The Government of the Turks and Caicos Islands is in the middle of a financial crisis. As a result of the actions of the previous administration it has been running a significant budget deficit since 2007 and has accumulated high levels of debt as a result.
Following the negotiation of a $79 million last spring, the Government was unable to attract further borrowing on the capital markets, and without emergency UK support it would have been unable to pay salaries or fund
public programs. Bankruptcy has only been avoided because the UK Government provided the financial support needed to keep the public sector afloat and now, through $260 million of loan guarantees, with the time and resources we need to tackle the dire fiscal legacy the Interim Government inherited.
The financial package which is now in place buys us the time we need to tackle the fiscal crisis. The UK support does not, however provide money to
reverse previous spending cuts or fund significant new expenditure; instead it provides a one-off opportunity to refinance our existing debt and bring revenue
and spending into line. There is no alternative other than to balance TCIG’s budget by raising revenues and cutting spending; like any household or business, the
public sector cannot continue to live beyond its means. The public debt run up in a short period of time is equivalent to $12,000 for every man, woman and child in
the Turks and Caicos Islands.
Achieving fiscal stability is not only essential to avoid the specter of default; it will also provide a major boost to the economy by allowing local businesses to thrive and restoring confidence that the Turks and Caicos Islands are a sound place for investment.
It will be tough, but we must stabilise the Government’s finances now to ensure a quick path out of the current economic difficulties to a more prosperous
TCI in future. Being well on course to achieve a fiscal surplus by the end of financial year 2012/13 is a key milestone towards setting a date for elections.
The refinancing package:
With the support of the UK Government guarantee, TCIG’s debt has now been refinanced at much lower rates, providing significant savings in debt service
costs for the duration of the guarantee. This provides an immediate boost to TCIG’s finances, releasing money for more productive purposes.
The package is made up of a number of elements:
• Guaranteed bonds of $170m, payable in full on maturity in five years, at fixed interest of 3.20%. This provides both low cost debt and certainty
over our future debt service costs
• A five year term loan of $30m, at 0.5% over LIBOR, which is available if desired to repay other more expensive debts of TCIG
• A five year revolving bank facility of $60m, at 0.25% over LIBOR, which will fund the projected deficits over the next two years.
•The guarantee comes with a number of conditions to ensure that TCIG takes this opportunity to achieve financial stability; the most important of these is the need to achieve a financial surplus by the end of 2012/13.
Moving towards a surplus:
The financial package is underpinned by a plan to achieve a surplus and improve our stewardship and management of public money. In broad terms this
involves reducing the forecast deficit of $60m in 2010/11 to $8m in 2011/12, and moving to a surplus of $20m in 2012/13. The total deficit will be increased by the
amount of net capital expenditure.
This strategy will enable us not only to achieve a surplus in 2012/13, but also to build reserves that will allow us to start to pay down debt, establish a contingency for unexpected events, and invest in infrastructure. Until this is achieved TCIG’s finances will continue to be fragile, and we will be unable to invest to help TCI prosper in future.
The 2011/12 budget:
Reducing the deficit from $60 million in 2010/11 to $8 million in 2011/12 will require action to both raise revenues and reduce expenditure.
The need to reform TCIG’s revenue system has been recognised for many years. Government revenues fell from a peak of $220 million in 2008/09 to around
$120 million in 2010/11, reflecting the instability of the existing revenue system and its vulnerability to external shocks – in this case the global economic downturn
and its impact on the construction and real estate industries which have been the main sources of Government revenue in TCI. The measures agreed in this year’s
budget will set us well on the way to a modern system that will provide value for money and fund essential government services in future.
The cornerstone of the new system is the introduction of Value Added Tax, a broadly based consumption tax which has been successfully introduced in
countries world-wide including many smaller economies with a heavy reliance on tourism. In the Caribbean, it has been successfully implemented in Barbados,
Jamaica, Trinidad and Tobago, the Dominican Republic, Haiti, Belize, Dominica, Grenada, Guyana, Antigua and Barbuda, and St Kitts and Nevis, and it is in the
process of being implemented in St Lucia, and St Vincent and the Grenadines.
In many instances the revenues raised by VAT have been well ahead of projections. VAT will provide a stable source of revenue for TCIG, and will stimulate
economic growth by removing the distortions of the existing system. It will, however, require a significant amount of preparation, and we have therefore
agreed a number of temporary measures to pave the way to VAT, close the budget gap, and avoid a default. We expect that most of these temporary measures will
fall away, together with a number of existing taxes, when VAT is introduced in 2013.
