By NEIL HARTNELL
Tribune Business Editor
The Bahamas needs a $160 million “adjustment” to its primary fiscal balance if this nation’s debt-to-GDP ratio is to achieve long-term sustainability, the Inter-American Development Bank (IDB) has warned.
The bank, in its latest Caribbean Quarterly Bulletin, emphasised that the Bahamas’ 2016 year-end debt-to-GDP ratio of 74 per cent was above the ‘danger threshold’ set by the International Monetary Fund (IMF).
“Central government and publicly guaranteed debt decline by 1 per cent (to 74 per cent of GDP end of 2016),” the IDB said. “Central government debt alone was 65 per cent of GDP, and above the targeted level within the [Government’s] medium term fiscal consolidation plan.
“It is above the threshold at around 70 per cent of GDP for market access countries used as the operational target for the IMF and World Bank. Simulations show that the Bahamas would need to adjust the primary balance by 2 percentage points of GDP to stabilise its debt-to-GDP ratio in the long run.”
Given that the Bahamas’ GDP is estimated to be between $8 billion to $9 billion, such an adjustment would require the Government to achieve a $160-$180 million ‘swing’ with regard to its primary fiscal balance.
The primary balance measures the difference between recurrent revenue and recurrent spending, but strips out interest payments to service the Government’s existing debt.
The mid-year Budget figures, released on Wednesday, show that the Christie administration ran a $387 million recurrent deficit for the first six months of the 2016-2017 Budget year.
Recurrent revenues of $855 million were dwarfed by $1.242 billion in fixed-cost spending. However, the latter figure includes debt servicing (interest) payments, meaning that the primary deficit will be less than the $387 million figure recorded.
The IDB, meanwhile, said the primary surplus initially targeted for the 2016-2017 fiscal year was “ambitious” to put it mildly, given the $300 million blow that Prime Minister Perry Christie says has been inflicted on the Government’s finances by Hurricane Matthew.
“The Bahamas’ fiscal position improved, but at a slower pace than forecasts in the medium–term fiscal consolidation plan,” the IDB said.
“The targeted primary surplus for 2016-2017, at 1.9 per cent of GDP, would be ambitious considering the projected deficit of -0.3 per cent of GDP, impacted in part by Hurricane Matthew and increased spending on transfers and subsidies.”
The IDB added that the Bahamas’ gross external reserves, standing at $902 million at year-end 2016, were slightly below the IMF-recommended minimum of three months’ import coverage.
The $902 million was equivalent to 2.6 months’ worth, and the IDB added: “Reserves were supported by external borrowing at commercial rates and improved tourism receipts (year-to-date).
“On broad money, which includes assets that are highly liquid, reserves are 1.6 months. Reserves are above 100 per cent of the short-term debt (Guidotti- Greenspan ratio), as is the case with the adjusted ratio, which also includes interest payments. However, when adding to the denominator the current account deficit obligations, the indicator falls short at around 0.4.”
The IDB continued: “The IMF notes that the country would benefit from additional reserves accumulation, given its exposure to external shocks and natural disasters, and increased reliance on more volatile non-foreign direct investment (FDI) capital flows in recent years.
“Additionally, efforts to improve competitiveness through structural reforms, accompanied by fiscal consolidation, are needed to address these vulnerabilities.”
The IDB also predicted that unemployment will “likely remain in the double digits”, hitting a full-year average of 14.5 per cent for 2016, despite the decline to 11.6 per cent in November.
“Domestic demand remains less active than expected due to lower employment and household deleveraging,” it added. “The high share of personal non-performing loans, particularly mortgages (54 per cent for non-accrual loans), had negative wealth effects on domestic demand.
“Achieving a higher growth trajectory is the greatest challenge the Bahamian economy faces. Tourism capital–related investments will help maintain a medium-term growth rate of 1.6 per cent. Consideration can be given as to ways to further enhance human capital and improve cost efficiency.”