The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Fund (IMF) yesterday said the fiscal deficit for year to end-June 2016 was twice what the Christie administration had projected, and urged it to make “more determined efforts to rationalise spending”.

The Fund, in a statement on its week-long visit to the Bahamas that ended yesterday, said reduced government expenditure was now “critical for rebuilding fiscal and external buffers”, which have been further eroded by Hurricane Matthew.

While suggesting that Baha Mar’s phased opening and hurricane-related construction repairs would enable Bahamian economic growth “to resume” in 2017, the IMFs statement was otherwise unrelentingly grim - especially on the Government’s finances and the economy’s structural problems.

“Preliminary data for the fiscal year ending in June 2016 suggests that the fiscal deficit declined to about 3.5 per cent of GDP, down from 4.4 per cent in the previous fiscal year,” the IMF team head, Jarkko Turunen, said.

While the year-over-year comparison sounded reassuring, and provides a modest bit of good news, the 3.5 per cent deficit projection is actually a 50 basis point (half a percentage point) increase on the forecast made in the IMF’s own Article IV report from July 2016.

The Fund had then projected that the Government’s deficit for the 2015-2016 fiscal year would be equivalent to 3 per cent of gross domestic product (GDP), or around $240-$250 million.

This was still in excess of the $150 million, or 1.7 per cent of GDP, that Prime Minister Perry Christie had confidently touted in his 2016-2017 Budget address just one month before.

Now, the revised IMF estimate is more than double that Government projection in percentage terms, implying that the 2015-2016 fiscal deficit has actually come in at around $300 million.

While that is still an improvement on the $381 million worth of ‘red ink’ incurred during the 2014-2015 fiscal year, the latest projections further reinforce the IMF’s message that the Government’s fiscal consolidation projections are “too optimistic”.

The Fund is projecting that the Government’s progress in eliminating the fiscal deficit, and achieving a balanced Budget - then surplus - will be more gradual, and take much longer, than it is bargaining for despite the $1 billion in extra revenues it has earned from Value-Added Tax (VAT) in just 21 months.

With VAT, and other revenue administration and enforcement measures in hand, the IMF is now calling on the Christie administration to rein in its spending if is to maximise the benefits from its new income.

“Further fiscal consolidation, including more determined efforts to rationalise spending, remains critical for rebuilding fiscal and external buffers,” the IMF’s Mr Turunen said.

“To support stronger growth and job creation, policies should focus on implementing structural reforms to improve productivity and competitiveness, and shoring up the economy’s resilience to natural disasters. Steps to address financial sector challenges include policies aimed at increasing credit growth and responding to global ‘de-risking’ trends.”

K P Turnquest, the FNM’s finance spokesman, told Tribune Business that the IMF assessment confirmed that the Government was continuing to spend “recklessly”, and at a rate that outpaced the VAT-related increase in its revenues.

“This again is only confirmation of what we’ve been saying all along: The level of spending is unabated and reckless,” he said.

“Despite over-achieving in VAT revenues, they’ve not been able to account for its usage, and they’ve been increasing expenditure even more - over and above the increase in the revenues from VAT collections.

“It’s a serious problem. It means that our spending remains out of control, and despite talk of fiscal consolidation, the Government is ignoring the warning signs.”

Mr Turnquest called on the Government to review all its discretionary spending programmes to ensure they were delivering “value for money”.

He added that those which were not essential should be delayed “until such time as we get our fiscal house in order”.

Gowon Bowe, the Bahamas Chamber of Commerce and Employers Confederation’s (BCCEC) chairman, told Tribune Business that the Government needed to “set the tone” and demonstrate it was willing to “cut the fat” or eliminate unnecessary spending.

He said that in its previous visits to the Bahamas, the IMF had been more cautious than many locals and the private sector when it came to the need for a reduction in government spending.

While the Fund agreed with spending reductions, Mr Bowe said it had also emphasised the need to “be very careful” in avoiding “a shock to the system” from cutting too deeply and quickly.

He emphasised that it had been focused on “trimming the fat, ineffective and inefficient expenditures”, and focusing on programmes where results could be measured.

In contrast, Mr Bowe said many Bahamians feel there is significant waste and inefficiency in government that can be eliminated relatively easily, provided the political will was there.

“We’re probably speaking the same language,” he told Tribune Business, “but the general view of Bahamians is that there’s more spending reductions that can take place imminently than over time.

“There’s low hanging fruit. It’s more important now that a tone is being set. It’s important for the Government to demonstrate that a tone is being set, and show they’re willing to cut, and trim their spending significantly.”

With the eyes of the IMF and the two rating agencies, Moody’s and Standard & Poor’s (S&P), now trained on the Bahamas via twice yearly visits by each, Mr Bowe said this nation’s economic and fiscal platforms were effectively undergoing quarterly reviews.

“That augurs well for us in terms of transparency,” the Chamber chief added, “as any government will have to become familiar with the required reporting until we create the necessary breathing space again.”

Meanwhile, the IMF’s Mr Turunen said Hurricane Matthew would have “a negative impact on near-term growth, as well as on fiscal and external accounts”.

He added: “Real GDP growth is nevertheless expected to resume next year, supported by construction activity related to the repair of Hurricane damage and work towards completion of the Baha Mar resort.

“The Baha Mar resort is expected to provide an important boost to growth and employment over the next few years. However, structural impediments continue to constrain growth over the medium term.”

Mr Turunen said the Bahamas’ current account deficit was still in “double digits” percentage wise, despite having benefited from lower global oil prices.

“Foreign reserves stood a$913 million end-September, equivalent to about 2.6 months of imports of goods and services. Altogether, modest fiscal and external buffers make the economy vulnerable to shocks, including natural disasters,” he added.

“Available indicators continue to point to a sound domestic banking system as a whole. However, together with high unemployment, the persistent overhang of non-performing loans (at more than 13 per cent of total loans at end-September 2016) continues to dampen private sector credit and economic activity.

“While the loss of correspondent banking relationships by some domestic and international banks has not resulted in major disruptions so far, a further deterioration remains an important challenge to economic development and financial stability.”