By NEIL HARTNELL
Tribune Business Editor
Revenue losses from WTO-related import tariff cuts are “manageable”, a Chamber of Commerce-commissioned study revealed yesterday, standing at between $110m-$130m per year.
The Oxford Economics consultancy, in a comprehensive report that analyses the likely impact of full World Trade Organisation (WTO) membership on the Bahamian economy, nudged this nation towards proceeding with the accession by finding that the “net impact” will “be moderately positive”.
The study, which assessed two accession scenarios, largely dispelled fears that the need for lower or eliminated tariffs on many imports would result in new and/or increased taxes being imposed on Bahamian businesses and consumers.
VAT will likely remain at the 12 percent it was hiked to in the 2018-2019 budget to compensate the government for reduced tariff income. With the $360m in unfunded arrears likely to be paid-off by the government by the time the tariff rate reductions start to kick-in, the Oxford Economics study said there were significant political factors mitigating against further taxes.
Analysing what would happen if The Bahamas joined WTO without enacting broad-based policy reforms to improve the cost and ease of doing business in the domestic economy, the report said the reduction/elimination of tariff rates would be partially offset by increased import volumes as goods became cheaper.
“The negative impact is dampened to the extent that import volumes increase relative to baseline levels,” the Oxford Economics finds said. “Once the economy has adjusted to the new trading environment, actual losses would moderate to around 45 percent of [tariff] revenues, equating to a shortfall of around $130m based on 2017 values.
“Although revenues from tariffs will be significantly reduced, the negative impact [on the fiscal deficit] will be partly offset by higher VAT and excise tax revenues... Our estimates show the widening of the budget deficit peaks at around 1 percent of GDP in 2021 (equivalent to around $120m based on 2017 values), but the impact subsequently settles at around 0.8 percent of GDP (equivalent to around $90m based on 2017 values).
“Hence, while the budget balance deteriorates in this scenario, the headline deficit remains manageable. Importantly, the budget deficit in this scenario is not sufficiently large to push government debt back on to a rising trend (as a share of GDP).”
While many Bahamians remain concerned about the prospect of new and/or increased taxes, the Oxford Economics report added: “Tax behaviour is tempered by local political realities and, in the case of acceding countries, political economy issues and possible demands by WTO members that the acceding member does not increase protectionism through other means.”
And the impact on the Government’s revenues is even less, the Oxford Economics study shows, if full WTO membership is accompanied by domestic policy reforms that create a more favourable environment for investment, commerce and job creation.
Describing the impact as “more muted”, the report added that this scenario also assumed a phase-in of the tariff cuts/eliminations over a period of three to five years and stronger growth in import volumes.
“By the time tariff reductions are fully implemented in 2024, associated revenues are therefore only down by 38 percent, equating to a $110m loss based on 2017 values (compared to $130m in the [other] scenario),” Oxford Economics projected.
“The phased implementation period for tariff reductions in the comprehensive reform scenario allows the economy time to adjust, while revenues from other sources also grow more strongly to offset the graduated reduction in tariff revenues.
“Moreover, growth in expenditures (as a share of GDP) would be somewhat better contained as a result of policy reforms and more healthy private sector activity levels.”
The impact on the Government’s fiscal deficit was even better, with the Oxford Economics report finding: “Our estimates show the widening of the budget deficit peaks at around 0.45 percent of GDP in 2024 (equivalent to $53m based on 2017 values).
“By the end of the forecast period in 2029, our simulations indicate that the budget deficit has narrowed to just 0.1 percent of GDP, representing only a moderate deterioration compared to baseline levels. As a share of GDP, government debt levels actually fall compared to our baseline projections, reflecting the larger size of the economy.”
Should The Bahamas adopt the recommended more comprehensive reform approach, Oxford Economics estimated it could lift the economy’s long-run average annual GDP growth rate to around 2 percent - higher than the 1.5 percent currently forecast by the International Monetary Fund (IMF).
It also projected that this would help slash The Bahamas’ national unemployment rate from its current 10 percent to 6.5 percent over the next decade, driving it to its lowest level this century.
“The positive effects would quickly build in subsequent years, lifting the average growth rate of the economy to 2 percent per annum across the forecast, compared with 1.5 percent per annum in the baseline. By the end of the forecast period in 2029, this leaves the economy 5.7 percent larger than baseline levels,” the Oxford Economics study said.
Elsewhere, the report recommended that The Bahamas reduce the scope of its offer on legal services to target specific sectors where foreign expertise was necessary. It added that the country might be better served opening the sector to a physical presence by foreign firms (mode 3) instead of allowing foreign attorneys to come in as individuals (mode 1).
“The offer on legal services is relatively broad and liberal, and it includes all legal services,” the Oxford Economics report said. “It is advisable to carefully target particular sub-set of skills for market opening instead of a broad commitment of the whole sector.
“For instance, it may be desirable to grant market access in only areas in which there is inadequate skills locally such as international tax law, international law, Fintech law and arbitration.
“Also, it is unusual for a country to open cross border trade (Mode 1) but not commercial presence. This may not be in the best interest of consumers who might seek legal services from foreigners and have no means of redress in the event of malpractice. From a development perspective, it is perhaps better to open Mode 3 instead of Mode 1 in legal services.”
The Bahamas was also recommended to better define the “presence of natural persons” under WTO, separating the definition of ‘business visitor’ from ‘key personnel’.