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Govt Urged To Explore 'Social' Bonds To Fund Disaster Relief

By YOURI KEMP

Tribune Business Reporter

The government should explore the creation of “green” bonds to help finance future disaster recovery efforts, an Inter-American Development Bank (IDB) economist urged yesterday.

Dr Allen Wright, addressing a Bahamas Society of Chartered Financial Analysts luncheon, said these debt securities could be marketed to Bahamian nationals living overseas, multinationals with economic interests in this nation, such as the cruise lines, and others who would be willing to invest in this nation’s social and economic well-being.

He also backed the International Monetary Fund’s call (IMF) for the government to establish a sustainable disaster relief fund, containing between $200m-$250m - a sum equivalent to 2-2.5 percent of annual Bahamian gross domestic product (GDP) - to provide a further cushion against the damages created by Hurricane Dorian-type storms.

“If The Bahamas is in a situation where this is the fourth hurricane in the last five years, and there is a 70 to 80 percent chance of being struck by a hurricane in the future based on what happened over the last four or five years, why is there not some development of a sustainable disaster fund that the government can call upon to draw down on resources where they can get persons back to a normal position?” Dr Wright asked.

“Now might be the perfect time for the government to look at the possibility of developing a disaster fund of somewhere between 2 or 2.5 percent of GDP, just about $200m or $250m available, so whenever there is a disaster they can draw down on these funds to help with the remediation.”

The government’s Fiscal Strategy Report commits it to following this IMF/IDB suggestion, with the initial seed capital for a Disaster Relief Fund set to come from the $40.1m in dormant bank account balances that the Central Bank is to transfer to the Public Treasury. Some of that sum, though, has already been earmarked for Dorian relief efforts.

“Following on an IMF study, which placed the optimal size of a Disaster Relief Fund for The Bahamas at between 2 and 4 percent of GDP, the Government committed to seeding the Fund with an initial contribution of $40.1m representing extinguished dormant account funds,” the Fiscal Strategy Report confirmed.

“Over time, the Fund, which will be fully established under the framework of the Proposed Disaster Relief Fund Act, will benefit from further transfers of dormant proceeds alongside budgetary contributions and insurance pay-outs under the CCRIF (Caribbean Catastrophe Risk Insurance Fund).”

Dr Wright, meanwhile, suggested there were other capital raising options open to the Government. “There are a number of instruments that I am sure the Government is looking into as well,” he said. “It is the development of green bonds, blue bonds or other bonds related to social issues, such as orange bonds or purple bonds.”

The IDB economist explained that such bonds can be bought not only by local Bahamians but also those living overseas. They could also be sold to companies that do business in The Bahamas, with the funds drawn down on a “needs basis” in order to help mitigate the financial fall-out from Dorian-type storms.

Hurricane Dorian has has blown the Government off its key deficit and debt ratio reduction targets by between five to 10 years depending on the indicator.

Its 2019 Fiscal Strategy Report, tabled in Parliament last week, now forecasts 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 this ratio will only “resume its downward trajectory” towards 50 percent come 2028-2029.

Dr Wright yesterday said The Bahamas is looking at the middle of 2021 or in early 2022 to begin a fiscal adjustment greater than 2 percent of its GDP, which is when Dorian-related reconstruction spending is expected to taper off.

He warned that achieving these goals hinges on improved tax collection efforts, the rationalisation of some spending items and programmes, and greater efficiencies at state-owned enterprises (SOEs) that generate savings to stabilise The Bahamas’ fiscal position.

Dr Wright added that it would be difficult to place a timeline on how long it could take The Bahamas to fully rebound from Hurricane Dorian’s devastation, saying he could not put this nation “side by side” and compare it with other Caribbean nations, such as Dominica, and their recoveries from hurricanes Irma and Maria in 2017.

Explaining that they were separate nations with different challenges and capabilities in mobilising resources, Dr Wright said recovery on Grand Bahama could be quicker than Abaco’s. He also warned that reconstruction efforts depend on how quickly the Government can mobilise resources, both physical and human, and praised both the disaster recovery ministry’s creation and its engagement with bodies such as the IDB and internal government agencies.

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