Taking ECLAC to heart

Research-based strategic planning is something that Deloitte has taken seriously as a matter of good business practice. In the past two years, this was taken to a higher level when we were engaged to facilitate the drafting of a strategic economic plan for the Cayman Islands.

It is in this light that we appreciate the recently released Report of the United Nations Economic Commission for Latin America and the Caribbean on the impact of Hurricane Ivan on the Cayman Islands.

The ECLAC Report was prepared upon the request of the Government to provide a ‘quantitative approximation of the overall damage and reconstruction costs of the event and looks into the effect on the country’s macroeconomic performance as compared to the pre-hurricane targets.’

As a private firm, our interest in the Report is not just mere curiosity. It informs us of the possible scenarios that may shape the Government’s policies. Since the private sector does not operate in a vacuum, any policy change will ultimately impact on all of those in the private sector – whether individuals or companies – who wish to plan for 2005 and beyond. We thus deem it important to share our views on some implications of the Report, especially as the Government considers its findings for strategic planning and policy-making purposes.

We would like to start with the Report’s implications on the fiscal balance. The Report’s estimate of the country’s economic losses due to the hurricane amounts to $2.8 billion or 183 per cent of the 2003 GDP. Of this amount $125 million relates to the public sector, although this could be underestimated since the amount of the Government’s vehicle losses had not yet been quantified at the time of the Report’s release. The public sector’s losses pose a substantial challenge to the Government not only for the fiscal year 2004/05 but also beyond, considering the following:

First, these losses equate to about 39 per cent of the Government’s targeted pre-Ivan expenditure in 2004. The Report estimates that the Government has spent $45.90 million in replacing part of the damaged infrastructure, restoring basic services and other losses. It would be safe to assume that Government will spend the balance on public sector losses, $79.10 million, in this or succeeding years, depending on the spending polices and strategies adopted. In fact, it would be no great surprise if the expenditure was substantially more given the need to improve upon the facilities and infrastructure post-Ivan.

In addition to the public sector’s own losses, some losses of the private sector may have to be addressed by the Government. The Report, for example, cites the need for assistance to the most vulnerable groups, and credit support to those who are under-insured and heavily indebted. The Report, however, does not give an estimate of the amount that the Government may have to spend for these programs in addition to what the private sector may contribute through the National Recovery Fund.

Second, the Report estimates that the immediate impact of the extra spending in 2004 will be a deficit amounting to $38.70 million. Whether the pressures for increased spending due to the reconstruction this year and the succeeding years will also result in future deficits will depend on the revenue-generating strategies implemented.

Financing options

Given the tight fiscal scenarios, the Report recommends the ‘solicitation of additional development funds either through donations and funding by partnerships with the private sector, or by borrowing from the international official development aid market or private sector hedge instruments.’

We note that the first two options are now being tapped primarily through the setting up of the National Recovery Fund. As regards the third option, we also note that Section 14(4) of the Public Management and Financial Law allows the Government to borrow beyond the limit set by the principles of responsible financial management for a limited period provided certain conditions are met.

The Leader of Government Business has announced that there will be ‘no new taxes’ in 2005. We appreciate the rationale for this policy and it implies that the Government is maintaining its policy in the 2004/05 Strategic Policy Statement of ‘keeping revenue growth in line with economic growth. Revenue growth will thus hinge on the speed of adjustment by the private sector this year, which will in turn depend on the flow of insurance payments and other forms of financing in the Islands, access to external resources and the infrastructure and policy support for bringing in external resources including materials and manpower.

It is therefore prudent for the Government to place equal emphasis on strengthening the recovery process as this shall lead to improving the chances of generating revenue without necessarily introducing new revenue schemes in the short-term. This may entail a two-pronged strategy:

(1) Issuance of policies that can be implemented without the need for additional resources, such as the coordinated streamlining of procedures in the form of a one-stop-facilitation for both local and inward investors. In this regard, the full-scale operation of the Cayman Islands Investment Bureau is a positive step, where clear incentive programs for attracting investment and can be designed and implemented.

(2) Prioritizing expenditures that have the greatest impact on easing bottlenecks to the private sector’s access to imported materials and labour, for instance, Port and Immigration facilities that can ease backlogs. In other words, there is a need to prioritize expenditures that will directly help in generating revenues for the Government. The policies implemented to address these issues should be robust enough to adapt to still be relevant once the Cayman Islands have advanced beyond the pre-Ivan stage of development.

The latter recommendation dovetails with the conclusion of the Report that ‘unlike other countries in the region, the constraint is not given primarily by the lack of financial means to be invested in the process…the challenge lies more on the mobilization of the needed workforce, the importation of the necessary building materials and components…’

In addition to the above, there may also be a need for the Government to revisit the current structure of the revenue base. An analysis of the post-Ivan economy will be required to ensure that the revenue generation policies continue to be aligned with the drivers of the economy. The latter may have changed as a result of the recovery process or due to changes in the market forces.

There is also merit in improving the system of revenue assessment and collection. In this respect, the operation of the recently established Revenue Unit is a strategic move that should be supported by the private sector as it could potentially avoid the need for raising taxes in the future.

Risk management strategy

The Report identifies the need for an overall risk management strategy, and cites the project of the United Nations Development Programme to help the Government in defining development projects that will address the reconstruction needs while promoting ‘disaster mitigation, risk reduction and risk management’. We understand that this project is in progress.

The effort is a step in the right direction since it can potentially reduce the cost of future disaster recovery efforts not only for the public sector but also for the country as a whole. The private sector should therefore be encouraged to have a role in the project because of the close and numerous private-public interactions in the disaster mitigation and recovery efforts. The Report itself documents a number of private buildings and properties that have been used as shelters and temporary operation centres of the Government during the Hurricane. As well, the public sector is involved, at least financially, in the reconstruction of private homes, etc. The private sector should organize itself and coordinate with the Government so that the various options for reducing the risk of potential damage from future disasters can be systematically considered.

We also hope that the project will include baseline activities such as those needed to identify the vulnerable and exposed members of the community. For example, the Report’s summary of sectoral damage and losses clearly indicates housing as the sub-sector that suffered most from the storm. It also recommends Government assistance for ‘the poor, now rendered homeless, the low medium households, many headed by females, which are heavily indebted and require assistance to rebuild their houses and replace their basic needs and amenities.’ We believe that Government assistance can be better guided by a database or indicator system for identifying these vulnerable groups. An indicator system can facilitate speedy monitoring of their conditions and the preparation of possible safety nets prior to the occurrence of potential disasters. Again, the aim here is to reduce the cost of the recovery effort for the Government and the concerned households.

Finally, the Report suggests the need for mandatory insurance. We hope that both the Government and the private sector will be able to study this suggestion carefully since mandating the demand for insurance may have implications on insurance cost in the Islands. Other risk-sharing mechanisms can be looked into within the context of promotion through public education or awareness programs.

Impact on GDP

The Report estimates a 2.2 per cent reduction in the 2004 GDP growth. This implies that positive growth of 0.83 per cent was still achieved in 2004. Putting it another way, the ECLAC numbers indicate that the economy has strengthened sufficiently in the first eight months to absorb the impact of the hurricane in the last four months, posting a small but respectable growth on the whole. This bodes well for the country’s resilience and its chances for recovery.

On behalf of the Deloitte family, I reaffirm our continued support to the recovery and sustainable development of the Cayman Islands. It is in this spirit that we are sharing our notes and views on the Report.

Ian Wight

Managing Partner

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