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Idb: Bahamas Needs $560m 'Adjustment'

The Bahamas needs a $560 million "adjustment" at present growth rates just to cut its debt-to-GDP ratio to 60 per cent by 2021, amid warnings this nation now lies on the fiscal "dark side".

The Inter-American Development Bank (IDB), in a newly-released report, warns that the Christie administration's fiscal consolidation plan will only "stabilise" - not reduce - the Bahamas' growing $6.6 billion national debt.

Implying that more far-reaching action was needed, the IDB said the Bahamas now found itself on the "dark side" of the relationship between economic growth and national debt.

Its latest Caribbean Region Quarterly Bulletin, the IDB said studies had shown that above 60 per cent debt-to-GDP, any further increases in that ratio would have a negative "marginal and average impact" on economic growth.

The Government's direct debt-to-GDP ratio was almost 68 per cent at year-end 2015. And when contingent liabilities (debts guaranteed on behalf of public corporations) are factored in, the debt-to-GDP ratio matches the 76.3 per cent figure produced by the Central Bank.

Prime Minister Perry Christie last week again touted the Government's fiscal accomplishments, pointing to the $389 million reduction in the GFS fiscal deficit (if 2015-2016 projections hold true) since the 2012-2013 fiscal year.

The Government is also forecasting that it will achieve its first $68 million GFS surplus come 2018-2019, but the IDB report sharply arrests this optimism by offering a much more sober analysis.

In particular, it warns that at the Bahamas' present 1 per cent average GDP growth rate, this nation requires a "fiscal adjustment) equivalent to 7 per cent of GDP just to reach a 60 per cent debt-to-GDP ratio.

The IDB added that even to "stabilise" the debt-to-GDP ratio, the Bahamas needed an adjustment equal to 3.4 per cent of GDP. 'Adjustment' is defined as the size of the swing into a primary surplus, which measures the difference between recurrent revenues and spending, once interest (debt servicing) payments are subtracted.

Given that the economy's annual output is estimated to be $8 billion, the "stabilising adjustment" is equal to $270-$280 million. The "60 per cent ratio adjustment's" equivalent is $560 million.

"The Bahamas requires a fiscal adjustment of 3.4 per cent of GDP to stabilise the debt ratio at its current level," the IDB said.

"Simulation results show that with a debt stock at 76 per cent of GDP including contingent liabilities, the Government would need to adjust fiscally by 3.4 percentage points of GDP to stabilise the ratio of debt- to-GDP.

"Debt reduction, however, is an even greater challenge given that the economy is projected to remain in a low-growth trap," it added.

"The simulations show that with a GDP growth rate of almost 1 per cent, a 7 per cent fiscal adjustment would be required to reduce the debt to 60 per cent of GDP in the next five years."

Economic growth has proven elusive for the Bahamas in recent years, with Department of Statistics data showing the economy contracted in both 2014 and 2015.

The Christie administration is now projecting just a 0.5 per cent GDP expansion in 2016, and growth of 1 per cent in 2017 - placing the Bahamas right in line with the IDB's 7 per cent "adjustment" requirement.

Drawing on its own calculations, and the International Monetary Fund's (IMF) World Economic Outlook, the IDB report showed how higher GDP growth rates would reduce the level of "fiscal adjustment" required by the Bahamas.

Should the Bahamian economy expand at a 3 per cent rate, the "adjustment" required would fall to 6.6 per cent of GDP - a sum still equivalent to $520 million.

And, should the 'Holy Grail' of a 5 per cent average growth rate be hit, the Bahamas would need an adjustment of 5.2 per cent - equal to $416 million - to reach a 60 per cent debt-to-GDP ratio by 2021.

"Higher GDP growth rate assumptions of 1.5 per cent and 3 per cent reduce the required fiscal adjustment marginally to 6 and 5 per cent of GDP, respectively," the IDB report said.

"Fiscal reforms identified in the medium-term fiscal framework may reduce the primary deficit and stabilise public debt at current levels, but they will not be sufficient for debt reduction over the medium term."

The IDB also criticised the Ministry of Finance's budget estimates, pointing out that they were constantly too optimistic, and overly aggressive, under both the former Ingraham administration and the current government.

The last FNM government under-estimated spending in 2011 and 2012 by sums equivalent to 6 per cent and 4 per cent, respectively, while revenues in both years were over-estimated by 5 per cent of GDP.

While the Christie government was able to cut spending below projections by a sum equivalent to 6 per cent of GDP in its first year, this was more than offset by a revenue over-estimate equivalent to 12 per cent of GDP.

