with GDP cyclical component is -0.13 and -0.19, respectively, but not significant at 10 percent. This is an interesting result and in contradiction with the empirical evidence for developing countries. However, most of this empirical evidence does not include small islands like Grenada, inwhich government expenditures are acyclical. 20 B. THESTRUCTURALBUDGETSURPLUSAND THEUSEOFFISCAL RULESINGRENADA 2.19 This section will examine the role of cyclical factors in the fiscal performance of Grenada. In order to factor out cyclical effects, a structural budget surplus indicator is defined. The methodology used here is the same as the one used by the European Community. It uses the HP filter- based trend in GDP to measure potential output. For the case of Grenada's economy, only one tax revenue category (international transaction taxes) showed a statistically significant correlation with cyclical GDP.*' No government expenditure category showed a statistically significant correlation with cyclical GDP. A complete discussion of the methodology is presentedinAppendix B. Structural Budget Estimatesfor Grenada, 1983-2002 2.20 The cyclical adjustment of the government budget balances in Grenada varies from -0.8 percent of GDP in 2002 (recession year) to 1.3 Figure2.2 FiscalCyclicalAdjustment inGrenada 1983-2002 percent of GDP in 2000 (aspercentage of GDP) (expansion year). International transaction taxes account for all the I 5 O1 cyclical adjustment. (See Figure 2.2). As we - discussed 100 in paragraph 2.17, this i s due to the high correlation between the 0 E 0 5 0 - cyclical component of taxes in international transactions (D and GDP (0.48) and the importance of taxes in ".r t 0.00 I international transactions in total revenue (52 percent). -0.50 Grenada's cyclical adjustment compared to -100 J other countries in the region i s in the low range. The cyclical adjustment in St Kitts and Nevis is between -1.8 and 1.9 percent of Source: Author's calculationsbasedon ECCB and IMFdata GDP and in Chile is between -4.0 and 2.5 percent of GDP. 2.21 Once the cyclical effects are factored out, the country fiscal structural balances follows very closely the observed fiscal balances. For example, as Figure 2.3 shows, the government ran an overall fiscal deficit after grants of 19.5 percent of GDP in 2002, but factoring out the cyclical impact of lower tax collection, the cyclically adjusted overall deficit was 18.7 percent of GDP. The latter concept is the so-called structural fiscal balance. The same pattern is observed for the cyclically adjusted primary and current fiscal balance. The main message is that cyclical factors are not the main determinant of the fiscal deterioration experienced by the country inthe last few years. The elasticity for international transaction taxes was 1.6. 21 2.22 It is recommended that Grenada adopt a fiscal rule based the structural budget measures detailed above. Any fiscal rule has two objectives: (a) to enforce fiscal responsibility, and (b) to make certain that the government runs a countercyclical fiscal policy. In this regard, Grenada is on the right path with an acyclical fiscal policy. However, in order to move the country to a countercyclical fiscal policy we propose a fiscal rule basedon a structural surplus. 2.23 We propose a structural surplus of about 2 to 4 percent of GDP for Grenada. This rule is more austere than the Chilean fiscal rule of an overall surplus of 1percent. However, considerations of high GDP volatility in small states and credibility may require that small states such as Grenada adopt tighter fiscal rules. This fiscal rule implies a fiscal adjustment of about 9-11 percent of GDP in the medium-term.21Box 2.1 presentsin detail the fiscal rule in place in Chile since 2000. 2.24 However, successful implementation of a fiscal rule based on a structural surplus would require, as a first step, timely and reliable fiscal information. As we discuss at length in Chapters 3-5, the current presentation of the fiscal information does not follow international practices and do not present a complete picture of the country's fiscal situation. These data shortcomings would need to be addressedto support the adoption of a fiscal rule basedon a structural surplus. 2.25 Therefore, the sequencingof the fiscal adjustment proposed in chapter 1and the proposed fiscal rule need to be considered. This report envisagesa sequencing strategy in which the government, first, achieve fiscal consolidation along the lines suggested in chapter 1 by running, on average, a primary surplus of about 4-5 percent of GDP between 2003-2010. Duringthis period, the government will build credibility with its prudent stance on fiscal policy and simultaneously use this transition period to ensure that transparency in the fiscal accounts and debt reporting complies with international guidelines (a pre- condition for successful implementation of the fiscal rule). The structural surplus rule could be implemented after fiscal consolidation and transparency in fiscal accounts and debt reporting are achieved. The introduction of the structural surplus rule will reaffirm and intensify the government commitment to fiscal responsibility and reorient fiscal policy to an effective performance of its countercyclical role and strengthening fiscal discipline. 21 In2002, one time payments of about 12 percent of GDP were made for the National Stadium and the Ministerial Complex. Thus, subtracting from the overall cyclically adjusted fiscal balance ( 18.7 percent o f GDP) these expenditures, then the fiscal adjustment required to comply with the fiscal rule is about 9- 11 percent o f GDP. 22 Figure 2.3 Cyclical Adjusted Primary, Overall, and Current BalanceinGrenada 1983-2002 (as % GDP) (a) Current Balance 8 00 6 00 4 00 f 200 B :::: 05 000 - -6 00 - - -8 00 -1000 Total cycllcal Adiuxmenf .- cyci~soih/Adlusted current ~aiance-current eaislnce (b) PrimaryBalance 10.00 _-- 5.00 E g 000 2 .-&- 1983 1984 1985 1386 1987 1988 1989 1990 1931 1992 1993 1934 1995 1996 1997 1998 1999 2000 2001 ZOO2 -500 3 sE n -1000 - - - - - - -15 00 -20 00 ~ Total Cyclical Adjustment Cyclically Adjurtea Primary salance Primary Balance (c) Overall Balance 500 1 0 00 c -500 E 2 s E -1000 !i -15 00 -20 00 -25.00 J -Total Cyclical Adjustment- - Cyclically Adjusted Overall Balance -Overall Balance Source: Author's calculations basedon ECCB and IMFdata 23 Box2.1: Chile's Fiscal Rule In2000, the Chilean governmentintroduceda fiscal rule basedon a structural surplusof Ipercentof GDP. The objective of this fiscal rule is twofold: (a) to strengthenChile's commitment to fiscal responsibility, and (b) to jevelop fiscal policy indicators that will serve as a tool to formulate medium-term fiscal policy rules, avoiding the procyclical bias inpublic finances. The fiscal rule is a self-imposedmeasure enforced by the government to guide fiscal policy during 2001- 35. The computation of the structural balance follows the IMFmethodology and reflects the amount revenues and Fiscal spending would reach if the GDP were at its potential level and the price of copper were at the medium-term price. Consequently, it excludes the cyclical effects of economic activity and the price of copper. The institutional :overage used in the structural balance is the Central Government. The figure below summarizesthe results of the application of this method during 1989-2000. The estimateof the structuralbalance consistsof three steps: 0 Adjustment of the actual balance according to the concept of net worth variation of the Central Government (adjusted balance). Chile: Stuctural and Overall Balance 1989-2000 {as % GDP) 6.0 5.0 4.0 3.0 2.0 1.o 0.0 -1.o 94 1995 1996 1997 -2.0 -3.0 0 Estimation of the cyclical impact of each budget component. This includes the impact of the economic cycle on tax revenues and the impact of cyclical fluctuations of the price of copper on fiscal revenues from copper. The cyclical component of spending has not been taken into consideration because there is no significant relation between public spending and GDP in the Chilean economy. The cyclical component of tax revenues is obtained by adjusting observed tax revenues using an estimated output elasticity of 1.05. The cyclical adjustment to the copper price is based on the gap between actual export price and the estimatedreferenceprice. 0 Estimation of the structural balance. This is obtained at by subtracting cyclical components (tax revenuesand income from copper) from the adjustedbalance. Source: Marcelandothers (2001). 24 3. BUDGETMANAGEMENT 3.1 Budget procedures, which lead to the formulation, approval and implementation of the budget and its impact on fiscal outcomes, have received considerable attention in the recent literature. Several empirical studies have provided evidence that budget institutions have an impact on fiscal outcomes in developed and developing countries. Von Hagen (1992) and Von Hagen and Harden (1995) found that European countries with strong institutional rules governing the budget process have lower expenditure, deficit, and debt ratios. Eichengreen (1992), Alt and Lowry (1994), and Poterba (1994), among others, have studied the effect of fiscal restraints on fiscal outcomes for the U.S. states finding that more restrictive state fiscal institutions are correlated with more rapid fiscal adjustment. Alesina, Hausman, Hommes and Stein (1996) and Stein, Talvi and Grisanti (1999) have extended this line of research to Latin American countries. They found evidence that countries with centralized, transparent budget processes and strict formal or informal constraints have lower deficits and debt levels. Jones, Sanguinetti and Tomassi (1999) obtained similar results analyzing public expenditures in the Argentinean provinces. Lao-Araya (1 997) corroborates this finding for Thailand, Gleich (2003) for transition economies, and Campos andPradhan (1996) for several developing countries in Asia and Africa. 3.2 Consequently, a good public expenditure management system provides a government with the incentive and means to promote fiscal discipline and efficiency and a transparent use of funds in service delivery. Starting in 1997, Grenada instituted a set of budget reforms that have served well to improve aggregatefiscal outcomes, however, there are still considerable shortcomings that needto be addressedby the government. 3.3 This chapter focuses on the rules governing the decision-making process that leads to the formulation of the budget, its passage through the legislature, its implementation, execution, and monitoring and recommends changes in the budgetary processes and framework that can help to achieve fiscal discipline, better allocation across ministries and programs and a more transparent budgeting process. The main findings and recommendations can be summarized as follows: On Legislation The draft of the Public Finance Management Bill (PFM) and Audit Bill that together will replace the 1990 Finance (Administration) Act (FAA) and its 1998 Amendment need to contain more stringent provisions governing the use of advances and deposit accounts. Inaddition, this new FAA presents an excellent opportunity for the government to extend it into a fiscal responsibility law by introducing explicit fiscal targets to be met. Also, the updated Financial Rules and Stores Rules that will be issued following the enactment of the PFM need to address the following concerns: a) the incorporation of computerized systems and b) donor financed activities, including offshore receipts and expenditures such as direct payments by donor agencies to suppliers, plus the treatment of donors' deposit accounts outside the Accountant General's control. On Budget Preparation, Execution,and Monitoring e Extendthe budget cycle to 24 months as has been done inother OECS countries. 25 Strengthen the Medium-Term Economic Strategy Paper (MTESP) and the Strategic Policy Paper as a tool to anchor the budget by making certain that the following elements are thoroughly addressed: (a) estimates of aggregate resources available for public expenditure consistent with macroeconomic stability, (b) bottom-up estimates of the cost of carrying out ongoing and new policies based on reliable assumptions, and (c) reconciliation of the aggregate resources with the cost estimates of the ongoing and new activities. Ensure that major ministries complete corporate plans and keep these updated to reflect changes in national priorities. The capital budget prepared by the Project Management and Technical Cooperation Unit needs to be an integral element of the Strategic Policy Paper and the MTESP. A complete discussion of the Public Sector Investment Program (PSIP) and policy recommendations are the focus of Chapter 4. The current program presentation in the budget is insufficient to link expenditures to policy priorities such as growth and poverty reduction. Therefore, the government will be well advised to disaggregate expenditures at the program level in a way that will be useful for monitoring outcomes, such as in health, education, and social protection. Although the government has instituted a Debt Management Committee to monitor and manage domestic and external debt, the domestic and external debt units need to be merged into one. I n addition, this new unit needs to be staffed with qualified personnel that can keep adequate records of external and domestic debt, analyze the data, and advise the government on debt management issues. There are still shortcomings that curtail the effective operation of the Standardized Integrated Government Financial Information System (SIGFIS). First, skilled and experienced personnel remain in short supply. Second, the Human Resources module is needed. Third, not all line ministries and agencies have terminals to access the SIGFIS system. On BudgetAccountability 0 The financial statements of Grenada should cover all government activities. The operations of statutory bodies, including state-owned enterprises need to be included in the government financial statements. a Complete the long-overdue annual government financial statements and present them to the Direct of Audit; Audit the statements and presept the reports to the Minister of Finance to put before Par1iament. a Weak Public Accounts Committees (PACs) are a common feature in the OECS countries. The recent Country Financial Accountability Assessment (CFAA) report for the OECS recommended a number of measures, including the following, to begin addressing this common problem: a) Given that opposition parties are often insufficiently representedto form a functioning PAC, it is recommended that each country consider enacting the appropriate constitutional or other changes to allow the appointment of nonparliamentary members; b) Members of Parliament and other interested parties could participate in the Commonwealth Parliamentary Association, which, in conjunction with the World Bank Institute (WBI), has organized a Study Group on Public Accounts Committees and plans follow-up seminars; c) OECS countries could draw on the advice of neighboring countries such as Jamaica, where the PAC i s a vibrant component of government oversight and d) It is recommended that a media campaign be developed to publicize PAC activities to the public and to create demand from the public for strong public financial management. 26 A. CONSTITUTIONALAND LEGALFRAMEWORK 3.4 Grenada attained independence in 1974 when the Grenada Constitution Order came into operation. As a constitutional monarchy with a Westminster-style Parliament, it has a Governor-General (who represents the UK Queen) and a bicameral legislature with a Senate of 13 members." Executive authority lies with the Prime Ministerand the Cabinet. The lower House at present has 16 members, that is, one elected from each of 15 constituencies and the Speaker, who is elected by the House from outside the elected membership. The New National Party (NPP, conservative) has been in power since 1995. Following the November 2003 elections, the NPP holds 8 of the 15 seats elected in the lower House instead of the 15 seats held before the election. Parliament has a life of five years. Figure 3.1 presents Grenada's government structure. 3.5 The 1974 Constitution includes general provisions on financial matters. These are then amplifiedin the Finance and Audit Act of 1990and the Financeand Audit (Amendment) Act 25 of 1998?3The Finance and Audit Act, with the 1998 amendment, provides definitive guidelines on government financial management, containing provisions for: a) control and management of public finance; b) principal officials responsible for managing government finances; c) definitions of the Consolidated Fund and other public funds; d) general procedures for government accounting, authorization of expenditure payments, bank accounts, investments and deposits, management of the public debt, abandonment of claims and write-offs of public monies, stores surcharges, and financial management of State-Owned Enterprises (SOEs); and e) issuance of regulations by the Minister of Finance to provide more detailed guidance on financial management. 3.6 The 1987FinancialRulesand 1957Store Rulesprovide moredetailedguidance on financial management and are issuedby the Ministerof Financeunder the power givenby the 1990FAA and its Amendment. Financial Rules include provisions for the application of the Finance and Audit Act in ministries and departments with detailed internal control arrangements on commitment accounting and other checks to avoid unauthorized expenditures beyondbudget approvals, pre-audit of payment vouchers and instruments to ensure compliance with the regulations, surprise inspections to deter fraud, embezzlement and negligence, detailed regulations for the maintenance of vote account, security of accounts and instructions covering every aspect of receipts and payments, and their accounting. The Stores Rules give the provisions governing the procurement of goods and services, the custody, issues, and receipts of stores, and accounting, inventories, and other records. 3.7 Other legislationthat affects budgetmanagement inGrenadaincludes: 0 Revenue legislation which defines taxes, establishes tax bases and rates, assigns responsibilities for assessments, collections, accounting, and sets penalties and means of enforcement; 0 Acts, which establish Statutory Bodies (including State Owned Enterprises); 0 Fiscal IncentivesLegislation, mainly the Fiscal Incentives Act and the Tourism IncentivesAct, which define the conditions in which exemptions from taxes, customs duties, service charges and fees will be granted `under statute'. *'Senators are appointed by the Governor General - 10 on the advice of the Rime Minister, 3 on the advice of the Leader of the Opposition. 23 This Amendment was passed to give legal status to the Financial Rules of 1987 and Stores Rules of 1952 and enable these to be used indisciplinary proceedings. 27 Figure3.1GrenadaGovernmentStructure Grenada Non-FinancialPublicSector GeneralGo ernment t 1 NationalInsurance State Owned Scheme Enterprises Local Government (NISI 1 (Six parishesand one Government dependency runby the Councilof Carricou and Petit 3.8 Grenada's legislation and regulations for financial administration and audit need to be modernized. There is a draft Public Finance Management (PFM)Bill and a draft Audit Billthat together will replace the 1990 FAA and the 1998 Amendment. The draft bills are based on the model recommended under the Eastern Caribbean Economic Management Program (ECEMP) I1and had been under review since 1996. They are now under active preparatory discussion to be sent to the Legal Draftsman, then presentation to the House and enactment would follow. It is recommended that the government incorporate into the PFM draft more stringent provisions governing the use of advance and deposit accounts. In addition, this new PFM draft presents an excellent opportunity for the government to explore the possibility of extending it into a Fiscal Responsibility Law by introducing explicit fiscal targets to be met. The Brazilian Fiscal Responsibility Law can serve as a guide in this regard. Updated Financial Rules and Stores Rules will be issued following the enactment of the PFM, but the draft for the former does not refer to various computerized systems in place nor to matters relating to donor financed activities (e.g., offshore receipts and expenditures such as direct payments by donor agencies to suppliers, plus the treatment of donors' deposit accounts outside the Accountant General's control). ECEMP111has a project to review the applicability of the draft Rules ina computerized environment. B. BUDGETPREPARATION,EXECUTIONANDMONITORING Preparation and Presentation 3.9 Grenada hasa dual budgetsystem. The Budget and Debt Management unit inthe Ministry of Finance (MoF) is responsible for recurrent expenditures and for monitoring overall expenditures and revenues, while the Project Management and Technical Cooperation Unit takes the lead with respect to capital projects. Grenada has a calendar fiscal year. Unlike other OECS countries, which have adopted a continuous 24-month budget cycle, Grenada has retained an 18-month cycle, which seriously constrains the ability of all parties to conduct adequate strategic and operational planning. The budget cycle is presented inFigure 3.2. 28 3.10 Starting in 1997, Grenada instituted a set of budget ref0rms.2~The principal measures of these reformswere: 0 Conversiono f the budget from a line item format to a programformat; 0 Development of Corporate Plans by each ministry or department outlining the agency's missions and priorities, and the objectives for each program;*' 0 Publicationof all Corporate Plan summaries inthe Annual Estimates; 0 Development of preliminary allocations for each agency, issued with the budget call, with instructions that agencies should reallocate funds from low priority programs to higher priority without exceeding their allocations; 0 Formation of Budget Committees in the agencies to complete the corporate plan, annual strategic outlook, and budget preparation, and to monitor implementation. 3.1 1 The budget, in line with the 1997 budget reform, is prepared basedon the Strategic Policy Paper that is in turn anchored in the current Medium Term Economic Strategy Paper (MTESP) and the ministries' Corporate Plans. Both the Strategic Policy Paper (a yearly document that presents the economic prospects of the country for the next fiscal year including revenue projections and proposals for expenditure limits for each ministry) and the 2003-05 MTESP (a three-year economic plan that provides the information for the next budgets) last prepared for the Caribbean Group for Cooperation in Economic Development (CGCED) in June 2002, suffer from the same shortcomings: (a) top-down estimates of aggregate resources available for public expenditure not always consistent with macroeconomic stability (mainly fiscal), (b) lack of bottom-up estimates of the cost of carrying out ongoing and new activities or based on unreliable assumptions, and (c) no attempt to reconcile the aggregate resources with the cost estimates of ongoing and new activities. Moreover, unfortunately, the attempt to base the budget also on the ministries corporate plans did not succeed. The government's fiscal resources could not meet the requirements implied by the plans, and the planning phase of the budget cycle is too short for agencies to revise their plans to fit within government priorities and available resources. Budgeting remained incremental and the corporate planning initiative lost credibility with some agencies no longer making an effort to update their plans as requiredby the BudgetCircular. 