The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas has the “lowest level” of foreign reserve import coverage in the Caribbean, a top Royal Bank of Canada (RBC) economist yesterday describing the situation as “critical”.

Marla Dukaran, Royal Bank of Canada’s (RBC) group economist for the Caribbean region, gave a sobering presentation to a Bahamas Chamber of Commerce and Employers Confederation (BCCEC) luncheon, revealing how this nation’s economy was being caught between a loss of competitiveness and deteriorating fiscal situation.

Apart from having to contend with just seven weeks’ worth of import coverage provided by its existing $646 million in foreign currency reserves, Ms Dukaran said it also suffered a net 28 per cent decline in foreign direct investment (FDI) in 2012.

Producing data that showed the Bahamas’ was losing stopover visitor market share to lower cost destinations, especially the Dominican Republic, the RBC economist warned that this nation’s debt-to-GDP ratio was rapidly approaching the level where it would “shrink” the economy.

Backing Value-Added Tax (VAT) as the centrepiece of the Government’s tax reforms, Ms Dukaran acknowledged that while all Bahamians and residents would share the burden of paying it, they were “not overtaxed” in comparison to other Caribbean nations.

And, echoing John Rolle, the Ministry of Finance’s financial secretary, she warned that failure to address the fiscal situation now would result in “more painful” corrections than VAT in the future.

Focusing on the Bahamas’ external reserve situation, Ms Dukaran said this nation had “seven weeks of import cover, which is the lowest level in the Caribbean”.

This, she explained, meant that if foreign currency inflows were cut off tomorrow, the Bahamas would have enough reserves to afford to purchase less then two months’ worth of its normal import bill.

Ms Dukaran said normal foreign reserves coverage in the Caribbean was for 12-15 weeks, with the ‘international prudential’ benchmark closer to the smaller of those two figures at three months’ worth.

“Seven weeks is critical,” she added of the Bahamas’ situation.

Ms Dukaran argued that the hefty fiscal deficits the Bahamas has been running over the past five years, the 2013-2014 deficit projected at $443 million, had contributed to the foreign reserves run down and weakened current account balance.

“The longstanding fiscal deficit is a major component of the current account,” she added, pointing out that the 28 per cent year-over-year decline in net FDI for 2012 had also had “significant impact on the strength of the external balance in the Bahamas”.

Weakness in the Bahamian tourism sector, Ms Dukaran added, had also impacted the foreign reserves level.

This nation, she added, had the “second highest level of dependency on tourism in the region” after Aruba, accounting for around 50 per cent of gross domestic product (GDP).

As a result, the Bahamas’ fiscal performance and foreign currency earnings were heavily reliant on tourism, something that was exacerbated by the fact 80 per cent of this nation’s visitors came from the US.

Yet, while cruise arrivals had been on an upward trends since the 2008 financial crisis, Ms Dukaran said there was “very little growth taking place” in the “high value added” stopover component, with this nation losing market share to cheaper destinations.

Tepid economic growth and reduced revenues from the Bahamas’ major industries, had combined with increased borrowing during the recession and a “longstanding structural fiscal deficit” to produce a perfect storm for the public finances.

Ms Dukaran explained that the Bahamas had been running primary fiscal deficits approaching 4 per cent of GDP, meaning that it was effectively borrowing to pay interest on its existing debt (borrowing to pay previous borrowing).

“It means you are borrowing to pay interest on your existing debt. That should tell you that you are in a spiral situation that’s unsustainable and not where you need to be,” Ms Dukaran warned. “This is one of the primary drivers of a balance of payments deficit.”

Without tax reform, Ms Dukaran warned that the rapid increase in the Bahamas’ debt-to-GDP ratio, from 30 per cent pre-recession to more than 50 per cent today, would continue at the same pace.

“The sustainable threshold for debt-to-GDP in this region is around 60 per cent,” she added. “Debt-to-GDP over 60 per cent causes an economy to contract; taking on more debt shrinks an economy.

“This is the point you are getting very near to here in the Bahamas, and suggests there is an urgency to correct it. You’re entering this point where you’re going to cross a sustainability threshold.”

Having set the scene for justifying why tax reform is necessary in the Bahamas, Ms Dukaran said a VAT would ensure that the tax base captured the self-employed and those working in the economy’s informal sector.

She added that 40 per cent of all working age adults in the Caribbean were regarded as working in the informal sector.

Arguing that an income tax would “eliminate 40 per cent of the tax base”, Ms Dukaran said opting for the former, rather than a VAT, would also threaten to drive “a significant percentage of the workforce”, namely expatriates in high-value jobs, to leave the Bahamas.

Praising the Government’s White Paper for suggesting it would make VAT ‘as progressive as possible”, Ms Dukaran confirmed that the tax would be a burden to all consumers and those companies in industries selected as ‘exempt’.

She suggested the Bahamas “has some levers to pull on” by virtue of not having income tax or corporation tax, as in other Caribbean countries.

“You’re not in a situation where you will be over-taxed. This is the only direct tax Bahamians are going to have to pay,” Ms Dukaran added.

“Tax reform is always painful, not matter where you are. No one wants to pay more of their income to the Government, but revenue and expenditure measures have to be in balance.”

The RBC economist said: “If that primary fiscal deficit is not eliminated soon, you can see things spiralling into a very problematic situation which we’ve seen in the region, a restructuring of debt or a default.

“The consequences are more far reaching, more painful than the current tax reform the Government is engaged in.”