While it has done better since then, revenues have been over-estimated by 3-4 per cent, with spending under-estimated by 3-5 per cent.

As a result, the Government has always been dealing with a deficit of 5-10 per cent of GDP between its Budget forecasts and the actual outturn.

"The estimates indicate a systematic overestimation of fiscal revenues and an underestimation of expenditure in most fiscal years," the IDB report said.

"Budget preparation and execution in the Bahamas could be improved. Prudence in budget preparation and execution are important determinants of the fiscal outturn, and can provide insights about the quality of institutions involved in the budgetary process.

"The adoption of fiscal rules, perhaps based on structural fiscal budgets, accompanied by institutional strengthening of budgetary institutions, may be in order. Such would increase the credibility of fiscal policy, and perhaps reduce the cost of financing."

The IDB said the Bahamas' debt-to-GDP ratio had risen by 36 percentage points compared to pre-recession levels, and was now weighing down economic growth, in addition to sucking money away from infrastructure investments and essential public services.

"A steep rise in public debt could place a country into a vicious, unsustainable cycle of increasing debt and rising interest payments," the IDB report said, echoing previous IMF warnings.

"A moniker often invoked to describe the Caribbean is: 'High debt, low growth'. It was never completely true. Today it may have become so. The tourism countries, Jamaica, Barbados, and the Bahamas, are still in distress from the tailwinds from the world crisis of 2009.

"Barbados, the Bahamas, and Jamaica are on the 'dark' side of the debt-growth relation; that is, with debt levels that put negative pressure on economic growth," the IDB added, in a bleak assessment of the wider Caribbean region.

"Guyana and Trinidad and Tobago are expected to join them. Only Jamaica and, to a lesser extent, Barbados, are expected to reduce their debt levels in the next two years, albeit remain on the dark side of the growth-debt relation."

The IDB added that the fiscal buffers for all Caribbean nations, including the Bahamas, were "inadequate". With only Jamaica forecast to produce "an unambiguous improvement", it warned that there was "a deteriorating limited policy space to respond to negative external shocks".

Turning to the Bahamas specifically, the IDB said this country was now categorised by the IMF as 'higher scrutiny', given the ongoing concerns over its debt and fiscal sustainability.

Pointing to what has the Bahamas in its current fiscal mess, the IDB report said the Bahamas' primary deficit had grown from 0.1 per cent in 2008, just before the global recession, to 4.2 per cent of GDP in 2013.

"In the five years leading up to fiscal year 2013, expenditure growth averaged 4 per cent annually, compared to a decline in revenue of 0.9 per cent on average each year," the IDB report said.

"The annual change in debt-to-GDP over the period 2011-2015 averaged 4.4 per cent, and was determined largely by the primary balance. For the same period, the annual growth in the primary deficit averaged 2.8 per cent."

The primary deficit, together with interest rates, were identified by the IDB report as the main drivers of the increase in the Bahamas' national debt.

It also blamed structural rigidities in the Budget, with more than 60 per cent of recurrent spending allocated to public service compensation, subsidies and transfers, for the fiscal predicament.

"Stabilising the debt-to-GDP ratio and subsequently putting it on a sustainable path would require the central government to generate primary surpluses over an extended period of time," the IDB report said.

"In the Bahamas, current spending is rigidly focused on subsidies and transfers, and personal emoluments - almost 60 per cent of current expenditure.

"In particular, transfers and subsidies as a share of GDP increased from 5.3 per cent in 2011 to 7.3 per cent in 2016, and this accounts for 34 per cent of current expenditures.

"Personal emoluments account for a similar share of GDP (7.5 per cent), but have been relatively steady over the same period."

The IDB report said the Bahamas' primary deficit had shrunk as a result of increased revenues stemming from Value-Added Tax's (VAT) implementation.

It added: "The Bahamas still has room to increase tax revenues, as it is presently well below that of other tourism-dependent Caribbean countries, such as Barbados at 25 per cent of GDP, and Jamaica at 25 per cent."

The IDB warned that the Bahamas' fiscal consolidation efforts would only succeed if they were accompanied by economic growth.

"The fiscal imbalance is further amplified by what appears to be weaknesses in the fiscal institutions and/or technicalities of budget preparation and execution," it said.

"Moreover, fiscal adjustment measures outlined in the country’s medium-term fiscal framework should be supported with complementary growth-enhancing policies to support the country’s debt reduction efforts and growth prospects over the medium term....

"The task is not only fiscal consolidation but to increase economic growth."

