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Fiscal Targets 'Blown' Without Disaster Plan

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Hurricane Matthew-type event could wipe out the IMF's proposed national disaster fund and forever blow The Bahamas off its Fiscal Responsibility targets, a top insurer warned yesterday.

Emmanuel Komolafe, pictured, the Bahamas Insurance Association's (BIA) chairman and a risk compliance specialist, told Tribune Business that the Government will struggle to hit - and maintain - the goals set out in the Fiscal Responsibility Bill unless it implements a "multi-faceted" national disaster risk management programme.

Arguing that the two initiatives needed to go "hand in hand", Mr Komolafe warned that governments will frequently find themselves having to call on the Bill's section 13 given The Bahamas' increasing exposure to more frequent and powerful hurricanes.

This section, titled "Exceptional Circumstances", allows the Government to "temporarily depart" from the Bill's deficit and debt targets "when sudden and unexpected events arising from external shocks, resulting in a significant economic downturn, national security considerations, or natural disasters so require".

Qualifying events would include the likes of the 2008-2009 global recession, plus major hurricanes, and the Bill requires the Government to outline both the measures and timeline needed to get "back on track" with targets that require it to maintain a 0.5 per cent deficit from 2021 onwards and, over the long-term, slash the debt-to-GDP ratio to 50 per cent.

But, with The Bahamas impacted by major hurricanes in each of the past three years, Mr Komolafe said the extent of the subsequent "fiscal correction" and time needed - as demanded by the Bill - would have increased each year had the legislation already been in effect.

The BIA chairman suggested it was thus no accident that the International Monetary Fund's (IMF) latest Article IV report had focused heavily on establishing a national disaster savings fund, which it recommended should equal between 2-4 per cent of GDP.

This would create reserves worth between $214m to $428m, based on 2017's real GDP figures, to help finance immediate post-hurricane recovery. Yet Mr Komolafe pointed out that Hurricane Matthew's estimated damage, pegged by the Inter-American Development Bank (IDB) at $374 million, together with $145.5 million in 'economic losses' could effectively 'blow' those funds in one go.

He called for the Bahamas to go beyond the IMF's suggestion, and instead increase insurance penetration through a combination of tax and other incentives; ensure full compliance with Building Code and land use plans; and secure coverage for public infrastructure assets such as docks, roads, bridges and government buildings.

"Our ability to achieve them may be impacted significantly if we do not have a multi-faceted approach to addressing national disasters," Mr Komolafe told Tribune Business of the Fiscal Responsibility targets.

"We may have to have several of those fiscal adjustment plans in the absence of a national disaster risk management plan. Fiscal adjustment plans are not something you should have to use often. It just highlights that this [Fiscal Responsibility] goes hand in hand with the IMF report, and their recommendation to have a holistic approach to address these issues."

Recognising the Bahamas' increasing vulnerability to major hurricanes, the IMF reiterated its call for the Government to set aside savings equivalent to 0.5 per cent of GDP in storm-free years to help build a 'disaster savings fund'.

Based on real GDP data for 2017, these annual savings would amount to between $53-$54 million. With the IMF calling for a fund equal to between 2-4 per cent of GDP, the Bahamas will only be able to achieve this recommendation if it enjoys four consecutive storm-free years at the low end - and eight years at the high end.

Such a lengthy storm-free period is doubtful given that the Bahamas has been struck by major hurricanes in each of the past year, which suggests that it may take a decade or more to hit the IMF's 'disaster saving fund' target.

Explaining the rationale for its suggestion, the IMF's Article IV report said: "Over the last 30 years, the Bahamas has recorded annual average damages from natural disasters (NDs), including both to public and private sector assets, at close to 1.5 per cent of GDP, higher than the Caribbean regional average of 1.2 per cent of GDP.

"Four out of the eight hurricanes that hit the Bahamas since 1990 resulted in estimated total damages - public and private - of at least 5 per cent of GDP, implying a probability of a disaster of that magnitude of close to 15 per cent in any given year.

"The Bahamas has traditionally absorbed the fiscal consequences of these shocks through re-prioritisation of spending and/or worsening fiscal deficits, often forcing a rapid accumulation of debt. However, increased reliance on risk reduction and preparedness policies are preferable than relying entirely on [after-the-fact] intervention as financing can be made available immediately; and likely at more affordable costs."

The IMF estimated that there was just "an 11 per cent probability or less" that its proposed savings fund would be depleted once it reached its target size, although Mr Komolafe was yesterday unconvinced.

Pointing out that Hurricane Matthew produced $409 million in insured losses alone, with uninsured damage and economic losses accounting for millions more, the BIA chief argued this showed the Bahamas needed to go further than the IMF's proposed 'fund'.

"One event could easily wipe that out," Mr Komolafe told Tribune Business. "God forbid we have another event like Matthew. It [the IMF's fund] might suffice, but not for total losses to the country.

"That's why it's important on the part of government to incentivise more people and companies to be insured because it reduces or limits the burden on the Government in the aftermath of the storm... If we have a significant event, that fund will be depleted and we may have to start again."

While the IMF's 'fund' would likely suffice "on the high end", Mr Komolafe said annual contributions to it could be part-funded by the 3 per cent premium tax levied on the insurance industry.

Based on the Insurance Commission's annual 2016 report, this tax generated $22 million in revenue - equivalent to about 40 per cent of the annual target contribution cited by the IMF.

"It's a drop in the bucket in terms of the overall fund, but at least it's a start," the BIA chairman told Tribune Business. He added that $13 million of 2016's premium tax total came from the life insurance sector, with the $9 million balance generated by property and casualty insurers.

Mr Komolafe also reiterated the industry's call for Value-Added Tax (VAT) to be removed from property and casualty premiums, on the grounds this would make hurricane coverage more affordable and accessible, and thus reduce the financial recovery burden on government.

"We have stated repeatedly that the Government ought to consider insuring public sector assets," he told Tribune Business. "A self-insurance policy without an annual allocation of funds within the Budget earmarked specifically for disaster recovery or infusion into a captive-style structure is flawed."

The BIA chairman agreed that "a properly-structured" insurance policy with the Caribbean Catastrophe Reinsurance Fund (CCRIF), and the proposed $100 million disaster 'contingency loan' facility from the Inter-American Development Bank (IDB), were also critical elements of a more comprehensive disaster risk management plan.

The IMF seemed to agree, saying: "A tiered approach to disaster risk financing--an approach including different financial instruments for different layers of risk--is appropriate and cost effective.

"Self-insurance or risk retention, including through contingent funds in the Budget, the proposed savings fund, and the recently requested contingent loan from the IDB for $100 million should be used to confront the more frequent, less severe shocks.

"Risk transfer through the Caribbean Catastrophe Risk Insurance Facility (CCRIF), of which the Bahamas is a member, and insurance of public sector assets should be used to confront more severe events. Catastrophe bonds could also help to insure against the most severe disasters."

Summing up its recommendations, the Fund added: "Increased reliance on preparedness and risk reduction policies, including by setting up a natural disasters savings fund, should enhance fiscal and economic resilience.....

"In addition, insuring public assets and encouraging the broader use of private insurance, including through financial literacy training and targeted subsidies, would reduce fiscal contingent liabilities. Investing in resilient infrastructure and maintaining up-to-date building codes, land use and zoning guidelines are also critical elements of an adequate disaster risk management strategy."

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