24The budget reform program in the OECS countries is part of the wider fiscal reform program o f the ECCB, instituted with assistance from the ECEMP. Budget reforms were piloted in St. Kitts and Nevis, and replicated in Dominica, Saint Lucia, and St. Vincent and the Grenadines. Grenada only partially implemented these measures. 25InGrenada's case, themovetoCorporate Planningwas initiatedsomeyearspriorto thebudgetreformaspartofa DFIDfinanced Public Sector Reformproject. As part of the budgetreform, corporate plans were requiredbeforeany increase to an agency's base budget would be considered. 29 1:r E .3 0 m 3.12 Given the dualbudget system, the capital budget prepared by the Project Management and Technical Cooperation unit is appended to the Strategic Policy Paper, but it is not an integrated element of this document. Indeed, both the Public Sector Investment Program (PSIP) (which presents the investment plan for three years) and the capital budget (that presentsthe current investment plan) are a list of desired investment projects rather than a well-thought-out and feasible investment plan with growth and poverty reduction as main objectives. Therefore, they cannot be used with confidence to project the fiscal outcomes inthe current or next fiscal years. The PSIP is the focus of Chapter 4 of this report. 3.13 In this budget process, the government solicits views from its social partners. The Multipartite Consultative Committee was established in the late 1990s as a means for discussing public policy options. It has met regularly, but Committee members feel it has not been effective. The Chamber of Commerce submits budget recommendations each year. The government has implementeda number of the recommendations such as an increase in licenses and user fees. 3.14 Other than Trust Funds and those aid funds, which are unreported by donors, Grenada's budget is comprehensive, including all central government transactions. However, the budget reform resulted in only minor modifications to the format of the budget. Recurrent expenditures are detailed by object line (personnel emoluments, utilities, etc.) for each vote and program. The approved estimates and the estimated prior year expenditure are provided for comparison, together with actual expenditures for the two previous years, all at the object line level. No explanations of variances are provided.26However, as Box 3.1 shows major discrepancies are observed between estimated outturn and actual provisional for recurrent expenditures. In addition, the current program presentation in the budget is insufficient to link expenditures to policy priorities such as growth and poverty reduction. Therefore, the government will be well advised to disaggregate expenditures at the program level in a way that will be useful for monitoring outcomes, such as in health, education, and social protection. 3.15 The Ministry of Finance does, however, have the capacity to present the budget by standard functional classification, and should start doing so in fiscal year 2005. The Standard Object Classification introduced by Grenada in 1998 is compatible with the IMFGovernment Financial Statistics economic classification system. Thus, although recurrent expenditure data are not presented in IMF-GFS format in the Estimates books, Grenada uses the functional classification in the MTESP. Thus, it should be able to move quickly to present the budget according to international best practices, such as the ones contained inthe IMF's Government Financial Statistics (GFS) 26As the preparation and audit of the annual accounts are years in arrears, the `actual' prior year expenditures are termed `provisional'. 31 Box 3.1 Errorsand OmissionsinGrenadaEstimates Grenada's Estimates contain numerous errors and omissions. Expenditures reported for prior years are often the approved estimates for that or another year rather than the actual expenditures. Prior year expenditures of entire programs sometimes go unreported. More generally, estimated expenditures for the year just ending can be extremely inaccurate and subject to substantial revisions in future years. The table below lists some o f the Votes, rankedby the size (inpercentages) o f the revision in their 2000 expenditures reported initially as `estimated outturn' in the Estimates for 2001 and subsequently as `actual provisional' in the Estimates for 2002. Total recurrent expenditures were revised downward by almost EC $13 million or 4.8 percent o f the originally estimated outturn. At the program level, revisions were as high as 295 percent of the estimated outturn and in 14 cases exceeded 25 percent. Errors and omissions concerning capital expenditures in prior years appear to be even worse and are discussed inChapter 4 o f this report. FY2000expendituresreportedin.. . SelectedVotes 2001BudgetBook 2002BudgetBook % (EstimatedOutturn) (ActualProvisional) Revision Magistracy 1,110,676 820,86 1 -26. I% Le& Affairs 1,952,522 1,539,173 -21.2% Supreme Court 1,338,292 1,059,533 -20.8% Works, Communication and Utilities 7,236,424 5,934,905 -18.0% Director of Public Prosecutions 149,625 129,265 -13.6% Carriacou & Petite Martinique 1,666,125 1,863,722 +11.9% Foreign Affairs 4,912,733 4,339,94 1 -1 1.7% Governor General 424,352 471,682 +11.2% Public Debt 62,759,096 56,103,829 -10.6% Prime Minister's Ministry 3,O 15,652 2,699,328 -10.5% Audit 555,882 498,456 -10.3% Total allVotes 268,676,386 255,776,268 -4.8% The extent and size of these errors and omissions makes meaningful analysis difficult, and reduces accountability. As Parliament does not have accurate information on prior year expenditures, its members are not in a position to assess whether the budgets proposed for programs are reasonable. This problem is magnified because audits o f the public accounts are years late and generally contain the strong reservation by the Director of Audit that the accounts do not accurately represent `the state o f affairs of the Government o f Grenada as at [year end], nor of its revenue and expenditure for the year then ended.' Execution2' 3.16 The budget preparation shortcomings discussed previously are reflected in an aggregate trend of budgeting expenditures above program requirements. As Figure 3.3 shows, in every fiscal year since 1995 actual recurrent expenditures have been below budgeted, with the exception of 1998 (election year). In addition, in the last years the variance has increased from about 5 percent in 1999 to 7 percent in 2002. This is evidence of increased weakness in the preparation of the budget. Interestingly, this pattern is very similar to the one observed inDominica, but quite the opposite of the one observed in St. Kitts and Nevis. In St. Kitts and Nevis every year since 1995, with one exception, actual expenditures *' This analysis is based on Grenada's Annual Estimates books for 1994 through 2002. Reported recurrent expenditures differ somewhat from those prepared by the IMF and ECCB, both because o f differences in presentation and classification and because the Estimates books often contain incorrect figures for prior year expenditures. 32 were above budgeted expenditures. In the case of Dominica, the under budgetingwas the result of cash constraints, inGrenada it is the result of budgetingat the Ministry andprogramlevel independently of the aggregateexpendituretarget that the Governmentis committedto observe. Figure3.3 Variance betweenActual andBudgetedRecurrentExpendituresinGrenada, 1994-2001 (in percentage) 290 0Yo -296 4% -6% -8% 1 Source:GrenadaEstimates 3.17 Breaking the total variance in expenditures incurred by the Ministry of Finance and all other ministries reveals some interesting patterns.28 As Figure 3.4 shows, on aggregate, the MoF portfolio was under budget each year until 1998, but subsequently tended to be over-budget. All other ministrieswere, onaggregate, over budgetfrom 1996through 1998but under budgetbeforeandafter. Figure3.4 VariancebetweenActualandBudgetedRecurrentExpendituresinGrenada, MoFandall other Ministries,1994-2001 (in percentage) 6% 4% 2% OYO -2% -4% -6% -8% -10% 61Finance 0All other Ministries Source: GrenadaEstimates **The Ministry of Finance itself plus votes covering interest on public debt, pensions, retroactive salaries, and contributions to regional and international organizations. 33 3.18 Turning to the Finance portfolio, the shift from consistent under-spending prior to 1998 followed by over-spending in the next years is the result of lack of provision for significant future payments inthe budget. As Figure 3.5 shows the main components of the over-spending experienced by the MoF inthe last years are: 0 significant retroactive salaries payments were made from I998 onwards with only provision for such payments inthe 2001 budget; 0 under-estimation of the provisions made for Pensions and Gratuities since 1997; and29 0 a significant shift in the budgeting-spending pattern for payment of contribution and arrears to international and regional organizations. In brief, the budget provisions made dropped in the four previous years prior to 2001 to zero, while the actual payments rose.3o Interestingly, enough compared to other OECS countries interest payment were consistently under budget until 2000. Interest were over budgeted in 2001, and base on the experience of the other Caribbean countries this is a warning sign of the need to look more carefully at the budget process for interest payments. Figure3.5 VariancebetweenActual andBudgetedRecurrentExpendituresinthe MoF Grenada, 1994-2001 (inpercentage) 8% 6% 4% 2% 0% -2% 4% -6% -8% -10% -12% 13Interest 13Pensions 0RetroSalaries Contributions Source: GrenadaEstimates 3.19 As Figure 3.6 shows, by decomposingspending of all other Ministries the following patterns emerge: 0 Spending by Education generally exceeded the budget (on average, by 3.9 percent) from 1994 through 1997, but came under budget by an estimated average of 6.8 percent for the remainder of the period under examination. 31 0 Spending by Health was consistently under budget, with variances averaging 4.1 percent from 1994- 97, and 12.8 percent for the next four years. *' The Actual (provisional) expenditures for 1999 reported for each program of this vote in both the Estimates of 2001 and 2002 are exactly the same as the budget provisions. This is likely an error and we do not have the actual expendituresfor 1999. 30 The Actual (provisional) spending reported for 1995 is exactly the same as that for 1994. Thus the figure shown for 1995 is probably an error. 3' Actual (provisional) expendituresreported for 1998 are exactly the same as the budget for 1998. Presumably, this is an error and 1998 has beenleft out of the calculations. 34 35 Table 3.1ProgramsOver or UnderbudgetinGrenada1994-2001 (inpercentage) 1994-1995 1996-1997 1998-1999 2(300-2001 ORGANSOFPARLIAMENT Governor General -3.5 7.8 -5.4 -19.7 Par1iament -3.3 0.2 -16.1 -15.1 Audit -9.8 -12.1 - 19.0 -26.5 JUSTICE SERVICES SupremeCourt -10.7 0.1 -2.9 -29.2 Magistracy -3.6 3.8 -18.8 -32.3 Director of PublicProsecutions 4.4 - I6.7 -18.4 -59.4 Legal Affairs (Program) -17.9 -0.7 -6.0 -22.4 SOCIAL SERVICE PROGRAMS Gender & Family Affairs -40.1 -57.0 -3.9 -21.3 Community Development -30.5 -2.8 -10.6 -26.2 Culture -13.0 -21.2 -21.8 -22.7 HealthAdministration -0.2% -24.7 -6. I -15.1 EnvironmentalHealth -17.7 -28.5 -20.0 -25.2 ECONOMIC SERVICES Agricultural Extension -19.1 -12.4 -9.9 -15.3 Agricultural Engineering -17.4 -9.1 -17.0 -20.9 ProduceChemistryLab -1.7 -13.2 -15.1 -37.6 LivestocWVeterinaryServices -7.9 -7.1 -1 1.4 -18.4 KEYECONOMIC PUBLICMANAGEMENT & PROGRAMS Audit -9.8 -12.1 -19.0 -26.5 Cabinet Sec. & Dept. of HumanResources -7.7 -12.8 -13.1 -16.9 Inland Revenue -15.2 -10.4 -23.1 -20.6 Accountant General NA NA -11.7 -8.4 Department of EconomicAffairs -47.6 -15.7 -10.0 -15.6 Source: Author's calculations Monitoring 3.21 Grenada implemented the Smart Stream version of the Standardized Integrated Government Financial Information System (SIGFIS)in 1999,the second country in the ECEMPI1 program to adopt the ~ystem.3~However, there are still shortcomings in the effective operation of SIGFIS. The modules for funds, payables, purchasing, ledger, and cashiering (receipt of cash) have been implemented. Remaining problems include: e The HumanResourcesmodule has not been fully implemented; e Other than the Ministries of Finance and Education and the Audit Department, agencies do not yet have on-line access; e Some reports which should be standard have not yet been developed and personnel find it difficult to generate non-standard reports from the system due to: (a) the absence of a user-friendly interface for report generation and (b) inadequatetraining. Plans exist to address most of these problems. The network infrastructure in preparation for the rollouts of on-line access to the other large ministries has been installed but further work has to be done to bring these ministries on-line.34 33 The SIGFIS has also been implemented in Dominica, Saint Lucia, and St. Vincent and the Grenadines using SmartStreamsoftware, and inbothSt. Kitts andNevisusingFourGen. 34Governmentpayrollis now handledona stand-alone`Easy Pay' system. 36 3.22 Treasury producesa variety of monthly reports and year-end reports from SIGFIS to allow in-year budget monitoring. However, highrates of staff turnover coupled with inadequate training and documentation of procedures mean that transactions entered in Treasury are often misclassified. Moreover, few spending agencies regularly reconcile the Treasury reports against their vote books, so the accuracy of these reports is questionable. The accumulation of errors and omissions also complicates the preparation of annual financial statements, which are years in arrears.35 3.23 The Economic Affairs Divisiontries to maintain control of expenditure through a system of weekly and monthly cash forecastsand quarterly allocations that authorize Accounting Officers to make commitments within given limits. These allocations are fed into SIGFIS/SmartStream (see above), so any requests for payment over and above the cumulative total of allocations are automatically rejected. However, only the Ministries of Finance and Education have fully operational systems. Ministries and departments that are not on line still submit payment requests by hand, which complicates central control. Moreover, the control is effective only on total expenditures (payments), not on commitments. Accounting Officers are requiredto keep Vote Account Books that show a runningbalance of funds available for each budgeted item, but this does not prevent excessive commitments, which create liabilities that the government has to meet, irrespective of cash limits. A funds control module of Smart Stream is designed to prevent this by registering commitments as they are made. In the meantime, the result is: 0 Increased pressureon the financial sector for higher overdrafts, 0 Pressure on creditors to allow more time for settlement, and 0 Pressureon ministries and departmentsto cut `discretionary' expenditure and delay projects. 3.24 The Standardize Integrated Government Tax Administration System (SIGTAS, Inland Revenue) and Automated System for Customs Documentation and Administration (ASYCUDA, Customs) systems automate the bulk of the revenue accounting tasks for the two major revenue departments. Once again, reporting limitations represent a problem. All revenues are deposited into the Consolidated Fund. Treasury updates these balances in the SIGFIS system. Some entities like Land Revenue are on line, Customs updates data at the end of each day, and Health Ministry information is updated twice a week. Unfortunately, the two systems are not integrated, which would facilitate the maintenance of a single account per taxpayer covering all taxes. There are internal audit units inCustoms, Inland Revenue and the Ministry of Finance. The MoF is supposed to check that ministries and departments are reconciling their records with the monthly statements from the Accountant General, but little reconciliation is being done. The Director of Audit's report for FY 1997 refers to the lack of bank reconci1iations. 3.25 Grenada uses a cash basis of accounting. Monthly, quarterly, and year-end reports are produced, but these appear to contain numerous and material errors and the annual financial statements are many years in arrears. The Accountant-General has assigned a special team to reduce the backlog. Unfortunately, no audit report since independence has found that the annual financial statements provided an accuratereflection of the revenues and expenditures for the year covered or of the government's financial affairs as of year-end. 3.26 The debt management function is split between the Budget and Debt Management (DBM) unit in Finance, which uses the CS-DRMS to maintaindata on foreign debt, and the Accountant 35 The legislative requirement is for these to be submitted to the Director o f Audit within six months of year-end. This can be extended in writing by the Minister of Finance who then must advise the House of the extension. The 1998 accounts were submitted in March 2002. The 1999, 2000, and 2001 Financial Statements were completed in 2003 and the 2002Financial Statement accounts are targeted for completion by February, 2004. 37 General's Department,which handlesdomestic debt.36The debt managementsection within DBMhas been plagued with high rates of staff turnover, forcing Grenada to call on the ECCB for backstopping support on a regular basis.37 To facilitate cash flow and debt management, the Ministry of Finance has instituteda Debt Management Committee, comprising the Permanent Secretary of Finance, Accountant- General, and Director of Economic Affairs. This meets monthly to review revenue and expenditure performance and consider financing alternative^.^^ It is recommended that, the domestic and external debt units be merged into one. In addition, this new unit needs to be staffed with qualified personnel that can keep adequaterecords of external and domestic debt, analyze the data, and advise the government on debt managementissues. 3.27 Foreign aidaccounting is a problem. When cash is received that is tied to a project or program, it is credited to a temporary account, and cleared to revenue only when expenditure reports are received. The spending project unit is supposed to prepare a joumal voucher to inform the Accountant General of expenditures. It appears that considerable expenditure is not cleared out or is cleared only after long delay, so both revenue and expenditure are understated. The Capital Development Projects Unit was transferred from the Accountant General's Department to the Economic Affairs Division in 2000 and this has exacerbatedthe problem. There are said to be enormous differences between expenditure inthe Public Sector Investment Program system and the Accountant General's ledger.39 C. BUDGETACCOUNTABILITY 3.28 While independent in a sense by dint of authority derived directly from the Constitution, the Director of Audit (and the Audit Department) has no guaranteed operating budget or staff complement, and must obtain approval from the Executive via the annual Estimates process. In addition, other factors have served to reduce potential benefits accruing from the work of the Audit Department, including: 0 The failure of the Accountant General to submit the government's annual accounts on a timely basis; e The automation of critical financial managementfunctions (e.g., SIGFIS; SIGTAS; and ASYCUDA) without adequate inputfrom the Audit Department; 0 The non-functioning of the Publics Accounts Committee(see para. 3.32) e Lack of training for staff, particularly on computer assisted auditing tools, auditing of computer systems, and value-for-money auditing. 3.29 The problems of Grenada's Audit Department are longstanding. No government accounts were submitted from independence in 1973 until well after the US intervention a decade later. From the late 1980s to the mid-l990s, Grenada benefited from a British aid project to strengthen the Audit Department and to bring the public accounts up-to-date. Duringthe life of this project, a fire destroyed the Ministry of Finance Complex in 1990, making it impossible to prepare the 1988 and 1989 accounts. The accounts were reconstructed as of the day of the fire, involving write-offs of EC $46.9 million, but by 1995 the government's annual statements were again well in arrears.40In2000, the Director of Audit was 36 Grenada is not in arrears on domestic or foreign debt except for some Treasury Bills interest, which reflects procedural rather than cash flow problems. 37The ECCB, which provides `backstopping' services to its members relating to the CS-DRMS, now advocates the transfer of this system to Treasury. 38The government is pursuing a debt consolidation program. 39World Bank, OECS Country Financial Accountability Assessment, 2003. Those that were submitted were assessed by the Director o f Audit as not properly reflecting `the state of affairs of the Government of Grenada as at [year end], nor of its revenue and expenditure for the year then ended.' 38 suspended and her case is still before the courts so an individual on an acting basis fills this important position. 41 3.30 The Financial Statements of Grenada present a partial view of government activities. The government would like to monitor SOE financial performance better, but at the moment there is no specific unit with a mandate to do so. SOEs and other statutory bodies are audited in accordance with their respective statutes, mainly by private audit firms, which should be in good professional standing and totally independent of the bodies they audit and of the government. The Director of Audit has constitutional authority to audit statutory bodies. However, he does not do so. These documents are tabled inthe Housebut not debated. Parliament and the Public Accounts Committee(PAC)42 3.31 The Estimates, which are actively debated in both the House and the Senate, provide essential -albeit minimal information for Parliament to discharge its responsibility to hold the - government to account for its use of public res0urces.4~This does not mean that Parliament is otherwise equipped to perform this task adequately. This is a current problem in Grenada - and one that has occurred in other OECS countries owing to the small number of elected representatives and the first- past-the-post election system. Even when Opposition members are elected, their numbers may be inadequate for them to exercise effective oversight on many issues. As well, a Parliamentary Committee intended to play a key role in holding the government to account -the Public Accounts Committee (PAC) -hasrarelyfunctionedeffectively. 