The temporary measures include:
• A Customs Processing Fee of 4% on all imported goods
• Changes to the system of work permits to raise revenue and make it fairer and more effective
• Increases to business licensing and other fees and charges to keep up with inflation, together with simplification and improved administrative efficiency
• A carbon tax on electricity, to raise revenues and provide incentives for greater environmental sustainability by the generating companies
• A water sales tax on commercial customers and the largest residential customers, which will also encourage water conservation
• A sales tax on financial services and insurance premiums
We will also review the wide-ranging concessions and exemptions that were granted in the past, with the aim of ensuring that they are being properly
exercised. Where possible we will remove them unless they produce social and economic benefits that would not otherwise occur.
Together with forecast increases in existing revenues, these measures will raise TCIG’s income to around $160 million in 2011/12, rising to around $190
million by 2013/14. At the same time we need to cut expenditure to reverse the rapid and unsustainable growth of recent years and bring it back into line with
income.
Staff costs are by far the biggest element of TCIG’s expenditure. The public service has grown much more quickly than the economy as a whole. It now needs
reform to be affordable, able to deliver the services expected by residents and visitors, and offer rewarding jobs for public servants. Some jobs will have to go in
line with the widely accepted target to reduce the cost of the public service by 25%, but we will work to find alternative jobs and provide assistance for the
people affected by these changes.
In the meantime the budget for 2011/12 contains measures which will reduce costs by around 10%, an important step toward achieving the 25% target.
Most of this will be achieved by applying existing rules properly, and implementing proper controls over the TCIG payroll. These measures are essential
to increase fairness and to release money for use in other areas of government such as education and primary healthcare. We fully understand that these are difficult
times and so we are making transitional arrangements in a number of areas to ensure that the people affected are treated as fairly as possible. And we are not
seeking to recover past overpayments, unless there is clear evidence that the individuals receiving such payments acted improperly or were clearly aware that
they were in receipt of payments to which they were not entitled.
We are also committed to making savings in other areas of Government spending, including statutory bodies, scholarships, rents, utilities, communications, travel and procurement, in order to balance the budget, ensure value for money and safeguard the interests of the people of TCI.
Capital spending can provide much needed stimulus to the economy of the Turks and Caicos Islands. The state of TCIG’s finances means that the scope for
capital expenditure will be extremely limited for the next two years. Existing commitments for 2011/12 already total $6.4 million, and some high priority
projects do not yet have funding, including the rebuilding of Ona Glinton Primary School, the repair of the causeway between North and Middle Caicos, and
improvements to the airport at South Caicos. It is likely that some further capital expenditure will be needed in order to continue to provide essential services. We
hope to be able to approve new capital projects during the year, depending on revenues, and we will continue to seek additional funding from partners such as
the EU for essential capital expenditure.
Improving financial management, reporting and accountability:
Setting and achieving a balanced budget is only the first step in restoring financial stability to TCIG. We also need to exercise proper financial management
in order to control revenue and expenditure, monitor performance against the budget, and report the results clearly, openly and regularly. We have already made
progress with this, and we intend to publish quarterly reports setting out actual income and expenditure against the budget and explaining any significant
differences together with the action we are taking to correct them. The first report, covering April to June 2011, will be published in August. We are also preparing to
bring the backlog of financial accounts since 2006/07 up to date, so that we can produce audited financial statements and fulfill our obligations to be accountable
to the people of the Turks and Caicos Islands.
Building a better future:
TCIG has a large structural deficit which will continue to grow unless there are significant reforms. Expanding the TCI economy is vital, but this alone will
not close the deficit fast enough to avoid defaulting on our debts. We will continue to invest in affordable economic stimulus measures and in administrative and legal
reforms to encourage growth and diversification, but this need to be accompanied by wide-ranging reform to improve the openness and competitiveness of the
economic environment. And any TCI Government faces tough choices – we need to modernise the tax system, cut wasteful public expenditure and implement public
sector reforms to improve value for money. The same is true of many other countries, both regionally and globally, that are taking similar action to control
their public finances and reduce their debts.
Our aim is to restore and firmly embed the principles of sound financial management, sustainable development and good governance. This will help
rebuild confidence in TCI and its ability to manage its public finances. Restoring financial stability to TCIG is essential to help make TCI what we all want it to be –
an outstanding place to live and work with equal opportunities for all, and an attractive, welcoming destination for tourism, the central pillar of our economy.
PS. Finance. Delton Jones
