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."