3.32 InGrenada, a StandingOrder of the House ofRepresentatives provides for the election ofa three-to-five member PAC by the House. Neither ministers nor parliamentary secretaries can be appointed to the PAC, which excludes all but two members of the current House, making it impossible to constitute the Committee.* This led to an amendment to the Standing Orders to provide for two committees, one each in the House and the Senate, and having these sit together as a Joint Committee. However, the PAC has not yet been established as the government has not proposed and passed the necessary motion inthe House. 3.33 Accountability to Parliament is also compromised when expenditure control mechanisms are misused. For example, until the 1998 amendment to the Finance and Audit Act, the Minister of Finance was empowered to authorize expenditures via special warrants to cover unforeseen expenditures which could not be delayed without `injury to the public service' provided that supplemental estimates were submitted to Parliament at its next sitting and the total value of special warrants outstanding did not exceed $50,000. A 1997 study found that the Minister had approved EC $27 million - over 50 times the statutory limit - in special warrants in that year alone, with none of these subsequently approved by Parliament via a Supplemental Appropriations Act. 45 4'Appointments to the position of Director of Audit is governed by Section 87 of the Constitution, and incumbents who have not reachedretirement age may only be removed for inability to exercise the functions of the office or for `misbehaviour' after an enquiry by a tribunal appointed by the Governor General. The tribunal ruled the Director of Audit could be dischargedfor misbehaviour, but she appealedand won. This decision was overturnedby the OECS SupremeCourt (December 2000) and the case is now before the Privy Council of the UK. 42The World Bank's recent "OECS Country Financial Accountability Assessment (CFAA)" contains a detailed assessmentof the problems facing Public Accounts Committees inthe EasternCaribbean. 43Unfortunately, information concerning expendituresinprior years is often rife with errors. 44The Committee last met in 1997to consider the 1991 statements of account. 45 See " Value-for-Money Study of the Ministry of Finance", KPMG, December 1997,pp. 32-35. 39 40 4. PUBLICSECTOR INVESTMENT PROGRAM 4.1 One of the main reasons behind the weakening of Grenada's fiscal position discussed in Chapter 1 is the significant debt contracted to finance investment projects. From 1994 to 2002, capital expenditures in Grenada were on average about 11 percent of GDP. This level of capital expenditures is one of the highest in the OECS countries. Dominica's Central Government (CG) spent about 9.0 percent of GDP in capital expenditures during FY 199996-FY 2000/01, St. Kitts and Nevis Federal Government about 5.1 percent of GDP over the period 1996-2001 (a country that like Grenada was hit by two major hurricanes between 1996and 2001), and St. Lucia 7.7 percent of GDP duringFY 1995/96-2001/02. 4.2 The main recommendation of chapter 1 is that capital expenditures be reduced and their efficiency improved. While detailed recommendations follow below to improve capital spending efficiency, it was not possible to establish an optimal level of capital expenditures given the poor quality of the data as discussed below. On Capital Expendituresand PSIP Preparation, Monitoring, and Execution 0 The capital budget and the PSIP prepared by the Project Management and Technical Cooperation Unit(PMTCU) inthe MoF needto be madean integralelement of the Strategic Policy Paper and the Medium-term Economic Strategy Paper (MTESP) and not merely an addendum containing a list of desired investment projects. The Budget and Debt Unit and PMTCU need to work closely to anchor the capital budget and the PSIP to the country strategy. 0 I t i s recommended that Grenada establish clear selection criteria for investment projects. First, only investment projects, independently of their source of financing, with all the required information (in particular projected recurrent costs) should be included in the capital expenditure and the PSIP. Second, only investment projects prioritized based on some type of cost-benefit analysis and in accordance with the overall resources available for capital expenditures should be included in the capital budget and the PSIP. Third, all projects with a cost above for example, EC$5.0 million should be subject to a formal cost-benefit analysis before being included in the capital budget or the PSIP. Fourth, given the objective of the government to reduce the high debt burden, the PSIP should maximize the use of available grants and concessional resourcesfinancing. 0 At a technical level, administration procedures for the PSIP and capital budget preparation and implementation need to be defined, and staff needs to be trained inthe procedures and tools of project analysis. 0 The PMTCU should require the line ministries to report capital spending monthly and should stop disbursements to those projects that do not provide regular information. 0 Projects above EC$5.0 million need to be subject to a post-evaluation of their impact. On the Coverageof Capital Expendituresand the PSIP 0 Investment projects currently included in the PSIP and in the capital budget that are in nature expenditures incurred on a yearly basis should be recorded as recurrent expenditures. International practice should be followed inthis respect. 0 All investment projects by statutory agencies, such as state-owned enterprises, or privatecorporations but financed through loans guaranteed by the government (for example, BOLT agreements), need to 41 be included in the PSIP and the financial statements and be subject to a cost-benefit analysis before the government guaranteedthese projects. A. INSTITUTIONAL ORGANIZATION AND PREPARATION Institutional Organization 4.3 Grenada has a dual budget. The Project Management and Technical Cooperation Unit (PMTCU) in the MoF prepares the capital budget and the medium-term PSIP. The Chief Planning Officer heads the unit. There are two committees that oversee the capital budget and the medium-term PSIP, the Planning and Priority Consultative Committee (PPCC) and the PSIP Operating Committee (OC). The PPCC is responsible for formulating policy and selecting projects to be included in the PSIP. The committee consists of the Permanent Secretaries and Chief Technical Officers from the line Ministries and is chaired by the Permanent Secretary of Finance. The PMTCU acts as the secretariat for the PPCC organizing meetings and managing the flow of relevant information. The PPCC is supposed to meet four times per year, but has met infrequently. The OC i s the working level committee that is responsible for the identification, preparation, implementation, and monitoring of projects. It consists of the project/planning officers from the line ministries and is chaired by the Chief Planning Officer. During the 2000 medium-term PSIP exercise for the Medium-term Economic Strategy Paper (MTESP), another committee known as the Project Facilitation Committee became operational. It was chaired by the Prime Minister and included selected Permanent Secretaries and Technical Officers from line Ministries. Its main function was to identify policy issues and actions affecting the implementation of projects. The Project Facilitation Committee like the PPCC does not appear to be active. 4.4 In January 2002, a European Union Project Management Unit was established in the Ministry of Finance, led by the National Authorizing Officer (NAO), the person responsible for administering all EUAid granted to Grenada. The NAO is instrumental in selecting the projects to be funded by the EUand acts as a liaison between the government and the EU.The European Union Project Management Unit is responsible for the implementation, administration, and monitoring of all EUfunded projects under such instruments as STABEX, the National Indicative Program, and the Special Framework of Assistance to ACP Banana Producers. Similar units have been established in most OECS countries to facilitate compliance with EU procedures and guidelines. The slow pace of EU grant disbursements, however, evidences that red tape still curtails the process. For example, allocations for STABEX 1996 and 1997 (in total about 800,000) were decided in November 1998, but still an agreement on how to use these funds has not been signed. Under the Special Framework of Assistance to ACP Banana Producers, in the years 1999-2001 2.0 million were allocated, but only a small fraction has been disbursed. 4.5 It is recommended that the role of the PMTCU for donor assistance coordination be strengthened. Currently, line ministries liaise directly with donors and may only bring in the MoF at a later stage. Some donors such as Japan and Taiwan, China liaise directly with the Ministry of Agriculture and the Prime Minister's Ministry respectively. Others such as the EU deal with the NAO. A stronger PMTCU would help to coordinate the assistance from all donors within the country's economic strategy and avoid future unexpectedfinancial implications to the budget. PSIP and CapitalBudget Preparation 4.6 A call letter is sent out to line ministries (18 months before the budget is presented to the Parliament) to submit their project proposals with all the required information to the Ministry of Finance. However, the information received in these proposals is generally inadequate for a 42 thorough assessment. In the past, no information was provided for recurrent spending in the project proposals. It was left to the line ministries to include the relevant provision in their own recurrent estimates submission. More recently, recurrent expenditures have been linkedto project planning in some instances such as the Basic Education Reform Project financed by the World Bank. However, this is still more the exception than the rule. One of the roles of the PMTCU is to help the line Ministries develop their project ideas into project profiles on an ongoing basis. The PPCC is then supposedto prioritize the projects submitted linkingthem to the framework provided by MTESP.However, no cost-benefit analysis is generally done by the line ministries or the MoF to assess whether the proposed projects are cost- effective (with the exception of those financed by some donors). A package of proposals reflecting the government's priorities is submitted to Cabinet for final decision during the process of preparing the budget. The Estimates are approved by Parliament through an Appropriation Bill that provides the legal basis for spending on the projects. The line ministries implement the projects with the Accountant General being responsible for making the approved disbursements. For major construction projects, the Ministry of Works is responsible for managing the procurement activity and providing the needed technical support to the various implementing agencies. 4.7 The figures presented in the capital budget and the PSIP are of limited use as an indicator of public investment in fixed capital because a significant number of projects included in the PSIP and the capital budget are recurrent expenditures. OECS countries by and large include in their PSIP all projects for which they will seek external financing (loans and/or grants). Thus, when the capital budget is prepared all the projects in the year for which the budget is prepared are classified as capital expenditures. However, this does not follow international practice and IMF guidelines. For example, training programs, maintenance of buildingsand roads, some social protection programs, analytical work such as poverty assessments, labor force surveys, population censuses, and other expenditures incurred annually should be recorded as recurrent expenditures independent of their source of financing. The government may keep all these projects in a separate file for the purpose of seeking external financing from donors, but the recording in the budget and the PSIP should follow internationalguidelines. In2002, for example the following projects were included in the capital budget while they should be categorized as recurrent expenditure: National Training and Employment Program @C$ 1.5 million), Tourism Marketing and Promoting (EC$ 10.0 million), Contributions to the IFC, GDB, CDB and SEDU (EC $1.8 million), RoadMaintenance Program (EC$20.4 million) and School Feeding Program (EC $2.1 million). In total, all these projects represented about 25 percent of the reported capital expenditures in the year 2002. 4.8 The public sector investment program presented in the MTESP and the capital budget presented in the Estimates Book mainly cover Central Government, but some projects of statutory agencies are also included. All capital expenditures in excess of EC$100,000 are included in the PSIP and the capital budget. This includes expenditures by the Central Government and some statutory bodies such as the National Water and Sewage Authority (NAWASA). It is recommended that all investment projects by statutory agencies be included in the PSIP and be subject to a cost-benefit analysis. This is a serious gap because these investment projects can represent a sizeable portion of the public sector investment program and can expose the government to serious fiscal liabilities. The current nomenclature allows the PSIP and capital expenditures to be disaggregated by the CG and the rest of the public sector. It is recommended that the government start to do so inthe 2005 budget. 4.9 Projects being considered to be financed under Build-Operate-Lease-Transfer (BOLT) agreements or by private corporations but guaranteed by the government need to be subject to a cost-benefit analysis before the government commits to guarantee the project or sign a BOLT agreement. BOLT agreements covering the Financial Complex, National Stadium, and Ministerial Complex have financed investments for at least a total of EC$ 127 million. However, these projects although guaranteed by the government, were not subject to any cost benefit-analysis. Moreover, it is 43 recommended that all projects guaranteed by the government be disclosed in the government financial statements. Property of the National Stadium and the Ministerial Complex buildings was transferred to the government in 2002. A more detailed discussion of the BOLT agreementsis presented in Box 4. I. Box 4.1 The use of Build-Operate-Lease-Transfer(BOLT) Agreementsto FinanceCapitalExpenditures The Financial Complex, National Stadium, and Ministerial Complex were constructed using BOLT agreements for their financing. Under these agreements the government agreed to lease these buildingsfrom a private firm when construction is completed with the option of buying and transferring the buildings to the government. In these agreements the government usually guarantees the loan contracted by the private firm. None of these investment projects was subject to rigorous cost-benefit analysis, and at least the National Stadium and the Ministerial Complex would be hardto justify interms of their rates of return on investment. The National Stadium, with a cricket stadium for about 3,000 persons and a soccer stadium for about 5,000 persons, was completed in early 2000. Its purpose was to be a "centre-piece and rallying point for sport development, sports tourism, culture and entertainment." I t was originally budgeted to cost EC$ 58 million, but ended up costing EC$ 85.2 million or almost 10per cent of GDP at the time of construction. I t is highly unlikely that it will ever be able to generate enough revenue to cover its capital and operating costs. There are already plans for an extension, required to host the cricket World Cup. In small countries like Grenada, the best way to meet the country's needs for sporting facilities is to encourage amateur sport, physical fitness and social cohesion through several smaller facilities rather than one costly national stadium with a seating capacity that is almost never fully used. The Ministerial Complex is a prestigeoffice building, which provided ministries with neededoffice space but at a relatively high price. The complex, which cost EC$41.7 million or over 4 per cent of GDP, was never included inthe country's capital budget. Instead, it was constructedoff budgetand subsequently transferredto government along with a corresponding amount of debt. Construction defects reportedly resulted in some difficulties in controlling the buildinginternal temperatures. Off-budget projects like this often end up being more costly and troublesomethan their more transparent on-budget equivalents. 4.10 Grenada prepares a three-year medium-term PSIP as part of the MTESP. However, in practice the focus is the one-year capital budget. As Table 4.1 shows, in the PSIP the capital spending intentions are the highest for the budget year (estimates). In following years, planned capital spending drops off. The reason for this pattern is threefold: a) insome sectors, lack of a well-thought-out medium- term country strategy and sectoral strategies that allow line ministries in coordination with the MoF to prepare a medium-term PSIP; b) the fact that donors' objectives and financing become explicit only closer to the budget year; and c) the lumpy nature of capital spending in small states. It is recommended that the government prepare a rolling three-four year PSIP instead of preparing a PSIP only in responseto the Medium Term Economic Strategy Paper (MTESSP) presentation at the Caribbean Group for Cooperation inEconomic Development (CGCED). The last CGCED took place inJune 2002. 4.1 1 The government's broad goal that guides the PSIP and the capital budget is poverty reduction, infrastructural development and investment in productive sectors to stimulate growth. Nevertheless, some investment projects in the 2003 budget only partially fulfill these objectives. In addition, some projects including the Special Project Program (EC$ 5.0 million), National Training and Employment Program (2.1 million), Road Maintenance Program (EC$ 3.0) and School Feeding (EC$ 2.1 million) aimed at poverty reduction, but as we discuss in chapter 7 and 8 of this report the targeting mechanism is weak and leakageto higher-income level families is pervasive. Inaddition, an extension to the National Stadium is planned at a cost of EC$ 5.0 million. However, no cost-benefit analysis of this project has been undertaken and its impact on growth is questionable. 44 Table4.1 GrenadaPublicSectorInvestmentProgram2003-05 (in millions EC$) Projections 2003 2004 2005 Economic Services 60.7 66.1 49.6 Agriculture 10.4 12.9 2.9 Tourism 15.I 20.2 20.1 Transportation 30.4 27.2 22.4 Water 4.8 5.8 4.2 Social Services 52.6 31.8 22.8 Education 16.3 11.7 7.4 Health 21.0 4.9 1.3 Housing 2.5 2.5 1.6 Other SocialServices 12.8 12.7 12.5 General Public Service 10.7 8.1 5.2 Administration 6.8 3.6 2.0 Public Safety 2.9 3.0 2.7 Other Fixed Investment 1.o 1.5 0.5 Total 124.0 106.0 77.6 Percentage of which: Ongoing 83.0 79.4 74.8 New 17.0 20.6 25.2 Percentage financed by: Local 30.9 35.6 40.0 Loans 47.5 42.5 39.4 Grants 21.6 22.0 20.6 Source: Governmentof Grenada,MediumTerm EconomicStrategy, 2003-2005, June 2002. Note: Figures are mainly for the CG, but includeprojectsfor some statutory agenciessuch as NAWASA. 4.12 In summary, the following steps can be taken to improve the preparation of the PSIP and the capital budget: e The capital budget and the PSIP prepared by the PMTCU in the MoF need to be made an integral element of the Strategic Policy Paper and the MTESP and not merely an addendum containing a desired list of investment projects. The Budget and Debt unit and PMTCU need to work closely to anchor the capital budget and the PSIP to the country strategy. 0 It is recommended that the government establish clear selection criteria for investment projects. First, only investment projects, independently of their source of financing, with all the required information (inparticularprojected recurrent costs) shouldbe includedinthecapital budget andthe PSIP. Second, only investment projects prioritized based on some type of cost-benefit analysis and in accordance with the overall resources available for capital expenditures should be included in capital expenditures and the PSIP. Third, all projects with a cost above EC$5.O million should be subject to a formal cost-benefit analysis before being included in the capital expenditure or the PSIP. Fourth, given the objective of the government to reduce its high debt burden, the PSIP should maximize the use of available grant and concessional resource financing. 45 At a technical level administrative procedures for PSIP and capital budget preparation and implementation need to be defined and staff need to be trained in the procedures and tools of project analysis. The PMTCU should require the line ministries to report capital spending monthly and should stop disbursements to those projects that do not provideregular information at the end of the month. Expenditures incurred on a yearly basis currently recorded as investment projects should be recorded as recurrent expenditures. EXECUTIONAND MONITORING Execution 4.13 From 1994 to 2002 capital expenditures in Grenada were on average about 11percent of GDP. As Table 4.2 shows, capital expenditures fluctuate from a low of about 6.0 percent of GDP in 1995 to a peak of 15.8 percent in 2001, with the reconstruction of the General Hospital. This level of capital expenditures is one of the highest in the OECS countries. Dominica's CG spent about 9.0 percent of GDP in capital expenditures during FY 1995/96-FY 2000/01, St. Kitts and Nevis Federal Government about 5.1 percent of GDP over the period 1996-2001 (a country that like Grenada was hit by two hurricanes between 1996 and 2001), and St. Lucia7.7 percent of GDP duringFY 1995/96-2001/02. Table 4.2 SectoralCompositionof Actual CapitalExpenditures for Grenada 1994-2002 (aspercentage of GDP) 1994 1995 1996 1997 1998 1999 2000 2001 2002 Average1994-2002 Tourism 0.06 0.17 0.05 0.29 0.29 0.10 1.10 0.90 1.13 0.46 Community Development. 0.22 0.52 0.31 0.25 0.14 0.17 0.23 0.29 0.29 0.27 Infrastructure 4.44 2.98 4.33 4.27 4.60 6.67 6.29 5.92 5.77 5.03 Education 0.41 0.32 0.53 0.39 0.42 1.35 1.47 1.69 1.55 0.90 Health 0.78 0.24 0.15 0.43 0.28 0.41 1.73 2.68 1.09 0.87 Other Social Services 1.25 0.14 Agriculture 2.80 1.73 2.20 1.67 0.77 0.85 1.51 1.49 0.60 1.51 Other 1.00 0.92 0.95 0.85 1.46 0.89 1.97 2.84 1.97 1.43 Total 9.72 6.88 8.52 8.16 7.96 10.44 14.31 15.80 13.66 10.60 Source: Grenada, Estimates for the Year. Note: a)The figures in this table differ from those in chapter 1because the buy-out of the National Stadium andthe Ministerial Complex was recorded as recurrent expenditurein the budget. b) Health includes housing in 1994. Community Development includes Youth& Sports in 2001. c) Others include generalpublic services andpublic safety. 