The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A former finance minister fears The Bahamas may miss out "on a really good upward swing" in GDP growth as a result of the VAT rate hike and other budget measures.

James Smith, pictured, also an ex-Central Bank governor, told Tribune Business that "all the macroeconomic indicators" indicated The Bahamas was poised for a strong economic rebound prior to the latest fiscal consolidation moves.

While acknowledging that it might take until year-end to determine the precise impact of 12 percent VAT, Mr Smith said there was already "anecdotal evidence" that Bahamian companies had decided to hold-off on further investment and expansion "until the dust settles".

He also echoed warnings that VAT's initial inflationary impact could be made worse by the so-called "trade wars" between the US and other large economies, particularly China, given that the imposition of tariffs by both sides will drive up prices for the vast majority of goods imported by The Bahamas.

Mr Smith, who held the finance ministry post between 2002-2007, reiterated that he would have held off increasing the VAT rate by 60 percent to see what impact Baha Mar's full opening had on the Bahamian economy and government revenues.

"What is really unfortunate is that we were on the verge of a really good turnaround, an upward swing, because all the macroeconomic indicators were looking good," Mr Smith told Tribune Business. "It's been detracted from in a way because investors are still waiting for the dust to settle.

"The greatest impact of a tax hike is not sometimes the increase in prices across the board, but the attack on confidence of consumers and businesses. The first reflex action is to stop and see, meaning holding off on this purchase or investment. There's no doubt about that, if you listen to the number of businesses changing their minds on expansion plans."

BISX-listed AML Foods, the food retail and franchise group, previously told this newspaper it is deferring vertical construction of any new stores until the business environment becomes more certain, with the Bahamas' pending accession to full membership in the World Trade Organisation (WTO) also influencing its decision.

Boosted by Baha Mar's opening, and construction activity related to foreign direct investment (FDI) inflows, the International Monetary Fund (IMF) previously forecast that the Bahamian economy will grow by 2.5 percent this year - its fastest expansion rate in a decade. The momentum was predicted to carry over to 2019 with 2.2 percent GDP growth.

Those projections, made pre-VAT rate increase, will now be subject to doubt. The Government, though, is seemingly banking on a combination of Baha Mar, increased FDI and improved stopover tourism numbers to offset the impact of VAT sucking an extra $400 million out of consumers' disposable income.

Mr Smith, though, said any VAT-induced price rises will ultimately be passed on to the Bahamas' stopover visitors once the hotel industry's "transition period" ends and the tax increase works its way through the supply chain.

"It works its way through to them at some point because the stuff we import, they consume," the now-CFAL chairman added, emphasising that the Bahamas "certainly doesn't need" a strike by a major hurricane while it adjusts to the 2018-2019 Budget measures.

"I have some problems with the timing of it," Mr Smith told Tribune Business of the VAT increase. "Bear in mind we've been looking for five years at the completion of one of the largest resorts in the Caribbean to give us the boost we need coming out of recession.

"That was Baha Mar. We will never be able to measure the real impact of Baha Mar, because as soon as it opened its doors you changed the tax rate.... My view was, then and now, even if there was a demonstrated need for a tax increase across-the-board, I would have waited until the major economic correction we were waiting for, and see how it played out for another year."

Mr Smith said Baha Mar's economic impact should have been allowed to determine the VAT rate increase's magnitude and, indeed, whether it was necessary. "That would determine how much more revenue you think you need going forward, which begs the question of whether the VAT increase was to plug a deficit or part of a plan to jump to the WTO down the road," he added.

The Minnis administration has consistently argued that the VAT hike, and other Budget revenue-raising measures, are painful but necessary to stop "kicking the can down the road" on eliminating the annual fiscal deficits that the Bahamas has run since independence.

It was also "caught between a rock and a hard place", faced with a total of $360 million in unfunded bills for which there was no money to pay them, and the Fiscal Responsibility Bill's target of reducing the fiscal deficit to maximum 0.5 percent of GDP by 2020-2021.

Mr Smith, though, expressed doubt that the Government will see the $400 million gross VAT revenue increase it is projecting. "We won't know with any measure of confidence the intake, whether it is up as high as expected, because when you raise prices it doesn't yield one:one the amount of revenue you're thinking," he explained.

"As the quantity of goods imported shrinks in proportion to the increase in rate, the impact may not be what you're projecting."

The former minister also expressed concern that real estate FDI will be negatively impacted by the changed 'transfer tax' structure, which has reverted back to 10 percent Stamp Duty and abandoned the previous 7.5 percent VAT/2.5 percent Stamp Duty split.

This means that real estate sales are now treated as VAT 'exempt', leaving developers unable to recover the levy on their inputs - a development that will likely result in increased taxation and costs being passed on to purchasers.

Mr Smith said real estate investments represent "a substantial part of our FDI", and added: "I think some of them [developers] will be getting a slight loss on property in the pipeline. When they committed to pre-contracts, their projects would have included 7.5 percent VAT and lower Stamp Duty, and that's how they pre-sold units.

"Most FDI going into real estate is for condos pre-sold before they put their first holes in the ground. That is predicated on the tax structure in the Bahamas, but that got changed and I'm sure that left them with a little taste."