The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas must explore the removal of protectionist barriers to growth if it is to overcome its bleakest-ever fiscal position, a former finance minister urged yesterday.

James Smith, also an ex-Central Bank governor, told Tribune Business this nation needs to "throw everything into the mix" given that Hurricane Dorian's fall-out threatens to impact the government's finances for the next ten to 15 years.

With the national debt predicted to expand at a faster rate than economic output in the near-term, he argued that The Bahamas may have little choice but to abandon "preconceived notions" that have long outlived their usefulness such as the reservation of certain industries for local ownership only under the National Investment Policy.

Describing the fiscal challenge created by the category five storm as "unprecedented", Mr Smith also suggested that the government seek to restructure its debt in such a way as to reduce debt servicing (interest) costs over the immediate to medium term.

These payments to bondholders and lenders are projected to hit $400.8m in the 2023-2024 fiscal year, and the former finance minister said extending the maturity term on outstanding debt issues would create the necessary "breathing room" for the government to continue funding essential services by lowering these debt servicing costs.

Acknowledging that The Bahamas had previously avoided such debt restructuring for fear that it would send a negative signal to lenders, Mr Smith argued that now was the time to take such action "before the International Monetary Fund (IMF) does it for us" and while the country still has access to the international capital markets.

While the extent of the financial blow inflicted by Dorian is "no surprise to anybody", Mr Smith said: "The principal issue is that the increase in the debt, which will be so much higher than the growth in GDP, is simply unsustainable. We have to reduce that gap between the rate of increase of the debt vis a vis the growth of the economy.

"The question is that if it's very difficult not to increase the debt because of circumstances that are real, due to the reconstruction and social services demanding more, we have to find ways to grow the economy.

"I know it's easy to say, but it may mean stepping aside and identify obstacles to growth. We have identified one of them, the ease of doing business, and we may have to look at a combination of foreign and domestic investment, and how we can provide incentives for them to flow and a faster rate."

Warning that this may involve giving up protections long cherished by some, the ex-finance minister told Tribune Business: "We have some preconceived notions about investment flows; where they can go, and which sectors they can go in. We may have to step back and look at all of them.

"We can't deny investment and the creation of jobs because we want to protect a certain segment of the economy for a select group. That may have been relevant a decade or two ago when the numbers were better.

"It's a tough position, I recognise that, and it's going to be tough not only for this government but successive governments for the next 10-15 years. Now might be the time to revisit these policies to stimulate growth and national development, and which ones continue and which are to be discarded. You throw everything into the mix. You're dealing with an extraordinary challenge, one I think is unprecedented."

Mr Smith said a "game changer" for the Bahamian economy "wherever it comes from" is now sorely needed, adding: "We need a shot in the arm that provides increased revenue flows to the Government to pay back or retire some of the debt." While environmentalists will not like to hear it, the only possibility in this area presently appears to be Bahamas Petroleum Company's (BPC) oil exploration activities.

The Government's just-released Fiscal Strategy Report exposes the extent to which Dorian has blown the Government off its key deficit and debt ratio reduction targets by between five to 10 years depending on the indicator.

It is now forecasting that nine-figure deficits will persist for the next five years post-Dorian and only come back into line with the Fiscal Responsibility Act's 0.5 percent of GDP target by 2024-2025.

The report also shows that the sustained "red ink", caused by the Government having to borrow to cover the gap created by its spending exceeding income, is projected to drive its direct debt from $8.205bn this fiscal year to almost $9.5bn over the same period.

This represents a $1.3bn debt surge that will keep the Government far away from achieving the Fiscal Responsibility Act target of a 50 percent debt-to-GDP (gross domestic product) ratio. That is projected to still be at 62.9 percent in 2024-2025, and the debt-to-GDP ratio is projected to only resume its decline towards 50 percent come 2028-2029.

The Government will only start "returning to compliance" with the Act's debt and deficit reduction goals by 2024-2025, some two years after the next general election has to be called, while the current fiscal year's deficit is now forecast to increase by a further $104m from the immediate post-Dorian estimate of $573.4m to $677.5m.

That sum, equivalent to 5.3 percent of Bahamian GDP, will require the Government to seek Parliament's approval to borrow $507.9m to cover the difference between the original Budget estimate of a $137m deficit.

With Dorian restoration continuing to serve as the chief drain on the Public Treasury, the Fiscal Strategy Report outlines a painfully slow reduction in the fiscal deficit to $498.9m in 2020-2021 and $301.2m the following year. Deficits of $238.6m and $122.6m are forecast for 2022-2023 and 2023-2024, respectively, with the 0.5 percent of GDP goal finally reached the following year at $82m.

Mr Smith yesterday argued that The Bahamas should take a proactive stance by moving to restructure its existing debt now, rather than wait for the IMF and other multilateral agencies to do this for it. Arguing that minimising debt servicing costs is key, he called on the Government to stretch out the maturity terms on existing issues to achieve this objective.

The Fiscal Strategy Report indicates that the Government has begun to do this, as it revealed: "Recently, the Government took advantage of a discretionary option to convert several US LIBOR-based rate loans with the Inter-American Development Bank (IDB) to US fixed rates.

"The recent decline in US LIBOR rates presented a unique and attractive opportunity for the Government to lock in competitive fixed interest rates over the remaining life of the disbursed amounts of 10 eligible loans, which totalled $159.77m at the time of conversion on August 8, 2019, and bearing maturities ranging from 2021 through 2041."

Advocating such a strategy yesterday, Mr Smith told Tribune Business: "We piled on a lot of debt over the last four to five years from the international agencies and local bond markets. The time may have come to do a first major restructuring of the debt.

"I think we've stayed away from that because of the signals it may send, but because of Dorian this is the time to take hitherto scary measures in terms of repositioning some of the loans where you change the tenor from 10-15 years and stretch them out.

"You concentrate more on debt servicing costs as a percentage of the total budget, revenue and expenditure. The reason for that is as we work out of this and have to pile on the debt, you have to borrow," Mr Smith continued.

"While the debt goes up you want to be paying the same service charge on the principal so that it gives you enough room not to restrict spending on other items like health, education, welfare and national security."

Arguing that the time was now to take such restructuring action, Mr Smith said: "More than anything else I think there's still a confidence level in The Bahamas by the international agencies and international banks, and if we can prevent ourselves reaching the thresholds that would be of concern to them in the next year or two, we might be able to weather the storm.

"What we don't want is the debt-to-GDP all of a sudden to reach 100 percent, and still be going north and unsustainable. If the debt is too high the IMF will come in and restructure for us. That's why I think maybe we should restructure ourselves while we still have access to the international capital markets. It's a difficult period and calls for all hands on deck."