4.14 During this period, on average almost half of capital expenditures were ininfrastructure. In part, expenditures on infrastructure have been driven by the damage caused by the passage of Hurricane George in 1998, Lenny in 1999 and Tropical Storm Lili in 2002 (see Tables 4.3 and 4.4). However, the fact that a) important infrastructure projects such as the Financial Complex, Ministerial Complex and National Stadium are not part of the capital budget due to their financing mechanism and b) a large 46 fraction of the expenditures recorded under infrastructure (for example, the road maintenance program) are recurrent expenditures and not investment in fixed capital raise questions on the actual impact on infrastructure of these expenditures. Table4.3 Actual CapitalExpendituresfor Grenada1994-2002 (EC$ '00) 1994 1995 1996 1997 1998 1999 2000 2001 2002 Tourism 415 1,254 439 2,533 2,721 1,045 12,200 9,600 12,300 Community Development 1,565 3,863 2,535 2,160 1,280 1,699 2,500 3,100 3,100 Infrastructure 31,518 22,291 34,838 36,962 43,581 68,052 69,500 63,300 62,500 Education 2,935 2,424 4,282 3,399 3,996 13,750 16,200 18,100 16,800 Health 5,550 1,769 1,222 3,749 2,645 4,157 19,100 28,700 11,800 Other Social Services 13,600 Agriculture 19,911 12,961 17,690 14,460 7,282 8,705 16.700 15,900 6,500 Other 7,106 6,894 7,615 7,363 13,801 9,075 21,800 30,400 21,400 Total 68,999 51,458 68,620 70,626 75,307 106,482 158,000 169,100 148,000 Source: Grenada, Estimatesfor the Year. Note: a) Health includes housing in 1994. Community Development includes Youth & Sports in 2001. b) Others include general public servicesandpublic safety. Table 4.4 Actual CapitalExpendituresfor Grenada1994-2002 (aspercentageof total capital expenditures) 1994 1995 1996 1997 1998 1999 2000 2001 2002 Tourism 0.6 2.4 0.6 3.6 3.6 1.o 7.7 5.7 8.3 Community DeveloDment 2.3 7.5 3.7 3.1 1.7 1.6 I.6 1.8 2.1 Infrastructure 45.7 43.3 50.8 52.3 57.9 63.9 44.0 37.4 42.2 Education 4.3 4.7 6.2 4.8 5.3 12.9 10.3 10.7 11.4 Health 8.0 3.4 1.8 5.3 3.5 3.9 12.1 17.0 8.0 Other Social Services 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 9.2 Agriculture 28.9 25.2 25.8 20.5 9.7 8.2 10.6 9.4 4.4 Other 10.3 13.4 11.1 10.4 18.3 8.5 13.8 18.0 14.5 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Grenada, Estimatesfor the Year. Note: a) Health includeshousingin 1994.Community Development includesYouth & Sports in2001. b) Others includegeneralpublic services andpublic safety 4.15 On average, Agriculture and Others (including public services and public safety among others) comprised about 28 percent of total capital expenditures. Agriculture capital spending share intotal capital expenditures has declined over the period from 29 percent in 1994 to 4.4 percent in2002. Recent agricultural projects include a loan to facilitate the production of organic bananas for the UK 47 market; the restructuringof the cocoa industry; and the opening of the Melville Street FishMarket. On the other hand, the share of the category `other expenditures' has increasedover the periodfrom 10.3 percent in 1994 to 14.5 percent in 2002 as the refurbishment of government buildings (mainly the Ministerial Complex) is beingcompleted. 4.16 The social sectors accounted for about 20 percent of total capital expenditures. As we discuss in chapter 6 and 7 of this report the main projects were: in health, the reconstruction of the General Hospital and the HIV/AIDSPrevention and Control Project financed by the World Bank and in education the World Bank Basic Education Program (U$11.1 million). 4.17 The realization rate of plannedcapital expendituresin Grenada is low with a high year-to- year variation. As Table 4.5 shows, on average over the 1994 to 2002 period, only around 65 percent of planned capital expenditure was actually implemented. However, this statistic conceals substantial year- to-year variations and the progress in improving the rate of realization in recent years. After falling to around a half from 1995 to 1998, the realization rate rose steadily to 88 per cent in 2001 and achieved 74 percent in 2002. While there is still room for improvement, the realization rate is substantially higher than in St. Kittsand Nevis and Table4.5 RealizationRateof GrenadaCapitalExpenditures1994-2002 1994 1995 1996 1997 1998 1999 2000 2001 2002 1994-2002 Average Estimates (EC$Thousand) 82,688 95,269 137,912 141,693 155,384 185,000 203,088 192,368 199,724 Actual (EC$Thousand) 68,999 5 1,458 68,620 70,626 79,434 106,482 158,000 169,100 148,046 RealizationRate (%) 83.4 54.0 49.8 49.8 51.1 57.6 77.8 87.9 74.1 65.1 Source: Grenada, Estimatesfor the Year. 4.18 By funding, the largest shortfall has been in loans which on average were half realized (Table 4.6). The lowest rate of realization for Grants was around 40 per cent in 1999. Local revenues were often required to make up shortfalls, as were external loans. In 2000, the realization rate for local source funding was actually in excess of 100per cent. Inthis year, local sources accounted for almost half of the actual financing of capital expenditures. In 2001, the realization rate for external loans exceeded 100 per cent as loans were incurredto meet shortfalls inother funding Table4.6 RealizationRateof GrenadaCapitalExpendituresbyFundingSource 1994-2002 (aspercentage) 1994 1995 1996 1997 1998 1999 2000 2001 2002 Local Revenue NA 81.5 66.2 76.3 76.5 79.3 116.6 78.7 90.0 Loans NA 35.4 22.2 28.8 25.4 61.2 58.4 106.8 64.9 Grants NA 45.1 63.3 54.7 73.6 39.8 60.9 79.1 59.4 Total 83.4 54.0 49.8 49.8 51.1 68.5 77.8 87.9 74.1 Source: Grenada, Estimates for the Year. 46With the exception of 2003/04which has seena significant improvement inDominica's realization rate. 48 4.19 Since 1997,capital expenditures have been mostly financed through loans and local revenue instead of grants. As Table 4.7 shows, in 1994 about 36 percent of all capital expenditures were financed by grants, in 1997 only 30.5 percent and in 2002 less than 20 percent. Local revenue and loans have substituted grants. Inparticular, local revenue financed only about 23 percent of total capital expenditures in 1994, but in 2002 financed 51.2 percent. Moving forward and given its high debt burden, Grenada needs to maximize the use of available grants (especially from the EU) and concessional resource financing. Table 4.7 Sourcesof Financingof GrenadaActualProvisional CapitalExpenditures 1994-2002 (aspercentage of total capital spending) 1994 1995 1996 1997 1998 1999 2000 2001 2002 Local Revenue 22.7 45.4 41.0 44.7 39.0 35.1 48.4 36.7 51.2 Loan 41.3 13.6 15.7 24.8 24.0 40.6 33.1 39.1 30.6 Grant 35.9 41.0 43.3 30.5 37.0 24.3 18.5 24.2 18.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Grenada,Estimates for the Year. 4.20 The most important source of external financing in 2001 was Taiwan, China. As Table 4.8 shows, Taiwan, China provided grants for about EC$22.4 million or 21 percent of the total external financing received by Grenada. The next most important source was the Caribbean Development Bank, which provided mostly loans. Japan was the third most important source of financing and the secondmost important provider of grants. The World Bank was the fourth most important source of financing with loans for EC$ 5.1 million. The United Kingdom through DFID's grants was the fifth most important source of financing. The EUwith its STABEX and EDF instruments was not a major source of financing in2001as it hadbeen inmost recent years. Table4.8 SourceofExternalFinancingof Capital Expenditurein2001 (EC$Millions) Loan Grant Total As percentageofTotal Taiwan, China 22.4 22.4 20.9 CDB 18.4 1.1 19.5 18.2 Japan 6.5 6.5 6.1 World Bank 5.1 5.1 4.8 BDDDF'ID 1.7 1.7 1.6 France 0.1 0.15 0.1 EU 0.08 0.08 0.1 UNICEF 0.05 0.05 0.1 Others 42.6 8.9 51.5 48.1 Total 66.1 40.9 107.0 100.0 Source: Grenada, Estimates for 2002. Monitoring 4.21 The capacity of the Project Management and Technical Cooperation Unit (PMTCU) to monitor the implementation of capital projects, which are carried out by line ministries, is weak. Line ministries are supposed to complete quarterly reports on project implementation to be sent to the 49 PCTU unit, but compliance has been rather lax which makes it rather difficult to monitor implementation by the PSIF' unit. 4.22 Expenditures in investment projects are not tracked adequately. Indeed, record of actual expenditures in some capital projects lagged behind in some cases by more than one year because line ministries did not submit the required information and the PMCTU unit did not enforce this requirement. In addition, capital expenditures disbursed directly by donors (for example, Japan) are unlikely to be recorded and therefore no information exists on actual expenditures and thus i s not presented in the budget. The Accountant General's Department of the Ministry of Finance is responsible for making the approved disbursements. Not all projects are included at budget time. Some can be introduced at mid-year through supplementary estimates. This gives the government some flexibility to respond to urgent needs, but it also gives ministriesan opportunity to short circuit the whole PSIPprocess. 4.23 Post evaluation of projects is usually only done for external funded projects where it is required by the financing institutions. A good example is the Basic Education Reform Project that the government implemented from 1996 to 2001 with financial support from the World Bank. The project achieved greater access to secondary education through the increase in enrollment from 7,417 pupils in 1995 to 9,699 pupils in 2001 and improvement in the quality of instruction: the pass rate of the CXC exam increased from 52.5 percent in 1995 to 66 percent in 2001. On the negative side, the project fell short of the goal to increase efficiency: the pupil-teacher ratio in primary decreased from 1:27 to 1:25, where the target was I:29. 50 5. PUBLICSECTOREMPLOYMENT AND COMPENSATION 5.1 With a total population of about 100,000 inhabitants, Grenada has limited resources to carry out the whole range of functions performed by any government. As several studies have shown, small countries tend to have bigger governments in response to the higher unit cost of supplying public goods and the need to provide a stabilization role to ameliorate the effect of external shocks (Alesina and Wacziarg 1997; Rodrik 1996). 5.2 In this regard, Grenada has managed its wage bill prudently in comparison to neighboring countries. Since 1995, the wage bill as percentage of GDP has remained stable at around 11.8 percent of GDP. Moreover, the wage bill has fluctuated from 10.4 percent of GDP in 2000 to 12.8 of GDP in 1997 (election year). However, even under this prudent management of the wage bill there is still scope for improvement, inparticular in the wage policy usedby the government to reward performance. 5.3 The Grenada government is also to be commended for its commitment to public sector reform, mainly in the form of contracting out services and statutorization. Since 1997 with the statutorization of the Post Office, Grenada has contracted out several government services. Commercialization provides an alternative to the direct delivery of services by the government and offers the possibility of improving the quality of services, at a lower cost. However, if commercialization is to deliver on its promise, it requires careful preparation in the context of an overall public sector reform, adequate cost-benefit evaluation, selection of providers in a competitive fashion, and systematic monitoring and feedback of the provider's performance by an effective managerial entity in the government. This report contends that commercialization in Grenada still has to deliver the returns that one would expect from the effort made by the country. 5.4 The purpose of this chapter is to review the main trends inCG employment and compensation, as well as the experience to date with public sector reform, inparticular the policy of commercialization that the government has being pursuing since 1997. The main findings and recommendations can be summarized as follows: On Legislation 0 The articles in the Constitution that govern the appointment of public officers, pensions. etc. need to be revised to reflect the requirements of a small open economy that experience continuous external shocks and want to respond with the flexibility of a modem public service. On CGEmployment and Compensation 0 The performance appraisal system in place does not work as intended. The increments are too large and almost everyone (95 per cent) qualified for them. Public officials need to be educated about the importance of frank and objective appraisals for improving the delivery of public service. If this can be done, then some sort of performance bonus that is not built into the pay scale might provide a useful incentive. 0 The practice of recording some of the expenses of the commercialized programs under object 340 or in the capital budget shouldbe discontinued. All expensesfor the commercialized program needto be recorded in the recurrent budget in the same program as before but under a new object code that allows the government to monitor and evaluate these programs. 51 e Moving forward, it is recommended that the government in response to changes in the age structure of the population rethink (downwards) the number of established employees required to deliver education and health services (see chapters6 and 7 in this report). On Commercialization and other Public Sector Refom Issues e The Grenada government lacks a human resource strategy. The Commonwealth Secretariat carried out a detailed assessment of the training needs of the public service in early 2000. This assessment needs to be implemented. e The government needs to carry out a detailed evaluation (cost-benefit analysis) of the commercialization program to date to further inform future initiatives in this regard. e The government needs to establish a proper secretariat with full-time personnel to assess alternative service delivery options and to address the issues that inevitable arise during implementation. A task force of senior public servants, each with several responsibilities, cannot carry the commercialization program forward on its own. e Commercialization contracts should be subject to competitive bidding by potential suppliers. In addition, the government needs to establish formal monitoring procedures to determine whether the services contracted out are being rendered in the quantity and quality specified in the contracts. e It is essential that the information systems that contain such staff particulars as date of hiring, date of increments and movements between salary scales, training received, performance evaluation reports, and the date of retirement be updatedto the needs of a modern public service. e It is recommended that the government exploit, through greater collaboration at the regional level, opportunities to pool resources and realize lower unit costs in the areas of tax administration, customs, audit services, police services, magistracy, and environmental protection. A. TRENDS INCENTRALGOVERNMENTEP~IPLOYMENT DURING1995-2002 5.5 There are two types of government positions in Grenada: established and non-established. The Public Service Commission appoints employees to established positions and is responsible for promotions and disciplinary actions in the public service.47Established positions are permanent positions listed in the budget, and their compensation is classified as Personal Emoluments. Employees for non- established positions are hired directly by line ministries, the positions are also listed in the budget, and their compensation is classified as wages. The Department of Human Resources inthe Prime Minister's Ministry is responsible for the control of established positions and must be consulted by ministries concerning non-established positions. 5.6 From 1995 to 2002, CentralGovernment employment in Grenada declinedby a total of 3.6 percentor 0.5 percentper year. However, this decline inCG employment is the result of a reduction in the number of non-established positions.48As Table 5.1 shows, total CG positions decreased from 5,264 positions in 1995 to 5,074 in 2002. But this reduction in positions was driven only by a reduction in the number of non-established positions. Non-established positions decreasedfrom 1,235 positions in 1995 to 47 The Public ServiceCornmission is a five-member constitutional body which has a Chair chosenby the Governor General and must include representativesof the Teachers' Union and the Public Workers' Union as well as two members selectedby the Prime Minister. 48Informationon hours worked by non-establishedemployees was not available, thus it is possiblethat some of the non-establishedemployees are part-time and therefore cannot be compared to establishedpositions. Moreover, the World Bank's team did not receive information on vacancies and acting positions. 52 402 in 2002. That is, a total reduction of 67 percent or 14.8 percent per year. By contrast, established positions in the CG increasedfrom 4,029 positions in 1995 to 4.672 positions in2002. Table5.1 EmploymentinGrenadaCentral Government, 1995-2002 1995- 1995 1996 1997 1998 1999 2000 2001 2002 2002 Established Positions 4,029 4,443 4,298 4,018 4,541 4,548 4,633 4,672 Annual Growth Rate(%) 10.3 -3.3 -6.5 13.0 0.2 1.9 0.8 2.1 Non-established Positions 1235 907 825 830 847 670 421 402 Annual Growth Rate(%) -26.6 -9.0 0.6 2.0 -20.9 -37.2 -4.5 -14.8 Total CG Employment 5,264 5,350 5,123 4,848 5,388 5,218 5,054 5,074 Annual Growth Rate (%) 1.6 -4.2 -5.4 1 1 . 1 -3.2 -3.1 0.4 -0.5 As % of Population 5.3 5.4 5.1 4.8 5.4 5.2 5.0 5.0 Source: Grenada, Estimatesfor the Year. Note: a) Figuresare actual for all years except for 2001 and2002, which are budgeted.b) Figurefor 2001for established positionscorrectedto be4,633 basedonadd-upof components. 5.7 The largest decreases in the number of non-established CG workers occurred in the Ministries of Works, Communications and Public Utilities and Education. As Table 5.2 shows, of the 548 non-established positions cut between 1995-2001, 238 positions (43 percent) were in the Ministry of Works, Communications and Public Utilities; 93 positions (17 percent) in the Ministry Education and 82 positions (15 percent) inthe Ministry of Agriculture, Forestry, Landand Fisheries. The services delivered by the RoadMaintenance Program inthe Ministry of Works and Communications started to be contracted out in 2001. The Post Office was statutorized in January 1997, removing almost a hundred positions: 31 of which were non-established positions. 5.8 Established positionsin the CG during this period increased by a total of 16 percent or 2.1 percent per year. The main increases as Table 5.2 shows correspond to Police (119 positions), Ministry of Education (119 positions), Ministry of Housing, Social Services, Culture and Co-Operatives (43 positions) and the Prime Minister's Ministry (39 positions). Interestingly enough the increase in the number of established positions in the Ministry of Education (119 positions) more than compensate the reduction in the number of non-established positions (93 positions) in the same ministry. 5.9 The Ministries of Education, Health and Environment and the Department of Police accounted for almost 75 percent of established positions in 1995 and 2001. Established positions are distributed among 12 Ministries and 10 Departments. As Table 5.3 shows, in 1995, the largest ministry/department was the Ministry of Education with 36.9 percent of the total established positions; the second largest was the Ministry of Health and Environment with 22.1 percent of the total; and the third largest was the Department of Police with 15.5 percent of the total. The same distribution of established positions among ministries/departments was observed in 2002. The ratio of police personnel per 100,000 habitants in Grenada (635) is in the high end compared to neighboring countries such as Barbados (5 16) and Dominica (605)!9 49The data for Barbadosand Dominica are for 2000, and its source is the Seventh United Survey of Crime Trend and Operations of Criminal Justice System, UnitedNations. The data for Grenada are from the Budget Estimates 2003, vote 12,programs01and24-27 (establishedandnon-establishedpositions). 53 Table 5.2 Changl 1Central GovernmentEmploymentby Ministry 1995-2001 1995 2001 Change Non- Non- Non- Vote Established Established Established Established Established Established Positions Positions Positions Positions Positions Positions 01GovernorGeneral 11 4 11 4 0 0 02 Parliament 14 2 13 2 -1 0 03 Supreme Court 32 3 31 2 - 1 -I 04 Magistracy 33 3 37 4 4 1 05 Audit 19 0 20 0 1 0 06 PublicService Commission 10 0 I1 0 1 0 07 Directorof Public Prosecution 4 0 4 0 0 0 08 ElectoralOffice 9 0 7 0 -2 0 09 LegalAffairs, Local 17 20 24 2 7 -18 Government,and Labour I O PrimeMinister's 36 0 75 0 39 0 11 Prisons 129 1 130 I 1 0 12Police 681 159 800 170 119 11 15Tourism 17 43 19 1 2 -42 16ForeignAffairs 38 1 1 37 12 -1 1 17Labour,SocialSecurity., 47 9 NA NA NA NA Cooperativesand Community. Development 19Youth, Sports, and Communit 8 10 -16 Development 27 24 37 20 Finance 335 14 330 0 -5 -14 30 Works 70 266 59 28 -11 -238 32 Post Office 64 31 NA NA NA NA 35 Housing, SocialSecurity 0 0 43 1 43 1 36 Carriacou& Petite Martinique 0 0 25 9 25 9 40 Education 1,623 149 1,742 56 I19 -93 50 Health 975 71 986 44 I 1 -27 64 Agriculture 211 159 I92 77 -19 -82 Total 4,402 9691 4,633 4211 231 -548 Source: Grenada, Estimatesfor thi 5.10 In 1995,three ministries and one department accounted for 314 of non-established positions. In2001, only two ministries and one departmentaccounted for the same fraction ofnon-established positions. In 1995,the Ministry of Works, Communications andPublic Utilitieshired about 27 percent of all non-established employees, followed by the Ministry of Agriculture, Forestry, Land and Fisheries and the Police Department each with 16.4 percent of the total, and the Ministry of Education with 15.4 percent. In2001, as a result of the contracting out of road maintenance, only three votes accounted for 75 percent of all non-established positions. The Police department accounted for 40.4 percent of all non- established positions, followed by the ministries of Agriculture, Forestry, Land and Fisheries, with 18.3 percent of the total non-established positions and Education with 13.3 percent. 