The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The IMF yesterday forecast that despite Value-Added Tax’s (VAT) implementation the Government’s direct debt-to-GDP ratio will decline by little more than one percentage point over the next five years.

The Fund’s projections, contained in its newly-released full Article IV report on the Bahamas, showed that the central Government’s debt would fall from a peak 63.2 per cent of GDP in the current fiscal year to 62.1 per cent by 2019-2020.

This is despite the International Monetary Fund (IMF) agreeing that VAT will consistently add revenues equivalent to 3 per cent of GDP throughout the next five years, taking its total income above the 20 per cent threshold by 2018-2019.

This all suggests that VAT will enable the Government to ‘hold the line’ on its debt-to-GDP ratio, without making any substantial inroads cutting into the national debt as had been promised.

Although the Government will start to run a primary balance (this strips out debt interest, as well as principal, payments) from this fiscal year onwards, the Fund is also forecasting that it will still incur overall deficits - albeit declining ones - every period through until 2019-2010.

And with Government-owned corporations collectively owing a debt pile equivalent to 16 per cent of GDP in 2013-2014, the Bahamas is already well above the 70 per cent ‘danger threshold’ set by the IMF as the point where countries are in danger of losing control of their financial affairs. Adding that figure to the central government debt comes to 79.2 per cent of GDP.

While the IMF also praised the Bahamas’ “relatively smooth” VAT implementation, this was well short of Prime Minister Perry Christie’s hyperbole earlier this year.

He told College of the Bahamas (COB) journalism students: “They [the IMF] have looked at (our taxation reform) and analysed it. They have said we have had the most efficient implementation of VAT of any country.”

The Article IV report said: “Staff commended the authorities for the introduction of a broad-based VAT on January 1, 2015, with a standard rate of 7.5 per cent and very few exemptions.

“This represents a significant step towards boosting policy credibility, and bolstering market confidence. The implementation of the VAT appears to have been relatively smooth despite some transitional issues that are being resolved. Early indications of its performance are encouraging, and the authorities seem on course to achieving their initial revenue targets.”

The IMF now urged the Government to focus on other revenue reforms that have “lagged”, such as Customs modernisation and real property tax administration.

It added: “The fiscal deficit is expected to narrow to about 2 per cent of GDP in 2015-2016, reaching 0.3 percent in 2019-2020. The primary balance is projected to move into a surplus in 2015-2016.

“The central government debt-to-GDP ratio will remain elevated, but decline slowly over the medium term as the fiscal position strengthens. Under the baseline scenario of the debt sustainability analysis, central government debt is projected to peak at 63 per cent of GDP in 2014-2015, declining marginally thereafter to 62 per cent in 2019-2020.

“Gross financing requirements will decline from 5.7 per cent of GDP in 2014-2015 to about 2 per cent of GDP in 2019-2020.”