The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The government must run an unheard-of $500m fiscal surplus beginning in the 2024-2025 budget year to hit a key debt reduction target by the end of this decade, the International Monetary Fund (IMF) has revealed.

The fund, in a report accompanying its decision to approve a $250m loan to The Bahamas, revealed that the government will only achieve its goal of a 50 percent debt-to-GDP ratio by the 2030-2031 fiscal year if it achieves an annual budget surplus equivalent to four percent of economic output gross domestic product (GDP).

This would mean the government has to generate an average $472.65m primary surplus, the amount by which its revenue income must exceed all fixed cost spending bar interest payments, for a six-year period over the coming decade as the extent of the combined blow dealt by COVID-19 and Hurricane Dorian is fully revealed.

The IMF also warned that The Bahamas faces a three-year wait for its economy to return to pre-COVID-19 output levels, estimating that this would not occur until “end-2023” - more than three-and-a-half years away and a full 12 months further out than projections previously given by John Rolle, the Central Bank’s governor.

And, while backing the government’s policy response to the health and economic fall-out produced by the pandemic, the fund added that The Bahamas now faces “significantly higher” interest rates on its future borrowings as the Minnis administration moves to finance the projected $1.327bn fiscal deficit for the upcoming 2020-2021 budget year.

The report also noted that this nation faces “a pronounced balance of payments shock”, with foreign direct investment (FDI) inflows projected to fall by more than $290m or 50 percent year-over-year to $265m in 2020-2021. As a result, the IMF forecast that The Bahamas faces a $1.012bn balance of payments financing gap that will have to be filled with help from multilateral lending institutions.

Urging the government to immediately shift “to rebuilding buffers and strengthening resilience” once the COVID-19 crisis has passed, the IMF said: “Decisive and significant fiscal measures are needed to bring public debt on a clear downward path and achieve the fiscal targets under the Fiscal Responsibility Act.

“Staff calculations suggest that to achieve the Fiscal Responsibility Act debt target by 2030-2031, an average primary surplus of four percent would be needed starting in fiscal year 2024-2025, with significantly faster consolidation than in the current baseline already beginning in fiscal year 2022-2023.

“The exact speed of this adjustment should be calibrated to the economic outlook, subject to scrutiny by the Fiscal Council and parliament approval.” The closest that the government has come to achieving the required four percent of GDP surplus came in the 2018-2019 fiscal year, when it managed to notch a positive $342.5m balance on the primary account.

However, this is still $130m short of the six-year average estimated by the IMF, which suggests that achieving a 50 percent debt-to-GDP ratio within a decade will be virtually impossible - especially for a country that faces an annual risk of being struck by major hurricanes - without fundamental fiscal reforms.

“The authorities remain committed to fiscal consolidation over the medium term as specified under the Fiscal Responsibility Act,” the IMF said nevertheless. “The Government activated the escape clause of the Fiscal Responsibility Act after Hurricane Dorian hit the country. This allows the authorities to postpone the achievement of their fiscal consolidation targets (a fiscal deficit of 0.5 percent of GDP by fiscal year 2020-2021 and a public debt-to-GDP ratio of 50 percent by fiscal year 2024-2025) by four years.

“The COVID-19 crisis will delay reaching these targets further, but the authorities are steadfast to bring the fiscal deficit to 0.5 percent of GDP by 2026-2027 and the debt ratio to 50 percent of GDP by 2030-2031. They will resume various measures when the pandemic fades, including the reviews of state-owned enterprise (SOE) governance, investment incentives, and the pension system, enhancements to public financial management (PFM) to increase expenditure control and efficiency, and revenue administration reforms.”

The IMF report added that the Government’s fiscal stimulus measures to protect the health system, private sector, jobs and most vulnerable in society, were worth $437m - equivalent to 3.7 percent of Bahamian GDP - and spread over the current and upcoming fiscal years. The largest component is the $180m allocated to the tax credit and deferral initiative targeted at supporting payroll expenses for medium-sized and large firms.

