The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

While “not time to break out the champagne yet”, a former finance minister said the Bahamas’ fiscal position will have “turned the corner” if it can be maintained for 18 months.

James Smith, also an ex-Central Bank governor, said the Government’s financial performance for the 2013-2014 first half was moving “in the right direction”, although it was impossible to base a trend on just two quarters.

“I think if the trend continues,, with a slowdown in expenditure growth - recurrent and capital - and better collection on revenue, if this lasts for 18 months, we can say we have started to turn the corner and arrested the trajectory,” Mr Smith told Tribune Business in a recent interview.

“I’m cautious about two quarters, but it looks like we’ve started to turn the corner somewhat. It’s not time to break out the champagne, but seems like a move in the right direction.”

The Government’s fiscal deficit for the 2013-2014 first half was down by 19.3 per cent at $238 million, compared to $295 million the previous year, largely due to a drop in capital (investment) spending that many believe is unsustainable.

The first half GFS deficit, a measurement that strips out debt principal redemption, shows the Government is still running monthly deficits averaging almost $40 million, and the full-year deficit is expected to come in at $447 million, a sum equivalent to 5.2 per cent of gross domestic product (GDP).

But, adding a note of caution, Mr Smith said the Government had yet to see how revenues for its peak period - the January-April months that coincide with tourism’s high point - had been impacted by flight cancellations resulting from the recent US snow storms.

And he suggested that the Bahamas could afford to put off fiscal and tax reforms for no more than a year, adding that to wait longer would also result in many people’s main complaint about Value-Added Tax (VAT) - an increase in prices and inflation.

Mr Smith, now chairman of CFAL, told Tribune Business that as a consumption-based tax, VAT would spare savings and investment, ultimately leading to more economic expansion and job creation.

Doing nothing, he added, would see the Government’s deficit and $5 billion-plus national debt grow to unsustainable levels, requiring ever-greater financing through borrowing.

These borrowing demands, Mr Smith said, would ultimately push up interest rates and ‘crowd out’ the private sector, making credit and capital more expensive and less accessible for everyone else.

“This puts downward pressure on the economy into negative growth, and with that comes higher prices from lower growth and lower incomes,” Mr Smith told Tribune Business.

“In the short-term, you might get away with no tax reform for a year.”