54 Table 5.3 CentralGovernmentEmploymentbyMinistry1995and2001 (aspercent of total CG nployment) 1995 2001 Non- Non- Vote Established Established Established Established Positions Positions Positions Positions 01GovernorGeneral 0.2 0.4 0.2 I.o 02 Parliament 0.3 0.2 0.3 0.5 03 SupremeCourt 0.7 0.3 0.7 0.5 04 Magistracy 0.7 0.3 0.8 1.o 05 Audit 0.4 0.0 0.4 0.0 06 PublicServiceCommission 0.2 0.0 0.2 0.0 07 Director of Public Prosecutions 0.I 0.0 0.1 0.0 08 ElectoralOffice 0.2 0.0 0.2 0.0 09 Legal Affairs, Local Government, andLabour 0.4 2.1 0.5 0.5 I O PrimeMinister's 0.8 0.0 1.6 0.0 I 1 Prisons 2.9 0.1 2.8 0.2 12Police 15.5 16.4 17.3 40.4 15 Tourism 0.4 4.4 0.4 0.2 16ForeignAffairs 0.9 1.1 0.8 2.9 17Labour, Social Security., CooperativesandCommunity. Developmer 1.1 0.9 NA NA 19 Youth, Sports, and Community Development 0.6 2.5 0.8 1.9 20 Finance 7.6 1.4 7.1 0.0 30 Works 1.6 27.5 I.3 6.7 32 Post Office 1.5 3.2 NA NA 35 Housing, SocialSecurity 0.0 0.0 0.9 0.2 36 Carriacou& PetiteMartinique 0.0 0.0 0.5 2.1 40 Education 36.9 15.4 37.6 13.3 50 Health 22.1 7.3 21.3 10.5 64 Agriculture 4.8 16.4 4. I 18.3 Total 100.0 100.0 100.0 100.0 Source: Grenada, Estimatesfor the Year 1995and 2001 5.1 1 A new form of employment hasarisen under object 340 inthe budget. The economic object 340 (Professional and Others Services) in the Estimates has been often used in the case of IT professionals where there is a EC$ 500-1,000 per month gap between the government pay scale and the private sector salaries. However, the government decided to keep some of the employees released through commercialization in the payroll. But, because the government could not re-hire the released employees and it was committed to the targeted staffing level of 5,000, their compensation was recorded in the object 340. Moreover, some of these employees were kept on the payroll under object 340 performing the same tasks as prior to commercialization. Although these expenses must be approved as part of the annual budget process, it is not subject to central control by the Department of Human Resources. Consequently, its use results in only a partial control on staffing inthe CG. 5.12 Inconclusion, in2001'5 in100individualsworked for the Grenada's CGas an established or non-establishedemployee. This is a much lower ratio than in St. Kitts and Nevis and about the same as in St. Lucia (with similar population sizes) and significantly higher than in Jamaica and the Latin America and Caribbean Region in general. (Figure 5.1). Moreover, because of the use of object 340, it is not clear that all the reduction observed in non-established positions took place or that some of the non- established workers were kept inthe payroll but under a different code. 55 Figure 5.1. GovernmentEmploymentas percentageofPopulation,2001 (SelectedCaribbeanCountries) 160 7 - 301 4 0 - c st. Kim 4 and a Nevis g0.1 - s 2 0 - $ 1 0 0 - -5E6 8 0 - -E w 6 0 - Grenada St. Vincent andthe LatinAmerica c t Jamaka andthe 4 0 - + Grpadines + Dominica t Caribbean E g S t Lucia t + 2 0 - Barbados 13 0 0 - B. TRENDS CGCOMPENSATION DURING1995-2002 IN 5.13 PersonalEmoluments and Wages increased (in real terms) by 20 percent or 2.5 percent per year during the period 1995-2002. This increase in the wage bill is wage driven rather than employment driven. As Table 5.4 shows, the total (nominal) increase in personal emoluments and wages was 35 percent duringthis period or 4.4 percent per year; however, in the same period the number of CG established positions and non-established positions decreased by 3.6 percent or 0.5 percent per year. Moreover, inflation increasedonly by about 14 percent intotal or 1.9 per year. 5.14 During this period, there were only three negotiated increases in salaries for the periods 1993-95, 1996-2001, and 2002-05. These increases account for a small fraction of the raise in the wages bill. The pattern of increases in wages due to negotiated increases is more clearly revealed in the profile of the low end of the salary scale E for established positions. Category E applies to local government officers, road officers and trained nurses. Table 5.4 shows, that in this period there were two negotiated increases in wages and salaries in 1997 and 2001 with a total increase of 11.1 percent or 1.6 per year, hardly enough to keep the wage scale up with inflation over the same period. Therefore, these increases do not explain the increase inthe wage bill observed duringthis period 56 Table5.4 GrenadaCG Compensation1995-2002 1995- 1995 1996 1997 1998 1999 2000 2001 2002 2002 PersonalEmoluments and Wages (EC$ 82.04 88.11 96.93 95.83 107.35 105.62 116.9 111.1 Milions) Annual GrowthRate(%) 7.4 10.0 -1.1 12.0 -1.6 10.7 -5.0 4.4 Total C G Positions 5,264 5,350 5,123 4,848 5,388 5,218 5,054 5,074 Growth Rate(a) 1.6 -4.2 -5.4 11.1 -3.2 -3.1 0.4 -0.5 Average Compensation per establishedand non- 15,586 16,470 18,920 19,767 19,924 20,241 23,130 21,896 establishedposition(EC$) Growth Rate (a) 5.7 14.9 4.5 0.8 1.6 14.3 -5.3 5.0 (EC$) Grade E 13,464 14,004 14,004 14,004 14,004 14,004 15,000 15,000 Growth Rate(%) 4.0 0.0 0.0 0.0 0.0 7.1 0.0 1.6 Annual Inflation 2.24 2.79 1.29 1.41 0.51 2.18 3.20 1.73 1.9 Source: GrenadaEstimatesfor the years 1994-2002. 5.15 However, pay scale changes and performance increments wages explained most of the increase in the wage bill. In 1996, following a study by KPMG done in May 1995, a new pay and performance system was implemented. This new pay system involved the preparation of job descriptions and the initiation of annual performance appraisals. The new pay system for public officers has 13 grades (A-M)with 9 pay levels for grades A-Iand5 pay levels for gradesJ-M.50The new performance appraisal adopted, and still in place, yielded increasesof about 10percent per year because most of the employees were ranked as best performers. The Department of Human Resources believed that increases due to performance will max in2004 as most employees will be inthe ninthpay level and will only get increases ifthey arepromoted to nextgrade. 5.16 This inflexibility of the public sector wage policy is a concern in the context of a currency union. In a currency union, the real appreciation of the exchange rate that fiscal deficits can generate cannot be compensatedby an increase in the exchange rate, thus wages will need to adjust downwards to maintain the competitiveness of the economy. However, if the public sector wage policy is not flexible, as seems to be the case in Grenada, and public employment represents a substantial share of total employment in the economy, then the country will be double tied, as was the case in Argentina. One alternative that has been discussed inthe literature is to index wages to GDP. 5.17 Although these increases may have achieved to some extent the goal of reducing the gap between public and private sector compensations, they have also implied an increase in CG compensation that does not necessarily reflect increases in productivity in the public sector. 50PoliceOfficersandTeachershavea separate pay structure. Moreover, they raise the question whether or not changes in the incentive structure (performance appraisal) governing public sector wage policy could change attitudes and performance in the workplace without the need for commercialization. While no information was provided on private sector wages, discussions with officials have suggested that public service salaries still are below those in the private sector at the senior and middle level and above private sector wages at the bottom end of the salary scale. This seems to be one of the reasons why it is difficult to recruit highly skilled public servants and that turnover is high at the middle level of the public service. However, as it is was discussed in chapter 1 (para. 1.23) civil servants are exempted from income taxation 5.18 The ratio of wages and salaries at 10.8 per cent of GDPis lower than in St. Kitts, Dominica, St. Lucia, and St. Vincent and the Grenadines but about the same as Jamaica and Barbados (see Figure 5.2). The government needs to be prudent in the management of the wage bill given that the CG debt (excluding government guarantees to statutory bodies and private enterprises) to GDP ratio had reached almost 85 percent as of December 31,2003. Figure5.2 PublicSector Wage Billas percentageof GDP,2001 (SelectedCaribbeanCountries) +Dominica +St. St. Vincent andthe KMs and Nevis + Grenadines +Grenada +Jamalca +Barbados "'Luc'a Source: Author'scalculations. C. PUBLICSECTOR REFORM,COMMERCIALIZATION ANDSTATUTORIZATION 5.19 The government is strongly committed to a program of commercialization as part of an overall public sector reform. Several different arrangements have been employed duringthe divestiture of functions. In the case of solid waste disposal and the post office, an autonomous executive agency was created. In other cases such as grounds maintenance of athletic facilities, cleaning of government offices, and cleaning of public markets, a contractual arrangement has converted agency employees into private providers of equivalent services. In recent years, 800 to 1,000 positions (the majority non-established positions) have been contracted out of the CG. It represents a significant proportion of the total CG employees of around 5,500 and has been the main mechanism that the government has used to achieve its targeted staffing level of 5,000. 5.20 Cabinet established a Commercialization Task Force in September 1999 to oversee the commercialization and/or private management of selected government departments. However, this Task Force has met infrequently. The Commercialization Task Force includes the Head of the 58 Department of Human Resources, the Permanent Secretary of Finance, the Accountant General, and the Head of Legal Affairs, and is chaired by the Permanent Secretary of Agriculture - reporting to a broader Public Service Development Committee (PSDC) chaired by the Cabinet Secretary. Its effectiveness has been weighed down by non-attendanceof many members. In May 2001, an effort was made to revitalize the Task Force, but again it suffered from poor attendance. More fundamentally, the government has not established a proper secretariat with full-time personnel to assess alternative service delivery options and to address the issues that inevitably arise during implementation. A task force of senior public servants, each with several responsibilities, cannot carry the commercialization program forward on its own. 5.21 The Post Office was the first government operation to be commercialized by setting it up as a statutory agency in January 1, 1997. It has been operating as such ever since. Since then, the cleaning services in the Ministerial Complex, road maintenance, the Farms Roads Division and other services in the Ministry of Agriculture, cleaning services and fee collection at public markets, maintenance, cleaning and security services in the Ministry of Education, maintenance of sports facilities, cleaning, security, grounds and maintenance of Hospital Services, and waste collection and disposal have been contracted out. The 2003 Estimates reports the government's intentions to transform the Printery into a statutory agency by June 2003.51Discussions have also been underway about statutorizing the General Hospital and the T.A. Marryshow Community College. However, the unions have been resisting the change and as of today, they are still part of the CG. 5.22 It was estimated in the report on public service reform prepared by KPMGfor the Office of the Prime Minister in 1994 that it would be possible to reduce staff numbers by 688 through contracting out and to save EC$1,642,000 per year. This estimate was based on the data available on compulsory competitive tendering in central government in Britain where savings of 30 percent were reported for compulsory competitive tendering and 20 to 25 percent for market tested services. Services covered included: gardeners and grounds men; cleaners; security; seamstresses; police garage; schools' maintenance; refuse services; computer services; printery; and hospital laundry?2 5.23 The World Bank conducted a preliminary assessment of the commercialization process in Grenada in 2003 at the request of the government on the basis of interviews with public officers, supervisorsof contracted out services and consumers. The assessmentnoted that: 0 The impact of commercializationon the quality of services contracted out varied. The quality of the service provided for road maintenance, maintenance of athletic fields, and cleaning of government offices improved slightly, the performance of cleaning services and fee collection at public markets was unsatisfactory; 0 No economies over the previous level of costs appear to have been realized. The failure to realize savings was likely a product of the model usedfor contracting 0 The outsourcing or privatization of services employing establishment employees is impeded by the inordinately heavy burden of severance payments. Thus, to date outsourcing has been confined to services employing daily wage workers requiring costly but manageable severance payments (see para. 5.26). 51The printery publishesthe official Gazette and other governmentdocuments, has a staff of 22 full-time employees establishedand non-established 52See "The Government of Grenada Prime Minister's Office: Report on a Strategic Review for Public Service Reform", KPMGPeatMarwick, September 1994, p.27. 53 The mode usedfor contracting out was to provide the releasedworkers with a severance payment and help them form companiesthat would receivecontractsto carry out the same servicesthey had delivered as public employees. 59 5.24 On the basis of the above observations, it is recommended that government carry out a detailedevaluation of the commercialization programto date, to further informfuture initiatives in this regard. To date none of the executed or proposedcommercializationprojects has been subject to a cost-benefit analysis of different options. This is in part because the information available from the government does not disaggregate inputs and outputs at the level required, or is presented in budget codes in conjunction with other expenses or because the scope of the program has been extended making it difficult to compare before and after commercialization (Box 5.1 details some of the problems involved in attempting to evaluate the statutorization of the Post Office). For example, expenses for the road maintenance program before commercialization were recorded as recurrent expenditures in the budget, after commercialization they are recorded in object 340 in a new program in the recurrent budget and in the capital budget.54 However, only after such a study is done, would it be possible to establish if commercialization has resulted inbetter value for money and the population has benefitedfrom increased productivity and efficiency. 5.25 Next, it is recommended that future instances of commercialization be open to bids from private operators or employee cooperatives- without insisting on the preservation ofjobs. Similarly, it is recommended that upon expiration of existing contracts, future contracts be awarded on the basis of an open bidding process by potential suppliers. Inaddition, to the extent possible the government should avoid financing the up-front capital costs of the private operators but rather encourage them to obtain private financing from banks. Each commercialization contract should have an established monitoring procedure to determine whether the services contracted are being rendered in the quantity and quality specified in the contracts. 5.26 Moreover, the legislation that governs public sector employment is outdated and has a void with respect to the potential compensation to be paid when an established employee is terminated on account of redundancy. This in turn limits the possibility of the government to embark on an overall public sector reform. As discussed in the education and health chapters of this report, changes in service delivery modes in the social sectors are required in the near future and this reform may imply the curtailing of established positions in these sectors. However, Article 84 (8) of the Grenada Constitution guarantees that any established worker who is requiredto retire on abolition of hisher office or for the purpose of reorganizationof the Ministry or Department shall be entitled to pension and retiring benefits as if he/she had attained the compulsory retiring age. That is, an immediate pension (pension that would be normally received at age 60) based on the last salary earned and the maximum permissible months (320) months. Non-established workers are not eligible for pension, but are eligible for a severance allowance in accordance with the terms of the collective agreement, those with fewer than five years of service are compensated at four weeks compensation times the number of years of service or fraction thereof. For those with five or more years of service, the payment is equal to six weeks compensation times the number of years of service or fraction thereof. There are no upper limits on these payments. It is not clear whether permanent employees eligible for a pension can also receive a severance allowance. The law creating the pension regime was abrogated on April 4, 1983. The government maintains that only those employees that were employedprior to that date are eligible for payments in the event of their dismissal; it i s estimated that perhaps as many as half of the permanent employees are covered. However, the unions maintain that the Constitutional provision covers all employees, even those who have enteredgovernment service since April 4, 1983. A case involvingthis issue i s currently on 54 Clearly all expenses for road maintenance in the capital budget should be moved to the recurrent budget as a matterof goodbudgetingpractices. 60 Box 5.1 The Post Office Statutorization The Post Office was the first governmentoperationto be commercialized by being set up as a statutory agency inJanuary 1, 1997. It has been operating as such ever since. Prior to commercialization, the Post Office had 44 employees and formed part of the Ministry of Works, Communicationsand Public Utilities. Rather than separate the existing employees, o f the Post Office, the workers agreed to be seconded to the Postal Corporation, thus preventing the need to make severance payments. The original duration of the secondment was two years, but was extended for an additional three, expiring inJanuary 2002. The status of the seconded workers has yet to be resolved. In March 2001, the Postal Corporation informed the government of its decision to return27-seconded workers to the Ministry of Works, Communicationsand Public Utilities. The Ministry requested a postponement of their return and, as of yet none have returned. In May 2003, the Postal Corporation sought to return only 14 of the original &-seconded employees, retaining the remaining 30 employees. If these workers cannot be placed in the civil service they will have to be declaredredundant and retired with full pensions as mandatedby the Constitution (see para. 5.25) for the case of establishedpositions. I t is difficult to assess its success based on the information contained in the Estimates and Financial Statements of the GrenadaPostal Corporation shown below. As can be seen, expenditures before commercialization and expenses after do not seem to be strictly comparable. This could be because some expenses were recordedunder other programs. While there seems to be a closer correspondence betweenrecurrent revenue and gross income, the fact that recurrent revenue is lower than gross income, and expenditureon administration is lower than expenses suggests that some expenditure was being netted against revenues prior to commercialization. This is consistent with the pattern of the surplus, which is similar in 1997 and 1996, after and beforecommercialization. The fact that the surplus deterioratesafter 1997 is cause for some concern about the efficiencies resulting from commercialization. However, this could also result from improved services or lower prices. Nevertheless, the best that can be said is that there is no aggregate evidence that commercialization of the Post Office has resultedinlower costs or increasedrevenues to the government. Post Office Revenues, Expenditures and Net Surplus Before and After Commercialization(EC$) Before Statutorization After Statutorization 1994 1995 1996 1997 1998 1999 2000 (prov) Expenditures Administration 1,398,060 1,353,857 1,33 1,002 Administrative andGeneral Expenses 955,549 1,265,955 1,569,872 1,860,829 Direct Expenses 1,356,346 1,679,222 1,897,980 1,963,711 Total Expenses 2,311,895 2,945,177 3,467,852 3,824,540 Revenues Total RecurrentRevenue 3,035,676 4,022,652 3,043,27 1 Total Gross Income 3,486,778 2,998,162 3,664,924 4,156,085 Net Net surplus 1,637,616 2,668,795 1,712,269 1,690,161 1,115,510 1,114,583 1,209,069 Source: Grenada, Esrimates for the Year and GrenadaPostalCorporation, Financial Statements for the year ended December 31, 1997. 1998. 1999and2000 61 appeal before the Privy Council in England. It should also be noted that the pension legislation made no provision for the funding of pensions.Pensions must be treated as a cuvent expenditure, thus constituting a heavy burden on the budget. Thus, future plans for the commercialization of activities staffed by established employees are clouded by the uncertainty of the government liability for pension costs. Inthe absence of a clarification of this issue, severancepayments associated with further commercialization are likely to be so highas it make it not cost-effective. 5.27 The personnel information systems are fairly basic for the needs of Grenada and the implementation of serious public sector reform. The information system that usually contains such staff particulars as date of hiring, date of increments and movements between salary scales, training received, performance evaluation reports, and the date of retirement is inadequate for a modern public sector. It does not contain the information required for manpower planning, professional development, and the design and implementation of a public service reform. 5.28 Moreover, the Grenada government lacks a human resource strategy. The Commonwealth Secretariat carried out a detailed assessment of the training needs of the public service in early 2000.55Based on the results of questionnaires filled out by public servants, the consultants identified required competencies and training needs. For top management, the key competency areas indicated were: leadership; strategic planning and management; managing people; and expertise and professional competence. The areas needing development were: strategic planning and policy formulation; team building skills; target setting; general management; reporting; project planning; information technology; change management; interpersonal and communications skills; and negotiation skills. Top management saw an urgent need for Executive Development Programs. Middle management emphasized the need to develop the following skills: leadership and management; interpersonal relations; information technology; and people management. Lower management called for: self-awareness and personal development; information technology; pre-service training; and mandatory promotion courses. The non-management group highlighted: communication skills; general skills and abilities; tact in handling people; supervisory skills; and basic management. The Commonwealth Secretariat consultants made specific recommendations for strengthening training in the public service. These included a call to expand the Training Division in the Human Resource Development Department, which is responsible for training. It is now more than two years since the training needs report was prepared and no action seems to have taken place. There is still no training plan for individual employees to enable them to advance along their career paths. Training is still offered in an unsystematic way, and depends on the availability of donor financing. And afterwards, trained individuals are often not well utilized and as a result may leave the public service. A good example of this is the course in public sector investment planning sponsored by one of the donors. Most of the people who took the course left the public service shortly afterwards. 