What does the FFR mean?

Economic perspectives column Paul Byles 

The government and the FCO have recently signed an agreement entitled Fiscal Framework for Responsibility, which is intended to set out the broad parameters of how the government will manage the public sector’s finances in the context of the so styled “partnership” between the Cayman Islands and the UK. Most of the content of the agreement is reasonable and if the parameters are broadly adhered to they should improve the government’s approach to fiscal management. That said, the FFR will also require changes to how the government operates and it is worth having a look at some of the key implications. 


Better data, better policy 

One of the general themes of the FFR is that it requires effective medium term planning and makes clear that a more data driven approach to managing the Cayman Islands economy is required and this will mean changes to the current approach to policymaking. For example, there is mention of the use of ‘econometric modeling’ in the FFR, but the value of these types of models (which are used frequently by many developed countries) is only as good as the quality and timeliness of the data you put into the model. The country will need to see a significant improvement in both the quality and use of statistics as well as a shift in the culture among decision makers towards basing decisions on objective data analysis, in order to implement effective medium term planning. The required change will also mean that private sector firms will need to become more comfortable with the idea that the country needs to have an effective measure of its gross national product, a measurement that has been sorely lacking for the past two decades. This means a higher participation rate among firms when the Economics and Statistics Office carries out its national income survey. But for years there has been a huge gap between the expectations of the ESO and the willingness of private sector firms to participate. 


Ambitious debt reduction 

Another observation is that the target of decreasing the net debt to be in compliance by 2015/16 fiscal year may be challenging to achieve without some form of divestment of public sector resources within the next three years as it is unlikely that the government will be able to reduce its debt by the required amount solely through operational surpluses by that time. The alternative approach to achieve the required reduction in the ratio is to increase government revenues, but the economy is not in a position to handle further increases in taxes at this time. 


FCO oversight or FYI? 

One of the requirements of the FFR, which seems innocent enough but requires some investigation, is that the UK requires the government to report very detailed information and on a frequent basis under the agreement. This is the equivalent of management accounts in the private sector and is good discipline for any government to adhere to. The fact that this information is required to be sent to the FCO in such a detailed manner and with this frequency does beg the question as to whether the FCO will be actively involved in management of the government’s finances or whether the level of reporting is purely for informational purposes. But this seems to be a clear signal that a more frequent scrutiny will be applied to the country’s fiscal situation by the FCO, at least in the medium term and possibly for the foreseeable future. 


He who lends, may make the rules 

Finally, the requirement by the FCO to give preference to concessional lending institutions that lend their expertise to project assessment is geared towards future borrowing from multilateral organisations such as the Caribbean Development Bank and the IMF as this is the approach traditionally taken by these institutions when lending to governments. This implies that future lending is less likely to be secured from local banks and the private markets (though still possible). The future approach towards tendering for finance will need to reflect this bias towards the multilaterals in a transparent manner and may actually discourage local institutions from participating in the bidding process. 

The FCO’s preference for multilateral organisations also means that the government will now need to take into account any potential policy related conditions that may be tied to such financing from these institutions to ensure these are consistent with the country’s broader set of policies and strategic objectives. It is widely known that many countries that borrow from such multilateral organisations have complained about the policy related strings that inevitably comes with relying on loans from these types of institutions. Although the Cayman Islands has borrowed on a limited basis from organisations such as the CDB, this is essentially new ground for the Cayman Islands. The additional technical expertise provided by these lenders will likely be good for the projects in question, but the government will also need to consider the wider political implications that surround this form of financing. 

In general the FFR contains some good principles that over the long run should improve the way the economy is managed. But complying with the agreement will require a lot of work, a change in some attitudes and a significant change in the way governments have managed the Cayman Islands economy for the past two decades. 


Paul Byles is managing director of Focus Consulting. He is a former external consultant to the Ministry of Finance in 2009, and is also a former director of a big four firm. He is author of the book ‘Inside Offshore’ and is also a former financial services regulator.