The Cayman Islands government is within sight of regaining control over its own budgetary destiny, some seven years after a reported $81 million operating deficit and other financial difficulties forced the United Kingdom to step in back in mid-2009.
“By the grace of God, provided there are no natural disasters…no global or U.S. recessions, we are on track to hit [legally mandated] budget targets [by June 2016],” Finance Minister Marco Archer said during an interview in December.
The story of how Cayman ended up under the U.K.’s thumb with regard to its annual government budget approvals dates back two political administrations to the end of the former People’s Progressive Movement government’s first term in May 2009.
In the last budget year governed by the former PPM, the 2008/2009 year, the Cayman Islands fell out with a number of principles of responsible financial management as stated in the territory’s Public Management and Finance Law. Some of those principles included the amount of cash or cash equivalents the government maintains, the operating surplus it maintains, overall public sector debt when compared to government revenues, and the rate at which that debt must be repaid.
The financial troubles, which were exacerbated during the world markets crash of 2008-2009, led to U.K. demands that the territory increase its revenues and cut back expenses.
Eventually, what became known as the Framework for Fiscal Responsibility was signed by then-Premier McKeeva Bush in late 2011 and was passed into law about a year later. Mr. Bush’s United Democratic Party government was also forced to increase a number of fees and charges on local businesses, including annual operating fees paid by Cayman’s financial services companies and work permit fees paid by all businesses that employ non-Caymanians.
Fast forward to the current 2014/15 financial year, and the Cayman Islands government finds itself awash in projected operating surpluses.
The projected cash surplus for the current year is expected to end on June 30, 2015, well above $100 million. Minister Archer’s projections show that figure growing to about $125 million during the 2015/16 year and $135 million during the 2016/17 year.
The major difficulty now faced by government is that, in a year’s time – by Dec. 31, 2015 – it must show the U.K. that it has cash or cash equivalents [liquid investments, bonds and the like] to cover 90 days of operating expenses.
As of now, by Dec. 31, 2015, Archer says, Cayman will have enough cash available to cover 96.3 days of expenses, putting it in line with U.K. requirements. After that, it’s just a matter of ensuring government revenues don’t collapse and expenditures don’t grow out of control ahead of the mid-2016 deadline. According to legal guidelines, Cayman cannot spend more than 10 percent of its core government revenues to pay off existing debts.
Nonetheless, Archer says debt repayment should continue apace, with the entire public sector debt balance falling to about $500 million in mid-2018 from a high of more than $700 million in 2009/10.
“What that means is that by June 30, 2018, if there are no natural disasters, the economy performs as expected, and we are able to contain or further reduce operating costs, the central government is forecast to have more cash in its bank accounts [$514.5 million] than the total outstanding debt balance of the entire public sector,” Archer says. “That will be a monumental achievement for this country considering where we were just a few short years ago.”
While Minister Archer’s longer-term projections sound promising, the looming deadline to meet the six principles of responsible financial management is set by the U.K. at June 30, 2016.
If Cayman meets those, it will no longer have to gain U.K. approval for its annual government budget and it would, theoretically, be able to borrow money to pay for needed capital improvements.
However, even if the territory meets financial management goals set out in local law by the United Kingdom’s deadline, other imposed constraints on government spending and borrowing will remain in the form of the Framework for Fiscal Responsibility.
The framework document governs a wide range of issues including public procurement processes, approval of public-private partnerships for infrastructure projects and even – in some cases – how much money government can spend on a project without first have to seek the approval of the U.K.
Minister Archer, who inherited the task of ensuring the government meets the U.K. timeline, says the framework should not affect local approval of budgets or the Cayman Islands’ ability generally to borrow long-term.
“I wouldn’t quite refer to [the framework] as U.K. controls,” Mr. Archer said. “The control only relates to the preparation and approval of the budget prior to its presentation in the Legislative Assembly.”
Cayman officials have been required to present their last several budgets to the United Kingdom’s Foreign and Commonwealth Office for approval. If the U.K. office doesn’t approve the spending plan, it doesn’t go to LA members. In past years, the U.K. approval process has delayed government budgets, even past the July 1 start of the fiscal year.
The Framework for Fiscal Responsibility should not impede any future budget approvals, Archer says.
“They’re good guidelines to operate under,” he says. “The only complaint that I would say is that, because of the requirements for the various reports and outline business cases [for public projects]…it does add a significant length of time to when you can bring a project on line. And it does add significant costs to the implementation of the project, but it is meant to avoid some of the fiascos that the country experienced.
“You can’t put a price on good governance.”
During a visit here in late 2012, U.K. Overseas Territories Director Peter Hayes spoke about Britain’s arrangements with Cayman in regard to local finances.
At the moment, Cayman is prevented from entering into any further long-term borrowing to support public projects through June 30, 2016. The only exception to that rule is in the case of natural disasters affecting the Islands. Currently, the Progressives-led administration has announced no plans to borrow any cash through 2017.
Hayes said some adjustments could also be made to the fiscal framework document as Cayman’s financial situation improves.
“One would hope, as the financial management situation develops and as the guidelines come back within the debt limits…then obviously we want to make sure the Framework for Fiscal Responsibility is keeping pace with circumstances,” Hayes said.
The fiscal framework now requires government to improve the quality and independence of statistical economic, business and social data that is gathered, set up a reporting framework for its expenditures, and develop econometric models to assist with forecasting coercive revenues. Government also has to discuss all proposals and decisions affecting expenditure, revenues and borrowing in its annual strategic policy statement.
Other major requirements of the agreement include that Cayman “suitably appraise” all public projects before the procurement process begins and all projects must have a sound business case, demonstrating the economic need for the project, and include a risk-assessment completed prior to bidding to enable an informed decision on whether or not to proceed to the procurement stage.
The framework stipulates that for projects with a lifetime value above $5 million, and for those where the use of public private partnerships or any other form of alternative financing is being considered, the Cayman Islands government will retain independent accounting, legal, financial, economic, environmental and other technical advice as appropriate to ensure robust investment appraisals are produced. In addition, the agreement demand that public-private partnerships will not be considered for projects of less than $15 million.
The framework demands that, as part of its risk management, government make contingent and actual liabilities, such as pension and healthcare, subject to actuarial assessment every three years and set out strategies for managing these liabilities in the strategic policy statement.