5.29 It should not be surprisingthat, given the smallsize ofits population, Grenada suffers from serious deficiencies in human resources, which include specifically shortages of qualified administrators and policy advisors, and technical experts. While many people from Grenada attend the University of the West Indies and universities in the United Kingdom, the United States and Canada, it is difficult to recruit and retain such highly educated individuals in the public sector. The government of Grenada is run by an executive core of relatively few career senior public servants. While some of the public servantsgot theirjobs as a result of their professional qualifications, others rose to the top basedon seniority and lack of generally applicable skills and knowledge. Below the top level, there is a high degree of turnover among middle management, leaving the small executive core responsible for administration and policy formulation and implementation. 55See "Report on the Training Needs", Commonwealth Secretariat, February 2000. 62 5.30 The issue of performanceappraisal and incentivesneedsto be revisited. The system in place obviously does not work as intended. The increments are too large, and almost everyone (95 per cent) qualifies for them based on performance. According to some, the close island society makes it very difficult or impossible to critically appraise staff. Public officials need to be educated about the importance of frank and objective appraisals for improving the delivery of public service. If this can be done, then some sort of performance bonus that is not built into the pay scale might provide a useful incentive. 5.31 Grenada presents some fragmentation and duplication of work between ministries, departments, and agencies leading to a diffusion of responsibilities. The survey of public officials, carried out for the OECS Institutional and Organizational Capacity Review (IOCR) in 2001, noticed a duplication of functions and that such overlap adversely affected the public service. This suggests that missions, objectives, and functions of the different ministries need to be reviewed to determine the most effective and efficient organizational structure. Opportunities to pool resources and realize lower unit costs through greater collaboration extend to almost all areas of public sector activity, including international relations, economic and social policy, and policing. The benefits of common organizational arrangements for tax administration, customs, audit services, police services, magistracy, and environmental protection was discussed inthe OECS IOCR. 63 6. THE HEALTHSECTOR 6.1 On average during the period 1993-2002, Grenada's recurrent and capital public spending on health as a share of GDP was about 3.9 percent. This level of expenditure place Grenada inthe middle of the OECS countries, with St. Lucia and St. Kitts and Nevis spending less and Dominica, Antigua and Barbuda, and St. Vincent and the Grenadines, spending more as a share of GDP. 6.2 Public financing and public provision of health care dominate Grenada's health system. The system has a strong primary health care orientation with a solid nursingbase. The public health sector has managed to avoid investments in unsustainable medical equipment and tertiary facilities, and has introduced a policy of contracting out hospital support services and other innovations to improve efficiency. Grenada's health system has served the country well, although the model now needs some redesign to face the challenges of the coming years, given fiscal pressures, exacerbated by the demands on the system from an aging population. 6.3 This chapter reviews the status of health in Grenada, describes the main features of the health delivery system and analyzes the sources and uses of health financing with a view to identifying possible ways to improve efficiency and equity over the short- to medium-term. The main findings and recommendations can be summarized as follows: Improving and Sustaining Health Outcomes 0 Health promotion and disease control for noncommunicable diseases and injuries. Like other OECS countries, because of changes in lifestyles, disease patterns and its aging population, Grenada needs to strengthen public health and primary care in noncommunicable diseases and injuries, in order to continue to improve its health indicators and contain costs over time. This means focusing health promotion and disease control activities as effectively as possible on tobacco control, injury prevention, control of obesity through diet and physical activity, and screening and early treatment of diabetes and hypertension. 0 Epidemiological Surveillance. Health statistics are not up-to-date and health districts report that they provide information but rarely get feedback from the central level. The timeliness and coverage of health indicators and service statistics needs to be improved to better guide policymaking and district health activities. Given changing disease patterns, the government needs to support sentinel surveillance for HIV/AIDS, like the recent survey of pregnant women, rather than passive surveillance, to better understand .the epidemic. It also needs to improve its surveillance of noncommunicable diseases and monitoring of behavioralrisk factors. Improving EfJiciency in the Delivery of Services 0 Configuration and roles of medical stationshealth centers/district hospitals. Given Grenada's changing age distribution of the population, disease profile, and demands from the population, it would be useful to reexamine the functions of Grenada's extensive network of medical stations, health centers, and district hospitals and their staffing to see if some medical stations might be eliminated or moved, if health centers should be eliminated or upgraded, and if district hospitals should be upgraded or changed in other ways to improve service efficiency and quality. The district hospitals are of particular concern as their resolutive capacity is low given their infrastructure and staffing. Some health centers in St. George's need to stay open longer hours and be upgraded in order to relieve the congestion at the General Hospital. It is also recommended that the government allow facilities to retain some of the user fees collected inorder to reinvest in maintenance and other areas. 65 Human Resources. Presently the government has a professional nurse-to-nurse assistant ratio of approximately 1 to 1. The government could consider increasing the share of nurse assistantdaides to increase efficiency as it is reported that many professional nurses are doing tasks that could be performed by aides. Nurse assistantdaides are cheaper to train, easier to retain, and can fulfill an important role inefficient service delivery. The productivity of district medical officers in public service. Most district medical officers do not work for more than three or four hours a day in public service-devoting early morning andor evening hours to private patients to supplement their public salary. If the public clinic model is to work well, the problems of low productivity of district medical officers (at least in their public service) need to be addressedand hours of work enforced. The demand for private consultations also signals a need for change in quality of service in public clinics: more convenient hours of operation, greater privacy conditions, and more respectful treatment of patients. Maintenance. Maintenance problems appear widespread in public facilities. Ensuring adequate funding in the budget and decentralizing the control of some maintenance funds are ways to improve the situation. Hospital Autonomy. In the late 199Os, the government appointed a Board of Directors to manage the public hospitals as part of a long run plan to convert the hospitals to statutory bodies. This plan encountered difficulties--both on the legal framework and in the dialogue with the trade unions. The government is now inthe very early stages of making the General Hospital an executive agency as an intermediary step to its full transformation to a statutory body. The intention is to give the hospital more management controlnver human resources, supplies, contracting out, and maintenance. It is recommended that this processbe pursuedto achieve improvements in hospitalefficiency. Achieving economies of scale. Grenada achieves economies of scale in drug procurement by participating in the well-run OECS Drug Procurement Service. There may be scope to achieve economies of scale in other areas of the health sector-purchasing supplies, laboratory services, and health service delivery through regional arrangementswith neighboring countries. Regulation of private health insurance. Given the demand for supplemental coverage policies, the market for private health insurance is growing but is largely unregulated. The Ministry of Finance is now planning to strengthen regulation of this aspect of the insurance market. In doing so, there may be ways to encourage standardization of packages that promote efficiency in the market. The Ministry needs to start monitoring private insurance-both coverage numbers and what i s offered-as part of its broad oversight of the health sector. Improving Equity in Access to Services e Equity of access to elective surgery in the National Hospital. The Grenada health system appears to be fairly equitable with good access by the poor to health services. This said, there are distinct patterns in the use of services, as the poor use public facilities more than the nonpoor. Within the public system, there is indication that private patients tend to jump waiting lists for elective surgery in the General Hospital. A review is needed of wait times for elective surgery by private patientlpublic patient status to see the extent of the problem and in order to find solutions to resolve this inequity. Improving Financial Protection and Health Financing Issues e User Fees. Related to the issue of hospital autonomy is the issue of user fees. The General Hospital is not permitted to retain user fees and so has weak incentives to collect. With greater hospital autonomy, it is recommended that the government allow the General Hospital to retain some fees. To have an impact on revenue, the Hospital would have to revamp its admissions and billing procedures to enhance collection. The user fee policy needs to be reviewed as well. It would be important to 66 retain and possibly strengthen exemptions for the indigent. Care should also be taken to ensure that fees do not become financially catastrophic for the non-poor, but they could be increased for some services both to raise revenue and for efficiency purposes. Hospital fees can be used to give people incentives, for example, not to bypass health centers in favor of the hospital for problems that could be addressed, at no charge, at the health center. It is recommended that the private ward of the hospital have 100 percent cost recovery. A. HEALTH OUTCOMESINGRENADA 6.4 Although there are problems with the timeliness and coverage of health indicators in Grenada, the indicators that do exist show good progress in `improving health outcomes, particularly given the country's income level. As Table 6.1 shows, infant mortality was estimated at 14 per 1000 in 2000. This low level compares well with other countries in the Caribbean region and other countries in the world of similar income levels. The total fertility rate has declined considerably over the past 25 years and was estimated at 3.0 births per woman in2002. Interestingly, despite the steady decline since the 1970s, this rate is still the highest among the OECS countries. The International Planned Parenthood Federation concludes that the unmet need for family planning is high, even with a contraceptive prevalence rate of over 50 percent. Life expectancy is relatively highat 73 years. Table 6.1 Health Indicatorsin Grenada compared with Barbados,Jamaica and other OECS, 2002 GDPpercapita Infant Total Fertility Total 2002 Mortality Rate Rate LifeExpectancy Population Birthper Estimate (current $, 2002 at birth 2002 PPP) (per 1,000 live births ) women 2002 2002 Grenada 101,700 6,330 14 3.0 73 Antigua and Barbuda 68,890 9,960 15 NA NA Barbados 269,380 NA 17 1.7 75 Dominica 71,800 4,840 NA 1.9 77 Jamaica 2,617,930 3,550 20 2.3 16 St. Kitts and Nevis 45,980 9,780 19* 2.1 71 St. Lucia 158,520 5,138 13 2.1 12 St. Vincent and the Grenadines 116,720 5,100 20 2.1 13 Source: World Bank, World DevelopmentIndicators. Ministry of Health,Grenada Note: For St. KittsandNevis, the comparableIMR number in2001 is muchlower, 12.5 per 1,OOO due to a sharp decline in neonatalmortality that year. 6.5 Maternal and Child Health. The main reason Table 6.2 SelectedMaternal and Child Health behind the relatively low infant mortality rate is the Indicators,Grenada2001 fact that almost 100 percent of birthsare attended by (aspercentage) trained personnel. As Table 6.2 shows, another factor Birthattendedinhospitals 100.0 contributing to the good child health indicators is the Neo-natal deathrate 10.3 immunization program, which achieves excellent (per 1,000 live births) coverage, with rates above 95 percent for DPT, polio, Babies low birthweight 8.4 and measles, mumps, and rubella. Moreover, the 1998 (~2500grams) Cesarean Section Rate 2.1 Grenada Survey of Living Conditions showed that poor Teenage BirthRate 17.0 and non-poor immunization rates were very similar, ImmunizationCoverage reflective of the high coverage and broad access by the DPT 96.0 population to primary care. Over half of all infant Polio 96.0 deaths occur in the neonatal period, which would be Measles, Mumps, andRubella 99.0 expected given Grenada's relatively low infant mortality Source: Community HealthServicesReport, 2001. rate. 67 6.6 TeenPregnancy. The share of birthsto teens is slightly less than 1in5, andhas remained fairly constant from 1994 to 2000. This level is a concern as teen pregnanciescan be associatedwith high-riskpregnancies and poverty. A study basedon data from the maternity unitat the National General Hospital concluded that young, pregnant teenagers (aged 15 and under) had increased risks of pre-term labor, cesareansection deliveries, pre-maturity, low birthweight babies, asphyxia, and pre-natal mortality. Pregnant girls aged 16 and under are required to drop out of school, thereby reducingtheir long runearning opportunities and increasing their risk of poverty. 6.7 Water and Sanitation. Access to water Table6.3 Water and SanitationFacilitiesbyPoor and sanitation is fairly good, with differences andNon-poor, 1998 (aspercentage) sanitation access. The 1998 Grenada Survey of between the poor and non-poor only for Poor Nonpoor Living Conditions reported that 66 percent of the TYPe of Toilet 100 100 poor used a pit latrine, compared to 51 percent of Pit Latrine 66 51 the non-poor. About 31 percent of the poor had Watercloset Other 31 47 3 2 access to a waterAccess compared to 47 percent of Sourcesof Water the non-poor. closet,to water was more similar 98* 100 Private, pipedinto house 14 13 across poorhon-poor in that survey. About equal Public,piped intodwelling piped intoyard 55 59 numbers (77-78 percent) of the poor and non-poor Other 8 6 had Private or public water piped into the house or 21 22 Source: GrenadaSurvey of Living Conditions, 1998 yard (Table 6.3). * The figures presentedinthe PovertyAssessment do not add to 100. 6.8 ChangingDisease Profile. As is the trend in the Caribbean as a whole, non-communicable diseases have replaced infectious diseases as the main cause of health problems. Diabetes and hypertension are particularly common problems. The main problems for which adults and the elderly sought care at community health services in 2001 included diabetes, hypertension, respiratory tract infections, arthritis, eye infections, and home injuries. The leadingcauses of death in the late 1990s were malignant neoplasms, diseases of pulmonary circulation and other forms of heart disease, and cerebrovascular diseases. As can be seen in the age-population pyramids presented in Figure 6.1, Grenada is moving through the demographic transition, from a young population in 2000 (median age, 20) to an older population in 2025 (projected median age, 29) and even older population in 2050 (projected median age, 40). This has profound implications for the health system, as non-communicable diseases will dominate health problems. Cost-effective non-communicable disease control and prevention programs will need to be supported strongly to maintain the health of the population and to avoid costly care. 6.9 Endemic Diseases and Substance Abuse. Dengue is endemic and is the main tropical disease problem in Grenada. Cocaine and marijuana use are problems and the public system has a substance abuse rehabilitationcenter, Carlton House, to treat people. 6.10 HZV/AZDS. The Caribbean has the second highest rate of HIV prevalence following Sub- Saharan Africa. HIV was first diagnosed in Grenada in 1984. Since then, the number of infected persons has steadily increased. By 2001 there had been 216 reported cases of which 138 were males and 78 females. Of these, 106 had died, leaving 110persons living with HIV/AIDS. This certainly is an underestimate of the prevalence of HIV/AIDS in Grenada given problems with reporting. Surveys and other social indicators reveal that the sexually active population of Grenada does not usually follow safe sex practices. Results from a recent survey on HIV and sexual practice in Grenada show that approximately one-third of the people have their first sexual encounter before the age of fifteen, multiple sex partners is a more common practice than one lifetime partner, and condoms are reportedly used by less than 25 percent of the sexually active population. The main mode of HIV transmission is sexual. 68 Grenada does not face a serious issue of intravenous drug users, however needle sharing is a .concern among people who self-administer tattoos. Box 6.1 Relevanceof the Health MillenniumDevelopmentGoalsfor Grenada The under-5 mortality and HIVIAIDS targets of the Millennium Development Goals (MDGs) are the most applicable to Grenadaof all the health-relatedMDGs. Malnutrition (defined as the prevalence of underweight children), maternal mortality, and tropical diseases (other than dengue, which is endemic) are not major health issues inthe country. The under-five mortality rate in Grenada dropped from an estimated 37 per 1,000 in 1990 to 26 per 1,000 in 2000. This is a decline of about 3.9 percentper year. The MDGtarget - a reduction of two- thirds from 1990 to 2015 would require that the rate fall to about 13 per 1,000 habitants by 2015, or - about 4.2 percent per year over the period. So, strictly speaking, Grenada is not "on track" for meeting the under-five mortality MDG. At the same time, it is important to recognize that the MDG goals get harder and harder to achieve as countriesmove towards relatively low mortality rates, and for this reason some of the health-related MDGs are often criticized as not being relevant to countries with relatively low maternaland child mortality. It is difficult to assess the likelihood of reaching the HIV/AIDS targets, as baseline data on HIV prevalence and incidence are poor. However, given the size of the epidemic in the Caribbean, the target (reversing the epidemic) is very relevant for Grenada and should be achievable if the country supports vigorous and effective HIV prevention measures. I 6.11 According to the UNAIDS Epidemiological Update of December 2003, HIV prevalence among pregnant women reached or exceeded2 percent insix countries in the Caribbean Basin: the Bahamas, Belize, the Dominican Republic, Guyana, Haiti, and Trinidad and Tobago. These levels of HIV prevalence indicate that the epidemic has moved from a concentration in high-risk groups to a generalized spread into the population in these countries. Good estimates of HIV prevalence do not exist for Grenada. Given the magnitude of the HIV problem in the Caribbean, Grenada needs to ensure that it carefully monitors HIVIAIDS trends through active surveillance (such as the recent effort to test a large group of pregnant women that resulted in zero HIV cases), and that it strongly supports the most effective prevention activities, including behavior change targeted at high-risk groups, voluntary counseling and testing, and condom distribution. 69 RFE FEMRLE 25-59 3 -0-54 45-49 40-44 -Y -4 P B. THEHEALTH SYSTEM: FINANCING, COVERAGE AND DELIVERY 6.12 As in other OECS countries, the health system of Grenada is predominantly publicly- provided and publicly financed. Provision can be largely public, private, or a mix. Inan international context, health systems can be dominated by public finance, either through general revenue (for example, the United Kingdom) or social insurance (Germany), by private finance (China), by a hybrid of the two (the UnitedStates). There is no ideal model of health system financing and delivery. Delivery 6.I 3 Grenada's healthsystemincludes bothpublic and private providers but it is dominated by publicprovision. Mosthospital beds are public-the three private hospitals are very small. Inthe public system, the country is divided into six healthdistricts, made up of a network of health centers and medical stations (see Table 6.4). Medical stations and health centers perform community outreach activities as well as provide care in the facility. There are two small, poorly equipped public district hospitals-- Princess Alice Hospital (60 beds) and Princess Royal Hospital in Petite Martinique (40 beds). While they are referred to as hospitals, they do not have laboratory or diagnostic services, other than limited hematology. They can handle uncomplicated deliveries. The 192-bedGeneral Hospital in St. George's is the country's main hospital. It i s being rebuilt and the first phase is completed. It plays the role of a secondary hospital (there is no tertiary care in Grenada). It has laboratory and radiology services. It does not have the capacity to perform, for example, dialysis or mammography. In addition to the small private hospitals, there are many private clinics, often run by physicians who work in the public sector and supplement their public pay with privately-generated income. The largest NGO inthe health sector is the Grenada PlannedParenthood Association. It provides contraceptive and other reproductive health services at two clinics. 6.14 Given Grenada's changingage distributionof the population,disease profile, and demands from the population, itis recommendedthat the functions ofthese facilities andtheir staffingbe re- examined. Inparticular, determine if a) some medical stations might be eliminated or moved, b) health centers should be eliminated or upgraded, and c) district hospitals should be upgraded or changed inother ways. The district hospitals are a particular concern as their resolutive capacity is low given their infrastructure and staffing. In particular, Princess Royal Hospital has an extremely low occupancy rate of 12 to 15 percent. The government might consider reducing the number of beds and staffing at the Princess Royal Hospital and upgrading the services provided at other facilities, especially health centers in St. George's (including opening for afternoon hours), in order to relieve the congestion at the General Hospital. I t is also recommended that the government allow facilities to retain some of the user fees collected in order to reinvest in maintenance. 