Referring to the Government’s deficit financing plans, the IMF added: “The increased fiscal needs will be financed by a combination of domestic and external debt issuance, as well as financial support from the Fund and other IFIs (international financial institutions).

“Despite the recent S&P downgrade by one notch to ‘BB’, The Bahamas is expected to continue to have access to international bond markets albeit at significantly higher rates than before. The authorities plan a long-term external bond issuance in fiscal year 2020-2021.

“They are also seeking two guarantees from the World Bank’s Multilateral Investment Guarantee Agency (MIGA) for COVID-19 healthcare expenses and capital spending. The associated guaranteed commercial bank loans would have maturities exceeding five years. Discussions are ongoing with the Inter-American Development Bank (IDB) for new credit facilities amounting to $320m in fiscal year 2020-2021 for policy loans and investment loans, with maturities exceeding 20 years.”

Marlon Johnson, the Ministry of Finance’s acting financial secretary, confirmed to Tribune Business yesterday that the World Bank guarantees, which would ensure private sector lenders to The Bahamas are repaid, was among the $1.327bn deficit financing options being explored.

“We haven’t finalised the specifics of how we will make use of that facility,” he added. “Yes, we are looking at the MIGA facility as a way to secure private financing on favourable terms. It guarantees lenders will be repaid.

“It’s being explored to optimise the kind of rates we’re able to get out there in the marketplace. Again, we haven’t finalised the nature of the credit facilities. We are looking at the multilateral entities, the IDB and Caribbean Development Bank (CDB) facilities as well, to see how much we will make use of the facilities they have because we’re trying to get the best rates possible on borrowing and extended terms.”

The IMF report estimated that its $252m loan, together with $180m and $50m provided by the IDB and CDB, respectively, and $88m obtained from foreign lenders under the World Bank guarantees would cover some $570m - or nearly 60 percent - of The Bahamas’ balance of payments financing needs. The remainder, or $442m of the total $1.012bn need, would come from the drawdown on existing foreign currency reserves.

“The Bahamas faces a pronounced balance-of-payments shock,” the IMF said. “The current account balance is expected to deteriorate to a deficit of 17 percent in 2020, from a surplus of 0.7 percent in 2019. Although lower international oil prices and reduced imports will help the trade balance, these effects are more than offset by the sudden stop in tourist arrivals.

“On the financial account, foreign direct investment (FDI) inflows are expected to halve. Gross international reserves have been boosted by hurricane insurance payouts of about 8 percent of GDP in 2019 and 2020. The result is an external financing need of about US$1bn.

“It is expected that financial support from the Fund and other international financial institutions (IFIs), notably the Inter-American Development Bank (IDB) and the Caribbean Development Bank (CDB), will be able to bridge about 60 percent of this financing gap, helping contain the still-significant drawdown of international reserves. Reserves are expected to decline to about $1.3bn in 2020 and to remain at similar levels thereafter.”

The IMF estimated that The Bahamas’ services exports, representing the key tourism industry, will decline by $2.78bn or 24.5 percent of GDP this year. This represents a fall-off from $4.151bn to $1.371bn year-over-year, which will be partially compensated for by a $2.422bn or 21.3 percent contraction in total import volumes.

“A gradual recovery should take hold in 2021, assuming that the pandemic fades and global containment efforts can be gradually unwound. Tourist arrivals are expected to recover strongly in 2021 but reaching pre-crisis levels will take time,” the IMF said.

“With the removal of domestic containment measures, post-hurricane reconstruction activity is expected to regain momentum. These developments should lead to a rebound in real GDP growth of about 8 percent in 2021, but the recovery will be gradual with the economy reaching its pre-pandemic level only by end-2023. Inflation is expected to increase to 2.5 percent in 2021, along with the economic recovery, and converge towards 2 percent in the long run.”