By NEIL HARTNELL
Tribune Business Editor
The Bahamian economy is still contracting in real terms, a key Ministry of Finance adviser said yesterday, adding that the Government’s Air Fare Credit policy was “unsustainable” and had failed to generate compensating returns.
James Smith, a former minister of state for finance and Central Bank governor, told Tribune Business that with a current 2.78 per cent inflation rate, and GDP growth projected at 2.5 per cent for 2012, the Bahamian economy was still effectively contracting in real terms - meaning it was still in recession.
Real economic growth is calculated by subtracting inflation from the headline GDP expansion rate, as the latter figure could merely indicate ‘big ticket’ items are more costly and that there has been no corresponding increase in Bahamian economic output.
Pointing to the Central Bank’s monthly economic report for July 2012, Mr Smith said a key concern was that the rate of increase in the fiscal deficit - 24 per cent for the first 11 months of the 2011-2012 fiscal year - was far outstripping the projected 2 per cent GDP growth.
“I don’t know what percentage that works out to, but when there’s this gap - the recurrent deficit growing faster than the economy - you know you are in trouble,” Mr Smith told Tribune Business.
“If you get to real growth, taking out inflation of 3 per cent, we have negative growth. A lot of that [projected] growth could be explained by increases in oil prices, and if you’re not getting more output, you’re paying more for the same.
“If inflation is at 3 per cent, and growth is at 2.5 per cent, at best you are flat, or at worst, negative.”
Mr Smith also questioned the wisdom of persisting with the Air Fare Credit programme, a joint 50/50 venture between the Ministry of Tourism and the hotel industry to defray airlift/access costs to the Bahamas.
This, he suggested, had evolved into a government subsidy programme where the hotels reaped all the financial benefits and the Government never enjoyed any returns.
Questioning whether the programme had stimulated enough additional stopover visitor spending, and benefits, to compensate for the additional outlay, Mr Smith told Tribune Business: “What was started in the last administration was really not sustainable - the subsidisation of air travel to the Bahamas.
“The theory was that if we got them here, they would spend more money in the economy. But unless the net spending is more than we pay, it’s problematic because the subsidy is coming from the Government but the additional expenditure is all going to the hotel sector, and the Government is not getting a share of that.
“In effect, you’re running a deficit to bring in customers in the hope the additional activity will more than compensate for it, and I don’t know if that’s happening yet.”
Mr Smith added that the Bahamas had “never been able to get a handle on” the primary deficits, which is calculated as recurrent revenues minus recurrent spending.
This meant the Government had automatically every year, and every month, been forced to use its overdraft or Central Bank facilities to meet the civil service payroll.
This was further exacerbated by debt servicing obligations, and Mr Smith added that this “points to a structural imbalance where we have to raise taxes, cut spending or do both”.
With a $124 million increase in Excise Taxes for the first 11 months of the 2011-2012 fiscal year being driven by a public corporation making good on its arrears, Mr Smith said continued on-off injections were masking weakness in recurrent revenues.
The former finance minister said: “We’re becoming overdependent on once-off transactions rather than a more even, upward trend in revenue.
“We’re depending on shots in the arm for extraordinary Stamp Tax from the sale of significant assets in the Bahamas. We’ve been having these year after year, and it’s disguising the real problem, which is revenue growth is being outstripped by expenditure growth.”
Much, Mr Smith added, depended on factors outside the Bahamas’ control, such as the strength of US economic recovery and whether the Bahamas regained its US tourist market share.
With the US failing to grow fast enough to date to lift the Bahamas out of its predicament, Mr Smith said this nation needed to look at domestic policy, and not much had happened here.
“We’ve got a very deep hole to dig ourselves out of,” Mr Smith said, acknowledging the predicted $550 million fiscal deficit for 2012-2013, and national debt approaching $5 billion.
The “distortions” created by debt obligations sucking away resources from areas such as education, health and welfare had a “knock on effect” on the rest of the Bahamian economy, he added.
“This is why it is so important to get a handle on our debt situation as soon as we can; without delay. It’s one of those problems you can’t avoid, and in our case, can’t postpone.”