71 Table 6.4 Put :and Private HealthFacilitiesandFunctionsinC enada, 2003 Levelof Care Public Private Firstlevel Community outreach by environmental Health Officers, Community Health Nurses, Community Health Aides, Doctors, and other personnel SecondLevel Six healthdistricts, five on the main island and the Private clinics throughout sixth for the islands of Carriacou and Petite country. Health Centers Martinique. The districts have at least one health and Medical center and four to five medical stations. There are Two clinics run by the Stations 34 functioning medical stations throughout the Grenada Planned country. Every district has a community health ParenthoodAssociation, one Primary nurse. Health centers have at least one district in St. George's, one in Care medical officer, 1pharmacist, 2 district nurses, one Grenville. environmental health officer, and a social worker. Medical stations ideally staffed by a district nurse, Public sector doctors a community nurse aide, and a caretaker. Medical typically run a private clinic stations have regular hours during the week when before or after they work in they are attended by a district medical officer and the public sector. pharmacist. ThirdLevel 60 bed Princess Alice Hospital (no diagnostic services) District 40-bed Princess Royal Hospital (no diagnostic hospitals services) Fourth Level 192 bed National General hospital, St. George's. Of these beds, 12 are private. Most comprehensive public care available, including medicine, surgery, obstetrics, gynecology, pediatrics,ophthalmology and psychiatry. Emergency Five public ambulances equipped with a radio Secondary Transport communication system. Care Other 20 bed psychiatric unit on grounds on National 3 very small private Hospital. hospitals 80-bed Mt. Gay psychiatric hospital for chronic psychiatric patients CarltonHousefor treatmentof substanceabuse Richmond home--120-bedgeriatric facility Kennedyhome-for mentally disabledchildren Laboratory at GeneralHospital 2 private labs ~ Labs ~~ Source: Mini! y of Health 6.15 Maintenance problems appear widespread in public health facilities. Since 1993, the allocation of recurrent expenditures to maintenance and other overhead expenditures has steadily decreased (see Figure 6.5). In 1993, 9.6 percent of recurrent health expenditures was allocated to maintenance and in 2002 only 3.5 percent of recurrent health expenditures. In addition, the process in place to access these funds by the health centers seems cumbersome and slow. Ensuring adequate funding in the budget and decentralizing the control of some maintenance funds might be one way to improve the situation. 72 6.16 The Grenada health system appears to be fairly equitable with fairly good access by the poor Table 6.5 UseofHealthFacilitiesinGrenada, to health services. This said, there are distinct patterns 1998 in the use of services, as the poor use public facilities (aspercentage) more than the non poor (Table 6.5). Within the public PlaceVisited Poor Non Total system, there is one problem repeatedly mentioned by Poor Public Hospital 24 9 13 health staff. Patients who come into the General PublicHealth 37 29 30 Hospital as private patients, defined as someone who Center sees the doctor in his or her private practice before Pharmacy 2 2 being referred to the hospital, tend to jump waiting lists PrivateClinic - 5 4 for elective surgery. A review is needed of wait times PrivateDoctor 32 46 43 for elective surgery by private patientlpublic patient Other 2 3 3 status to see the extent of the problem and find Not stated 5 6 5 solutions to resolve this inequity. Total 100 100 100 N 79 289 368 6.17 Grenada achieves economies of scale indrug Source: Grenada Survey of LivingConditions, 1998. procurement by participatingin the well-run OECS Drug Procurement Service. While some of the OECS countries are struggling with fiscal crises and payment of suppliers, Grenada has a good record of timely payment of vendors. Drug stock-outs are, admirably, a rarity in the public system. There may be scope to achieve economies of scale in other areas of the health sector-purchasing supplies, laboratory services, and health service delivery through regional arrangements with neighboringcountries. Financing 6.18 Almost all of public spending on health is financed by general revenue. User fees in public facilities are not a significant share of total public spending on health. The government collected about EC$1,032,000 in user fees in public facilities in 2002 (1995 EC$), about US$4 per capita. That same year, user fees were the equivalent of 10percent of the General Hospital spending, and 3 percent of total recurrent spending by the Ministry of Health. In2002, the Ministry of Health's expenditures totaled about EC $320 per capita (1995 EC$) or US$135. 6.19 User fees are charged in the General Hospital for X rays, lab tests, and in government pharmacies for prescriptions. Those under 16 years of age, over 60 years of age, the indigent (determined by social services), and police officers are exempt. As can be seen in Table 6.6, the largest sources of fees are lab tests and X-rays. Hospitalfees have fallen steadily since 1993 as a share of total fees. The General Hospital has a private block with 12 beds, where patients pay EC$100 per day. This does not cover the full cost of care. Furthermore, doctors bringprivate patients into the hospital and other wards, but the hospital does not collect fees, even though the publicly-employed physician is collecting from the patient. 6.20 The fees collected by the hospitals and pharmacies go into the government's consolidated account. As occurs in health facilities in many countries, when fees are not retained at the facility level, there is little incentive to put much effort into collection. The hospital billing department is only open from 8 AM to 4 PM. I t cannot collect when it is not open. It has problems collecting from the emergency department and it has great difficulty collecting from private insurance companies. 73 User Fees Feesby Type and as Share of TotalFees Collected (as percentage) General Total Hospital M o H Hospital Prescriptions X Rays Labs Other Total Spending Spending 1993 1 1 1,478 47,376 165,383 208,443 I15,485 648,165 7 3 17% 7% 26% 32% 18% 100% 1994 161,332 71,313 156,020 255,332 97,790 741,787 8 3 22% 10% 21% 34% 13% 100% 1995 174,218 77,009 168,48 1 275,725 116,891 812,324 9 4 21% 9% 21% 34% 14% 100% 1996 97,246 127,404 164,766 228,7 14 80,908 699,037 7 3 14% 18% 24% 33% 12% 100% 1997 102,723 174,55 I 184,204 258,139 9 1,657 811,274 8 3 13% 22% 23% 32% 11% 100% 1998 143,402 203,877 182,179 388,538 135,056 1,053,053 NA" 3 14% 19% 17% 37% 13% 100% 1999 115,865 170,189 156,198 391,951 107,643 941,846 8 3 12% 18% 17% 42% 11% 100% 2000 25,643 153,506 184,470 433,637 110,568 907,824 8 3 3% 17% 20% 48% 12% 100% 2001 12,216 134,140 202,748 575, I22 175,485 1,099,711 1 1 3 1% 12% 18% 52% 16% 100% 2002 11,460 125,844 190,2 I O 539,556 164,633 1,03 1,703 10 3 1% 12% 18% 52% 16% loo%/ Source: ( :nadaRevenueandExpenditureYearbooks, variousyears. * Notav: iblefor this year as generalhospital spending was collapsed inanothercategory in that year. 6.21 The government recognizesthat the user fee system has problems and it is under review. In revising the fee schedule, several factors need to be considered. First, exemptions for individuals and for types of services are needed so that the poor are not deterred from getting service and individuals are not deterred from getting services with large externalities (such as immunizations, tuberculosis treatment). Second, fees need to be kept affordable for reasons of financial protection-for services offered in the publicly-financed health service, fees should not become a catastrophic burden even on the nonpoor. Third, fees can be used to improveefficiency, for example, by charging people a fee when they go to the overcrowded emergency room for a problem that should be addressed in a health center. Fourth, it is recommendedthat the General Hospital be allowed to retain fees, as an incentive to collect and reinvest in the hospital. With the proper incentives, the Hospital could keep Admissions and Billing open 24 hours, with all people routed through admissions, with deposits for people on private wards, among other measures, inorder to increasecollections. 6.22 The Grenada National insurance Scheme covers public sector workers and formal sector workers but it does not provide significant medical benefits. It is mentioned here because in some OECS countries, the National Insurance Scheme provides still limited, but somewhat broader medical benefits. For example, in St. Lucia, the NationalInsurance Scheme makes a lump-sumcontribution to the Ministry of Health each year. In return, workers covered by the scheme are exempt from user fees. In Grenada, the total contribution is 9 percent of wages up to a cap, with 4 percent deducted from the wages 74 of the employee and 5 percent paid by the employer. The scheme provides medical expenses in the case of employment-related injuries, in which case it covers medical care in Grenada as well as the cost of overseas care. In addition, the scheme sometimes supports requests on a case-by-case basis for other medical expenses, for example, airfare for overseas care. 6.23 Public sector workers have a voluntary private insurance plan to which the government contributes 50 percent of the cost of that insurance for participating employees. Private health insurancegenerally pays for private consultations, user fees at the General Hospital (however the General Hospital by and large does not manage to collect), overseas medical care, and airfare. There are several private health insurance firms, with the health plans largely unregulated to date. There are no good estimates of the proportion of the population with private insurance-but the Bank team, based on discussions with private insurers, estimates that between 12 to 20 percent of the population has private insurance. Recognizing the demand for supplemental coverage, it is recommended that the government start to regulate this market to ensure that it is working efficiently and fairly. 6.24 The country hasdebated for some time whether itshould adopt a national healthinsurance system based on payroll taxes. For such a small country, working with the existing financing system, but finding ways to improve efficiency to ensure that the country is getting better value for money may be a better choice in the long run. Assuming that the government continued to finance general health services, the introduction of a social security tax system would have the advantage of generating additional funds for the health system and this is important given that some groups in the population are willing to pay for additional coverage given their purchase of private insurance and of private services out-of-pocket. Furthermore, the existing National Insurance Scheme already collects revenue from payroll taxes so that mechanism is already in place. However, there are disadvantages. Payroll taxes are a tax on labor. Inaddition, given that many households are outside the formal sector, a national health insurance system would not cover the full population-the government would need to cover those outside the formal sector from general revenues. There are administrative costs to the system. Collecting contributions from those who have the ability to pay, but who are outside the formal sector, would be a challenge. Workers/employers contributing to national health insurance would expect differentiated services from what they can already obtain through the existing system. If the government cut its contributions to health from the general tax base over time, it would have consequences for the poorer segments of the population dependent on government financing. 75 Human Resources 6.25 The Grenada health system is Table 6.7 Personnel Employed inPublicHealth Services staffed with a large core of nurses, 1997-2001 including nurses, nurse practitioners, nurse Personnel assistants, and community health aides per 1997 1998 1999 2000 2001 10,000 (Table 6.7). The public health sector has a very high nurse to physician ratio of seven to habitants, 2001 one. Retention of staff at the nursing, Physicians 59 59 59 58 58 6 physician, and skilled engineerjtechnician Dentists 9 9 9 9 9 1 level is a considerable problem in the public Nurses 195 242 249 215 215 21 from Grenada to the U.K. and the United sector. Nurses are being actively recruited Nurse Practitioner 7 6 5 5 5 0 . 5 States. Staff sent overseas to study Nurse specialized skills such as biomedical 124 84 140 146 146 14 Assistants engineering often do not return. Cuban Community Aides 45 40 45 45 45 4 nurses and physicians make up a significant Pharmacists 22 22 22 22 22 2 as physicians from other countries. Most share of the nurse and physician base, as well Hospital Administrators 3 3 3 4 4 0.4 public sector physicians also have a private Lab practice, which has resulted in a number of Technicians 17 17 17 13 13 1 abuses, principally the problem of low hours 9 9 9 7 7 0.7 of attendance in public facilities and private Nurse patients getting better access to services at tYPes) to 6.3 6.3 7.4 7.1 7.1 public hospitals. In the public sector, some physician Ratio senior positions have been vacant for lengthy Community periods, resulting in much weakened HealthAide leadership and supervision of publicly- provided health services. In particular, the Nurse~and ~ ~ ~0.8:le 0.5:l t o0.7:l 0.9:l 0.9:l position of Medical Officer of Health, which Nurse i s the key figure responsible for community Practitioner health services, has been vacant for years at a Ratio time. One efficiency measure that could be Source: Community HealthServicesReport, 2001 introduced over the short term would be to increase the proportion of nurse assistants to professional nurses. Nurse assistants are cheaper to train, easier to retain, and can fulfill an important role inefficient service delivery. 6.26 Another issue to be addressed is the low productivity of district medical officers in their publicjobs. Most district medical officers do not work for more than three or four hours a day in public service-devoting instead early morning andlor evening hours to private patients to supplement their public salary. People report that they prefer seeing the district medical officer in his or her private clinic because(1) physicianspends more time inthe private consultation, (2) private clinic hours are convenient to many people (early in the morning and late in the day/early evening), and (3) patients are treated with more respect and are given more privacy. If the public clinic model is to work well, the problems of low productivity of district medical officers (at least in their public service) need to be addressed. Physicians need to be requiredto work for a specified number of hours and to report to work promptly intheir public sector employment. Also, the demand for private consultations signals changes in quality that are needed in public clinics: more convenient hours of operation, greater privacy conditions, and more respectful treatment of patients. 76 Recent Changes in the Health System 6.27 The government implemented several changes in the health system in the past few years to modernize the system and increase efficiency but the pace of change has recently slowed. The government will need to define its vision, strategy, and implementation plan to continue to adapt the system to best address the changing health conditions and demandsof the population in the coming years. It has several excellent reports to draw on in developing its plan, including the 1997 Value for Money Study of the Ministry of Health and Environment and the Analysis of District Health Services inGrenada Study prepared in2000. 6.28 The General Hospital is being rebuilt under a three-phase plan and phase one is now finished. The reconstruction to date has been financed by a loan from Grenada Cable and Wireless and from donations. Phase I1 has begun but the financing plan is Table6.8 General HospitalStatistics, 2002 incomplete. The government intends to Average Occupancy make dialysis services and a CT scan Departments Admissions Lengthof Stay Rate (as available in Phase 11. Phase I11 would (days) percentage) expand to offer mammography Medical 1,885 6.9 2,320 7.4 61 screening, among other things. The Pediatric 1,103 4.6 41 General Hospital has reduced the Ophthalmic 268 3.8 31 average-length-of-stay recently in part Obstetrical 1,593 5.4 77 by reducing the waiting time for Total 7,169 6.2 59 diagnostic services with its more up-to- Source: MedicalRecordOffice, GeneralHospital. date equipment. Average length of stay andSurgical Combined. (ALOS)was 6.2 days for the hospital overall in 2002 (Table 6.8). The occupancy rate was 59 percent. There is scope for greater improvements inefficiency by a further reduction inALOS to 4-5 days and by increasing the occupancy rate to at least 75 or 80 percent (although some improvements are likely to occur as the rehabilitation continues). Emergency transport has also been expanded and improved, with five ambulances equipped with a radio communication system. 6.29 Progress in Hospital Autonomy. In the late 1990s, the government appointed a Board of Directors to manage the public hospitals as part of a long run plan to convert the hospitals to statutory bodies. This encountered difficulties--both in the legal framework and in the dialogue with the trade unions. The government is now in the very early stages of making the General Hospital an executive agency as an intermediary step to its full transformationto a statutory body. The intention is to give the hospital more management control-over human resources, supplies, contracting out, and maintenance. Greater autonomy would also mean that the hospital could retain and reinvest user fees. The hospital has already beengiven more authority to purchase goods. Many countries are experimenting with or supporting greater autonomy for public hospitals as a measure to improve efficiency. In the OECS countries, St. Lucia has considerable experience as one of its public hospitals has been a statutory body for many years, and it is in the processof converting its main hospital to a statutory body. Over the short- to medium- term, this is one way that Grenada could potentially achieve significant improvements inhospitalefficiency. 6.30 The government has been testing contractingout inthe health sector. Security inthe General Hospital was contracted out at the end of 2002. Part of iaundry services has been contracted out, starting inJanuary 2003, and part of housekeeping has been contracted, inMarch 2003. These efforts needto be evaluated in terms of cost, quality and flexibility of service provided to determine if they should be continued, scaled up, or cut back. The report An assessmentof Commercialization inGrenada" prepared " for the World Bank inJuly 2003 does not review the quality of the services delivered in the health sector after was contracted out because at the time of the field work for the report these services were still 77 delivered by the CG. However, the report discusses the potential benefits and costs of outsourcing security and grounds maintenance in St. George's Hospital concluding that it is unlikely that the savings of outsourcing would be sufficient to offset the projected increases in operating expenses plus the outlay for pensions. 6.31 Disease Prevention and Control. The government is stepping up its efforts in HIV/AIDS prevention, care, and treatment and has develqped a strategy whose implementation is supported by a World Bank-financed loan and credit. It is also establishing a National Advisory Committee on Chronic Diseases and Noncommunicable Diseases in order to address disease prevention and control in a more prominent and multisectoral way. c. SOURCES AND USES OFHEALTHSPENDINGINGRENADA 1993-2003 6.32 The World HealthOrganization(WHO) estimatesthat the publicshare of totalspendingon health in Grenada is about 72 percent, with private spending making up the balance?6 This estimate is the highest public share of total health expenditures among the OECS countries. As Table 6.9 indicates, Grenada's share of spending on health, at 5.3 percent of GDP, places it in the middle of OECS countries-with St. Lucia and St. Kitts and Nevis spending less, and Dominica, Antigua and Barbuda, and St. Vincent and the Grenadines, spending more as a share of GDP. Table 6.9 Total, Public,andPrivateHealthSpendinginGrenada comparedto Barbados, JamaicaandotherOECS countries,2001 HealthSpending Health Public Private Spending as Per Capita Spendingas Spending as Share of Total (current US$) Share of GDPShare of Total HealthSpending Health Grenada 262 5.3 72 28 Antigua andBarbuda 531 5.6 61 39 Barbados 613 6.5 66 34 Dominica 203 6.0 71 29 Jamaica 191 6.8 42 58 St. Kitts andNevis 393 4.8 66 34 St. Lucia 199 4.5 65 35 St. Vincent and the Grenadines 178 6.1 63 37 Source: WHO 6.33 Grenada's public spendingon healthas a share of GDP isjust slightly more than would be expectedfor a country of its incomelevel. As Figure 6.2 shows, Grenada's, as well as St. Vincent and the Grenadines, public spending on health as share of GDP is above the level of spending expected for their income levels. This is the opposite of St. Kitts and Nevis and St. Lucia. 56Private spending consists of (1) user fees at public facilities, (2) out-of-pocket payment for care at private clinics and hospitals in Grenada and overseas, and, (3) contributions to private insurance. 78 Figure6.2 RelationshipbetweenIncomePer CapitaandPublicSpendingonHealth LatinAmerica andthe Caribbean,2001 = 6 0 - 8 5 0 - f E H.0- .m g . 0 - I c 1 2 0 - 9 '" - L s 2 1 0 - 0 0 0 2000 4000 6000 8000 10000 12000 14000 16000 18000 Source: World Development Indicators 6.34 On average, from 1993-2002, the share of public recurrent and capital health spending in GDPwas about 3.9 percentwith Grenada's health sector receiving,on average, 12.5 percentof the government recurrent spending. In the same period, average recurrent public spending on health was about 3.1 percent of GDP. As Figure 6.3 shows, Grenada's health spending as a share of GDP has increased over the period 1993 to 2002. Inparticular, the large increase observed since 2000 corresponds to an increase in capital expenditures. Capital investments were modest over the period 1993 to 1999, but rose sharply in 2000 with the first phase of the reconstruction of the General Hospital. Figure6.3 Shareof RecurrentandCapitalHealthExpendituresinGDP 1993-200 (aspercentage) i 7.001 5.00 &OO A 4.00 3.00 2.00 1.oo 0.00 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 0 Recurrent 0 Capital Source: Grenada Estimates of Revenue and Expenditure. All figures are actual except 2002, which is estimated outturn. 