Five months after the government presented a record $1.6 billion two-year budget, the coronavirus pandemic has thrown all financial plans into disarray.
The need for a near-total economic lockdown and the closing of Cayman’s borders for the foreseeable future will undoubtedly hit government revenues this year.
For Finance Minister Roy McTaggart that will mean a much stronger focus on cash management, using the more than $500 million accumulated in cash reserves to cover shortfalls and, if necessary, raising new debt.
Responding to questions from the Cayman Compass, McTaggart said government will continue to be prudent in its spending as well as paying down debt in accordance with the terms of its loans. But he acknowledged that government’s revenue position will undoubtedly change.
Before the health and economic crisis, government had planned for operating revenues of $825 million this year. This was expected to exceed operating and financing expenses by $65.3 million.
“It is fair to say that there is a good chance that we will end the financial year in a deficit position. We face the double-edged sword and difficult challenge of managing our financial affairs in the face of declining revenues and increasing demands for government resources,” McTaggart said.
In an environment like this, managing cash flows was becoming more important than ever.
“In my mind, it is inevitable that most, if not all, of government revenue sources will experience a decline this year, some more significant than others,” the finance minister said. “That being the case, our significant accumulated reserves will absorb the deficit.”
It is difficult for an economy like Cayman’s to adjust its revenue model, which is mainly based on import duties and business fees. Raising fees on companies and services that are already under strain can quickly result in a loss of competitiveness and less revenue, not more.
McTaggart emphasised that there is no consideration of raising taxes to cover a deficit. “That would be economic suicide!” he said.
That leaves only cash reserves, and potentially new debt, to cover any shortfall or to spend additional funds to help residents and businesses during the economic downturn.
“The unrestricted cash reserves are a ready source of funding to support governments economic-recovery programmes,” he said.
“A crisis such as this is the reason you have these reserves set aside.”
Raising new debt is also no longer off the table and lenders are already lining up.
“We have the option of borrowing, should that become necessary,” the finance minister said. “Given our strong credit rating and low debt ratios, Cayman is a good credit risk for banks. Indeed, I have been approached by an international bank willing to provide funding for any borrowing we may need to undertake. That sets us apart from just about every other country in our region.”
Government’s two-year budget includes capital investments into infrastructure and statutory authorities of $182.6 million in 2020 and $121.4 million in 2021. Except for the runway rehabilitation and expansion of Owen Roberts International Airport, work has stopped on other projects while the country is under curfew and lockdown.
At this time, McTaggart said, he is not aware of any decision to put those projects on hold permanently for budget reasons..
In setting the budget, government is bound by several parameters that were part of a Framework for Fiscal Responsibility agreed with the UK government after the 2008 financial crisis pushed Cayman deep into debt.
These rules for the management of government’s finances are set out in the Public Management and Finance Law. McTaggart said the government will always seek to remain in compliance with the fiscal framework, because it is key to a prudent financial-management strategy.
But during a severe economic downturn, many of the principles can easily be violated, as government’s income is falling and the need to raise debt grows.
For instance, the rules dictate that core government’s net operating position should be positive. At the same time, cash reserves in the government’s bank accounts and the general reserve fund should be large enough to cover 90 days of running its operations.
In addition, debt-service costs should make up no more than 10% of core government revenues. And the total debt should not exceed 80% of core government revenues.
It will be difficult to stay within these limits, should the economic downturn endure for more than just a few months. Under these conditions, Cayman will need to seek UK approval for missing any of the financial targets.
“The law requires us to engage with the UK if circumstances arise that cast doubt about our ability to comply with the FFR,” the finance minister said, adding that he would seek to have those discussions at the earliest opportunity “to mitigate the risks of it hindering the government’s ability to pursue its economic recovery programmes”.