Adviser: Gov't Must 'Move' To Run Recurrent Surpluses


Tribune Business Editor


James Smith

THE 128 per cent increase in the Bahamas' national debt over the past decade means the Government must "address without delay" its ever-growing fiscal deficit, a key Ministry of Finance consultant yesterday calling on it to "move" to cover its fixed costs.

James Smith, a former Central Bank of the Bahamas governor and minister of state for finance, told Tribune Business that bringing a national debt that reached $4.356 billion at year-end 2011 under control "ought to be at the top of the list" for the Christie administration's priorities, given its impact on the entire Budget process.

Speaking after a Standard & Poor's (S&P) report, published by Tribune Business, revealed that the Bahamas' national debt had more than doubled to 48 per cent of GDP between 2001-2011, Mr Smith said the data showed this nation's fiscal woes were structural in nature - and not just caused by the recession.

Agreeing with the Wall Street credit rating agency that the Bahamas needed to implement an "effective debt management" plan, Mr Smith outlined a three-pronged strategy to get the fiscal deficit and national debt back on a sustainable trajectory and, over time, reduce them.

Apart from growing the Bahamian economy and reforming the existing tax system, Mr Smith also called upon the Government to target a recurrent surplus - a situation where its revenues exceeded its fixed costs (recurrent spending). This the country has rarely done in almost 40 years of independence.

"That's very troublesome," the now-consultant to the Ministry of Finance said when contacted by Tribune Business about S&P's findings.

And he added of the 128 per cent national debt increase over the past decade: "You're looking at the trajectory. It's not kind of a blip to coincide with a recession. It's becoming a permanent feature in our fiscal affairs, and must be addressed without delay."

Yet Mr Smith emphasised that with much of the Bahamas' debt set to mature in the medium-to-long term, in the decades of the 2020's and 2030's, there was little prospect of an immediate fix. With more than $3.2 billion in outstanding public sector borrowings, the Government could do little about that but service it.

"The debt service item is becoming the most important metric in terms of the Budget," he added, "because by beginning to use up too much revenue to service the debt, funds are not available for other areas you want to focus on. We need to look at effective debt management going forward.

"It's [debt servicing] probably overtaken all the big items in the Budget, and it's going to be very difficult to manage because it moves so quickly."

The S&P report found that with debt servicing (interest) costs standing at 13 per cent of general government revenues in 2011, the Bahamas' had the third highest national debt repayment burden in the Caribbean.

Only Jamaica and Belize carried higher debt servicing burdens. In Jamaica, 44 per cent of government revenues went to cover debt interest costs, while the percentage for Belize was 14 per cent.

"The Bahamas and Barbados' debt servicing costs have also grown as a result of their rising debt. Each respectively paid 13 per cent and 12 per cent of general government revenues for interest in 2011," S&P said.

A chart embedded in the report showed that the Bahamas' debt servicing costs had remained stubbornly in the 9-10 per cent of government revenues range between 2000-2007. A steady uptick occurred from 2008 onwards, as the Ingraham administration steadily borrowed both to cover recurrent costs and various capital/infrastructure works programmes to prevent the bottom falling out of the Bahamian economy.

Asked where the Bahamas' fiscal position should figure in terms of the new government's priorities, especially given that the 2012-2013 Budget will be presented to the House of Assembly today, Mr Smith told Tribune Business: "It ought to be at the top of the list, as everything flows from whatever else you've got to fund all the other sectors, like law enforcement and education.

"It's [the debt] the beginning and end of budgeting. It has to be brought under control, because on the current path it's going to be very difficult to keep borrowing just to stay in one spot."

With around 55 per cent of the Budget taken up by civil service salaries, and a further 25-30 per cent accounted for by debt servicing and other fixed costs such as rents, the Government - at a maximum - only has discretion over where to spend 15 per cent of its annual expenditures.

And for the incoming Christie administration that 15 per cent is likely to be on the high side, given that it will inherit a Budget largely prepared by its FNM predecessor in terms of fixed costs and ongoing capital works commitments.

As for a strategy to rescue the Bahamas from its fiscal woes, Mr Smith told Tribune Business: "We've got to grow the economy, reform the tax system and move to producing a small surplus on the recurrent account. That's where the problem is."

The Bahamas will find achieving consistent recurrent surpluses difficult to put it mildly. Although it did run an $8 million surplus in 2005-2006, and $24 million in 2007-2008, when the economy was booming, since then it has run recurrent deficits of between $168 million to $259 million. It is projected to continue incurring recurrent deficits of between $48 million to $166 million for the current, and next two, fiscal years.

And, looking further out, Mr Smith told this newspaper that the Government needed to take "some very hard and fundamental decisions".

He warned that bringing the national debt and fiscal deficit under control, and down to a sustainable level, would require a combination of revenue and spending measures - including "curtailing" the size of the Bahamian public sector/civil service.

"I think down the road we're going to have to take some very hard and fundamental decisions," Mr Smith told Tribune Business. "One is tax reform to capture more in the net and broaden the base to include services.

"Two, is curtailing expenditure by stopping the growth of the public sector. It's expenditure containment and revenue enhancement."

The 2012-2013 Budget, he added, was important in "at least starting it off in the right direction".


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