The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Caribbean economist yesterday stuck to her forecast that The Bahamas "faces a potential balance of payments crisis" within the next two years but is arguing this will not be the Government's fault.

Marla Dukharan, whose recent prediction that The Bahamas' will suffer a sovereign debt default and be in an International Monetary Fund (IMF) structural adjustment programme by 2021 was rebuked as "unduly alarmist" by the Ministry of Finance, said the multiple economic pressures facing the country cannot be blamed on the Government's COVID-19 policy response.

Praising the Minnis administration for its actions, she said she could recall no other Caribbean country that has had to contend with both the worst natural disaster and worst economic crisis in its history within the space of six months.

"Never before has any country in the Caribbean (and maybe even globally - but please don’t quote me) had to grapple with the worst natural disaster in its history and (arguably) the worst economic crisis in its history, both within a six-month timeframe," Ms Dukharan wrote in her analysis of the Bahamian economy that was released yesterday.

"How the Government of The Bahamas has maintained a reasonable level of socio-economic stability so far, is testament to their capabilities, political will and ability to access assistance from external parties including the multilateral lending institutions. By no means could this be an easy task, and the Government is certainly dealing with a lot more than many, at least in a regional context."

She said The Bahamas' economic woes, and post-COVID-19 recovery challenges, stem from its overwhelming dependency on tourism to generate 75 percent of its export earnings and 40 percent of tax revenues.

Noting that The Bahamas' is the third most dependent country in the world on an industry that has been shut down for nine months, and is only now just re-opening, she said: "All of the above suggest that The Bahamas is facing a potential balance of payments crisis, which is possible in the next year or two - not because the Government has not managed these crises appropriately, but because it is hard to imagine how any small, open, developing economy would be able to successfully survive its worst natural disaster in history, and a global sudden-stop, within one year.

"A balance of payments crisis would not necessarily reflect on the authorities as much as it reflects The Bahamas’ vulnerability, and indeed, that of many in the Caribbean. In order to create the sustainable long-term progress we desire, we must reverse our poor policy choices, such as fiscal imprudence, which have contributed to our ‘pre-existing conditions’.

"This pandemic, like every crisis, presents us with a precious opportunity to take a long, hard look at our current policy approach and fearlessly adopt a transformative path towards the future we deserve."

Ms Dukharan's analysis was released on the day that Senator Kwasi Thompson, newly-appointed minister of state for finance, hailed the Government's monetary and fiscal policies for maintaining the security of the one:one fixed exchange rate peg with the US dollar.

Noting that the foreign currency reserves were "near historic highs" of $2.39bn as at December 15 thanks to the Government's recent foreign currency borrowing, Mr Thompson said: "I am pleased to cast aside any concern regarding the threat of devaluation of the Bahamian dollar.

"Despite the economic trauma of the last nine or so months, the prudent management by this administration has ensured that the Bahamian dollar remains as strong and as secure today as it was before the onset of this most devastating economic setback."

On the fiscal side, Marlon Johnson, acting financial secretary in the Ministry of Finance, conceded that "where we are heading is not ideal but is certainly within the realm of being manageable" as the debt-to-GDP ratio is projected to peak at 85 percent in the 2021-2022 fiscal year before declining to 73.7 percent by 2024-2025.

However, Ms Dukharan warned that the fact The Bahamas' primary fiscal balance has been in deficit for some time indicates it is having to borrow to pay interest on its existing debt, which could trigger a debt spiral.

"It is important to note that even before Hurricane Dorian in 2019, The Bahamas’ primary fiscal balance was consistently in deficit for some time, which means that the Government is already in deficit before it pays the interest on its existing debt, so it has to borrow to pay the interest on existing debt, suggesting that there is a structural problem with the Government’s fiscal affairs, as opposed to an exceptional or event-driven problem," she said.

"A longstanding primary fiscal deficit - and borrowing to pay interest on existing debt - is a good indication that the level of debt is already unsustainable, regardless of what your debt-to-GDP ratio looks like."

Ms Dukharan added: "On the issue of debt-to-GDP, important empirical evidence exists to suggest that in the Caribbean, beyond a level of about 56 percent debt-to-GDP, each additional dollar of debt has a negative effect on the size of the economy. This means that over roughly 56 percent of GDP on average, each dollar of additional debt will shrink the economy.

"Moody’s reported that the Bahamas’ debt-to-GDP was already 60 percent in 2019, indicating that the country was already carrying an unsustainable debt level even before these crises hit. Standard and Poor’s estimates that the Government will have to borrow a further $1.3bn in this fiscal year, and over $800m in fiscal year 2021-2022.

"This will drive The Bahamas’ fiscal and debt trajectory further into unsustainable territory, increasing the likelihood that the Government will run into difficulty to service its debt payments."