By NEIL HARTNELL
Tribune Business Editor
The Bahamas will cut its disaster recovery costs by 28 per cent it takes out its $100 million 'contingent loan' facility, the Inter-American Development Bank (IDB) is asserting.
The IDB, in its proposal for the emergency financing, argued that its facility would amount to 72 per cent of the costs incurred by the Government in seeking bank loans or issuing debt in the aftermath of a catastrophe.
It said the savings would hold true even if the Government has to fully draw down on the $100 million facility, but warned that the funding will only be made available if the Bahamas implements an adequate Comprehensive Natural Disaster Risk Management Programme (CDRMP).
The IDB document, released yesterday, said unidentified "progress indicators" had been agreed with the Government for the implementation of such a programme, as it warned that a "once in 100 years" hurricane could wipe out 8.5 per cent of GDP - or close to $1 billion in economic output - should it strike the Bahamas' major population centres.
Touting the cost advantages of its $100 million facility, the IDB said: "The Net Present Value (NPV) of the cost of financing the IDB loan was compared to the NPV of the cost of issuing bonds.
"Both NPVs were calculated using a discount rate of 12 per cent. The results show that the contingent loan granted by the Bank is 72 per cent of the cost of issuing debt, which makes it a much more efficient option not only in terms of financial cost but also in terms of how quickly the resources are made available."
Some observers may view the IDB's analysis as self-serving, but the Bahamas' strained fiscal position means the Government can ill-afford the need to put in place disaster recovery financing mechanisms well ahead of a major hurricane strike.
And it took several weeks for the Central Bank and a consortium of local commercial banks to put together a $150 million emergency facility to finance disaster relief and essential infrastructure repairs in Hurricane Matthew's wake in 2016, with that storm inflicting $519 million in damage and losses - equivalent to 6.75 per cent of GDP.
Hurricanes Joaquin and Irma added $114 million and $118 million in damages and loss, respectively, in 2015 and 2017, and the IDB warned that the hurricane threat to the Bahamas is only likely to increase.
"These trends are likely to worsen as a result of climate change," it said. "With most of its territory a few metres above mean sea level, the Bahamas is highly vulnerable to sea level rise and storm surge associated with increasing intensity of extreme weather events due to the impacts of climate change.
"Likely impacts include coastal flooding and erosion, mangrove retreat, decreased seagrass bed productivity, and saltwater intrusion into existing small lenses of fresh groundwater. A study conducted by the IDB indicates that the probable flood exposed area in Nassau will expand 8 per cent by 2050 due to the increasing precipitation caused by climate change."
The IDB report added that female-headed households, of which the Bahamas has many, are at "a clear disadvantage during a disaster event", and pointed to the growing threat to the economy.
"The potential impacts of natural hazards and climate change on the natural resource base that supports tourism are a serious concern for future environmental, economic, and social sustainability in the Bahamas," it warned.
"Historically, the Bahamas has relied on the accumulation of debt to absorb the cost of recovery, contributing to the rise of public debt. The central government debt-to-GDP ratio increased to 67.8 per cent at the end of 2017.The fiscal deficit is estimated to have reached 5.7 per cent of GDP for 2017, up from 3.5 per cent of GDP in 2016, due to post-hurricane clean-up and reconstruction spending, temporary tax reliefs, and disruptions in revenue collection, among others.
"Furthermore, reconstruction activities depend heavily on imports which could drain the country's international reserves. As of March 2018, the Bahamas' reserves stand at US$1.597 billion, covering approximately 6.4 months of total merchandise imports."
The Bahamas' fiscal woes mean it is now unable to rely on such practices, and the IDB report added: "The country's exposure and vulnerability to natural disasters, and its current macroeconomic environment, highlight the importance of implementing measures that can help increase the Bahamas' economic and fiscal resilience to disaster risk.
"Overall, it has been estimated that, for a maximum considered event with recurrence period of one in 100 years, average annualised losses would reach 8.5 per cent of GDP. This number increases to almost 28 per cent of GDP when considering an event with recurrence of one in 500 years."
The IDB added that its $100 million facility would provide "more efficient coverage" through reduced costs and "the savings created by timely availability of resources, while reducing the liquidity gap that governments generally face during such events due to the combination of increased expenditures, lower revenues, and incremental constraints in terms of cost and access to debt".
It added: "In other words, providing ex-ante financial coverage for the emergency phase in high magnitude disasters partially reduces the risk of even worse impact scenarios in terms of the disaster's impact on public accounts, since financing is quickly available to handle the emergencies.
"Studies confirm that having the financial coverage to provide liquidity in case of severe events ensures greater stability in long-term economic growth compared to a scenario in which this type of coverage is not in place, since resources are readily available to meet the requirements of an emergency, which eliminates the need to finance extraordinary expenditures from public accounts that were not budgeted to accommodate such needs."