Comments

Well_mudda_take_sic 1 year, 5 months ago

$560 million is the lower end of the IDB's estimate of the total amount stolen from the Bahamian people by the corrupt Ingraham and Christie-led governments over the past decade. Sir Snake alone accounts for nearly half of this amount!

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John 1 year, 5 months ago

The Bahamas is suffering from Toxic TAX Shock Syndrome, where the government has shoved so many taxes at the Bahamian people, all in one short period, that some persons have had to revise their plans to invest and others had to cut back on investments to pay taxes> So there is no real growth in the Bahamian economy. In fact, there may have been some contractions. If one was to do a trail of the taxes collected by government they will discover double and triple routes of taxation. For example one pays customs duties on goods brought into the country for resale. Then that person also pays VAT on those goods. Then they pay business license bases on how much goods they sell. And if they own the property their business is located on they pay vat and customs duties on all inputs (labour included) on all the inputs for the construction of the building, then they still pay annual property taxes, so in essence more than 50% of a person's income reverts back to the government is some form of tax or another. More taxation may yield the government more revenue in the short term but eventually it stagnates businesses or it draws so much money out the economy, businesses are forces to down size or shut down.

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killemwitdakno 1 year, 5 months ago

Articles like this need to be on ZNS business segment broken down. This writer doesn't write for the masses.

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killemwitdakno 1 year, 5 months ago

So in short , the treasury won't have any revenue in 2021 bc of accounts payable , even if we stopped spending altogether.

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banker 1 year, 5 months ago

Here is the breakdown:

The government needs a debt reduction of over half a billion dollars to remain with an economically viable debt load, as measured the debt to GDP ratio of 60%.

The GDP is the total economy. You add up all of the money changing hands, and that is the GDP. It is the amount of business and money moving around in the Bahamas. Right now the GDP is about 9 billion dollars (you count absolutely everything - from a person being paid a wage to what they spent, to what the merchants spend buying that stuff etc). The national debt is 6.6 billion dollars, so the debt is approaching what our economy is worth. Any slowdown in the economy, and that is bad news for the debt ratio.

The IDB says that when the government debt is over 60% of the total economy, you are in deep trouble. We are in deep trouble, for a very small economy.

What this headline means, is that to get out of serious trouble, we need to pay down close to $600 million dollars of debt to be sustainable and bring down the debt to GDP ratio of 60%.

What Christie says, is that we have reduced going further into the hole (the deficit) by $389 million. In other words, we borrowed $390 million less than last year. The deficit is the shortfall between what the government takes in and what the government spends. The last balanced budget where the government spent what they took in, in the Bahamas was delivered by William Allen and there hasn't been one since.

This is disturbing because the economy of the Bahamas hinges on two pillars. In the US, the debt to GDP ration is 90-some percent, but they have a population of 320 million, a robust diversified economy and GDP growth.

This article states that we be good, mon, if the economy grows by 5-6%. If you grow the economy, the GDP, then the debt ratio falls. But that is impossible. It is like SuperValue saying, we will be fine if we can sell 10,000 more pounds of filet mignon steak this year. Not gonna happen.

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John 1 year, 5 months ago

The fact is that the government must keep its tax in proportion to the money supply in the economy. If the economy is in recession and/or contracting, government should expect reduced revenues and adjust its spending accordingly. If it is in a position it should also be able to provide stimulus by allowing tax breaks and/or other incentives to invest. But the problem in this country is that too many tax dollars goes unaccounted for, misused or spent in a way that government does not receive value for money. The scandals and misappropriations over the four years alone amount to $1 Billion dollars. Wrap your mind around that. At least 1/4 billion of the national budget goes missing or is misappropriated every year, at least under this government. If government can cut wastage and stealing, they can eliminate VAT and property taxes. Then there is this overblown idea that foreign investors coming to this country must be showered with gifts: Tax breaks, prime real estate and other concessions. And what happens? More often than not the foreign investment fails. In fact some never gets off the ground. But the foreign investor wants to hold on to their gifts. In fact many leave the country owing the government millions i9n taxes, electricity bills, national insurance you name it. And more millions to other creditors. And whenever this happens guess what happens to the local Bahamian? His tax burden increases. The government may not always come and say ;" we need to increase takes this year, but schools will not get built, roads will not get repaired, hospitals will be without medicine and so on. When these heads of agreements are signed there should be some type of performance bond so government is not always left with an empty basket and the foreign investor skips town with the Bahamian people's money.

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sheeprunner12 1 year, 5 months ago

We do not need an adjustment ........... we need a social revolution to rid ourselves of the PLP & FNM .............. the Gang of Six, Bran and GMoss must lead the way

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