The Bahamas would be “very wise to heed” findings that a new fiscal watchdog’s credibility will be enhanced the more independent it is from the Government.
Matt Aubry, the Organisation for Responsible Governance’s (ORG) executive director, told Tribune Business that this nation does not yet match up to the criteria set out for best-performing Fiscal Responsibility Councils in a recent Inter-American Development Bank (IDB) report.
The report, entitled Fiscal Councils: Evidence, common features and lessons for the Caribbean, zeroes in on The Bahamas and Grenada as the two smallest countries to establish such bodies.
It says the most effective Fiscal Councils are those with the greatest operational and financial independence from their governments, and that it is “preferable” that their scrutiny go beyond just the central government to include state-owned enterprises (SOEs) and local government authorities.
The Bahamas’ Fiscal Responsibility Council, whose five members are supposed to be appointed in time for the 2019-2020 budget next May, will only be focused on the central government with SOEs and so-called public-private partnerships (PPPs) excluded from their remit.
In addition, ORG has consistently called for the council to have a “more proactive role” in contributing to fiscal policy, and to be able to enforce their recommendations and decisions – something the Government did not accede to in the recently-passed Fiscal Responsibility Act.
Responding to the IDB report’s findings, Mr Aubry said: “I think that we are not there in the full capacity… We’d be very wise as a country to heed these points.
“We’ve started to take the path down that road. It’s a progression. We’re moving on the pathway to more open government, more transparency, more accessibility and through the Ministry of Finance there’s been greater access to information.”
Some 37 countries had established Fiscal Councils by end-2015, and the IDB report said: “Since 2017, two Caribbean countries —Grenada followed by The Bahamas — have created fiscal councils. They are the smallest countries (by population) in the world to put such agencies in place.
“In The Bahamas, Sections 17 to 22 of the Fiscal Responsibility Bill [now Act] 2018 prescribe the establishment, functions and constitution of a Fiscal Responsibility Council (FRC). The FRC’s mandate is to assess compliance with the [Act’s] general principles, fiscal responsibility requirements and fiscal objectives.
“This mandate also includes a requirement to advise on broader fiscal and budgetary matters, including the fiscal strategy report, annual budget, mid-year review, pre-election economic and fiscal update, annual accounts, reports on any potential deviations from fiscal responsibility requirements, and the Government’s fiscal adjustment plan in response to deviations.”
With Caribbean countries emerging as “the latest frontier” for fiscal councils, the IDB report said The Bahamas and other nations needed to “tailor their institutions to the specific characteristics and needs of their countries” given their vulnerability to natural disasters and economic shocks.
“While most fiscal councils currently focus on the general government, one country has expanded this scope of coverage to include local and regional governments, as well as state-owned enterprises and other entities with implications for budgetary resources. In this context, the broadest coverage for which data are available would be preferable,” the report found.
“The degree of independence with respect to the operations and budgeting also varies widely across countries. Those entities with the greatest legal and operational leeway are likely to perform best as independent watchdogs of the budgetary process.
“Some councils provide only positive analyses of policies, with limited ability to bind fiscal authorities to their recommendations. At the other end of the spectrum, some countries have empowered their councils to produce alternative fiscal forecasts and recommendations and to enforce action on their proposals. In this context, it would seem that capacity is a key factor in determining the degree to which a council’s recommendations and projections should be incorporated into budgets.”
Drawing its conclusions, the IDB report added: “In the seven decades since fiscal councils began to emerge, the experience overall has been positive, albeit highly dependent on the design, resourcing and mandates underpinning these institutions.
“Those that are most insulated from government influence, with the greatest flexibility in terms of staffing and resourcing, and that are able to anchor recommendations in quantitative objectives (fiscal rules) seem to be associated with stronger fiscal outcomes and improvements in the credibly of government with respect to fiscal and debt sustainability.
“Developing countries that are now contemplating the creation of their own councils stand to benefit greatly, while also facing unique challenges in terms of ensuring that these entities are optimized to their circumstances in terms of design, and provided with adequate capacity to produce high-quality analyses and recommendations. Emerging evidence suggests that not doing so may compromise the effectiveness of these institutions and potentially undermine broader efforts to enhance economic and fiscal institutions.”