79 6.35 On average, from 1998 to 2002, three fourths of capital expenditures originatedfrom loans, and the balance comes in the form of local revenue and grants from donors. As Table 6.10 shows, the share of capital expenditures financed by loans has been rapidly rising throughout the period with the reconstruction of the General Hospital. The General Hospital reconstruction is being financed primarily from a loan from Grenada Cable and Wireless and, secondarily, from donations. The reconstruction was of high priority, given how deteriorated the hospital had become. Some of these capital investments have already generated efficiency improvements, such as the reduction in average length of stay. The hospital reconstruction i s planned over three phases, and appears to be prudent, especially on decisions regarding investments in specialized equipment. Beyond the General Hospital, Grenadaneeds to develop a medium term plan for how it will deliver services efficiently given the changing needs of the population. This will most likely require changes in other health facilities--either in terms of capital investment to upgrade facilities to change their functions, or closing some facilities. Implementing such a medium term plan can require significant capital investment but could generate important efficiency gains and health improvementsover the longrun. Table 6.10 Sourcesof Financingof Health Capital Expenditures (aspercentageof total health capital expenditures) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Local 30.0 17.0 34.1 52.5 86.9 35.8 16.5 7.6 11.8 4.1 Grant 14.9 15.7 2.6 4.1 9.9 Loan 70.0 83*0 65*9 47S 13.1 49.3 67.8 89.9 84.1 86.0 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: GrenadaEstimates of Revenueand Expenditure. 6.36 Expenditures on administration increased as a share of the total recurrent health budget from 20 percent in 1993 to 31 percent in 2002 (Figure 6.4). This increase is in large part due to introduction of more contracting out the General Hospital and the classification of those expenditures under the category `administration'. Broadly speaking, in comparison with other countries, Grenada has done well in containing overall public expenditure on hospitals. In 2002, the General Hospital absorbed about 31 percent of all spending down from 41 percent in the 1993-99 period. Moreover, there i s some indication that efficiency has improved in the General Hospital with the decline of the average length of stay. Including the Richmond Hill institutions and Princess Alice Hospital, the figure for hospitals was about 42 percent in 2002, roughly 10percent less than its average in the 1993-1999 period. The share of spending on environmental health decreased steadily over the period, from about 10 percent to 3 percent and the share for community health services increasedfrom 14percent of the total in 1993 to 19 percent. 80 Figure 6.4 Shareof HealthProgramsinRecurrentHealthExpenditures 1993-2002 (aspercentage) 100% 90% dental HealthSeMces 80% oHousing 70% IEmronmentaHealth 60% oCommuniryHealthSeMces 50% rCancouandPehteMartlnique 40% HS 0PnnsessAliceHospital 30% 0RichmondHillInstihRions 20% ElGeneralHospital 10% aAdministabon 0% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source:GrenadaEstimatesof Revenue andExpenditure. All figures are actual except 2002, which is estimatedoutturn. Note: General hospital spendingwas not available for 1998 becauseit was collapsedinanother categoryinthat year. 6.37 The government has been successful in containing the share of health spending allocated to wages (below 60 percent, one of the lowest share in the OECS countries. This has allowed expenditures on non-wage inputs such as pharmaceuticals. As Figure 6.5 shows, wages in2002 made up 56 percent of the total recurrent expenditures of the Ministry. Utilities and supplies made up 19 percent. Some of the changes in shares over time probably reflect changes in the categorization of certain budget items, rather than actual increases or declines in certain expenditures. Drug stock outs-a common problem in many countries-are reported to be infrequent by health personnel. The public sector purchasesmost of its drugs-85 to 90 percent-through the OECS drug procurement service, in order to achieve economies of scale and good prices. Grenada has a good payment record-paying its bills relatively quickly compared to other OECS countries in the procurement service. Indirect costs (allowance, travel and subsistence, hosting and training) have been constant at about 8 percent of recurrent health spending during the period 1993-2002. In the same period, the increase observed in the category `others' reflects an increase in `grants and contributions'. 81 Figure6.5 Share inRecurrentHealthExpendituresby BudgetCategories1993-2002 (as percentage) 100% 90% 80% rn Other 70% 0Overhead 60% 50% 13Utilitiesand SuppIies 40% lndirects 30% Wages 20% 10% 0% 1993 19% 1995 1996 1997 1998 1999 2000 2001 2002 Source:Grenada Estimatesof Revenue and Expenditure. All figures are actualexcept 2002, which are, estimated outturn. Notes:a)Wage spending in 1998 is not comparableto other years becauseit was collapsed inanother category inthat year. b) Overhead expenditures include communicationexpenses, maintenance services, rental of assets, professional andother services, and insurance. 82 7. THEEDUCATION SECTOR 7.1 Education is fundamental for economic and social development. The knowledge and skills taught in the education system are highly valued commodities in the labor market. For example, in Grenada, attainment of secondary education, five years of additional schooling after primary education, allows an individual to increase earnings by 80 percent for the entire period of labor market participation. Completing tertiary education, additional four years of schooling after secondary education, increases labor market income by 314 percent compared to a worker with primary education. Furthermore, better- educated people are less likely to experience unemployment. From the society's perspective, human capital investment improves societal outcomes, such as less youth delinquency and better health outcomes. Hence, there are strong economic and social motives for the individual and the government to invest ineducation. 7.2 The Grenadian government invested on average about 5.7 percent of GDP in education from 1996-2002.57 This level of expenditure is significantly higher than the ratio in the Latin American and Caribbean Region (4.1 percent of GDP), but below the average for English-speaking Caribbean countries (6.6 percent of GDP). The high investment in education provides a tremendous opportunity for skill building and economic growth in the country. However, as this chapter shows, this high level of expenditure fails to translate into adequate educational outcomes due to inefficiencies at all levels of the educational system. 7.3 The government is to be commended by the reform efforts, initiated in the 199Os, inthe education sector. These reforms have produced improvements in educational outcomes, including increases in enrollment into pre-primary and secondary education. However, the Grenadian education system faces two main challenges that require strong policy actions to be overcome: (i)the cohorts entering the education system since the late 1990s are smaller. Without a gradual reduction in the number of schools and teachers in pre-primary and primary education, unit cost will rise. Therefore, it is recommended that this adjustment starts immediately in order to free up resources that can be used to achieve universal secondary education. A continual adjustment will allow Grenada to avoid the costly mistakes of other OECS countries such as Dominica-where 12 primary schools enrolled less than fifty pupils in 2002- and St. Kitts and Nevis, where the pupil-teacher ratio in primary education declined to 1:13 in 2002; (ii) the education system needs to improve learning outcomes of the students. The low quality of education substantially reduces the value of the invested resources. Raising the quality of education will require additional training and programs that need to be financed by reallocatingresources within the Ministry of Education's budget. 7.4 This chapter reviews education outcomes in Grenada, discusses how education services are organized, financed, and delivered, and suggests interventions to improve outcomes, efficiency, and equity. The main findings and recommendations can be summarized as follows: Improving Education Outcomes The government needs to strongly emphasize improvements in quality of education. Exam results at both the primary level (MinimumCompetency Test) and at the secondary level (CXC exam) are unacceptably low. The government could consider: ''This figure includes recurrent and capital expenditures. 83 Rethinking teacher training and teacher hiring regulations. To ensure that all new teachers have received at least two years of training before commencing full time teaching, only certified teachers should qualify for open positions. This would prevent the quality of the teacher corps from deteriorating further. This would equally imply significant savings from a reduction in the number of teachers on study leave. In 2001, teachers on study leave cost the government EC$ 2.9 million (6.1 percent of the 2001 recurrent education budget). Scaling up of the existing in-service teacher-training program following the above rethinking of teacher training and hiring. This would be key to continual up grading of pedagogical and technical skills of the teacher force. A ten-fold increase in the allocation to in-service teacher training would imply an additional EC$ 130,000 (0.2 percent of the 2003 recurrent education budget). Increasing attention to schools with low-performing students. There exist considerable disparities in test results among schools. The reasons behind the large disparity are not well understood and should be further investigated in order to design counter measures. Possible programs could be additional training for teachers and principals, improved counseling, and increasedresources for specialclasses. Increasing the share of funding allocated to didactic material. Although funding to learning material has increased over the last five years, the current level of 5 percent of recurrent education expenditures i s still insufficient. These inputs-textbooks, material for woodwork, and chemicals for science classes and the like-are crucial for learning and an increment in their availability would increase the efficiency of the education budget. Increasing the share for didactic material should come about by a reduction in the share allocated to salaries for teachers and administrative personal. Improving Efficiency in theDelivery of Education Services a The government needs to proactively re-allocate the recurrent expenditure budget to promote improvements in the education sector. The sectoral distribution of the recurrent budget has practically not changed in the last 8 years. Resources should to a greater extent be directed from lesser-stated priorities towards high priority areas (secondary education) accompanied by greater emphasis on monitoring and evaluation. 0 The government can increase the efficiency of education delivery at the primary and secondary level through an increase in the pupil-teacher ratio. Increasing the pupil-teacher ratio at the primary level from 25 to 30 would generate costs savings of EC$ 9.5 million (18 percent of the recurrent education budget in 2002) through a gradually diminishing of the teacher force by 384 positions. Raising the secondary pupil-teacher ratio from the current 23 to 30 would eliminate the need to hire new teachers to teach the growing pupil population in secondary education and would entail a potential fiscal saving of EC$ 2.9 million (5.4 percent of the 2002 recurrent education budget). Among the initiatives that the government could consider to increase the pupil-teacher ratio are: a) Merging of primary schools. Smaller primary schools persistently have higher unit costs due to a low pupil-teacher ratio. A merging of schools based on the school mapping would exploit economies of scale inthe education system and reduce cost, while increasing quality; b) Institutinga curriculum reform of secondary education. A common core curriculum for the first three forms of secondary education would reduce the excessive offering of subjects of a specialized nature, such as typewriting, auto mechanics, and metalwork, and lead to larger classes and c) Mandating of a minimumfloor on class size at the primary and secondary level. Many schools, in particular at the secondary level, offer subjects with low demand, leading to small class sizes and high costs. Mandating a minimum class size of, say, 15 students, a rule in many developed countries, would increase efficiency. a Increase enrollment into tertiary education through greater cost-recovery. Grenada recovers through tuition and fees around 10 percent of the full cost of tertiary education, which is the average 84 cost-recovery share in the OECS countries. A further increase in enrollment cannot be financed without raising the tuition fees. It is recommended that such a tuition policy be implemented in parallel with a reform of the student loan scheme operated by the Grenada Development Bank to ensure availability of student loans for students from low-income families. Raising the fee by EC$ 750 per student would endow the public community college with EC$ 1.1 million extra per year, which at the current unit costs would suffice to instruct a further 274 students. 0 The government needs to reduce administrationcosts through deeper cooperation at the OECS sub-regional level. The development of exams, information systems, strategy development, monitoring o f programs, research, program development and curricula need to take place at a sub- regional level. This would reduce duplication of work and lead to further efficiency gains through common curricula, common regional exams, and collective purchases of material and sharing of teachers. A 25 percent efficiency gain in administration costs would free up EC$ 1.3 million (2.5 percent of the recurrent education budget) that can be used for quality investment at the school level. Increasingregional cooperation among colleges. This could pave the way for quality and efficiency improvements through achieving economies of scale, networking and specialization in particular fields. Improving Equity in the Access to Education 0 Better targeting of the School Feeding and Textbook Programs. The School Feeding Program is substantially subsidized. It covers around 90 percent of the primary school population, but with little or no targeting of the subsidies towards students from low-income families. Reducing the subsidy to school meals to children from the most affluent half of the population would approximately reduce education spending by EC$1.0 million. In addition, only 44 percent of pupils in public primary and secondary schools that come from poor backgrounds have access to some of the required textbooks, while 10percent have none. Lack of textbooks is a serious impediment to improve learning especially for students from low-income households, which tend to provide less academic support to the children. Therefore, the planned scaling up of the rental book scheme should be implementedquickly with a clear prioritization of pupils from low-income households. 0 It is recommended that an evaluation of the student loan scheme operated by the Grenadian Development Bank be undertaken to assess the equity and efficiency of the scheme. Available information suggests that the student loan scheme benefits a few number of student with a high amount and without strong targeting of the financial aid towards low-income families. Depending upon the findingsof such an evaluation, it is advisable that (i) loans be directed towards students from low-income families studying in national programs, in particular to finance an increase in cost- recovery of the T.A. Marryshaw Community College (TAMCC) courses, and (ii)action be taken to strengthen recovery of outstanding loans. A. THEGRENADIANEDUCATIONAL SYSTEM 7.5 The education system in Grenada consists of five levels: pre-primary, primary, senior primary, secondary, and tertiary education (Table 7.1). The government is expected to phase out senior primary by the year 2010, butuntilnow, there is no plan on how to implement this objective. At the end of primary education, a student's result at the Common Entrance Exam (CEE) determines whether he/she will enter the five-year secondary cycle or continue education in the three-year senior primary cycle.58 This parallel system implies an expensive duplication of structures with partial success 58Students can join secondary education, if they complete senior primary education and pass the School Leaving Certificate Exam (SLCE) at the end of Grade 8 or 9. However, actual transition rate of students sitting SLCE to secondary schools is low. 85 of outcomes. In accordance with the government's objective of achieving universal enrollment in secondary, it is recommended that the government start to outline a plan for the complete phasing out of the program. At the end of Form 5, the Caribbean Examination Council exam (CXC) i s administrated. This exam is the door to higher education and to some professional entry-level jobs. Additionally, the system has technical school centers and adult continued education. Pre- E E Cycle Prim Primary X a Secondary Tertiary ary m m Expected 2-4 5 6 7 8 9 10 I 1 12 13 14 15 16 Age C C 17-24 Grade K GI G2 G3 G4 G5 G6 E FI F2 F3 F4 F5 X E C Enrollment 3006 1978 2146 2283 2352 2317 2424 2474 2090 2118 2085 1947 1651 1475 Senior Primary E x m G7 G8 G9 SLCE 1567 1414 179 Net Enrollment 100' 99 % 62 %" 13% rate % Pre-primary 7.7 Almost all children in the ages of three to four years are enrolled in pre-primary school. However, a recent survey by the Ministry of Educationshows that many early childhood centers do not provide the minimum quality expected, despite the fact that most centers are well equipped with the furniture for routine play and learning. Diagnosticsfrom the Ministry of Education finds that 95 percent of children who enter primary schools have attended some kind of pre-primary education. A 59Unless, explicitly stated, senior primary education is included as part of primary education, since this education cycle is taughtat primary school buildings. 86 simple estimation of the enrollment rate-no official enrollment rate exists-indicates a gross enrollment rate of around 100 percent.60 This high percentage is significantly better than its neighboring OECS countries-Dominica (70 percent), St. Kitts and Nevis (80 percent), and St. Vincent and the Grenadines (50 percent)-and is a very important step in the preparation and socialization of the Grenadian children for further education. According to the available statistics, there is no difference in attendance between boys and girls. Enrollment in public pre-primary education decreased from over 3,400 pupils in 1996 to 2,100 pupils in2003 with six centers being closed in the last 5 years. There is no time series data for non- governmental provision. Primary 7.8 Grenada has reached the Millennium Development Goal of universal completion of primary education. 61 Both the Gross Enrollment Rate (GER) and the Gross Completion Rate (GCR) in primary school are above 100 percent. In 2001 the GER was 121 and the CGR 110. As Table 7.3 shows, the GER declined from 133 in 1997 to 118 in 2003, indicating a declining trend in repetition and over-aged pupilsin primary schools. The repetitionrate declined from 10percent in 1997 to 6.4 percent in2003 and the dropout rate decreased from 0.8 percent in 1997 to 0.6 percent in 2002. These are the lowest repetition and dropout rates in the OECS countries. Boys are around 25 percent more likely to repeat or dropout of primary school than girls. Table7.3 EducationalOutcomesIndicatorsinPrimary Education (as percentage) 1997 1998 1999 2000 2001 2002 2003 GrossEnrollmentRate 133 131 125 122 121 120 118 Dropout Rate 0.8 1.1 1.o 0.7 0.6 0.6 NA Repetition Rate 10.0 8.4 8.4 5.2 5.2 6.9 6.4 Source: GrenadaEducationalStatisticalDigest2002 and2003 (forthcoming) 7.9 However, the MinimumCompetency Test, administered to students ingrade 4 anddesigned to determine whether students at that grade level had acquired the expected knowledge and skills reveals the need to improve the quality of primary education. The test was introduced in 1999 as part of the overall education reform process and its results have showed major shortcomings in the learning outcomes. In 2003, only 21 percent of students obtained the minimum pass level (50 percent score) in Math, and 26 percent in English. These early learning deficiencies propagate throughout the education system and seriously reduce future learning of the children. To address this urgent issue the government is currently designing numeracy and literacy programs.62 ~ In 2001, 3,006 children attended pre-primary centers and based on population figures from the Grenada Central Statistics Division, it is estimated that the population of three to five year old is 2,971, which suggests a gross enrollment rate of 102percent. "TheGERandGCRusedinthischapterwereconstructedfromnationalstatistics anddifferedfromtheestimated by UNESCOInstitute of Statistics. ''Other OECS countries administer a test to 4" graders. But the design of the test differs among countries; consequently, the test scores may not be comparable. In 2001, St. Lucian 4" graders scored better than their Grenadian peers: 47 and 38 percent pass Englishand Math, respectively. 87 Secondary 7.10 The government has placed expansion of secondary schools as its top priority. School capacity increased from 7,291 pupilsin 1996 to 9,891 pupilsin2001, which translated inan increase of the GER from 67 percent in 1996 to 88 percent in2001. This capacity expansion allowed the intake in Form 1(first year of secondary education) relative to the number of six Graders(last grade in primary education) to increase from 51 percent in 1996 to 78 percent in 2001. Nevertheless, the GER rate is still lower than other OECS countries.63 For example, in Dominica the GER was 91 percent in 1999 (excluding the JPS program) and inSt. Kittsand Nevis 100percent. The GrenadaNet Enrollment Rate in 2001 was 62 percent with marked differences by gender. In 2001, 72 percent of 12-16 years old girls attended secondary education, while only 52 percent of the boys attended. The government has begun undertaking the final expansion of secondary school capacity that will allow universal secondary education. 7.1 1 Inthe Caribbean wide CXC- Figure7.1 CXCExamPassRatesinMathand English,2001 - exam, that measures learning (as percentage) outcomesfor graduates of secondary education, Grenadian pupils scored the lowest among its OECS peers in 90 2001, with a pass rate of 24 in Math ao and 57 in English (Figure 7.1). 70 Nevertheless, some progress has taken 60 place, since the pass rate for all 50 subjects increased from 56 percent in 40 the mid-nineties to 66 in 2002. This 30 improvement, nevertheless, should be 20 taken with caution because it could 10 stem from a tendency to switch 0 towards subjects with higher passing &+ $*