The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A former finance minister yesterday criticised Royal Bank of Canada’s (RBC) top regional economist for reaching a “too superficial” and “self-serving” conclusion that the Bahamas is squandering its Value-Added Tax (VAT) revenue windfall.

James Smith told Tribune Business that Marla Dukharan’s statements at last week’s RoyalFidelity Bahamas Economic Outlook conference were not the product of “rigorous analysis” of this nation’s fiscal predicament.

He argued that her conclusions were not grounded in evidence, and failed to place the Government’s financial woes within the proper “contextual framework”.

“I thought it was, in some instances, a bit too superficial for a chief economist,” Mr Smith, a former minister of state for finance and Central Bank governor, told Tribune Business.

“The conclusions were not based on a rigorous analysis, and set in a contextual framework. She’s put out a broad statement that we had a good implementation of VAT, but we’ve squandered it by overspending.”

Mr Smith, now a Ministry of Finance consultant, implied that he expected someone of Ms Dukharan’s stature would have produced more evidence, analysis and research to back up her comments at the conference.

He added, in particular, the RBC’s top Caribbean economist had failed to account for the impact of Hurricanes Matthew and Joaquin on the Government’s finances, which required it to undertake emergency spending and borrowing to finance repairs and recovery.

“I’m not arguing with the broad based conclusion,” Mr Smith said of Ms Dukharan’s comments, “but coming from one of the top banks in the world, she should stand to do more analytical things, rather than more self-serving conclusions that are not evidence based.”

Mr Smith’s comments may surprise observers, especially those in the Bahamian private sector and many in wider society, who regard Ms Dukharan’s comments as ‘spot on’ in pinpointing the root cause of the country’s persisting fiscal crisis. “Truth hurts,” one source told Tribune Business.

Yet Mr Smith’s comments represent the first sign of ‘push back’ against the RBC economist. Tribune Business understands that the Christie administration was enraged by Ms Dukharan’s remarks, and especially that they came from a foreigner.

The Government is also understood to have been especially affronted by the timing, given that it came in the midst of the ‘Where the VAT money gone’ controversy ignited by Michael Halkitis, minister of state for finance, in his address to the PLP convention.

Ms Dukharan’s ‘offence’ was to accuse the Bahamas of squandering the Caribbean’s “most successful Value-Added Tax” by failing to act in a fiscally prudent manner.

In a harsh verdict on the Christie administration’s fiscal policies and achievements, said it had failed to slash the Bahamas’ annual fiscal deficits “in the way it had planned”.

Ms Dukharan called for the Bahamas to implement so-called ‘fiscal rules’ to cap government spending and establish a debt ceiling.

And she warned that the Government’s fiscal profligacy could ultimately impose pressure on the Bahamian dollar, and its one:one peg with its US counterpart.

“I am disappointed that despite having the most successful VAT in the whole region - despite getting more from this VAT than you expected to - the fiscal deficit was not reduced in the way it had planned to be reduced. Fiscal prudence had not been adhered to,” Ms Dukharan said.

“This is going to put pressure on the currency. It has already put pressure on your ratings. I believe that if you continue on this path of persistent fiscal deficits, which drive debt up, you will end up in a situation where it’s unsustainable and you have to get help. That is where we consistently end up in the region.

“It’s easy to take the money and spend it on a mechanism that you think your electorate wants and will reward you for. We need to have ‘fiscal rules’ which limit how much you can spend, how big your deficit can be and how high your debt can go.”

Mr Smith acknowledged that while there might have been ‘overspending’ initially by the Christie administration, this trend had been “tapering off” in recent years as revenues caught up with the pace of expenditure growth.

“I think one of the most important things is the way out of this crisis we see ourselves in is economic growth,” he told Tribune Business, “expanding GDP rather than government expenditure.”

However, he argued that the Bahamas’ persistently high unemployment and crime rates, and demands on the social security system, meant that public spending could not be reduced overnight.

The now-CFAL chairman added that even “holding the line” on government spending “might exacerbate social policy down the line”.

Mr Smith also expressed bewilderment at Ms Dukharan’s call for the Bahamas to reduce its dependence on foreign direct investment (FDI), given that all countries - even those in the developed world - all relied upon it and competed to attract it.

“That is a part of globalisation, attracting FDI,” Mr Smith said. “It’s like saying we’re over-reliant on tourism, so do away with it. That’s like telling the Arab countries to move away from oil.

“I would have expected more analysis of what’s really there and the context in which the Budget unfolds in this country. She could have come to the same conclusions, but would have to bring more rigorous analysis.”